1 00:00:00,320 --> 00:00:03,640 If you walk down Change Alley in the City of London, you'll come 2 00:00:03,640 --> 00:00:07,880 across a blue plaque marking the site of Jonathan's Coffee House. 3 00:00:08,160 --> 00:00:10,880 A bit further down the street, look up and you'll see a 4 00:00:10,880 --> 00:00:16,120 memorial to Garraways, another long gone coffee shop boat lost 5 00:00:16,120 --> 00:00:20,520 in a fire in 1746. Just around the corner where the 6 00:00:20,520 --> 00:00:24,360 Jamaica Winehouse is today, you'll see a third sign marking 7 00:00:24,360 --> 00:00:27,320 the location of the first coffee house in London. 8 00:00:27,840 --> 00:00:31,280 While Change Alley is fairly nondescript today, it was the 9 00:00:31,280 --> 00:00:34,160 busiest part of the city in 1720. 10 00:00:34,360 --> 00:00:37,760 And not because of the quality of the coffee, either, which was 11 00:00:37,760 --> 00:00:41,480 described in a review at the time as tasting like a hideous 12 00:00:41,480 --> 00:00:45,200 brew of burned bread crumbs, Hickory and, one hopes, some 13 00:00:45,200 --> 00:00:49,680 fraction of actual coffee beans. Another, less charitable review 14 00:00:49,880 --> 00:00:53,720 described it as smelling of Lucifer's deep furnace with a 15 00:00:53,720 --> 00:00:57,120 stench that would stifle virtue and good manners. 16 00:00:57,360 --> 00:01:00,840 So I get a bit like one of those pumpkin spice lattes. 17 00:01:01,640 --> 00:01:05,280 This is probably why Starbucks won't sponsor my channel, but 18 00:01:05,360 --> 00:01:10,280 we'll keep going. In 1720, Change Alley had not 19 00:01:10,280 --> 00:01:14,360 yet had its name abbreviated. It was still called Exchange 20 00:01:14,360 --> 00:01:18,480 Alley and it was the busiest St. in the city because those coffee 21 00:01:18,480 --> 00:01:22,040 shops were where people went to trade shares in the South Sea 22 00:01:22,040 --> 00:01:27,200 Company, a company whose stock price rose from around £100 at 23 00:01:27,200 --> 00:01:31,760 the start of the year to over 1000 lbs by the summer, without 24 00:01:31,760 --> 00:01:35,080 the fundamentals of the business changing whatsoever. 25 00:01:35,520 --> 00:01:39,360 The Royal Exchange, which is just across from Exchange Alley, 26 00:01:39,480 --> 00:01:43,320 had been established by Royal Charter in 1571. 27 00:01:43,520 --> 00:01:47,480 There was a limit of 100 licensed brokers who could trade 28 00:01:47,480 --> 00:01:51,240 on the exchange. Brokers acted as intermediaries, 29 00:01:51,240 --> 00:01:53,920 executing orders for their clients and charging a 30 00:01:53,920 --> 00:01:56,480 Commission. They weren't allowed to sell 31 00:01:56,480 --> 00:02:00,480 shares to a client if they had a position in the stock, as this 32 00:02:00,480 --> 00:02:03,080 was seen as being a conflict of interest. 33 00:02:03,320 --> 00:02:07,160 Stock jobbers, on the other hand, a less reputable crowd, 34 00:02:07,440 --> 00:02:11,320 bought and sold securities on their own account, making a 35 00:02:11,320 --> 00:02:14,120 profit from the price differences between what they 36 00:02:14,120 --> 00:02:16,920 paid when they bought and the price they sold at. 37 00:02:17,120 --> 00:02:20,960 This was a risky business, but one where ordinary people 38 00:02:20,960 --> 00:02:23,720 sometimes made extraordinary fortunes. 39 00:02:24,120 --> 00:02:29,520 Walter Thornberry Rd. in 1878 of a watchmaker turned stock jobber 40 00:02:29,520 --> 00:02:33,640 named Quare who made such a fortune on Exchange Alley that 41 00:02:33,640 --> 00:02:37,400 the Princess of Wales, the Duchess of Marlboro and 300 42 00:02:37,400 --> 00:02:42,600 quality guests attended his daughters wedding in 1698. 43 00:02:42,800 --> 00:02:46,240 The stock jobbers had been expelled from the Royal Exchange 44 00:02:46,240 --> 00:02:50,000 because of their terrible behaviour and at first they took 45 00:02:50,000 --> 00:02:52,880 up trading in the street outside the exchange. 46 00:02:53,200 --> 00:02:56,680 After a short while, the city government prohibited them from 47 00:02:56,680 --> 00:02:59,920 meeting on the street, so they started to meet up to trade 48 00:02:59,920 --> 00:03:03,840 stocks at Jonathan's Coffee House and soon all of the other 49 00:03:03,840 --> 00:03:08,400 coffee houses in Exchange Alley. Exchange Alley was the perfect 50 00:03:08,400 --> 00:03:12,360 location for this business as it sat right between the General 51 00:03:12,360 --> 00:03:14,520 Post Office and the Royal Exchange. 52 00:03:14,680 --> 00:03:18,200 And when news from around the world arrived in London, it 53 00:03:18,200 --> 00:03:22,360 usually came via the Post Office, and thus the jobbers in 54 00:03:22,360 --> 00:03:26,080 the coffee shops would often hear the news before it worked 55 00:03:26,080 --> 00:03:30,400 its way up to the Royal Exchange or the Bank of England Exchange. 56 00:03:30,400 --> 00:03:34,560 Alley was an unruly place, and the news that spread wasn't 57 00:03:34,560 --> 00:03:37,440 always true. One afternoon, according to 58 00:03:37,440 --> 00:03:41,280 legend, a uniformed horseman galloped down the Queen's road, 59 00:03:41,440 --> 00:03:44,920 proclaiming that Her Majesty the Queen had died. 60 00:03:45,240 --> 00:03:49,000 Prices began to collapse, as a new monarch might be unwilling 61 00:03:49,000 --> 00:03:52,440 to pay the debts of the old one and might support different 62 00:03:52,440 --> 00:03:55,280 companies. It was noticed, however, that 63 00:03:55,280 --> 00:03:59,640 one group of jobbers mostly kept to themselves and only stepped 64 00:03:59,640 --> 00:04:03,120 in to buy near the market lows. It turned out to have been a 65 00:04:03,120 --> 00:04:05,280 hoax. The queen was fine and the 66 00:04:05,280 --> 00:04:10,600 jobbers had been tricked out of their stock. 1720 was a year of 67 00:04:10,600 --> 00:04:14,600 two bubbles and a plague. The bubbles were the Mississippi 68 00:04:14,600 --> 00:04:17,920 Company in France and the South Sea Bubble in England. 69 00:04:18,120 --> 00:04:22,200 In September, when the bubble burst, England was plunged into 70 00:04:22,200 --> 00:04:24,440 an economic and political crisis. 71 00:04:24,680 --> 00:04:28,120 This was one of the first examples of a financial boom and 72 00:04:28,120 --> 00:04:32,280 bust and was the event that gave rise to the use of the term 73 00:04:32,280 --> 00:04:35,320 bubble to describe a spectacular market failure. 74 00:04:35,760 --> 00:04:39,720 The plague which came towards the end of the year devastated 75 00:04:39,720 --> 00:04:43,400 the population of Marseille and made the already terrible 76 00:04:43,400 --> 00:04:46,280 economic conditions in Europe even worse. 