South Sea stock bubble Final Essay 2.0 PDF

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Was the political climate of 18th century Britain to blame for allowing the South Sea stock bubble to occur and how wide-reaching were the consequences of this affair? ...

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1 Was the political climate of 18th century Britain to blame for allowing the South Sea stock bubble to occur and how wide reaching were the consequences of this affair? (6500) The actions of the South Sea Company between the years 1711-1720 precipitated a stock market crash in the summer of 1720, the infamous South Sea Bubble. It was the first major financial crash of the early modern period and came about largely as a result of the Company’s scheme to repossess government debt. Due to the repossessing scheme being so convoluted and the clandestine actions of the Company there is still debate to be had as to the root causes of this unique affair. The Historiographical debate around the subject is outlined effectively by the early modern lecturer Natasha Glaisyer1. She effectively splits the debate into two main categories. The first is a more Whiggish view of the South Sea Company’s scheme and the crash, that it was an age defining event and held a lofty status, at least in terms of fiscal policy and credit. The opposing view is a more revisionist reading of the events, claiming that there was a multitude of factors contributing to the events which transpired and that the historical significance of the South Sea Company is a little overinflated. This second interpretation also tends to focus on specific fields of enquiry within the source material, such as a purely financial interpretation.

The Whiggish interpretation of the South Sea Company’s actions throughout the 1710s is one focusing on the significant individuals, their actions and grand narratives. Carswell, who spent much of his career as a civil servant, provides an in depth description of events, leading up to the South Sea Company’s schemes implementation and the political and economic fallout in the immediate aftermath. Much of Carswell’s volume on The South Sea Company centres around the colourful lives of the politicians and financiers at least in the latter sections2. The main reason given by Carswell for what transpired focuses on the changes resulting from the commercial revolution of credit access taking place and how that led to a changing relationship between government and business3. He goes onto characterise the effects of the Bubble as being profound, but not necessarily in a financial sense, saying political philosophy was irrevocably changed in the aftermath4. This view is taken further by Professor John Brewer who describes the large number of fixed term annuities issued by the government, in other words, the governments increasing reliance on debt as being a major 1 Natasha Glaisyer, The Culture of Commerce in England 1660-1720 (Woodbridge 2006), p.8 2 Janet Weston, ‘The South Sea Bubble by John Carswell’, The Journal of Finance 16 (1961), 446 3 John Carswell, The South Sea Bubble, revised edition 1993 (Stroud 1960), p.19 4 Carswell (1960), p.242

2 factor in combination with the competitive market for control of said debt5. According to Brewer’s analysis, the short term shock followed by a painful reconstruction of public finance helped to define the financial policy for the next century6. Brewers analysis of the South Sea Bubble prompting financial upheaval and reform is supported by the earlier writings of Peter George Muir Dickson7. But Dickson places the majority of responsibility for the bubble on the governments partially unjustified belief in their own bravura8. The opposing view of the revisionists is the more recent revision of not only the impetus for the actions of the South Sea Company but also the extent to which the crash really permeates society. Professor of economic history Julian Hoppit and the legal historian Ron Harris are the two most vocal supporters of this revisionist narrative. Hoppit’s analysis of events is that the South Sea Bubble was indicative of a wider trend of financial mismanagement and credit abuse leading to irrational bubbles throughout England and Europe9. He also attributes the ever growing power of the company the result of complacency in parliament towards regulation of joint stock companies, not outright corruption as Carswell has suggested10. Harris attributes the causes of the bubble to no factor in particular, citing the speculators, the small bubbles, and the joint-stock system as the roots of the disaster11. These are simply the most significant voices in the debate, and throughout the essay I will endeavour to introduce more historians analysis of the question.

