Odd this day
The House of Commons saw for the first time a plan for the South Sea Company to take on an enormous chunk of government debt, giving rise later in the year (in the words of Robert Chambers’ Book of Days) to
the most monstrous commercial folly of modern times.
The full story is far too long to tell effectively here, so your best bet is to buy one of the many books on the subject. What follows is a skim across the surface… Basically, the company had been established in 1711 as a public-private partnership which would consolidate, manage, and reduce the national debt. Britain was involved in the 15-year War of the Spanish Succession at the time, so it needed cash. Increasing taxes is never terribly popular, so the idea was to encourage people to buy a lot of shares in the South Sea Company to fund the conflict. To make the business attractive, it was given a monopoly on trading — slave trading, to be precise — in the South Seas and South America.
Whic is where we encounter our first tiny obstacle. (I say ‘first’ because I’m assuming as an 18th century investor after a good return, you’re not troubled by the buying, selling and exploitation of your fellow humans.)
Those waters and lands were in the hands of the Spanish and Portuguese, rendering the monopoly pointless, and the company unlikely to make very much money. Naturally, then, it offered a 6% return on investment, on the basis that they’d be awash with cash just as soon as the war was over.
After the peace, Spain… er, restricted British trade in the region, and taxed the company’s profits.
So, things did not looking promising, which meant the obvious thing to do was… yes, that’s right: get the King (George I) to become governor of the company to give it extra kudos, and carry on as normal.
By the end of 1719, government debt was £50 million, almost £12m of which was held by the South Sea Company. The idea on this day in 1720 was that the company would buy £32m of the national debt for £7.5m. the government would get £7.5m to ease its cashflow situation, and the company would… er, sell shares to pay its interest on the debt. Brilliant!
To be fair to Parliament, there had been considerable debate about the wisdom of the enterprise, but the company had bribed enough people to get the Bill passed.
Remarkably, though, it worked.
For a time.
The stock sold, people got their interest, so more stock sold… Then, in August, people started selling shares in larger numbers than others were buying them. There was a suggestion that the company could lend people money to buy the shares, but this was (a) stupid, and (b) mercifully too late.
Basically, it was your classic financial crash. Everybody chasing nothing; panicking — and a lot of money vanishing like a gambler’s lucky streak.
The poet John Gay was said to have lost £10,000, but he’d only paid the first instalment, so his real loss was around £600. He still wasn’t happy, mind. Isaac Newton was supposed to have lost £20,000 — the equivalent of over £3m now — but probably didn’t.
Still, at least everyone learnt their lesson, and there were never any stock market bubbles ever again.
Mind you, perhaps if there had been no South Sea Bubble, we wouldn’t have had this:
…and then we’d all be the poorer.