77 00:04:46,960 --> 00:04:50,200 The Southsea company is frequently described as being 78 00:04:50,200 --> 00:04:54,880 like a financial shell with no real operations, for a mania 79 00:04:54,880 --> 00:04:58,720 amongst investors drove the price higher and higher until 80 00:04:58,760 --> 00:05:02,320 the bubble finally popped. But there actually was some 81 00:05:02,320 --> 00:05:05,920 sense to what happened and the company itself didn't collapse 82 00:05:05,920 --> 00:05:09,720 into bankruptcy when the bubble burst, it was only wound down in 83 00:05:09,720 --> 00:05:16,120 eighteen 53133 years later. In today's video, let's look at 84 00:05:16,120 --> 00:05:20,480 what the South Company actually did, who made and lost money in 85 00:05:20,480 --> 00:05:23,960 the bubble, the flaw in the company's structure that led to 86 00:05:23,960 --> 00:05:27,640 all of the problems, the corrupt politicians, and most 87 00:05:27,640 --> 00:05:31,560 importantly, how the different reactions to bubbles bursting in 88 00:05:31,560 --> 00:05:36,120 England and France contributed to Britain's later victory over 89 00:05:36,120 --> 00:05:40,640 France 95 years later at the Battle of Waterloo, concluding 90 00:05:40,720 --> 00:05:44,960 the Napoleonic Wars. Today, we use the term bubble to 91 00:05:44,960 --> 00:05:48,760 describe a situation where the price of a stock or asset class 92 00:05:48,920 --> 00:05:53,040 inflates well beyond any fundamental value as investors 93 00:05:53,040 --> 00:05:57,000 suspend disbelief and just pump the price up until the bubble 94 00:05:57,000 --> 00:06:00,320 finally burst with a spectacular price crash. 95 00:06:00,640 --> 00:06:03,960 The South Sea Bubble and the Mississippi Bubble are the two 96 00:06:03,960 --> 00:06:07,840 early examples that we use, usually assuming that the term 97 00:06:07,840 --> 00:06:11,720 bubble got applied to them afterwards, much like it did to 98 00:06:11,720 --> 00:06:15,000 the.com Bubble bubble. But in the time of the South Sea 99 00:06:15,000 --> 00:06:19,120 Bubble, the term bubble was actually used as slang to mean 100 00:06:19,120 --> 00:06:21,760 scam. If someone was ripped off, you 101 00:06:21,760 --> 00:06:24,600 would say that they were bubbled out of their money. 102 00:06:24,880 --> 00:06:29,000 In fact, a popular song being sold as sheet music at the time 103 00:06:29,160 --> 00:06:32,840 was called the Hubble Bubble, and it was about foreigners like 104 00:06:32,840 --> 00:06:36,800 Scots, Irish, Italians and Jews conning people out of their 105 00:06:36,800 --> 00:06:39,240 money. At Jonathan's and Garraway, the 106 00:06:39,360 --> 00:06:43,320 two biggest coffee houses on Exchange Alley, it's sung to the 107 00:06:43,320 --> 00:06:47,240 tune of Over the Hills and Far Away and starts out the 108 00:06:47,240 --> 00:06:51,920 circumcised and uncircumcised. Come Hear my song and it only 109 00:06:51,920 --> 00:06:55,840 goes downhill from there. It's worth remembering that the 110 00:06:55,840 --> 00:06:59,280 South Sea Bubble occurred when the concept of hands off 111 00:06:59,280 --> 00:07:03,000 investing was quite new. The development of the joint 112 00:07:03,000 --> 00:07:07,000 stock company in Britain allowed businesses to attract large 113 00:07:07,000 --> 00:07:10,440 amounts of capital from investors who could easily sell 114 00:07:10,440 --> 00:07:13,480 their shares to someone else if they needed their money back. 115 00:07:13,720 --> 00:07:17,480 Before this type of structure existed, partnerships and more 116 00:07:17,480 --> 00:07:21,440 temporary alliances meant that investors had to be more hands 117 00:07:21,440 --> 00:07:25,120 on and they would often own specific parts of a larger 118 00:07:25,120 --> 00:07:27,680 business, like a ship or a machine. 119 00:07:27,880 --> 00:07:31,480 The joint stock structure made it possible to pool capital from 120 00:07:31,480 --> 00:07:35,440 a wider base and to operate indefinitely, which was a more 121 00:07:35,440 --> 00:07:40,480 flexible and scalable approach to doing business. 18th century 122 00:07:40,480 --> 00:07:44,120 London was filled with great thinkers who, inspired by 123 00:07:44,120 --> 00:07:48,400 scientists like Newton, Hook and Haley at the Royal Society, were 124 00:07:48,400 --> 00:07:51,400 applying mathematics to the world of business like never 125 00:07:51,400 --> 00:07:54,000 before. Insurance policies were being 126 00:07:54,000 --> 00:07:56,920 written at Lloyd's that considered probability and the 127 00:07:56,920 --> 00:08:00,600 time value of money. With all of these new things 128 00:08:00,600 --> 00:08:03,960 going on in the world, it's a mistake to think that the 129 00:08:03,960 --> 00:08:07,280 investors of the time were simple fools caught up in a 130 00:08:07,280 --> 00:08:10,640 speculative bubble. While financial mathematics had 131 00:08:10,640 --> 00:08:15,080 not yet been worked out at the time, 18th century investors 132 00:08:15,200 --> 00:08:18,880 weren't making any crazier investments than some people 133 00:08:18,880 --> 00:08:23,440 make today, and 18th century investors didn't have access to 134 00:08:23,440 --> 00:08:26,480 the same quality of information that we do now. 135 00:08:27,120 --> 00:08:31,920 The South Sea Company was established in 1711, largely at 136 00:08:31,920 --> 00:08:35,919 the initiative of Robert Harley, the newly empowered Chancellor 137 00:08:35,919 --> 00:08:39,000 of the Exchequer. The company was established as a 138 00:08:39,000 --> 00:08:43,240 counterpart to the East India Company and the Bank of England, 139 00:08:43,400 --> 00:08:47,240 which were both dominated by a rival political party, the 140 00:08:47,240 --> 00:08:50,240 Whigs. Harley was a Tory and didn't 141 00:08:50,240 --> 00:08:53,840 want the opposing party to dominate finance and business. 142 00:08:54,280 --> 00:08:58,320 At the time there was intense political partisanship in the UK 143 00:08:58,520 --> 00:09:03,080 between the two main parties and the monarch, Queen Anne, was in 144 00:09:03,080 --> 00:09:06,080 poor health and not very involved in politics. 145 00:09:06,600 --> 00:09:10,920 Britain had been involved in two long and expensive wars, the 146 00:09:10,920 --> 00:09:13,920 Nine Years War, which was quickly followed by the War of 147 00:09:13,920 --> 00:09:17,560 Spanish Succession which was still ongoing when the company 148 00:09:17,560 --> 00:09:20,520 was founded. Wars had grown more and more 149 00:09:20,520 --> 00:09:26,200 expensive over the years and by 1711 an army of 70,000 men had 150 00:09:26,200 --> 00:09:29,000 to be paid, fed, clothed and armed. 151 00:09:29,440 --> 00:09:33,080 Each war had seen government borrowing peak at between 5:00 152 00:09:33,120 --> 00:09:36,880 and 11:00 percent of GDP. With the government only able to 153 00:09:36,880 --> 00:09:40,440 run balanced budgets during the relatively rare peaceful 154 00:09:40,440 --> 00:09:43,640 intervals. This meant a steady growth in 155 00:09:43,640 --> 00:09:46,800 national debt. By the end of the War of Spanish 156 00:09:46,800 --> 00:09:51,320 Succession, England's long term national debt had grown from £7 157 00:09:51,320 --> 00:09:56,160 million to over 40,000,000 lbs. And that was just the long term 158 00:09:56,160 --> 00:09:58,120 debt. There was short term floating 159 00:09:58,120 --> 00:10:01,920 rate loans too which could be continued forever as long as the 160 00:10:01,920 --> 00:10:04,080 government kept up its interest payments. 161 00:10:04,280 --> 00:10:07,240 And on top of that, there were debt like instruments like 162 00:10:07,240 --> 00:10:10,600 pensions and annuities that had to be paid out too. 163 00:10:11,040 --> 00:10:14,400 By the time when the company was established, the government was 164 00:10:14,400 --> 00:10:17,840 already struggling to borrow. It had borrowed heavily from the 165 00:10:17,840 --> 00:10:21,200 East India Company and the privately owned Bank of England. 166 00:10:21,480 --> 00:10:25,320 The Treasury then turned to the public to borrow even more. 167 00:10:25,480 --> 00:10:29,040 And to entice lenders, the government was issuing lottery 168 00:10:29,040 --> 00:10:32,120 loans where if you bought a ticket, you stood a chance of 169 00:10:32,120 --> 00:10:35,000 winning a prize. But even if you didn't win, you 170 00:10:35,000 --> 00:10:37,760 could hold on to the ticket and earn interest. 