The History : Famous Crashes of the West,The South Sea Bubble,Part-2



Our second adventure to Manialand takes us to early 18th century England when thousands of Englishmen ‘lost their cool’ and engaged in a most extraordinary national passion. At that time, England was just about to launch its industrial revolution which was preceded by an agrarian revolution of some magnitude. A great deal of grazing land were put into cultivation. Marshlands were drained and utilized and new crops were introduced. There was an accumulation of wealth throughout the country and it gave rise to a middle class in English society. Laws were also in place to provide for the establishment of public and limited-liabilities companies to gather capital far the exploitation of the newly-discovered colonies and other exotic places. In short, 18th century England was much like 17th century Holland, prosperous and ready for some excitement.

In 1711, a company named The Governor and Company of Merchant: of Great Britain Trading to the South Seas and Other Parts of America and for the Encouragement of Fishing (Sic) was registered. Given such a mouthful it is not surprising it was to be known by one and all as The South Sea Company. The company was originated by the well-known Earl of Oxford (an ex-minister of the Crown) who took over part of the national debt of England. In return, the government granted the South Sea Company a monopoly for trade with the South Sea islands. In the early part of the 18th century, most people in England had already heard of the fabulous wealth of the South Seas. The South Seas conjured up visions of inexhaustible gold and silver mines. It was believed that it was only necessary to outfit a ship to the coast of South America and one’s investment would be repaid 3 thousand-fold. The South Sea Company naturally helped to spread such stories and the public became increasingly interested in its shares. What the company neglected to tell the public was that the South Seas were then controlled by Spain and not England. Moreover, Spain allowed the South Sea Company to send only one ship a year to trade with South America. Given the limited investment opportunities in England of those days, the Englishmen eagerly subscribed to the first shares which were issued. The first trading expedition with the South Seas was not carried out until 1717 and the profit obtained was not spectacular. Following this, the Earl of Oxford embarked on a scheme of most extraordinary boldness and vision. The South Sea Company was to take over the \hole oi the national debt in exchange for further trading monopolies,

The scheme “as so hold that the public went wild with excitement and expectation. That a company could take over the complete debt of a country was so overwhelming an idea that its limitations in terms of capability were never questioned. On the day when the Bill was passed by Parliament, the price of the company’s stock rose from £135 to £300, With hindsight, we can say that there is nothing special in taking over the national debt but once the public’s imagination was fired, it knew no bounds. Robert Walpole, a great statesman of the time, spoke against it:

This dangerous practice of stock-jabbing (trading) would direct the genius of this when from trade and industry. The great principle of the project was an evil of great magnitude; it was to raise artificially the value of the stock, by exciting and keeping up a general infatuation, and by promising dividends out of funds which could never be adequate for this purpose.

The Earl of Oxford and his contemporaries were geniuses. Their vision and actions predated the corporate manipulators of the 1960s and 1970s, financial wizards such as Jimmy Ling, Gerry Tsai and Jim Slater. The similarities in the modus operandi of the two groups of market manipulators are remarkable.

Sustained by the self-perpetuating momentum of feverish market talk, the price of the South Sea Company stock kept on rising. By June 1720, it had reached £1,000, giving the South Sea Company a total value of £500 million. In perspective, the total cash in circulation in the whole of Europe at that time was approximately £100 million. The success of the South Sea Company attracted numerous imitators. Soon, it seemed that everyone was establishing his own South Sea Company. Indeed, these companies in time, were known at ‘Bubble Companies’ since they appeared so fast on the scene and many of them were based on empty talk.

Even the highest of the aristocrats oi the land became involved in these companies. The Prince of Wales was the chairman of one such company and made a gain of £40,000, a huge sum of that time. A large number of schemes of unbelievably fraudulent nature were proposed. Among the companies floated, there were? those established for the purposes of turning lead to silver, horse insurance, suppressing pirates and so on. The most extraordinary story was that of a printer who, envious of others making easy money, created his own scheme and invited the public to participate in a company ‘For carrying on an undertaking of great advantage, but nobody is to know what it is’. His company was capitalized at 5,000 shares of £100 each and on the day of offer, crowds had gathered outside his shop by 9 a.m. There were subscriptions for 1,000 shares by 2 pm. and each required a deposit of £2. He pocketed the £2,000 paid in, closed his shop and was never seen again. In spite of nefarious schemes like these, the public was undeterred. The whole country was caught up in buying and selling newly-issued but often shares of little worth. Activities became so hectic that the ‘stock exchange’ of the time, Exchange Alley (an alley used for trading shares) could not cope with the volume of work. The men resorted to using taverns for the same purpose. The ladies, not to be left out (they were banned by law from taverns), used cloth merchants’ premises or shops where bats were sold.

Of course, this speculative fever could not possibly last forever. Eventually the public ran out of cash and many frauds were revealed. At long last, the public’s confidence was shaken. The stock of the South Sea Company began to drop in spite of all attempts by the directors to prop up the price. By 2 September, 1720, the price of its stock was down to £700 (from £1,000). Ten days later, it fell further to £400 in spite of many meetings held to inspire confidence in the company. By then, the whole country was in an uproar and everyone was stricken ed with panic. The King was urged to return from Hanover and Bank of England officials met to decide what was best to be done. Meanwhile, the public rushed to dispose of their South Sea Company stocks, so clearly treasured a few weeks before. The desperation to get to the Exchange Alley became a mad stampede. Masses of people crowded every inch of the Alley to the point of suffocation. People were panic-stricken and helpless. By the end of September, the stock of the South Sea Company was down to £129 and most bubble companies were totally worthless. True to form, another great speculative mania had run its full course.

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