London, December 1720
Outside the South Sea Company’s offices in Threadneedle Street, a crowd had been standing in the cold since morning, shouting and demanding the directors’ heads. Many had invested everything they owned in its shares, only to see it all vanish.
It all started in 1719 with a company that had every appearance of a great trading house: one which held a monopoly on trade with Spain’s colonies in South America and a royal charter to ship slaves across the Atlantic. In reality, neither amounted to much, and what little trade there was made no money. Its real business lay in managing the Crown’s debt, and one of its directors, John Blunt, saw how he could make a fortune out of it.
Blunt called the board, stood at the fireplace with his back to the table, and began: “As you might have heard, the Treasury is looking to refinance £30 million it owes to private creditors. I propose we take the whole debt into our own hands, by persuading the creditors to exchange their claims for shares in our company. This way, we can offer the Treasury a lower rate than it currently pays. The Treasury gets its savings, but we get something far better”.
“And what would that be?” asked, impatiently, another director. Blunt replied, a faint smirk playing on his lips: “We will convert their debt at whatever price our shares will be trading at. The higher the price, the fewer shares we need to hand out, and the more money for us.” Everyone in the room understood the incentives, and without another word, they agreed to take on the Crown’s debt.
Following the resolution, Blunt set about sending the share price soaring. Through the early months of 1720 dozens of pamphlets he had paid for began to appear, describing the Company’s trade in silver from the Potosí, the gold of Mexico, the markets of Cartagena and Buenos Aires waiting to be opened. In the coffee-houses men spoke of bullion already loaded and sailing home, and of the fortunes being made in the slave trade. The public started taking an interest, driving the price higher and fuelling further enthusiasm.
The more important work was done secretly, through a few words whispered at a corner of a ballroom, a few gestures at the card table, or through a simple handshake and a smile. The Company’s cashier spent the spring moving through the highest echelons of society, bribing and noting down in his book how many shares were handed to whom. Among others, the Chancellor, the Head of the Government and the King’s mistresses were all drawn into the scheme.
As the price increased, the Company brought in creditors to exchange their claims for its shares. It also allowed ordinary people to purchase new stock by paying only 10% upfront and settle the rest in instalments. Many, from lords to servants alike, were dazzled by their gains: a man who had bought in January had doubled his money in a few months. The conviction that the price could only rise rapidly spread through the city like a fever, and anyone who hadn’t yet bought was considered a fool. To feed the frenzy, the Company even lent money to its own shareholders against shares they already held through its own bank. By August, the price had plateaued around £1,000, an almost eightfold increase since the start of the year. But it was not enough: the price had to keep rising.
Alongside the Company, dozens of other ventures had emerged throughout the summer, each promising unfathomable riches, and people borrowed heavily to buy their shares. Speculators grew intoxicated by the rush, the feeling of invincibility that came from watching their fortunes soar. So they borrowed even more.
Then, a few days into August, the dream came to an abrupt end. Concerned about competitors pulling money away from the Company, its directors pushed the Bubble Act through Parliament. By making it illegal to operate a joint-stock company without a royal charter, they hoped money would flow back and push the share price higher. The South Sea itself was excluded from the act, for it had a royal charter.
Overnight, most of these new ventures were forced to shut and their shares turned worthless. Thousands of speculators found themselves scrambling for cash to meet their obligations, so they turned to the one asset that was still valuable and easy to sell: South Sea shares. The plan meant to drive the price higher backfired, and it set in motion the very selling that would ultimately bring the Company down.
The narrow lane running between Cornhill and Lombard Street, which for months had been packed with men pushing their way to the coffee houses to buy shares, became a scene of pure horror. Over-leveraged speculators rushed to sell South Sea shares, creating a wave of selling that fed on itself. Then came the turn of ordinary men, who had poured their life savings into the Company. Greed quickly gave way to grief.
By the middle of September the price had halved, and the Company, in desperation, went to the Bank of England and begged it to vouch for the Company’s debts. For a moment the Bank agreed. Then, on the 24th of September, the Company’s own bank collapsed. It had lent out vast sums to people buying South Sea shares, and those borrowers were now unable to repay. Rumours spread that it was facing bankruptcy, so its depositors rushed to get their money out. The panic spread to the Bank of England, who quickly withdrew its offer to help the Company in an attempt to save itself. With all hopes of a rescue gone, the price plunged to £150.
In the span of a few months, many people had lost everything. Crowds from the poor and elite alike demanded that the Company’s directors be sewn into sacks and thrown into the Thames. One by one, the people responsible were punished. The Chancellor was expelled and sent to prison, the head of the government ousted, and all of the directors’ estates seized and given to the people as compensation.
After the South Sea Company collapsed, the Bank of England became the dominant financial institution, managing the government’s debt and holding the state’s accounts. It has stood at the centre of British finance ever since. The day-to-day mechanics have changed over three centuries, and the business of managing and selling government debt was eventually handed to a dedicated Treasury office in the late twentieth century. But the principle which emerged from the wreckage of 1720 still stands today: the borrowing of the British state has since been managed through a disciplined institution acting in the public interest. Over time the Bank grew into something even bigger, the lender of last resort, though that role lay more than a century ahead.
There had been manias before, and there have been many after, but we owe the term “bubble” to the South Sea.
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