171 00:10:38,320 --> 00:10:43,000 In 1711, to place 30 year lottery loans, the government 172 00:10:43,000 --> 00:10:47,200 had to pay the prize money plus 8% annually. 173 00:10:47,480 --> 00:10:51,600 The interest rate alone was 50% higher than private borrowers 174 00:10:51,600 --> 00:10:53,600 were paying. At the same time. 175 00:10:53,920 --> 00:10:57,760 The War of Spanish Succession was largely considered a Whig 176 00:10:57,760 --> 00:11:01,800 war and now that the Tories were in power, Harley's goal was to 177 00:11:01,800 --> 00:11:05,240 end the war and get the national debt under control. 178 00:11:05,560 --> 00:11:09,880 The plan was to use the Southsea Company to consolidate and 179 00:11:09,880 --> 00:11:12,400 reduce the cost of England's national debt. 180 00:11:12,720 --> 00:11:16,800 The idea was that lenders could transfer their bonds to this new 181 00:11:16,800 --> 00:11:20,960 private company in a debt for equity swap, exchanging the 182 00:11:20,960 --> 00:11:24,920 promise of regular interest payments for a stake in a new, 183 00:11:25,000 --> 00:11:29,040 hopefully profit making concern. While this might sound like a 184 00:11:29,040 --> 00:11:32,040 wild scheme, it wasn't entirely new. 185 00:11:32,320 --> 00:11:36,520 The Bank of England had done something similar in 1697, 186 00:11:36,680 --> 00:11:40,320 offering its shares in exchange for bonds when it looked like 187 00:11:40,320 --> 00:11:44,160 the government might default. Lenders had gone with this deal, 188 00:11:44,320 --> 00:11:48,320 as the bet was that the Bank, as one big lender, could negotiate 189 00:11:48,320 --> 00:11:51,160 more firmly with the government than all of the small 190 00:11:51,160 --> 00:11:55,520 bondholders could individually, and thus the debt was more 191 00:11:55,520 --> 00:11:58,920 likely to be repaid. This had worked for the Bank of 192 00:11:58,920 --> 00:12:02,400 England investors, so it could work for the Southsea Company 193 00:12:02,400 --> 00:12:05,400 too. To generate income, the company 194 00:12:05,400 --> 00:12:09,480 was granted a monopoly on trade with the islands in the South 195 00:12:09,480 --> 00:12:13,720 Seas and South America, all of which were Spanish colonies. 196 00:12:14,040 --> 00:12:17,880 England was at war with Spain at the time, so this was not an 197 00:12:17,880 --> 00:12:21,320 awfully valuable ride. It did, however, have the 198 00:12:21,320 --> 00:12:25,840 potential for future profits if peace was negotiated, and maybe 199 00:12:25,840 --> 00:12:29,400 even huge profits if something unexpected happened, like the 200 00:12:29,400 --> 00:12:34,000 collapse of the Spanish Empire. Given the massive fortunes that 201 00:12:34,000 --> 00:12:37,840 East Indian merchants had made in international trade and the 202 00:12:37,840 --> 00:12:41,520 success of the Bank of England's debt for equity swap, this 203 00:12:41,520 --> 00:12:45,080 wasn't as harebrained a scheme as it's since been made out to 204 00:12:45,080 --> 00:12:47,240 be. The exchange of government debt 205 00:12:47,240 --> 00:12:51,360 for company stock was supposed to occur in five separate lots, 206 00:12:51,480 --> 00:12:56,040 and the first two of these, totalling £2.75 million, had 207 00:12:56,040 --> 00:12:59,720 already been arranged before the company charter was issued. 208 00:13:00,240 --> 00:13:03,640 The company's stock initially traded at around the value of 209 00:13:03,640 --> 00:13:06,480 the debt that had been submitted, which means that 210 00:13:06,480 --> 00:13:10,280 investors were not paying any premium for the right to trade 211 00:13:10,280 --> 00:13:14,720 in the South Seas. In 1713, as hostilities with 212 00:13:14,720 --> 00:13:18,680 Spain began to cool, Spain granted the company the right to 213 00:13:18,680 --> 00:13:24,520 sell up to 4800 slaves per year at any port in South America. 214 00:13:25,040 --> 00:13:28,680 The African coast was mostly under the control of local 215 00:13:28,680 --> 00:13:33,040 African leadership, and slave forts or castles were given to 216 00:13:33,040 --> 00:13:36,400 various European nations where they could buy slaves for 217 00:13:36,400 --> 00:13:38,520 transportation to their colonies. 218 00:13:38,840 --> 00:13:42,920 The Spanish didn't have an African Fort, so instead bought 219 00:13:42,920 --> 00:13:46,840 slaves, mostly from the Portuguese and the Genoese, but 220 00:13:46,840 --> 00:13:49,280 later the Dutch, French and British. 221 00:13:49,920 --> 00:13:53,600 The South Sea Company worked with an existing British slaving 222 00:13:53,600 --> 00:13:57,480 company, the Royal African Company, and shipped thousands 223 00:13:57,480 --> 00:14:01,240 of people across the Atlantic, which you can see in this chart. 224 00:14:01,800 --> 00:14:05,760 This trade was not particularly profitable for them for a number 225 00:14:05,760 --> 00:14:09,560 of reasons. Firstly, more slaves died at sea 226 00:14:09,560 --> 00:14:12,040 on their ships than on their rival ships. 227 00:14:12,200 --> 00:14:15,840 Secondly, a line in their contract allowed buyers to 228 00:14:15,840 --> 00:14:19,640 purchase slaves with the fruits of the country, meaning that 229 00:14:19,640 --> 00:14:23,200 buyers could pay with various commodities, which of course 230 00:14:23,200 --> 00:14:27,080 they did, which often spoiled or fell in value while being 231 00:14:27,080 --> 00:14:30,120 shipped back to England. And thirdly, and most 232 00:14:30,120 --> 00:14:33,480 importantly, they discovered covered in the fine print that 233 00:14:33,480 --> 00:14:37,320 the King of Spain, Queen Anne of England and some other nobles 234 00:14:37,520 --> 00:14:42,120 got to claim 58% of the profits of each permitted trading 235 00:14:42,120 --> 00:14:45,080 journey. Thus, the South Seas trade 236 00:14:45,280 --> 00:14:48,880 didn't yield any real wealth to those who had exchanged their 237 00:14:48,880 --> 00:14:52,520 government bonds for equity. But this didn't really matter 238 00:14:52,520 --> 00:14:56,240 much, as the traders in Exchange Alley were just valuing the 239 00:14:56,240 --> 00:15:00,200 company as a pure financial play based on the value of the bonds 240 00:15:00,200 --> 00:15:02,840 it held. They didn't really expect much 241 00:15:02,840 --> 00:15:05,560 of the trading license, at least to begin with. 242 00:15:06,320 --> 00:15:11,400 In 1714, Queen Anne died and her cousin George, a relatively 243 00:15:11,400 --> 00:15:15,280 remote German Prince who had the advantage of being Protestant, 244 00:15:15,440 --> 00:15:19,840 was made King of England. A year later, the Tories lost in 245 00:15:19,840 --> 00:15:22,960 an election and the Whigs were now back in power. 246 00:15:23,480 --> 00:15:27,040 All of this should have been bad for the South Sea Company, but 247 00:15:27,040 --> 00:15:30,920 the company had become important enough to the financial system 248 00:15:31,080 --> 00:15:34,120 that it managed to survive Harley's fall from political 249 00:15:34,120 --> 00:15:37,240 power. The company agreed to forget 250 00:15:37,360 --> 00:15:41,320 £1,000,000 in payments due from the Treasury, making itself 251 00:15:41,320 --> 00:15:45,440 useful to the new leadership. The new leaders had their work 252 00:15:45,440 --> 00:15:48,400 cut out for them. Despite Harley's efforts to 253 00:15:48,400 --> 00:15:50,840 bring the nation's debts under control. 