The primary sources I will be using to answer the specified question are all dated from between 1710 and 1721. A letter from John Drummond to Robert Harley provides useful context as to the political environment around the formation of the company12. When placed in the historiographical debate previously discussed it lends credence to the Harris analysis, however, can also be applied to the Carswell thesis of changing financial landscapes. The act 5 John Brewer, The Sinews of Power: war, money and the English state 1688-1783 (Cambridge 1989), p.125 6 Brewer (1989), p.126 7 Peter George Muir Dickson, the financial revolution in England: a study in the development of public credit 1688-1756 (New York 1967), p.198 8 Dickson (1967), p.90 9 Julian Hoppit, A land of liberty: England 1689-1727 (New York 2000), p.336 10 Julian Hoppit, ‘The Myths of the South Sea Bubble’, Transactions of the Royal Historical Society 12 (2002),143 11 Ron Harris, ‘The Bubble Act: Its Passage and Its Effects on Business Organization’, The Journal of Economic History, vol 54 (1994), 611 12 John Drummond, “letter to Robert Harley, 22 August 1710”, the manuscripts of his grace the Duke of Portland, Vol 4, (Welbeck Abbey 1891), 572-573

3 of law to make King George the director of the South Sea Company allows analysis of the culture of the business at the time. When questioned further and used in conjunction with Carswell’s telling of events the political motivations for the act become more apparent13. The proposal submitted to parliament by the South Sea Company can shed light on the goals of the scheme and how, as Hoppit has attested to, it made sense for the government to accept the proposal1415. A pamphlet, published as a public letter available for purchase summarises well all the fundamental concerns about the company and the scheme of it undertaking government debt16. It shows that there were vocal objections to the exploits of South Sea beyond their financial chicanery that is the focus of historical analysis. A royal proclamation, from the king himself, demanding the return of Robert knight shows how the political establishment framed the crisis and how blame was directed at the time17. This proclamation to the realm seems to counter Glaisyer’s argument that the effects were centralised as due to this source the whole nation would have at least some knowledge of the exploits of the company18. Finally, a satirical wood cut from William Harvey attempts to capture the public reaction to events and who they saw as responsible19. Not only this but the source illustrates the London orientated nature of the crisis. All these sources, placed in the context of the debate around the South Sea Company, begin to paint a picture of a multifaceted, short term and centralised financial disaster. Although numerous, the causes seem to be mainly political, and the repercussions more positive than adverse.

The private correspondence between the then merchant banker John Drummond and Robert Harley is dated from the 22nd of August 1710. It is a letter of congratulations regarding Harleys the appointment as Chancellor of the Exchequer. Before delving into the source and 13 Great Britain, “An Act to enable His Majesty to be governor of the South-Sea Company”, Eighteenth Century Collections Online, (London 1718), 1-3 14 John fellows and Charles Foye, “The proceedings of the directors of the south sea company & co: to the honourable the commons of Great Britain in parliament assembled”, published by J. Roberts 1721, (London 1719), 1-5 15 Hoppit (2000), p.335 16 Anonymous, “A Letter to a Member of Parliament, occasion'd by the SouthSea Company's Scheme for reducing the publick Debts”, J. Roberts publishers, 2nd edition (London 1720), 1-24 17 King George the first, “A Proclamation, for apprehending and securing the person of Robert Knight, Cashier of the South Sea Company”, published in J. Baskett Proclamations George I 1714-1727, (London 1721) 18 Glaisyer (2006), p.178 19 William Hogarth, “The South Sea Scheme 1721”, etching and engraving, the British museum (not on display), (1721)

4 how it relates to the question it is appropriate to discuss the man who produced it. John Drummond, a merchant banker based in Amsterdam would become a key advisor and confidant to Robert Harley as the Tory administration was constructed20. Given this level of rapport, it can be concluded that the statements made by the source are the truthful thoughts of Drummond. The letter itself is a snapshot of the political and financial situation Robert Harley would have to contend with. Drummond makes clear he holds the previous leader of the government, Lord Godolphin, in poor repute when exclaiming ‘if the bank will undertake everything, they ought to have it’ when describing the poor exchange imposed on merchants. He goes on, imploring Harley to ‘keep Furnese doing something, that he may not do mischief’. this is referring to Sir Henry Furnese who was a member of parliament and director of the Bank of England who, along with others in the Whig controlled bank of England refused the new administration credit to fund its various military obligations in Europe21. At this point, Britain was in the midst of the war of the Spanish succession and subsequently forcing itself into debt in order to maintain its military presence in Europe22. The cost of the Duke of Marlborough’s army in the low countries totalled £1,500,000 annually, however even this figure was small in comparison to the navy debt of £6,000,00023. The irredeemable fixed term annuities issued by the government during this conflict would drive up the annual obligations of the government to its creditors, and would ultimately prove a significant motivator for reducing debt through the South Sea Company’s scheme24.

