If you walk down Change Alley in the City of London, you'll come
across a blue plaque marking the site of Jonathan's Coffee House.
A bit further down the street, look up and you'll see a
memorial to Garraways, another long gone coffee shop boat lost
in a fire in 1746. Just around the corner where the
Jamaica Winehouse is today, you'll see a third sign marking
the location of the first coffee house in London.
While Change Alley is fairly nondescript today, it was the
busiest part of the city in 1720.
And not because of the quality of the coffee, either, which was
described in a review at the time as tasting like a hideous
brew of burned bread crumbs, Hickory and, one hopes, some
fraction of actual coffee beans. Another, less charitable review
described it as smelling of Lucifer's deep furnace with a
stench that would stifle virtue and good manners.
So I get a bit like one of those pumpkin spice lattes.
This is probably why Starbucks won't sponsor my channel, but
we'll keep going. In 1720, Change Alley had not
yet had its name abbreviated. It was still called Exchange
Alley and it was the busiest St. in the city because those coffee
shops were where people went to trade shares in the South Sea
Company, a company whose stock price rose from around £100 at
the start of the year to over 1000 lbs by the summer, without
the fundamentals of the business changing whatsoever.
The Royal Exchange, which is just across from Exchange Alley,
had been established by Royal Charter in 1571.
There was a limit of 100 licensed brokers who could trade
on the exchange. Brokers acted as intermediaries,
executing orders for their clients and charging a
Commission. They weren't allowed to sell
shares to a client if they had a position in the stock, as this
was seen as being a conflict of interest.
Stock jobbers, on the other hand, a less reputable crowd,
bought and sold securities on their own account, making a
profit from the price differences between what they
paid when they bought and the price they sold at.
This was a risky business, but one where ordinary people
sometimes made extraordinary fortunes.
Walter Thornberry Rd. in 1878 of a watchmaker turned stock jobber
named Quare who made such a fortune on Exchange Alley that
the Princess of Wales, the Duchess of Marlboro and 300
quality guests attended his daughters wedding in 1698.
The stock jobbers had been expelled from the Royal Exchange
because of their terrible behaviour and at first they took
up trading in the street outside the exchange.
After a short while, the city government prohibited them from
meeting on the street, so they started to meet up to trade
stocks at Jonathan's Coffee House and soon all of the other
coffee houses in Exchange Alley. Exchange Alley was the perfect
location for this business as it sat right between the General
Post Office and the Royal Exchange.
And when news from around the world arrived in London, it
usually came via the Post Office, and thus the jobbers in
the coffee shops would often hear the news before it worked
its way up to the Royal Exchange or the Bank of England Exchange.
Alley was an unruly place, and the news that spread wasn't
always true. One afternoon, according to
legend, a uniformed horseman galloped down the Queen's road,
proclaiming that Her Majesty the Queen had died.
Prices began to collapse, as a new monarch might be unwilling
to pay the debts of the old one and might support different
companies. It was noticed, however, that
one group of jobbers mostly kept to themselves and only stepped
in to buy near the market lows. It turned out to have been a
hoax. The queen was fine and the
jobbers had been tricked out of their stock. 1720 was a year of
two bubbles and a plague. The bubbles were the Mississippi
Company in France and the South Sea Bubble in England.
In September, when the bubble burst, England was plunged into
an economic and political crisis.
This was one of the first examples of a financial boom and
bust and was the event that gave rise to the use of the term
bubble to describe a spectacular market failure.
The plague which came towards the end of the year devastated
the population of Marseille and made the already terrible
economic conditions in Europe even worse.
The Southsea company is frequently described as being
like a financial shell with no real operations, for a mania
amongst investors drove the price higher and higher until
the bubble finally popped. But there actually was some
sense to what happened and the company itself didn't collapse
into bankruptcy when the bubble burst, it was only wound down in
eighteen 53133 years later. In today's video, let's look at
what the South Company actually did, who made and lost money in
the bubble, the flaw in the company's structure that led to
all of the problems, the corrupt politicians, and most
importantly, how the different reactions to bubbles bursting in
England and France contributed to Britain's later victory over
France 95 years later at the Battle of Waterloo, concluding
the Napoleonic Wars. Today, we use the term bubble to
describe a situation where the price of a stock or asset class
inflates well beyond any fundamental value as investors
suspend disbelief and just pump the price up until the bubble
finally burst with a spectacular price crash.