254 00:15:51,040 --> 00:15:54,720 Britain's finances were a tangled mess of loans that had 255 00:15:54,720 --> 00:15:58,680 been negotiated 1 by 1 as needed, some being lotteries, 256 00:15:58,680 --> 00:16:02,120 others annuities, and others being linked to distinct streams 257 00:16:02,120 --> 00:16:06,360 of revenue, like taxes on beer. It took took the WIG leadership 258 00:16:06,560 --> 00:16:10,680 three years to even work out how much money was owed and to whom. 259 00:16:11,000 --> 00:16:14,440 This was calculated by one of the youngest new ministers, 260 00:16:14,640 --> 00:16:18,600 Robert Walpole, who would later go on to be Britains first and 261 00:16:18,600 --> 00:16:22,600 longest serving Prime Minister. Walpole came up with a 262 00:16:22,600 --> 00:16:26,560 comprehensive plan to improve the nation's finances by 263 00:16:26,560 --> 00:16:30,400 consolidating and refinancing the debt at the new, lower 264 00:16:30,400 --> 00:16:33,520 interest rates. A big problem though, was that 265 00:16:33,520 --> 00:16:38,200 1/3 of the total outstanding loans were irredeemable bonds. 266 00:16:38,480 --> 00:16:41,960 They'd been issued with a legally binding promise that 267 00:16:41,960 --> 00:16:45,800 they couldn't be repaid ahead of schedule without their owner's 268 00:16:45,800 --> 00:16:49,520 consent, and these were the highest interest rate bonds, 269 00:16:49,640 --> 00:16:52,400 with rates about double a prevailing rate. 270 00:16:52,760 --> 00:16:56,360 The bondholders were also some of the wealthiest and most 271 00:16:56,360 --> 00:16:59,960 politically connected people in England, and it would be way too 272 00:16:59,960 --> 00:17:03,920 risky to try to force them to give up their high returns as 273 00:17:03,920 --> 00:17:06,920 the government might need to borrow from them again at some 274 00:17:06,920 --> 00:17:11,040 point in the future. These irredeemable bonds had one 275 00:17:11,040 --> 00:17:14,920 real downside for investors. They couldn't be transferred to 276 00:17:14,920 --> 00:17:18,599 another person, so the one thing Walpole could offer the 277 00:17:18,599 --> 00:17:23,079 investors was liquidity in exchange for a lower interest 278 00:17:23,079 --> 00:17:24,839 rate. If they would exchange their 279 00:17:24,839 --> 00:17:29,040 bonds for lower yielding bonds, the new bonds could be tradable, 280 00:17:29,200 --> 00:17:32,600 meaning that the investors could access their money whenever they 281 00:17:32,600 --> 00:17:35,120 needed it. Before this deal could be 282 00:17:35,120 --> 00:17:39,080 negotiated, however, internal political disputes within the 283 00:17:39,080 --> 00:17:42,400 Whig Party meant that Walpole was sidelined. 284 00:17:42,560 --> 00:17:46,160 He lost his position in both the Cabinet and the Treasury in 285 00:17:46,160 --> 00:17:50,440 1717. John Blunt, who had been leading 286 00:17:50,560 --> 00:17:54,400 the Southsea Company, loved a little financial trickery. 287 00:17:54,600 --> 00:17:57,760 A few years earlier, when the government had failed to pay 288 00:17:57,760 --> 00:18:01,920 £1,000,000 in interest to the company, he had negotiated that 289 00:18:01,920 --> 00:18:05,080 the interest arrears could be transformed into Southsea 290 00:18:05,080 --> 00:18:08,640 Company capital. Under the deal, that capital 291 00:18:08,640 --> 00:18:13,440 could be held as new shares with a face value of £100 a share, 292 00:18:13,600 --> 00:18:17,000 which could be sold at the coffee houses at whatever price 293 00:18:17,000 --> 00:18:20,160 the market would bear. When interest rates went down, 294 00:18:20,320 --> 00:18:23,960 the value of the company shares had gone up and the stock could 295 00:18:23,960 --> 00:18:28,920 be sold for more than £100 a win for the Southsea Company. 296 00:18:29,320 --> 00:18:34,120 In 1719, the company agreed with the Treasury to conduct an 297 00:18:34,120 --> 00:18:38,400 experiment where they would swap Southsea Company stock for one 298 00:18:38,400 --> 00:18:42,960 and a half 1,000,000 lbs of irredeemable 9% bonds with 30 299 00:18:42,960 --> 00:18:46,360 years remaining on them. While bond mathematics didn't 300 00:18:46,360 --> 00:18:50,240 yet exist, they were able to work out a fair value by pricing 301 00:18:50,240 --> 00:18:53,760 the bonds as if they were land, with a rental cash flow 302 00:18:53,760 --> 00:18:56,000 equivalent to the bonds coupon yield. 303 00:18:56,480 --> 00:18:59,800 The bonds would be swapped for newly issued Southsea Company 304 00:18:59,800 --> 00:19:04,960 stock at a par value of £100 a share, but because the shares 305 00:19:04,960 --> 00:19:09,480 were trading in Exchange Alley at 115 lbs a share, anyone 306 00:19:09,480 --> 00:19:12,120 making the swap would be ahead of the deal. 307 00:19:12,480 --> 00:19:16,280 On top of that, they would go from holding an illiquid asset 308 00:19:16,400 --> 00:19:19,360 to a liquid asset. The treasury would get a 309 00:19:19,360 --> 00:19:23,400 renegotiated lower interest rate out of the deal and save money 310 00:19:23,400 --> 00:19:26,920 on administrative costs as they would only have to deal with one 311 00:19:26,920 --> 00:19:30,720 counterparty as opposed to all of the individual bond holders. 312 00:19:31,080 --> 00:19:34,720 The real trick though, was that to fund the bond purchase, the 313 00:19:34,720 --> 00:19:37,840 company would be allowed to issue equity at par value of 314 00:19:37,840 --> 00:19:42,040 £100 per share, meaning that every 1000 lbs to be loaned 315 00:19:42,160 --> 00:19:44,840 would add 10 shares to the company's accounts. 316 00:19:45,200 --> 00:19:48,000 But the money that would actually fund that loan would 317 00:19:48,000 --> 00:19:51,040 come from selling shares at whatever price the market could 318 00:19:51,040 --> 00:19:53,760 bear. So if Exchange Alley quoted 319 00:19:53,760 --> 00:19:58,000 prices above par, the company would pocket the difference, in 320 00:19:58,000 --> 00:20:01,440 essence enjoying the same windfall offered to those being 321 00:20:01,440 --> 00:20:03,840 enticed to swap their bonds for shares. 322 00:20:04,120 --> 00:20:08,240 At the same time, the shares were trading at £114.00 per 323 00:20:08,240 --> 00:20:14,440 share, so 100 lbs would fund the loan, leaving 14 lbs or 14% 324 00:20:14,440 --> 00:20:17,280 gain. For the company itself, this was 325 00:20:17,280 --> 00:20:20,800 good for existing shareholders who would reap the benefit of 326 00:20:20,800 --> 00:20:23,720 the extra cash put in by new investors. 327 00:20:24,240 --> 00:20:29,040 The company began selling new shares in the spring of 1719 and 328 00:20:29,040 --> 00:20:32,320 everything went according to plan, allowing the company to 329 00:20:32,320 --> 00:20:37,920 record a profit of £270,000. This was seen as such a success 330 00:20:38,120 --> 00:20:41,520 that the company quickly began negotiating with the Treasury to 331 00:20:41,520 --> 00:20:45,720 do it again, but this time around with the entire national 332 00:20:45,720 --> 00:20:48,600 debt. When this much bigger deal was 333 00:20:48,600 --> 00:20:51,840 pitched to Parliament, there was a lot of excitement. 334 00:20:52,160 --> 00:20:55,800 Robert Walpole, who had been moved to the backbenches, would 335 00:20:55,800 --> 00:20:58,960 have towed the party line as he couldn't succeed if the party 336 00:20:58,960 --> 00:21:02,120 didn't succeed. But he did have some scores to 337 00:21:02,120 --> 00:21:05,480 settle with his rivals within the party who had demoted him to 338 00:21:05,480 --> 00:21:08,800 the backbenches. So he praised the overall plan 339 00:21:08,800 --> 00:21:12,280 in Parliament but possibly to cause a bit of trouble. 