The main deficiencies of this source come from the time that it was written and the person who was writing it. As this letter was written August 1710 this is before the Tory government had held its first session, it had yet to formulate plans for the South Sea Company and would first attempt to raise capital through the lotteries, which is suggested by Drummond25. The 1711 lottery run by future South Sea director john blunt would supply the government with an immediate cash injection, however, due to the prizes being paid in instalments it only increased the annuity burden on parliamentary finances26. yet there is no direct connection of this letter to the company itself or the bubble that would arise almost 20 Romney Sedgwick, The History of Parliament: The House of Commons 1715-1754, volume 1, (London 1970), p.623 21 Hoppit (2000), p.334 22 Brewer (1989), p.115 23 Carswell (1960), p.41 24 Brewer (1989), p.125 25 Carswell (1960), p. 43 26 Carswell (1960), p.44

5 exactly ten years after the sources creation. While the source does allude to the government finances being in a sorry state, it does not give any idea as to the extent of the problem. At this time unfunded government debt amounted to around £9,000,00027. However, perhaps it is unfair to assume Drummond would have any knowledge to this effect, as it took a thorough investigation by Harley to determine how dire the government finances were. Being a letter too means it is inherently selective in its scope, the viewpoint of John Drummond, removed from England at the time provides obvious limitations. One aspect of this source to note is that the Duke of Portland, who’s collection this letter is preserved in, converted £15,000 worth of annuities into South Sea stock28. The letter can be applied to Hoppit’s argument that the South Sea Company was at its core a tory counter weight to a Whig dominated bank of England29. This source, placed in the context of the Hoppit analysis, adds credence to the idea that political partisanship played a role in allowing the bubble to happen. John Carswell’s analysis of the causes of the South Sea bubble can also be used to question this source further. When Drummond is asking favours of Harley to mention him to Theodore Janssen, along with the suggestion he heed the advice of bankers and businessmen such as Theodore Janssen, it provides evidence of Carswell’s claim that business interests were beginning to have a more prominent relationship with government and policy30. When engaged with sufficiently this source shows how the political environment of partisanship, along with the issuance of government bonds to pay for war were important factors in the creation and nature of The South Sea company.

The act enabling King George the first to become the governor of the South Sea Company is interesting to examine. created in 1718, the law appears to have been penned by Thomas Newcomb, a poet and clergyman on behalf of the king and parliament. Newcomb was a Whig leaning writer who would later create works on the ascendance of Robert Walpole31. the source itself describes the king’s official relationship with the Company, and attempts to justify the legality of him holding this new position. It also provides some interesting loopholes that need to be scrutinised. The law begins with outlining the King’s entitlement of £10,000 of the company’s stock, as is required under the company’s charter in order to have a 27 Carswell (1960), p.44 28 Carswell (1960), p.103 29 Hoppit (2002), p.142 30 Carswell (1960), p. 37 31 Tone Sundt Urstad, Sir Robert Walpole's Poets: the use of literature as pro-government propaganda, 1721-1742 (1999), p. 61

6 vote in any company meetings32. This is a good reference point as over the next two years the king would exceed this entitlement, making large stock purchases and investing heavily in the company. one purchase of stock totalled £100,00033. instantly, when further knowledge is applied shows the clandestine nature of many of the dealings that would occur with South Sea. This criminal element of the company is something that is neglected in the narrower revisionist histories of Hoppit and harries. Having a monarch with a financial stake in the company means that the king, along with many other members of parliament had a vested interest in seeing the price of stock rise. This helps explain why the wild speculation of the summer of 1720 was allowed to occur. The law rightly identifies the doubts as to whether this is even ethical or constitutional, however, this is dispelled by claiming this is done on the advice of the ‘lords spiritual and temporal and commons in this present parliament’. The last part of this quote is key, as at this point the commons was now Whig dominated and this appointment allows Whig control over the tory bank34. When examining the last section of the source there is a degree of degradation to the text, despite its digitisation, making some of the content challenging to read which somewhat limits the analysis of this source. yet there are key provisions at the end that are of great importance to answering this question. The law finishes by effectively allowing the deputy governor to vote in the king’s interests, and that any existing laws prohibiting this should not be considered. John Fellows held this position at the time, and while it was difficult to locate any concrete information about the man the final clauses of the law suggest that the king’s position may have been more ceremonial than the source would have the reader believe.