The South Sea Bubble and the Mississippi Bubble are the two
early examples that we use, usually assuming that the term
bubble got applied to them afterwards, much like it did to
the.com Bubble bubble. But in the time of the South Sea
Bubble, the term bubble was actually used as slang to mean
scam. If someone was ripped off, you
would say that they were bubbled out of their money.
In fact, a popular song being sold as sheet music at the time
was called the Hubble Bubble, and it was about foreigners like
Scots, Irish, Italians and Jews conning people out of their
money. At Jonathan's and Garraway, the
two biggest coffee houses on Exchange Alley, it's sung to the
tune of Over the Hills and Far Away and starts out the
circumcised and uncircumcised. Come Hear my song and it only
goes downhill from there. It's worth remembering that the
South Sea Bubble occurred when the concept of hands off
investing was quite new. The development of the joint
stock company in Britain allowed businesses to attract large
amounts of capital from investors who could easily sell
their shares to someone else if they needed their money back.
Before this type of structure existed, partnerships and more
temporary alliances meant that investors had to be more hands
on and they would often own specific parts of a larger
business, like a ship or a machine.
The joint stock structure made it possible to pool capital from
a wider base and to operate indefinitely, which was a more
flexible and scalable approach to doing business. 18th century
London was filled with great thinkers who, inspired by
scientists like Newton, Hook and Haley at the Royal Society, were
applying mathematics to the world of business like never
before. Insurance policies were being
written at Lloyd's that considered probability and the
time value of money. With all of these new things
going on in the world, it's a mistake to think that the
investors of the time were simple fools caught up in a
speculative bubble. While financial mathematics had
not yet been worked out at the time, 18th century investors
weren't making any crazier investments than some people
make today, and 18th century investors didn't have access to
the same quality of information that we do now.
The South Sea Company was established in 1711, largely at
the initiative of Robert Harley, the newly empowered Chancellor
of the Exchequer. The company was established as a
counterpart to the East India Company and the Bank of England,
which were both dominated by a rival political party, the
Whigs. Harley was a Tory and didn't
want the opposing party to dominate finance and business.
At the time there was intense political partisanship in the UK
between the two main parties and the monarch, Queen Anne, was in
poor health and not very involved in politics.
Britain had been involved in two long and expensive wars, the
Nine Years War, which was quickly followed by the War of
Spanish Succession which was still ongoing when the company
was founded. Wars had grown more and more
expensive over the years and by 1711 an army of 70,000 men had
to be paid, fed, clothed and armed.
Each war had seen government borrowing peak at between 5:00
and 11:00 percent of GDP. With the government only able to
run balanced budgets during the relatively rare peaceful
intervals. This meant a steady growth in
national debt. By the end of the War of Spanish
Succession, England's long term national debt had grown from £7
million to over 40,000,000 lbs. And that was just the long term
debt. There was short term floating
rate loans too which could be continued forever as long as the
government kept up its interest payments.
And on top of that, there were debt like instruments like
pensions and annuities that had to be paid out too.
By the time when the company was established, the government was
already struggling to borrow. It had borrowed heavily from the
East India Company and the privately owned Bank of England.
The Treasury then turned to the public to borrow even more.
And to entice lenders, the government was issuing lottery
loans where if you bought a ticket, you stood a chance of
winning a prize. But even if you didn't win, you
could hold on to the ticket and earn interest.
In 1711, to place 30 year lottery loans, the government
had to pay the prize money plus 8% annually.
The interest rate alone was 50% higher than private borrowers
were paying. At the same time.
The War of Spanish Succession was largely considered a Whig
war and now that the Tories were in power, Harley's goal was to
end the war and get the national debt under control.
The plan was to use the Southsea Company to consolidate and
reduce the cost of England's national debt.
The idea was that lenders could transfer their bonds to this new
private company in a debt for equity swap, exchanging the
promise of regular interest payments for a stake in a new,
hopefully profit making concern. While this might sound like a
wild scheme, it wasn't entirely new.