340 00:21:12,400 --> 00:21:15,120 Questioned why the deal went straight to the South Sea 341 00:21:15,240 --> 00:21:17,800 Company without any competing quotes. 342 00:21:18,000 --> 00:21:20,920 Shouldn't the East India Company and the Bank of England be 343 00:21:20,920 --> 00:21:24,320 allowed to bid too? After an auction process was 344 00:21:24,320 --> 00:21:28,440 decided upon, the Southsea Company still won the deal but 345 00:21:28,440 --> 00:21:33,880 now had to pay the Treasury £7.6 million, which is over a billion 346 00:21:33,880 --> 00:21:36,760 in today's money for the right to do the deal. 347 00:21:37,080 --> 00:21:40,400 The bill that was voted on in Parliament allowed the Southsea 348 00:21:40,400 --> 00:21:44,760 Company to create new shares at par value up to the amount of 349 00:21:44,760 --> 00:21:47,200 the national debt exchanged in the deal. 350 00:21:47,480 --> 00:21:50,800 But if the shares were trading above that value in Exchange 351 00:21:50,800 --> 00:21:55,040 Alley, they could offer debt holders a swap payment based on 352 00:21:55,040 --> 00:21:59,240 that market valuation, keeping the additional shares within the 353 00:21:59,240 --> 00:22:02,960 company which could then be sold at the will of the company. 354 00:22:03,240 --> 00:22:06,440 This meant that the higher the share prices went, the more 355 00:22:06,440 --> 00:22:10,120 shares that they could hold on to to sell on Exchange Alley at 356 00:22:10,120 --> 00:22:13,200 a profit. As the deal was being debated, 357 00:22:13,400 --> 00:22:17,880 Walpole once again inserted himself between his rivals and 358 00:22:17,880 --> 00:22:21,480 their dreams of great wealth by pointing out the flaw in the 359 00:22:21,480 --> 00:22:25,600 deal and how it incentivized pumping up the stock price, as 360 00:22:25,600 --> 00:22:29,640 doing so benefited existing shareholders at the expense of 361 00:22:29,640 --> 00:22:33,200 new ones. Maybe, he asked, the deal could 362 00:22:33,200 --> 00:22:37,640 be made a bit more fair. The South Sea Company insiders 363 00:22:37,640 --> 00:22:41,480 pursued a ruthless campaign of bribery where the company's 364 00:22:41,480 --> 00:22:45,320 cashier, Robert Knight, allocated free shares to any 365 00:22:45,320 --> 00:22:48,880 politician or grandy who could help close the deal. 366 00:22:49,120 --> 00:22:52,320 I'm sure this scale of corruption is shocking to modern 367 00:22:52,320 --> 00:22:56,320 day listeners who can't imagine a scenario where politicians are 368 00:22:56,320 --> 00:22:59,880 allocated tokens that could become valuable if they agreed 369 00:22:59,880 --> 00:23:02,640 to pump the price. But things were different in 370 00:23:02,640 --> 00:23:06,160 18th century England. It's hard to know if Walpole 371 00:23:06,160 --> 00:23:09,640 didn't take any shares because of his morals or because he was 372 00:23:09,640 --> 00:23:13,360 more interested in slowing down his rivals in Parliament for his 373 00:23:13,360 --> 00:23:16,520 own political gain. But the fact that his hands were 374 00:23:16,520 --> 00:23:20,520 clean in this deal helped in his rise to power after the bubble 375 00:23:20,520 --> 00:23:23,240 burst. As the deal was getting done, 376 00:23:23,320 --> 00:23:26,560 stock prices in general were rising on exchange. 377 00:23:26,560 --> 00:23:30,960 Ally Daniel Defoe wrote that April right before the deal went 378 00:23:30,960 --> 00:23:35,800 live that a man that is out of stocks may almost as well be out 379 00:23:35,800 --> 00:23:39,120 of the world. Southsea Company stock almost 380 00:23:39,120 --> 00:23:42,840 tripled in value in the month leading up to the first swap on 381 00:23:42,840 --> 00:23:48,480 April 14th. Winston Churchill famously said 382 00:23:48,600 --> 00:23:51,920 that history is written by the victors, but in the case of the 383 00:23:51,920 --> 00:23:55,320 South Sea Bubble, it was mostly written by the losers. 384 00:23:55,560 --> 00:23:59,760 Servants, politicians, Lords and ladies were all drawn into the 385 00:23:59,760 --> 00:24:02,880 scheme, with many facing bankruptcy when the market 386 00:24:02,880 --> 00:24:05,520 crashed. A lot of the well known writers 387 00:24:05,520 --> 00:24:09,720 of the day also invested and lost out, and they were well 388 00:24:09,720 --> 00:24:12,200 placed to describe the financial carnage. 389 00:24:12,760 --> 00:24:15,880 Of course a bubble like this is a 0 sum game. 390 00:24:16,080 --> 00:24:18,920 For everyone who lost money there had to be a winner. 391 00:24:19,120 --> 00:24:23,240 But the winners in this case had the good sense to keep quiet, as 392 00:24:23,240 --> 00:24:26,240 boasting about your gains when so many people lost their 393 00:24:26,240 --> 00:24:29,440 savings might draw the wrong kind of attention. 394 00:24:30,080 --> 00:24:32,200 There are a few stories that we do know. 395 00:24:32,400 --> 00:24:35,800 An analyst who published his calculations as the stock price 396 00:24:35,800 --> 00:24:40,400 rose, A miser philanthropist who had bought in before the bubble 397 00:24:40,480 --> 00:24:42,600 and managed to exit near the top. 398 00:24:42,840 --> 00:24:46,160 Company insiders who were forced to explain themselves before 399 00:24:46,160 --> 00:24:48,840 Parliament. A Duke who lost everything, 400 00:24:48,840 --> 00:24:50,920 trading derivatives on company stock. 401 00:24:51,080 --> 00:24:55,320 And the greatest scientist in history, Isaac Newton, who also 402 00:24:55,320 --> 00:24:58,720 got involved. Archibald Hutchinson was a 403 00:24:58,720 --> 00:25:02,200 member of Parliament who was fascinated by the calculations 404 00:25:02,200 --> 00:25:05,040 made by the scientists at the Royal Society. 405 00:25:05,360 --> 00:25:09,640 Once the deal was agreed upon, he saw an opportunity to test 406 00:25:09,640 --> 00:25:13,600 his mathematics by estimating a rational price for the company 407 00:25:13,600 --> 00:25:16,200 shares. The types of calculations done 408 00:25:16,200 --> 00:25:20,600 by modern equity analysts didn't exist at the time, but people 409 00:25:20,600 --> 00:25:24,360 did understand that a business was worth more than the value of 410 00:25:24,360 --> 00:25:28,080 its physical assets. Hutchinson, starting in March 411 00:25:28,080 --> 00:25:33,200 1720, began publishing pamphlets with his calculations of how 412 00:25:33,200 --> 00:25:36,760 successful the company would have to be to justify various 413 00:25:36,760 --> 00:25:40,000 stock prices. He treated the company's profits 414 00:25:40,000 --> 00:25:43,240 as equivalent to the rent achieved on a piece of land. 415 00:25:43,520 --> 00:25:46,960 The company, he argued, had to do something profitable with its 416 00:25:46,960 --> 00:25:49,480 capital to justify the stock price. 417 00:25:49,680 --> 00:25:52,240 It would be receiving interest from the Treasury, which 418 00:25:52,240 --> 00:25:56,120 explained some of the price, but in order to justify a price of 419 00:25:56,200 --> 00:26:00,040 say £200 per share, he calculated that the company 420 00:26:00,120 --> 00:26:03,640 would have to make almost three and a half £1,000,000 a year in 421 00:26:03,640 --> 00:26:07,400 profit from trading with Spanish America, which he felt was 422 00:26:07,400 --> 00:26:10,840 impossible. South Sea voyages had so far 423 00:26:10,840 --> 00:26:15,800 struggled to bring in £100,000 in total profit over the last 424 00:26:15,800 --> 00:26:20,520 three years, and in 1720 the company didn't ship any slaves 425 00:26:20,520 --> 00:26:23,560 to the South Seas due to disputes with Spain. 