1911 Encyclopædia Britannica/South Sea Bubble

SOUTH SEA BUBBLE, the name given to a series of financial projects which originated with the incorporation of the South Sea Company in 1711, and ended nine years later in general disaster.

The idea at the root of the parent scheme was that the state should sell certain trading monopolies to a company in return for a sum of money to be devoted to the reduction of the national debt, and in the form which it took in 1711 it possibly owes its existence to Daniel Defoe, who discussed it frequently with Edward Harley (1664–1735), brother of Robert Harley, earl of Oxford. In 1711 the South Sea Company was formed, and was granted a monopoly of the British trade with South America and the Pacific Islands, the riches of which were popularly regarded as illimitable. Its promoters, mainly wealthy merchants, took over nearly £10,000,000 of the national debt, on which they were to receive interest at the rate of 6% in addition to £8000 a year for the expenses of arrangement. The £600,000 was secured on certain customs duties. The company prospered, and in 1713, when the Asiento treaty was signed with Spain, it received the lucrative monopoly of the slave trade with Spanish America. It was the special pride of the Tories, who regarded it as a rival to the Whig institution, the Bank of England. In 1716 it obtained further concessions under the new Asiento treaty, and in 1717 it advanced a further sum of £2,000,000 to the government, but its prospects were greatly darkened by the outbreak of war between England and Spain in 1718. Yet it continued to thrive, and early in 1718 the king became its governor.

Towards the end of 1719 the directors of the company put before the government, the head of which was Charles Spencer, 3rd earl of Sunderland, a more ambitious scheme. In return for further concessions the company offered to take over the whole of the national debt and to pay £3,500,000 for this privilege. At this time the amount of the debt was £51,300,000, the greater part of which consisted of terminable annuities, money lent to the state in return for a fixed income for life. The company would receive interest at the rate of 5% until 1727, when it would be reduced to 4%. The advantage which the government hoped to obtain from this bargain was obvious; it would rid itself of the unpopular and burdensome debt. The advantages hoped for by the company were much greater, although perhaps not equally obvious. The aim of the directors was to persuade the annuitants of the state to exchange their annuities for South Sea stock; the stock would be issued at a high premium and thus a large amount of annuities would be purchased and extinguished by the issue of a comparatively small amount of stock. Moreover, when this process had been carried out the company would still receive from the government a sum of something like £1,500,000 a year. Seriously alarmed at the proposals of the South Sea Company, the directors of the Bank of England offered the government £5,000,000 for the same privilege, but the company outbid them with an offer of £7,567,ooo. This was accepted, the necessary act of parliament being passed in April 1720. It is interesting to note that one of the most sturdy opponents of the scheme was Sir Robert Walpole.

The year 1719, when the South Sea scheme was projected, was remarkably favourable to an undertaking of the kind. It was the year when France went delirious over John Law and his Mississippi Company, and the infection spread to England. But before April 1720, when everything was ready, a terrible reaction had begun in France, confidence and prosperity giving way to ruin and disaster. Nevertheless, the directors proceeded with their plan, and in a few weeks they had persuaded over one-half of the government annuitants to become shareholders in the company. Meanwhile the stock of the company had been appreciating steadily in value, and when the new scheme was launched the public began to purchase it more eagerly than before. From 128½ at the beginning of the year the price rose to 330 in March, and in April the directors sold two and a quarter millions of stock at 300. In May the price rose to 550, in June to 890, and in July it touched 1000. At this tremendous premium the directors sold five millions of stock.

By this time the extraordinary success of the South Sea Company had produced a crowd of imitators, and the result was a wild mania of speculation, and its inevitable end—a crash. Hundreds of companies were formed, some of them being fortunate enough to secure the active support of royal and titled personages; thus the prince of Wales, afterwards George II., became governor of the Welsh Copper Company. Some of these new companies, like the Royal Exchange and the London Assurance, were perfectly legitimate and honourable undertakings, but the great majority put forward the most audacious and chimerical proposals for extracting money from the public. One was " for a wheel for perpetual motion "; another was for a " design which will hereafter be promulgated," and it has been estimated that the total capital asked for by the promoters of these schemes amounted to £300,000,000. Profiting by the sad experience of France, the British government made an attempt to check this movement, and an act was passed for this purpose early in 1720. A proclamation ofthenthofjune against the promoters of illegal companies followed, and the directors of the South Sea Company persuaded the lords justices, who were acting as regents during the absence of the king, to abolish 86 companies as illegal.

In August the fall in the price of South Sea stock began, and in September, just as the " insiders " had sold out, it became serious. Instead of being a buyer every one became a seller, and the result was that in a few days the stock of the South Sea Company fell to 175, while the stocks of many other companies were unsaleable. In November South Sea stock fell to 135, and in four months the stock of the Bank of England fell from 263 to 145. Thousands were ruined, and many who were committed to heavy payments fled from the country. The popular cry was for speedy and severe vengeance, both on the members of the government and on the directors of the unfortunate company. Parliament was called together on the 8th of December 1720, and at once both houses proceeded to investigate the affairs of the company, the lower house soon entrusting this to a committee of secrecy. To stem the tide of disaster Sir Robert Walpole proposed that the Bank of England and the East India Company should each take over nine millions of South Sea stock, but although this received the assent of parliament it never came into force. More to the liking of the people was the act of January 1721 which restrained the directors from leaving the kingdom and compelled them to declare the value of their estates. The committee of secrecy reported in February 1721, and it proved that there had been fraud and corruption on a large scale. The company's books contained entries which were entirely fictitious, and the favours which the directors had secured from the state had been purchased by gifts to ministers, some of whom had also made large sums of money by speculating in the stock. The chief persons implicated were John Aislabie (1670–1742), chancellor of the exchequer; James Craggs, joint postmaster-general; his son James Craggs, secretary of state; and to a lesser degree the earl of Sunderland and Charles Stanhope, a commissioner of the treasury. Aislabie, who was perhaps the most deeply implicated, resigned his office in January, and in March he was found guilty by the House of Commons of the " most notorious, dangerous and infamous corruption "; he was expelled from the house and was imprisoned. Both the elder and the younger Craggs died in March, while owing to the efforts of Walpole both Sunderland and Stanhope were acquitted, the latter by the narrow majority of three. By act of parliament the estates of the directors were confiscated; these were valued at £2,014,123, of which £354,600 was returned to them for their maintenance, the balance being devoted to the relief of the sufferers.

Under the guidance of Walpole parliament then proceeded to deal with the wreck. £11,000,000 had been lent by the directors of the South Sea Company on the security of their own stock, the debtors of the company including 138 members of the House of Commons. This debt was remitted on payment of 10% of the sum borrowed, this being afterwards reduced to 5%, and the £7,567,000 due from the company to the government was also remitted. More serious, perhaps, was the case of those persons who had exchanged the substance of a government annuity for the shadow of a dividend on South Sea stock. They asked that the state should again guarantee to them their incomes, but in the end they only received something like one-half of what they had enioved before the bubble.

The South Sea Company with a capital of nearly £40,000,000 continued to exist, but not to flourish. Various changes were made in the nature of its capital, and in 1750 it received £100,000 from the Spanish government for the surrender of certain rights. Its commercial history then ended, but its exclusive privileges were not taken away until 1807. In 1853 the existing South Sea annuities were either redeemed or converted into government stock. The London headquarters of the company were the South Sea House in Threadneedle Street.