The South Sea Bubble

The South Sea Bubble

[This is a complicated story. My feeble brain had trouble with

parts of it.]

The South Sea Company (SSC) originated in England in the year

1711 when government debt was taken on by a company of

merchants in exchange for which the government agreed to

secure them for a certain period of time, paying interest at 6%.

To provide for this interest, the duties upon wines, vinegar, India

goods, silks, tobacco, whale-fins (tastes like chicken), and other

articles was rendered permanent. The monopoly of the trade to

the South Seas (eastern coast of South America, primarily) was

granted, and the company, being incorporated by act of

parliament, assumed the title of South Sea Company.

It was thought back then that the trade potential was limitless.

For example, gold and silver mines of Peru and Mexico were

projected to be inexhaustible and that it was only necessary to

send the manufacturers of England to the coast to be repaid a

hundredfold in gold and silver ingots by the natives. The stock

that was issued in SSC came into high favour.

In 1717, the King of England suggested that the national debt

should be reduced. The SSC and the Bank of England (BOE)

made proposals to parliament, acts were passed and SSC

advanced 2 million pounds towards discharging the principal and

interest of the debt due. The name of the SSC thus was

continually before the public. Though trade produced little in the

way of real revenues (expensive trips, remember), the SSC began

to flourish as a monetary corporation.

But first, it is important to note that back around 1717, capital

had been flowing into Paris from Britain; attracted by stocks

such as John Law”s many “banques” in France and his

Mississippi Compagnie des Indies. These companies had their

own bubbles, prompting one speculator to say, “When the rest of

the world are mad, we must imitate them in some measure.”

So Britain sought to keep its capital at home and the SSC bubble

began. Here”s how the trading went. All figures are in pounds.

All dates are 1720.

April 7th the stock goes from around 300 to 290 before the

potential of the South Seas is talked up anew. By May 28th the

price has risen to 550. Just 4 days later it rockets to 890. There

were many who sold out at this time. On June 3rd the price

dropped to 640, alarming the directors who gave their agents the

order to buy. By evening the same day, the stock was back up to

750 and by early August hit 1000. Around September 2nd it had

fallen to 700 and on September 8th a raucous public meeting was

held. But the stock continued to fall, hitting 400 on September

15th and shortly thereafter a bank run followed on September

28th.

[At this point let me just add an anecdote about this bank run.

The BOE defended itself against the run brought on by its going

back on a promise to absorb the bonds of the SSC at 400. To

avert failure, the Bank organized its friends in the front of the

line and paid them off slowly in light sixpences. These friends

brought the cash back through another door; it was deposited,

again slowly counted, and then made available for paying out

once more. By this means, the run was staved off until the

Festival of Michaelmas (Sept. 29th). When the holidays were

over, so was the run, and the bank reopened.]

After the bank run, the price of SSC stock resumed its fall,

hitting 135 shortly thereafter. In the bankruptcy proceedings that

followed, investors were finally paid off at about 33.

So how did this all happen? John Blunt had been the Chairman

of SSC. He and his insiders deliberately sought to make profits

on stock issued to themselves against loans secured by the stock

itself, that is, free. As capital gains were drawn off, they were

converted into estates, for which Blunt had 6 contracts to buy at

the time of the collapse. [When new subscriptions for SSC failed

to meet profits paid out to greedy insiders, Blunt borrowed the

cash of the SSC for himself]. In order to pay-out profits, the

SSC needed both to raise more capital and to have the price of its

stock moving continuously upward. And it needed both

increases at an accelerating rate, as in a chain letter or a Ponzi

scheme.

Anecdotes:

Robert Knight, who doctored the books of the SSC, escaped the

Continent to make another fortune in Paris after breaking out of

an Antwerp jail. Charles Blunt, brother of John, slit his throat.

And then there was the case of Sir Isaac Newton, supposedly a

bright fellow. In the spring of 1720, he stated. “I can calculate

the motions of heavenly bodies, but not the madness of people.”

On April 20, accordingly, he sold out his shares in the SSC at a

solid 100% profit (he had gotten in below 300). Unhappily, a

further impulse later seized him, an infection from the mania

gripping the world. He reentered the market at the top for a

larger amount and ended up losing 20,000 pounds. For the rest

of his life he couldn”t bear to hear the name South Sea.

Another participant said, “The additional rise above the true

capital will only be imaginary; one added to one, by any stretch

of vulgar arithmetic will never make three and a half,

consequently all fictitious value must be a loss to some person or

other first or last. The only way to prevent it to oneself must be

to sell out betimes (sic), and so let the Devil take the hindmost.”

Some say the South Sea bubble marked the climax of the

Commercial Revolution, even its fatal end, and was responsible

for the lull of 40-50 years between the Commercial Revolution

and the Industrial Revolution. Others say it was nothing more

than excess and the breakdown of speculation.

Author Charles Mackay wrote of the collapse, “Enterprise, like

Icarus, had soared too high, and melted the wax of her wings;

like Icarus, she had fallen into a sea, and learned, while

floundering in its waves, that her proper element was the solid

ground.”

[Sources: Charles Mackay “Extraordinary Popular Delusions &

the Madness of Crowds,” Charles Kindleberger “Manias, Panics,

and Crashes.”]

Next article.June 4th

Brian Trumbore