A certain good old worthy ‘rich in lands’
Keeping his servants’ wages in his hands
Bought South Sea Stock when they knew nothing of it
Sold it when high, and gave to them the profit.
Known as the South Sea Bubble, the first great stock market crash in history happened in the City of London in 1720 in a climate of mass hysteria, political corruption and public upheaval. It came about as a result of the English fascination with things Spanish. Countless individuals lost personal fortunes in a wave of stock speculation that occurred during six months of furious activity. In fact several bubbles occurred as fraudulent joint-stock companies took advantage of the mania.
Diplomatic relations between England and Spain going back centuries had often been cemented by marriages between the two crowns. The present day British and Spanish royal families count Queen Victoria amongst their ancestors. Relations had evidently soured around the time of the Armada. Nevertheless, Elizabeth’s successor James I endeavoured to mend the fences. He tried and failed to arrange the marriage of his son, the future Charles I to a Spanish princess.
Commercial interest between England and Spain had always been valued with a consistently healthy balance of payments surplus in the English favour. In addition, smuggling or illegal commerce with the Spanish Colonies in the New World offered huge attractions as well as potential sources of conflict. The Crown of Castile consistently claimed and defended its monopoly with the overseas empire. It controlled all trade through the port of Seville and strictly reserved participation for the subjects of the Crown of Castile with just one excepted area, the supply of slaves. The monarchy permitted its subjects to own but forbade them to engage in the slave trade. The crown contracted the supply of slaves first to the Portuguese then the French, followed them by the Dutch before finally turning to the British. The Elizabethans wished to participate. In 1566, Hawkins and nephew Francis Drake set out on the first of three voyages from Plymouth. They sailed to West Africa, captured natives, transported them across the Atlantic and sold the hapless wretches into slavery in the Spanish Colonies at a spectacular profit. Thus began British participation in the slave trade.
Perfidious Albion
The year 1711 saw the flotation of the South Sea Company in London with a monopoly of all trade to the South Seas. At the time the British together with the Austrians and the Dutch were engaged in the War of the Spanish Succession fought in order to keep the French-backed claimant off the throne of Spain. Great Britain prolonged the war in order to secure el asiento, the contract for trade and the supply of slaves, and conducted separate peace negotiations behind the backs of its Dutch and Austrian allies. The terms agreed, the British left their allies in the lurch. After that example of duplicity our country became known abroad as Perfidious Albion and British statesmen acquired the reputation of being untrustworthy.
The Spanish negotiators were more than a match for the English. They drew up the asiento in terms which made profits difficult to come by. Some slave trade voyages were made but these produced meagre returns. However, it mattered nought that the initial operations yielded little. The prospects of benefits from the trade with Spain’s rich colonies in South America dazzled speculators. Readily convinced by arguments about the incredible prosperity that lay ahead, they sought confirmation in the fortunes accumulated in the past.
International finance had become a matter of crucial importance by the early 1700s. In France, a maverick Scot called John Law was manipulating public credit and his Mississippi Company enjoyed a monopoly of French trade to North America. He connived to drive the price of his company’s stock up. English capital crossed the Channel to be invested in France and many wished to see action to halt the diversion. By 1719 the directors of the South Sea Company had decided to follow the example of John Law. They wished to drive the value of their own share prices up and rival the Bank of England, which had been set up in 1694. The South Sea Company proposed to assume the entire public debt of the British government.
The company influenced prominent politicians by bribery and on April 12th 1720 the government accepted the proposal of the South Sea Company. Bribes were paid in fictitious holdings of stock. The company drove up the price of shares through artificial means. New subscriptions combined with pro trade reports regarding the Spanish colonies’ stories combined to give the impression that the value of stock could only go up. The potential for growth seemed limitless. Even wily Dutch investors put their money into South Sea Company stock.
South Sea stock steadily rose in value and attracted imitators. All manner of joint stock companies appeared hoping to cash in on the speculation mania, some honest, the majority bogus. However, they all shared a tenuous connection with the New World. Some were vague on terms but big on promise. There were scams. The prospectus for one company proposed to ‘carry on an undertaking of great advantage, but nobody to know what it is’. People rushed to invest their savings. Perpetrators of the sting pocketed the proceeds and ran.
The value of stock in the South Sea Company stood at 175 pounds per share in February 1720. The price reached 380 pounds at the end of March, 520 pounds by May and peaked at just over 1000 in June. Credulity was stretched to the limit and credibility dented. The directors of the South Sea Company suddenly began to sell their own shares and others followed. Rumours circulated and the crash began. The bubble did not exactly burst, it was deflated.
Bankruptcy
By the end of August a record number of bankruptcies had occurred. By the end of September the value of stock stood at 135 pounds per share. The directors’ attempts to pump-up more speculation failed. Thousands lost fortunes. People had purchased shares on credit or margin. The bubble remained in the collective consciousness of the Western world as a byword for financial disaster until replaced by the Wall Street Crash in 1929.
Mobs demonstrated on the streets of London in 1720. Parliament was recalled and a committee of inquiry set up. What followed is familiar to us here living in the 21st century but it was the first time that things had evolved in such a recognisable way. Inquiries revealed widespread corruption and fraud among company directors, officials and friends. The key players had fled the country. Incriminating documents disappeared. We cannot avoid a sensation of deja vu. It fell to Sir Robert Walpole, recently appointed as First Lord of the Treasury to restore confidence in our financial institutions. Losses amounted to twenty million pounds. That the economy weathered such a storm speaks volumes for its resilience.
The collapse of the South Sea Company assured the position of the Bank of England. The failure of the French Mississippi Company and the schemes of John Law did lasting damage to the French financial system, the economy and the trading position. Throughout the 18th century the English had an unrivalled advantage in credit and prospered as a result. Thanks to John Law, the French had to wait for a revolution and Napoleon before establishing the Bank of France in 1800. Meanwhile, the English fascination with the Spanish colonial market continued. Frustration and continual disappointments would once again bring Spain and England into conflict in 1739. |