The Bank of England had done something similar in 1697,
offering its shares in exchange for bonds when it looked like
the government might default. Lenders had gone with this deal,
as the bet was that the Bank, as one big lender, could negotiate
more firmly with the government than all of the small
bondholders could individually, and thus the debt was more
likely to be repaid. This had worked for the Bank of
England investors, so it could work for the Southsea Company
too. To generate income, the company
was granted a monopoly on trade with the islands in the South
Seas and South America, all of which were Spanish colonies.
England was at war with Spain at the time, so this was not an
awfully valuable ride. It did, however, have the
potential for future profits if peace was negotiated, and maybe
even huge profits if something unexpected happened, like the
collapse of the Spanish Empire. Given the massive fortunes that
East Indian merchants had made in international trade and the
success of the Bank of England's debt for equity swap, this
wasn't as harebrained a scheme as it's since been made out to
be. The exchange of government debt
for company stock was supposed to occur in five separate lots,
and the first two of these, totalling £2.75 million, had
already been arranged before the company charter was issued.
The company's stock initially traded at around the value of
the debt that had been submitted, which means that
investors were not paying any premium for the right to trade
in the South Seas. In 1713, as hostilities with
Spain began to cool, Spain granted the company the right to
sell up to 4800 slaves per year at any port in South America.
The African coast was mostly under the control of local
African leadership, and slave forts or castles were given to
various European nations where they could buy slaves for
transportation to their colonies.
The Spanish didn't have an African Fort, so instead bought
slaves, mostly from the Portuguese and the Genoese, but
later the Dutch, French and British.
The South Sea Company worked with an existing British slaving
company, the Royal African Company, and shipped thousands
of people across the Atlantic, which you can see in this chart.
This trade was not particularly profitable for them for a number
of reasons. Firstly, more slaves died at sea
on their ships than on their rival ships.
Secondly, a line in their contract allowed buyers to
purchase slaves with the fruits of the country, meaning that
buyers could pay with various commodities, which of course
they did, which often spoiled or fell in value while being
shipped back to England. And thirdly, and most
importantly, they discovered covered in the fine print that
the King of Spain, Queen Anne of England and some other nobles
got to claim 58% of the profits of each permitted trading
journey. Thus, the South Seas trade
didn't yield any real wealth to those who had exchanged their
government bonds for equity. But this didn't really matter
much, as the traders in Exchange Alley were just valuing the
company as a pure financial play based on the value of the bonds
it held. They didn't really expect much
of the trading license, at least to begin with.
In 1714, Queen Anne died and her cousin George, a relatively
remote German Prince who had the advantage of being Protestant,
was made King of England. A year later, the Tories lost in
an election and the Whigs were now back in power.
All of this should have been bad for the South Sea Company, but
the company had become important enough to the financial system
that it managed to survive Harley's fall from political
power. The company agreed to forget
£1,000,000 in payments due from the Treasury, making itself
useful to the new leadership. The new leaders had their work
cut out for them. Despite Harley's efforts to
bring the nation's debts under control.
Britain's finances were a tangled mess of loans that had
been negotiated 1 by 1 as needed, some being lotteries,
others annuities, and others being linked to distinct streams
of revenue, like taxes on beer. It took took the WIG leadership
three years to even work out how much money was owed and to whom.
This was calculated by one of the youngest new ministers,
Robert Walpole, who would later go on to be Britains first and
longest serving Prime Minister. Walpole came up with a
comprehensive plan to improve the nation's finances by
consolidating and refinancing the debt at the new, lower
interest rates. A big problem though, was that
1/3 of the total outstanding loans were irredeemable bonds.
They'd been issued with a legally binding promise that
they couldn't be repaid ahead of schedule without their owner's
consent, and these were the highest interest rate bonds,
with rates about double a prevailing rate.
The bondholders were also some of the wealthiest and most
politically connected people in England, and it would be way too
risky to try to force them to give up their high returns as
the government might need to borrow from them again at some
point in the future. These irredeemable bonds had one
real downside for investors. They couldn't be transferred to
another person, so the one thing Walpole could offer the
investors was liquidity in exchange for a lower interest
rate. If they would exchange their
bonds for lower yielding bonds, the new bonds could be tradable,
meaning that the investors could access their money whenever they
needed it. Before this deal could be
negotiated, however, internal political disputes within the
Whig Party meant that Walpole was sidelined.
He lost his position in both the Cabinet and the Treasury in
1717. John Blunt, who had been leading
the Southsea Company, loved a little financial trickery.
