Bursting the South Sea Bubble myth
The 1720 crash harmed dukes – but it wasn’t on the COVID-19 scale
Dire economic news, like any other dire news, often comes with historical comparisons.
So it was that my radio cheered me up with the prediction of the worst economic slump since the South Sea Bubble, which, conveniently, popped exactly 300 years ago. In the press, Jayne Dowle wrote, ‘The South Sea Bubble was so catastrophic because it encompassed the entire nation. Everyone from housemaids to shopkeepers to MPS and the aristocracy was encouraged to buy shares in a failed enterprise to raise millions to fight a war against France.’ This, apparently, makes it an ‘opportune’ comparison.
I’m not so sure. Though most of us have heard of the South Sea Bubble, and understand that overheated financial speculation rarely ends well, we couldn’t say much more about it than that. That description above is largely wrong (for a start, in 1720 Britain wasn’t at war with France: they were allies). We’re on safer ground with another journalist, Lindy Mcdowell, who wrote, ‘We do not need to concern ourselves with precise details here, other than to say it was a bubble, it centred on a South Sea Company and it was bad.’
The South Sea Company looked fishy from the start, if you expected it to do what it had notionally been set up to do – trade in South America. The Spanish and Portuguese were already there, and weren’t about to surrender their rights lightly. Actually, that wasn’t what the Company was really for. It was set up at the instigation of Robert Harley, Queen Anne’s Lord High Treasurer, as a way of managing the national debt. From 1719, it began offering its own equity in exchange for government securities. The Company got a guaranteed annual payment from the Exchequer equivalent to six per cent of the stock it took over.
As the creation of the ruling Tories, the Company was subject to attack from the rival Whigs, who tried to mobilise their earlier creation, the Bank of England, to outbid the opposition.
But the Company’s offer was bigger, and the price of their stock rose by 700 per cent during the first six months of 1720, before rapidly plummeting, as the truth about its shaky foundations and the shady dealings behind the scheme began to emerge.
There were certainly spectacular losses, such as the Duke of Portland’s, with a claim of £135,000 made against him. But others did rather well, including the Duke of Marlborough, whose wife, Sarah, got him to sell up in time to make a profit of £100,000 (about £11.5 million in today’s money).
Recriminations in Parliament followed the collapse of the stock (though not the disappearance of the Company, which did secure trade in South America – in slaves – and lasted until 1854).
Robert Walpole, a Whig, was able to take advantage of the blame laid on corrupt Tories to assume control of the government. Lessons were (briefly) learned, and prosperity returned.
The South Sea Scheme (it wasn’t called a bubble until more than 50 years later, in the Encyclopædia Britannica) certainly made an impact. What is less clear is how wide an economic shock it caused. Far from being a scheme open to all, it was jealously guarded and, even after a public issue of stock, the total number of investors has been estimated at 30,000, or 0.5 per cent of the population.
Those headlines today about economic contraction don’t seem to be based on the findings of economic historians. One of them, Julian Hoppit, having surveyed the impact on agriculture (the biggest sector), trade, number of bankruptcies and foreign exchange, concluded, ‘There are good reasons to doubt that the Bubble generally disrupted the British economy in the 18 months after it burst.’
So, if it mainly affected the toffs, and made little economic difference in the long term, why does the South Sea Bubble still float into our contemporary discussions? Well, we like tales of hubris and folly, preferring to forget that the hubris and folly were widely warned of at the time, by the likes of the journalist and
Spectator founder Richard Steele, who told his readers throughout 1720 that the scheme was a ‘bulky Phantom’, which he compared to investing at the gaming table.
The cautionary tale of the Bubble was also kept alive by some of the most memorable creative minds of the age, from Jonathan Swift and Daniel Defoe to William Hogarth and Alexander Pope. Pope warned of ‘Lucre’s Sordid Charms’, and revelled in the exposure of the corrupt.
Finally, there’s that name, which doesn’t belong to the contemporary story of the scheme at all. The Encyclopædia Britannica was a Scottish publication in origin, and ‘The Scottish economy was showing distinct signs of over-heating in 1771 [when the Bubble was first referred to], and suffered a major collapse in credit in the following year,’ wrote Julian Hoppit.
So whenever people talk about the great historical Bubble, they’re really thinking more about their own times.