Now there are limitations to this source despite its usefulness. As with the letter from Drummond, because of the nature of the source as a brief law, it does not provide in depth communication of factors that caused the bubble. In no place does in mention partisanship, government finances, trade or any such other issues to do with the company. The political climate of the time had shifted massively, with ministers complicit in financial manipulation like John Aislebie coming to positions of power and holding the ear to the king35. When used in conjunction with the royal decree that will be examined later in this portfolio the act establishes a picture of the role that the monarch and to a further extent the political climate 32 Richard Dale, The First crash: Lessons from the South Sea Bubble, (Princeton 2004), p.47 33Carswell (1960), p.110 34 Sedgwick (1970), pp.19-28 35 Geoffrey Poitras, The early history of financial economics 1478-1776: from commercial arithmetic to life annuities and joint stocks (Cheltenham 2000), p.306

7 played in setting up the bubble. It begins to show us how men of little or no experience were being assigned to roles that were not suited to them. This is shown in the incompetence of the initial directors of the company, none of whom had any experience in South Sea trade which was supposedly a major part of the company’s revenue model36. This is a stark example of how the company was extending its reach from public to royal finance, creating an ever larger network of powerful individuals who would want to see the price of stock rise. The source also forces us to question Hoppit’s argument that the company’s tory origins were key for causing the bubble as is demonstrated by the evidence provided that by this point the party who envisaged it were completely uninvolved. Furthermore, this source, when placed within the context of historian’s analysis of events, especially Carswell and Hoppit supports the utility of the content. taken together the law gives credence to the idea that politics, unchecked power and conflicting interests all played a role in allowing the South Sea stock to balloon how it did. It is a demonstration of a Whig administration that sought to take control of a company whose relationship with the government had been poisoned at this point37. Nonetheless, at this point company stock had remained relatively stable since its initial issue, due to the limited amount of government debt that could be exchanged for stock. So comprehensively this source shows the Whigs tightening control over financial institution, by placing an inexperienced king at the head of what was the largest financial institution in Britain. This is clear evidence of an overabundance of credit38 and overconfident political climate putting financial stability at risk.

The proposal for the taking on of public debts was first presented to parliament by the company on the 17th of January 1719. drafted by John fellows and Charles Foye, the sub and deputy governors of the South Sea Company it sought to build on the relative success and popularity of the first £9,000,000 of government debt the company had converted39. Further expanding the scheme to encompass long term fixed annuities along with the leftover obligations from the 1711 lottery. This was something that Robert Harley could not have imagines when he set up the South Sea Company in 1711 and ultimately Aislabie was 36 Dale (2004), p.49 37 Carswell (1960)pg 56 38 Garry Cox, “Was the Glorious Revolution a Constitutional Watershed?”, the journal of economic history, vol 72 (2012) p567-568 39 Arne Bialuschewski, ‘A True Account of the Design, and Advantages of the South-Sea Trade: Profits, Propaganda, and the Peace Preliminaries of 1711’, Huntington Library Quarterly 73 (2010), 275

8 committing plain blunder in accepting the proposals40. The consolidation of so much debt into one company, drew anger from the other debt holders, The East India Company and The Bank of England. So how was such a radical law passed. Straight away the proposal specifies that its purpose is to reduce government payments on debt, presenting this as a service they are doing to the government. The company was somewhat correct in this, as under the proposals the exceptional sum of £31,000,000 in debt that the government was paying various rates on would be reduced to a uniform four percent, saving over £400,000 annually41. What is n...