A few years earlier, when the government had failed to pay
£1,000,000 in interest to the company, he had negotiated that
the interest arrears could be transformed into Southsea
Company capital. Under the deal, that capital
could be held as new shares with a face value of £100 a share,
which could be sold at the coffee houses at whatever price
the market would bear. When interest rates went down,
the value of the company shares had gone up and the stock could
be sold for more than £100 a win for the Southsea Company.
In 1719, the company agreed with the Treasury to conduct an
experiment where they would swap Southsea Company stock for one
and a half 1,000,000 lbs of irredeemable 9% bonds with 30
years remaining on them. While bond mathematics didn't
yet exist, they were able to work out a fair value by pricing
the bonds as if they were land, with a rental cash flow
equivalent to the bonds coupon yield.
The bonds would be swapped for newly issued Southsea Company
stock at a par value of £100 a share, but because the shares
were trading in Exchange Alley at 115 lbs a share, anyone
making the swap would be ahead of the deal.
On top of that, they would go from holding an illiquid asset
to a liquid asset. The treasury would get a
renegotiated lower interest rate out of the deal and save money
on administrative costs as they would only have to deal with one
counterparty as opposed to all of the individual bond holders.
The real trick though, was that to fund the bond purchase, the
company would be allowed to issue equity at par value of
£100 per share, meaning that every 1000 lbs to be loaned
would add 10 shares to the company's accounts.
But the money that would actually fund that loan would
come from selling shares at whatever price the market could
bear. So if Exchange Alley quoted
prices above par, the company would pocket the difference, in
essence enjoying the same windfall offered to those being
enticed to swap their bonds for shares.
At the same time, the shares were trading at £114.00 per
share, so 100 lbs would fund the loan, leaving 14 lbs or 14%
gain. For the company itself, this was
good for existing shareholders who would reap the benefit of
the extra cash put in by new investors.
The company began selling new shares in the spring of 1719 and
everything went according to plan, allowing the company to
record a profit of £270,000. This was seen as such a success
that the company quickly began negotiating with the Treasury to
do it again, but this time around with the entire national
debt. When this much bigger deal was
pitched to Parliament, there was a lot of excitement.
Robert Walpole, who had been moved to the backbenches, would
have towed the party line as he couldn't succeed if the party
didn't succeed. But he did have some scores to
settle with his rivals within the party who had demoted him to
the backbenches. So he praised the overall plan
in Parliament but possibly to cause a bit of trouble.
Questioned why the deal went straight to the South Sea
Company without any competing quotes.
Shouldn't the East India Company and the Bank of England be
allowed to bid too? After an auction process was
decided upon, the Southsea Company still won the deal but
now had to pay the Treasury £7.6 million, which is over a billion
in today's money for the right to do the deal.
The bill that was voted on in Parliament allowed the Southsea
Company to create new shares at par value up to the amount of
the national debt exchanged in the deal.
But if the shares were trading above that value in Exchange
Alley, they could offer debt holders a swap payment based on
that market valuation, keeping the additional shares within the
company which could then be sold at the will of the company.
This meant that the higher the share prices went, the more
shares that they could hold on to to sell on Exchange Alley at
a profit. As the deal was being debated,
Walpole once again inserted himself between his rivals and
their dreams of great wealth by pointing out the flaw in the
deal and how it incentivized pumping up the stock price, as
doing so benefited existing shareholders at the expense of
new ones. Maybe, he asked, the deal could
be made a bit more fair. The South Sea Company insiders
pursued a ruthless campaign of bribery where the company's
cashier, Robert Knight, allocated free shares to any
politician or grandy who could help close the deal.
I'm sure this scale of corruption is shocking to modern
day listeners who can't imagine a scenario where politicians are
allocated tokens that could become valuable if they agreed
to pump the price. But things were different in
18th century England. It's hard to know if Walpole
didn't take any shares because of his morals or because he was
more interested in slowing down his rivals in Parliament for his
own political gain. But the fact that his hands were
clean in this deal helped in his rise to power after the bubble
burst. As the deal was getting done,
stock prices in general were rising on exchange.
Ally Daniel Defoe wrote that April right before the deal went
live that a man that is out of stocks may almost as well be out
of the world. Southsea Company stock almost
tripled in value in the month leading up to the first swap on
April 14th. Winston Churchill famously said
that history is written by the victors, but in the case of the
South Sea Bubble, it was mostly written by the losers.