426 00:26:24,200 --> 00:26:28,080 The way Hutchinson saw it, anyone could count, think and 427 00:26:28,080 --> 00:26:32,240 use the results of formal calculation to tame his emotions 428 00:26:32,240 --> 00:26:34,960 and make choices armored by reason. 429 00:26:35,240 --> 00:26:39,400 Unfortunately, mathematics was incomprehensible to the general 430 00:26:39,400 --> 00:26:43,960 public in 1720, so no one paid any attention to his work. 431 00:26:44,680 --> 00:26:49,000 As the stock price rose, investors piled in and South Sea 432 00:26:49,000 --> 00:26:56,400 shares hit £500 on May 28 and closed at 720 lbs on June 1st, a 433 00:26:56,400 --> 00:27:02,320 gain of 50% in just four days. Thomas Guy was the son of a 434 00:27:02,320 --> 00:27:06,080 Carpenter who learned enough Latin and Greek at school to be 435 00:27:06,080 --> 00:27:09,880 taken on as an apprentice book dealer at the age of 16. 436 00:27:10,360 --> 00:27:14,040 He set up his own business at the age of 24, securing big 437 00:27:14,040 --> 00:27:18,000 clients like Oxford University. He later branched out into 438 00:27:18,000 --> 00:27:20,840 publishing. Some called him a miser because 439 00:27:20,840 --> 00:27:25,800 of his simple lifestyle. In 1711, Guy converted some of 440 00:27:25,800 --> 00:27:30,240 his government bonds into shares in the South Sea Company at £100 441 00:27:30,240 --> 00:27:32,880 per share. In that first debt for equity 442 00:27:32,880 --> 00:27:37,800 swap, by 17/20 he had already received 10 years worth of 443 00:27:37,800 --> 00:27:40,200 dividends. He started selling his shares 444 00:27:40,200 --> 00:27:44,480 that April at 300 lbs a share, slowly exiting his massive 445 00:27:44,480 --> 00:27:49,080 position as the price went up. When he sold his last shares at 446 00:27:49,080 --> 00:27:54,760 £700 that June, he was done. He had a past fortune equivalent 447 00:27:54,760 --> 00:27:58,480 to around half a billion pounds in today's money and committed 448 00:27:58,480 --> 00:28:02,200 it all to building a hospital to help the people of London. 449 00:28:02,720 --> 00:28:06,600 Guy's Hospital is still around today and is one of the largest 450 00:28:06,600 --> 00:28:11,080 hospitals in the UK. Guy kept no record of his 451 00:28:11,080 --> 00:28:14,320 thoughts, so we can only infer his reasoning from his 452 00:28:14,320 --> 00:28:18,000 behaviour, but he possibly reached the conclusion that his 453 00:28:18,000 --> 00:28:21,640 shares were worth more of cash than his part ownership in a 454 00:28:21,640 --> 00:28:26,200 novel and increasingly uncertain financial experiment and just 455 00:28:26,200 --> 00:28:29,160 sold up. The Duke of Marlborough was one 456 00:28:29,160 --> 00:28:33,720 of Britain's wealthiest man and his wife Sarah Churchill was an 457 00:28:33,720 --> 00:28:37,040 experienced investor. She appears to have converted 458 00:28:37,040 --> 00:28:41,040 some bonds into stock in the early days of the scheme, and 459 00:28:41,040 --> 00:28:44,120 while there are records of her writing a letter asking for 460 00:28:44,120 --> 00:28:48,200 stock allocations for some of her friends, she notably didn't 461 00:28:48,200 --> 00:28:53,200 request any for herself. She sold her shares at 500 lbs, 462 00:28:53,360 --> 00:28:58,280 walking away with a tidy profit. Sarah Churchill was an ancestor 463 00:28:58,280 --> 00:29:01,280 of both Winston Churchill and Princess Diana. 464 00:29:02,040 --> 00:29:05,920 The Duke of Portland was another of Britain's wealthiest man, 465 00:29:06,040 --> 00:29:09,120 having inherited vast estates from his father. 466 00:29:09,440 --> 00:29:13,680 Over the year of the bubble, he signed 24 different forward 467 00:29:13,680 --> 00:29:17,240 contracts to buy company shares and when the bubble burst that 468 00:29:17,240 --> 00:29:21,360 summer, found that he owed far more to his creditors than he 469 00:29:21,360 --> 00:29:24,840 could ever repay. He wiped out his family fortune 470 00:29:24,840 --> 00:29:28,680 in just a few months. Isaac Newton is known to have 471 00:29:28,680 --> 00:29:32,000 invested in the South Sea Company too, and he's quoted as 472 00:29:32,000 --> 00:29:36,080 having said I can calculate the movements of the stars, but not 473 00:29:36,080 --> 00:29:39,360 the madness of man. While many have claimed that he 474 00:29:39,360 --> 00:29:42,520 lost money in the bubble, there's only one record 475 00:29:42,520 --> 00:29:46,080 surviving of his investment in the scheme and that is of him 476 00:29:46,080 --> 00:29:52,040 selling his shares on April 19th of 1720 at 300 lbs a share when 477 00:29:52,040 --> 00:29:54,680 the stock made its first great advance. 478 00:29:54,920 --> 00:29:58,120 Assuming that this was his only trade, he would have tripled his 479 00:29:58,120 --> 00:30:03,720 money, making a 20,000 LB profit a significant sum in 1720. 480 00:30:04,280 --> 00:30:07,280 Many of the people who made money in the bubble appear to 481 00:30:07,280 --> 00:30:10,160 have been people who saw that a dull investment that they 482 00:30:10,160 --> 00:30:14,240 already owned had become a risky gamble and so sold. 483 00:30:14,960 --> 00:30:18,520 Company insiders, you won't be surprised to hear, did quite 484 00:30:18,520 --> 00:30:22,280 well too, with many selling their shares at high prices and 485 00:30:22,280 --> 00:30:25,480 buying vast amounts of real estate with the proceeds. 486 00:30:26,400 --> 00:30:29,680 So what caused the stock price to inflate so fast? 487 00:30:30,280 --> 00:30:32,640 Well, John Blunt and the directors of the Southsea 488 00:30:32,640 --> 00:30:36,800 Company understood very clearly that the entire success of the 489 00:30:36,800 --> 00:30:40,440 scheme depended on pushing the stock price higher and higher. 490 00:30:40,640 --> 00:30:43,680 So they did everything they could, starting with bribing 491 00:30:43,680 --> 00:30:46,280 politicians and anyone else with influence. 492 00:30:46,560 --> 00:30:50,360 The first share subscription in mid-april required investors to 493 00:30:50,360 --> 00:30:54,160 put down only 20% of the purchase price, and they could 494 00:30:54,160 --> 00:30:57,480 pay off the rest in installments over 16 months. 495 00:30:58,120 --> 00:31:02,240 To add fuel to the fire, the next subscription required only 496 00:31:02,240 --> 00:31:06,360 a 10% down payment, with the installment stretching out even 497 00:31:06,360 --> 00:31:08,880 longer. The 3rd and 4th subscriptions 498 00:31:09,040 --> 00:31:11,600 came over the summer on similar terms. 