Servants, politicians, Lords and ladies were all drawn into the
scheme, with many facing bankruptcy when the market
crashed. A lot of the well known writers
of the day also invested and lost out, and they were well
placed to describe the financial carnage.
Of course a bubble like this is a 0 sum game.
For everyone who lost money there had to be a winner.
But the winners in this case had the good sense to keep quiet, as
boasting about your gains when so many people lost their
savings might draw the wrong kind of attention.
There are a few stories that we do know.
An analyst who published his calculations as the stock price
rose, A miser philanthropist who had bought in before the bubble
and managed to exit near the top.
Company insiders who were forced to explain themselves before
Parliament. A Duke who lost everything,
trading derivatives on company stock.
And the greatest scientist in history, Isaac Newton, who also
got involved. Archibald Hutchinson was a
member of Parliament who was fascinated by the calculations
made by the scientists at the Royal Society.
Once the deal was agreed upon, he saw an opportunity to test
his mathematics by estimating a rational price for the company
shares. The types of calculations done
by modern equity analysts didn't exist at the time, but people
did understand that a business was worth more than the value of
its physical assets. Hutchinson, starting in March
1720, began publishing pamphlets with his calculations of how
successful the company would have to be to justify various
stock prices. He treated the company's profits
as equivalent to the rent achieved on a piece of land.
The company, he argued, had to do something profitable with its
capital to justify the stock price.
It would be receiving interest from the Treasury, which
explained some of the price, but in order to justify a price of
say £200 per share, he calculated that the company
would have to make almost three and a half £1,000,000 a year in
profit from trading with Spanish America, which he felt was
impossible. South Sea voyages had so far
struggled to bring in £100,000 in total profit over the last
three years, and in 1720 the company didn't ship any slaves
to the South Seas due to disputes with Spain.
The way Hutchinson saw it, anyone could count, think and
use the results of formal calculation to tame his emotions
and make choices armored by reason.
Unfortunately, mathematics was incomprehensible to the general
public in 1720, so no one paid any attention to his work.
As the stock price rose, investors piled in and South Sea
shares hit £500 on May 28 and closed at 720 lbs on June 1st, a
gain of 50% in just four days. Thomas Guy was the son of a
Carpenter who learned enough Latin and Greek at school to be
taken on as an apprentice book dealer at the age of 16.
He set up his own business at the age of 24, securing big
clients like Oxford University. He later branched out into
publishing. Some called him a miser because
of his simple lifestyle. In 1711, Guy converted some of
his government bonds into shares in the South Sea Company at £100
per share. In that first debt for equity
swap, by 17/20 he had already received 10 years worth of
dividends. He started selling his shares
that April at 300 lbs a share, slowly exiting his massive
position as the price went up. When he sold his last shares at
£700 that June, he was done. He had a past fortune equivalent
to around half a billion pounds in today's money and committed
it all to building a hospital to help the people of London.
Guy's Hospital is still around today and is one of the largest
hospitals in the UK. Guy kept no record of his
thoughts, so we can only infer his reasoning from his
behaviour, but he possibly reached the conclusion that his
shares were worth more of cash than his part ownership in a
novel and increasingly uncertain financial experiment and just
sold up. The Duke of Marlborough was one
of Britain's wealthiest man and his wife Sarah Churchill was an
experienced investor. She appears to have converted
some bonds into stock in the early days of the scheme, and
while there are records of her writing a letter asking for
stock allocations for some of her friends, she notably didn't
request any for herself. She sold her shares at 500 lbs,
walking away with a tidy profit. Sarah Churchill was an ancestor
of both Winston Churchill and Princess Diana.
The Duke of Portland was another of Britain's wealthiest man,
having inherited vast estates from his father.
Over the year of the bubble, he signed 24 different forward
contracts to buy company shares and when the bubble burst that
summer, found that he owed far more to his creditors than he
could ever repay. He wiped out his family fortune
in just a few months. Isaac Newton is known to have
invested in the South Sea Company too, and he's quoted as
having said I can calculate the movements of the stars, but not
the madness of man. While many have claimed that he
lost money in the bubble, there's only one record
surviving of his investment in the scheme and that is of him
selling his shares on April 19th of 1720 at 300 lbs a share when
the stock made its first great advance.
Assuming that this was his only trade, he would have tripled his
money, making a 20,000 LB profit a significant sum in 1720.
Many of the people who made money in the bubble appear to
have been people who saw that a dull investment that they
already owned had become a risky gamble and so sold.
Company insiders, you won't be surprised to hear, did quite
well too, with many selling their shares at high prices and
buying vast amounts of real estate with the proceeds.
So what caused the stock price to inflate so fast?
Well, John Blunt and the directors of the Southsea
Company understood very clearly that the entire success of the
scheme depended on pushing the stock price higher and higher.
So they did everything they could, starting with bribing
politicians and anyone else with influence.
The first share subscription in mid-april required investors to
put down only 20% of the purchase price, and they could
pay off the rest in installments over 16 months.
To add fuel to the fire, the next subscription required only
a 10% down payment, with the installment stretching out even
longer. The 3rd and 4th subscriptions
came over the summer on similar terms.
Allowing people to invest with borrowed money and giving them
more and more leverage will have helped the price to soar.
The company shareholders voted early on to allow the directors
to lend money to investors using Southsea stock as collateral,
creating a feedback loop that pumped more cash into a rising
market. A financial writer wrote after
the crash that everyone, including the shareholders who
voted to give company officers this power, new do exactly what
they were doing. On June 17th, with the stock
price near its all time high, King George made John Blunt, the
leader of the scheme, a baronet, a title that survives in his
family to this day. As the bubble inflated, other
promoters took the opportunity to raise capital for their own
business ventures, and many of these ventures were harebrained
schemes quickly thrown together to take advantage of the ease
with which money could be raised at the time.
The Prince of Wales, the future King of England, even got
involved himself, lending his name to a venture called the
Welsh Copper Company and agreeing to serve as its
governor. The Prince was warned against
getting involved in a stock market scam which would taint
his good name, but ignored his counsellors as he was paid
£40,000 for his involvement. The flurry of new stock
offerings started to worry South Sea Company insiders that the
new stocks would obstruct the rise in their stock.
You can't have distractions like this.
They used their influence to pass a new law, the Bubble
Company Act, which declared all businesses that raised money in
the manner of a chartered company without a charter from
the Royal government illegal and void.
Dozens of these start up companies shut down over the
next few weeks, including the Prince's Welsh Copper Company.
At it's peak that summer, Exchange Alley priced the
Southsea company as being worth more than all of the real estate
in Great Britain. Then something surprising
happened. The stock price started to
slide. The company directors fought
back by boosting the dividend, which caused a one day rise.
But the stock price continued it's fall and was now falling
just as fast as it had risen. While some blamed the bust on
foreign investors pulling out, there was no big announcement or
event. The game was just over.
News of a plague in the port of Marseille did nothing to help
those hoping for another pump. Other stocks like the East India
Company and the Bank of England rose and fell with the South Sea
Company, but in a much more muted manner.
The collapse of the South Sea Company was a massive scandal
and the parliamentary committee was set up to uncover
corruption. Those who had lost money argued
that the whole deal should be unwound and all share
transactions that occurred over the six month period of the
bubble should be made null and void.
Robert Walpole, who had been sidelined for most of the
events, was now being seen as the man who could solve the
nation's problems. He was one of the few in
Parliament whose hands were clean.
He was pragmatic enough to try to ease the pain of the
collapse, but was clear that the nature of contracts meant that
the deal at its heart could not be undone.
Robert Knight, the company cashier who had kept record of
all of the company's bribes to politicians, fled the country,
taking his records with him. A bit of a show was put on about
trying to extradite him back to the UK, but I don't think anyone
in Parliament wanted his book of bribes being made public.
From a government perspective, for all the madness that had
gone on in Exchange Alley, it had been a financial triumph for
the nation where the mass of high interest rate loans have
been consolidated to 1 lender with a manageable interest rate
and principle that could be repaid at any time.
Sir John Blunt, the leader of the South Sea Company, was
hauled out in front of Parliament to answer questions.
But the problem for the politicians who were supposed to
be grilling him was that he could take them all down as he
knew how much money they had all taken.
Fortunately for them, he refused to speak.