499 00:31:12,040 --> 00:31:15,200 Allowing people to invest with borrowed money and giving them 500 00:31:15,200 --> 00:31:18,320 more and more leverage will have helped the price to soar. 501 00:31:18,680 --> 00:31:23,440 The company shareholders voted early on to allow the directors 502 00:31:23,440 --> 00:31:27,760 to lend money to investors using Southsea stock as collateral, 503 00:31:28,040 --> 00:31:32,200 creating a feedback loop that pumped more cash into a rising 504 00:31:32,200 --> 00:31:35,520 market. A financial writer wrote after 505 00:31:35,520 --> 00:31:39,040 the crash that everyone, including the shareholders who 506 00:31:39,040 --> 00:31:42,880 voted to give company officers this power, new do exactly what 507 00:31:42,880 --> 00:31:46,520 they were doing. On June 17th, with the stock 508 00:31:46,520 --> 00:31:50,720 price near its all time high, King George made John Blunt, the 509 00:31:50,720 --> 00:31:54,520 leader of the scheme, a baronet, a title that survives in his 510 00:31:54,520 --> 00:31:58,840 family to this day. As the bubble inflated, other 511 00:31:58,840 --> 00:32:02,120 promoters took the opportunity to raise capital for their own 512 00:32:02,120 --> 00:32:05,760 business ventures, and many of these ventures were harebrained 513 00:32:05,760 --> 00:32:09,960 schemes quickly thrown together to take advantage of the ease 514 00:32:09,960 --> 00:32:12,360 with which money could be raised at the time. 515 00:32:12,640 --> 00:32:16,200 The Prince of Wales, the future King of England, even got 516 00:32:16,200 --> 00:32:19,960 involved himself, lending his name to a venture called the 517 00:32:19,960 --> 00:32:23,560 Welsh Copper Company and agreeing to serve as its 518 00:32:23,560 --> 00:32:26,200 governor. The Prince was warned against 519 00:32:26,200 --> 00:32:29,400 getting involved in a stock market scam which would taint 520 00:32:29,400 --> 00:32:33,000 his good name, but ignored his counsellors as he was paid 521 00:32:33,120 --> 00:32:37,680 £40,000 for his involvement. The flurry of new stock 522 00:32:37,680 --> 00:32:41,760 offerings started to worry South Sea Company insiders that the 523 00:32:41,760 --> 00:32:45,000 new stocks would obstruct the rise in their stock. 524 00:32:45,120 --> 00:32:47,440 You can't have distractions like this. 525 00:32:47,880 --> 00:32:51,160 They used their influence to pass a new law, the Bubble 526 00:32:51,160 --> 00:32:55,280 Company Act, which declared all businesses that raised money in 527 00:32:55,280 --> 00:32:58,320 the manner of a chartered company without a charter from 528 00:32:58,320 --> 00:33:01,200 the Royal government illegal and void. 529 00:33:01,480 --> 00:33:05,040 Dozens of these start up companies shut down over the 530 00:33:05,040 --> 00:33:09,320 next few weeks, including the Prince's Welsh Copper Company. 531 00:33:10,160 --> 00:33:13,640 At it's peak that summer, Exchange Alley priced the 532 00:33:13,640 --> 00:33:17,600 Southsea company as being worth more than all of the real estate 533 00:33:17,600 --> 00:33:21,000 in Great Britain. Then something surprising 534 00:33:21,000 --> 00:33:23,400 happened. The stock price started to 535 00:33:23,400 --> 00:33:26,200 slide. The company directors fought 536 00:33:26,200 --> 00:33:30,280 back by boosting the dividend, which caused a one day rise. 537 00:33:30,480 --> 00:33:34,280 But the stock price continued it's fall and was now falling 538 00:33:34,280 --> 00:33:38,400 just as fast as it had risen. While some blamed the bust on 539 00:33:38,400 --> 00:33:42,400 foreign investors pulling out, there was no big announcement or 540 00:33:42,400 --> 00:33:45,000 event. The game was just over. 541 00:33:45,280 --> 00:33:48,880 News of a plague in the port of Marseille did nothing to help 542 00:33:48,880 --> 00:33:53,000 those hoping for another pump. Other stocks like the East India 543 00:33:53,000 --> 00:33:56,760 Company and the Bank of England rose and fell with the South Sea 544 00:33:56,760 --> 00:33:59,480 Company, but in a much more muted manner. 545 00:34:00,280 --> 00:34:04,000 The collapse of the South Sea Company was a massive scandal 546 00:34:04,160 --> 00:34:06,960 and the parliamentary committee was set up to uncover 547 00:34:06,960 --> 00:34:10,000 corruption. Those who had lost money argued 548 00:34:10,159 --> 00:34:13,239 that the whole deal should be unwound and all share 549 00:34:13,239 --> 00:34:16,000 transactions that occurred over the six month period of the 550 00:34:16,000 --> 00:34:18,679 bubble should be made null and void. 551 00:34:19,239 --> 00:34:22,280 Robert Walpole, who had been sidelined for most of the 552 00:34:22,280 --> 00:34:25,840 events, was now being seen as the man who could solve the 553 00:34:25,840 --> 00:34:28,600 nation's problems. He was one of the few in 554 00:34:28,600 --> 00:34:30,480 Parliament whose hands were clean. 555 00:34:30,880 --> 00:34:34,199 He was pragmatic enough to try to ease the pain of the 556 00:34:34,199 --> 00:34:38,440 collapse, but was clear that the nature of contracts meant that 557 00:34:38,440 --> 00:34:41,159 the deal at its heart could not be undone. 558 00:34:41,440 --> 00:34:45,040 Robert Knight, the company cashier who had kept record of 559 00:34:45,040 --> 00:34:48,840 all of the company's bribes to politicians, fled the country, 560 00:34:48,960 --> 00:34:52,840 taking his records with him. A bit of a show was put on about 561 00:34:52,840 --> 00:34:56,800 trying to extradite him back to the UK, but I don't think anyone 562 00:34:56,800 --> 00:35:00,440 in Parliament wanted his book of bribes being made public. 563 00:35:01,080 --> 00:35:04,440 From a government perspective, for all the madness that had 564 00:35:04,440 --> 00:35:08,440 gone on in Exchange Alley, it had been a financial triumph for 565 00:35:08,440 --> 00:35:12,080 the nation where the mass of high interest rate loans have 566 00:35:12,080 --> 00:35:16,040 been consolidated to 1 lender with a manageable interest rate 567 00:35:16,160 --> 00:35:19,040 and principle that could be repaid at any time. 568 00:35:19,640 --> 00:35:23,080 Sir John Blunt, the leader of the South Sea Company, was 569 00:35:23,080 --> 00:35:26,040 hauled out in front of Parliament to answer questions. 570 00:35:26,240 --> 00:35:29,000 But the problem for the politicians who were supposed to 571 00:35:29,000 --> 00:35:32,720 be grilling him was that he could take them all down as he 572 00:35:32,720 --> 00:35:35,280 knew how much money they had all taken. 573 00:35:35,560 --> 00:35:38,560 Fortunately for them, he refused to speak. 574 00:35:39,040 --> 00:35:43,360 Walpole, whose personal record was clean, was still a party man 575 00:35:43,520 --> 00:35:46,560 and wanted to keep the Whig Party in control. 576 00:35:46,760 --> 00:35:50,360 So while he was able to use the scandal to take out some of his 577 00:35:50,360 --> 00:35:54,360 political rivals within the Whig Party, it was more important for 578 00:35:54,360 --> 00:35:56,680 him to keep things under control. 579 00:35:57,280 --> 00:36:00,680 The people who had been wiped out in the crash wanted revenge 580 00:36:00,880 --> 00:36:03,920 and if they couldn't get their money back, they wanted to see 581 00:36:03,920 --> 00:36:08,520 those responsible suffering too. Walpole had to make this happen 582 00:36:08,640 --> 00:36:12,040 while still keeping his party in control of Parliament. 583 00:36:12,520 --> 00:36:17,040 The amount of bribery that had occurred was staggering, £1.7 584 00:36:17,040 --> 00:36:22,000 million in bribes and £1.8 million in company loans had 585 00:36:22,000 --> 00:36:26,320 been distributed amongst almost 200 members of both Houses of 586 00:36:26,320 --> 00:36:29,400 government. Walpole sacrificed some to 587 00:36:29,400 --> 00:36:34,240 protect the rest 6 Southsea Company directors who also held 588 00:36:34,240 --> 00:36:36,800 government posts were thrown under the bus. 589 00:36:37,400 --> 00:36:41,480 The House of Commons expelled 4 members who were also company 590 00:36:41,480 --> 00:36:44,920 directors. Southsea Company officers were 591 00:36:44,920 --> 00:36:48,520 ordered to catalogue their estates, which were then seized 592 00:36:48,520 --> 00:36:52,160 and sold off for the benefit of Southsea Company investors. 