Walpole, whose personal record was clean, was still a party man
and wanted to keep the Whig Party in control.
So while he was able to use the scandal to take out some of his
political rivals within the Whig Party, it was more important for
him to keep things under control.
The people who had been wiped out in the crash wanted revenge
and if they couldn't get their money back, they wanted to see
those responsible suffering too. Walpole had to make this happen
while still keeping his party in control of Parliament.
The amount of bribery that had occurred was staggering, £1.7
million in bribes and £1.8 million in company loans had
been distributed amongst almost 200 members of both Houses of
government. Walpole sacrificed some to
protect the rest 6 Southsea Company directors who also held
government posts were thrown under the bus.
The House of Commons expelled 4 members who were also company
directors. Southsea Company officers were
ordered to catalogue their estates, which were then seized
and sold off for the benefit of Southsea Company investors.
With that, the major political battles came to an end, and
while the Whig Party survived mostly intact, its centre of
gravity had now moved towards Walpole.
The next year, Robert Walpole was appointed First Lord of the
Treasury, Chancellor of the Exchequer and Leader of the
House of Commons. His tenure as Prime Minister is
often dated to this point. The term Prime Minister was
originally used by his rivals to make fun of how he had
consolidated power. The office of Prime Minister in
Britain is not an official title.
It only exists by long established convention where the
monarch appoints as Prime Minister the person most likely
to command the confidence of the House of Commons, and Walpole is
today considered the first British Prime Minister.
In 1720 both Britain and France experienced financial bubbles
and crashes, but their choices as to how to rebuild afterwards
were very different and reverberated through the global
war France and Britain waged over the next century.
In France, like in London, there was no bailout or do over and in
France law scheme had tamed the nation's national debt, just
like the South Sea Company had done in Britain.
In France, however, 1.4 million stock transactions were reviewed
and those who had exchanged debt were treated better than mere
speculators, possibly because this preserved the social order.
In France, experiments with money were over with and the
country returned to its old way way of selling the right to
collect taxes, an approach that made raising taxes in times of
need extremely difficult. France also went back to the old
way of issuing irredeemable debt to make up for tax shortfalls
and borrowing in a haphazard way as needed.
In Britain, the South Sea Company was kept alive but
scaled back significantly and kept under stricter government
control. It was broken up with some of
its capital being transferred to to the Bank of England.
The venturing arm was split off too, and they continued to do
some trade with South America and even entered the whaling
business with little success. Another Spanish war eventually
brought that part of the business to an end.
What was left of what had briefly been the largest private
enterprise in the world became a financial back office, where
clerks process debt issuance and interest payments for the
British government. The company slowly reprocessed
the national debt into a single pool of liquid government bonds
that could be easily bought and sold by investors on an
exchange. Britain's reliability in paying
its debt brought interest rates down to just 3% per year.
Having shown that the country could manage its debts
prudently, whenever there was a need to borrow in time of war,
investors were willing to lend. This financial consistency was
Britain's secret weapon in the Napoleonic Wars.
While France was twice as rich as Britain, and French subjects
outnumbered Britons by as much as 3 to one in times of war,
Britain was able to spend as much as four times as much money
per subject. The fact that Britain kept its
finances in better order meant that it could borrow more money
at lower rates and fight France on a level footing.
According to Thomas Levinson, who wrote an excellent book on
this topic, over the course of the 18th century, the size of
the nations at war came to matter less than the ability to
mobilize the resources that each state's economy could produce.
As well. As Britain's financial
infrastructure worked for the government, it was not as well
suited to private enterprise. America's corporate structure,
which allowed new companies to raise capital on stock exchanges
while limiting the liability for managers, became the next
evolution of the financial system. the US had only half of
Britain's population in the 1820s, but it's bankers were
able to place four times the loans into the US economy as
their British counterparts could, making it easier for
anyone with a business idea to get up and running in the United
States. This ease of raising capital
funded an explosion of commercial enterprises in
America that was without precedent.
There are many other reasons for America's huge growth, such as
the huge landmass and natural resources, but economic
historians argue that Britain's public borrowing monopolized the
available capital, reducing the amount of credit available to
British businesses. Thanks for tuning into this
week's podcast, with special thanks to my supporters on
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If you want to support the channel, I'll put a link in the
show notes. Have a great day and talk to you
again soon. Bye.