593 00:36:52,680 --> 00:36:56,120 With that, the major political battles came to an end, and 594 00:36:56,320 --> 00:37:00,480 while the Whig Party survived mostly intact, its centre of 595 00:37:00,480 --> 00:37:03,080 gravity had now moved towards Walpole. 596 00:37:03,720 --> 00:37:07,240 The next year, Robert Walpole was appointed First Lord of the 597 00:37:07,240 --> 00:37:10,720 Treasury, Chancellor of the Exchequer and Leader of the 598 00:37:10,720 --> 00:37:14,320 House of Commons. His tenure as Prime Minister is 599 00:37:14,320 --> 00:37:18,200 often dated to this point. The term Prime Minister was 600 00:37:18,200 --> 00:37:21,640 originally used by his rivals to make fun of how he had 601 00:37:21,640 --> 00:37:25,080 consolidated power. The office of Prime Minister in 602 00:37:25,080 --> 00:37:27,720 Britain is not an official title. 603 00:37:27,840 --> 00:37:31,840 It only exists by long established convention where the 604 00:37:31,840 --> 00:37:35,720 monarch appoints as Prime Minister the person most likely 605 00:37:35,720 --> 00:37:39,560 to command the confidence of the House of Commons, and Walpole is 606 00:37:39,560 --> 00:37:42,720 today considered the first British Prime Minister. 607 00:37:43,320 --> 00:37:48,000 In 1720 both Britain and France experienced financial bubbles 608 00:37:48,000 --> 00:37:52,480 and crashes, but their choices as to how to rebuild afterwards 609 00:37:52,600 --> 00:37:56,160 were very different and reverberated through the global 610 00:37:56,160 --> 00:37:59,480 war France and Britain waged over the next century. 611 00:37:59,960 --> 00:38:04,560 In France, like in London, there was no bailout or do over and in 612 00:38:04,560 --> 00:38:08,800 France law scheme had tamed the nation's national debt, just 613 00:38:08,800 --> 00:38:11,040 like the South Sea Company had done in Britain. 614 00:38:11,400 --> 00:38:16,360 In France, however, 1.4 million stock transactions were reviewed 615 00:38:16,520 --> 00:38:19,920 and those who had exchanged debt were treated better than mere 616 00:38:19,920 --> 00:38:23,920 speculators, possibly because this preserved the social order. 617 00:38:24,320 --> 00:38:28,200 In France, experiments with money were over with and the 618 00:38:28,200 --> 00:38:31,160 country returned to its old way way of selling the right to 619 00:38:31,160 --> 00:38:35,160 collect taxes, an approach that made raising taxes in times of 620 00:38:35,160 --> 00:38:39,840 need extremely difficult. France also went back to the old 621 00:38:39,840 --> 00:38:44,080 way of issuing irredeemable debt to make up for tax shortfalls 622 00:38:44,280 --> 00:38:47,600 and borrowing in a haphazard way as needed. 623 00:38:47,920 --> 00:38:51,440 In Britain, the South Sea Company was kept alive but 624 00:38:51,440 --> 00:38:55,400 scaled back significantly and kept under stricter government 625 00:38:55,400 --> 00:38:58,320 control. It was broken up with some of 626 00:38:58,320 --> 00:39:01,160 its capital being transferred to to the Bank of England. 627 00:39:01,400 --> 00:39:05,200 The venturing arm was split off too, and they continued to do 628 00:39:05,200 --> 00:39:08,920 some trade with South America and even entered the whaling 629 00:39:08,920 --> 00:39:13,200 business with little success. Another Spanish war eventually 630 00:39:13,200 --> 00:39:15,640 brought that part of the business to an end. 631 00:39:16,040 --> 00:39:19,680 What was left of what had briefly been the largest private 632 00:39:19,680 --> 00:39:23,760 enterprise in the world became a financial back office, where 633 00:39:23,760 --> 00:39:27,120 clerks process debt issuance and interest payments for the 634 00:39:27,120 --> 00:39:30,560 British government. The company slowly reprocessed 635 00:39:30,560 --> 00:39:34,560 the national debt into a single pool of liquid government bonds 636 00:39:34,760 --> 00:39:38,120 that could be easily bought and sold by investors on an 637 00:39:38,120 --> 00:39:41,640 exchange. Britain's reliability in paying 638 00:39:41,640 --> 00:39:46,200 its debt brought interest rates down to just 3% per year. 639 00:39:46,680 --> 00:39:49,400 Having shown that the country could manage its debts 640 00:39:49,400 --> 00:39:53,680 prudently, whenever there was a need to borrow in time of war, 641 00:39:53,800 --> 00:39:58,480 investors were willing to lend. This financial consistency was 642 00:39:58,480 --> 00:40:01,800 Britain's secret weapon in the Napoleonic Wars. 643 00:40:02,320 --> 00:40:06,240 While France was twice as rich as Britain, and French subjects 644 00:40:06,320 --> 00:40:11,240 outnumbered Britons by as much as 3 to one in times of war, 645 00:40:11,240 --> 00:40:15,040 Britain was able to spend as much as four times as much money 646 00:40:15,040 --> 00:40:18,160 per subject. The fact that Britain kept its 647 00:40:18,160 --> 00:40:22,200 finances in better order meant that it could borrow more money 648 00:40:22,200 --> 00:40:25,520 at lower rates and fight France on a level footing. 649 00:40:25,800 --> 00:40:29,000 According to Thomas Levinson, who wrote an excellent book on 650 00:40:29,000 --> 00:40:33,200 this topic, over the course of the 18th century, the size of 651 00:40:33,200 --> 00:40:36,960 the nations at war came to matter less than the ability to 652 00:40:36,960 --> 00:40:40,960 mobilize the resources that each state's economy could produce. 653 00:40:41,600 --> 00:40:43,320 As well. As Britain's financial 654 00:40:43,320 --> 00:40:46,560 infrastructure worked for the government, it was not as well 655 00:40:46,560 --> 00:40:50,440 suited to private enterprise. America's corporate structure, 656 00:40:50,520 --> 00:40:54,400 which allowed new companies to raise capital on stock exchanges 657 00:40:54,560 --> 00:40:58,360 while limiting the liability for managers, became the next 658 00:40:58,360 --> 00:41:02,720 evolution of the financial system. the US had only half of 659 00:41:02,720 --> 00:41:06,480 Britain's population in the 1820s, but it's bankers were 660 00:41:06,480 --> 00:41:10,680 able to place four times the loans into the US economy as 661 00:41:10,680 --> 00:41:13,920 their British counterparts could, making it easier for 662 00:41:13,920 --> 00:41:17,520 anyone with a business idea to get up and running in the United 663 00:41:17,520 --> 00:41:20,520 States. This ease of raising capital 664 00:41:20,640 --> 00:41:23,680 funded an explosion of commercial enterprises in 665 00:41:23,680 --> 00:41:26,240 America that was without precedent. 666 00:41:26,800 --> 00:41:29,920 There are many other reasons for America's huge growth, such as 667 00:41:29,920 --> 00:41:33,760 the huge landmass and natural resources, but economic 668 00:41:33,760 --> 00:41:38,200 historians argue that Britain's public borrowing monopolized the 669 00:41:38,200 --> 00:41:42,240 available capital, reducing the amount of credit available to 670 00:41:42,240 --> 00:41:44,840 British businesses. Thanks for tuning into this 671 00:41:44,840 --> 00:41:48,080 week's podcast, with special thanks to my supporters on 672 00:41:48,080 --> 00:41:51,120 Patreon whose support allows this all to happen. 673 00:41:51,320 --> 00:41:54,680 If you want to support the channel, I'll put a link in the 674 00:41:54,680 --> 00:41:57,160 show notes. Have a great day and talk to you 675 00:41:57,160 --> 00:41:58,400 again soon. Bye.