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The South Sea Bubble

The greatest of many stock market bubbles - classic stuff.

Then stars and garters did appear
Among the meaner rabble;
To buy and sell, to see and hear
The Jews and Gentiles squabble
-A South-Sea Ballad

Speaking of squabbling Jews and Gentiles, the Dow Jones Industrial Average closed down 222.2 points last Friday (10 January 1997), having plummeted 384.62 points (4.83%) over the course of that week, for its biggest one-week point loss ever. It's even got the Baby Boomers quaking in their sport-utilities, calling their analysts on their cell-phones. The amount of capital these guys have socked away in the market smacks of the South-Sea Bubble, a speculative rush of a similar nature that ruined an entire generation of eighteenth-century Britons. The set-up? Well, while it might be a bit bold to claim it's identical to our situation today, students of prudence would do well to attend carefully.

The British government of 1711 had spent itself into debt totaling over ten million pounds. For those of you familiar with inflation and the power of the pound, that's not exactly chump change. In a move that still befuddles experts today, a large group of merchants joined together and bought some 9,000,000 of the debt, assured by the government of a six percent interest rate. If you think about it, that's not a bad deal: 540,000 income guaranteed annually. Perhaps you've heard of these merchants before: the famous South Sea Trading Company.

Figuring profits from their lucrative trading in the New World, and South America in particular, would tide them over until the Government started ponying up, the Company started hawking its shares on the market. Within months, the stock had soared from 100 to 1000, with no end in sight. What drove this speculation? The British government had recently given them exclusive trading rights to four ports Spain was allegedly willing to open up in Chile and Peru. The South-Sea Company imagined piles of gold in South America, and between these trading rights and the incoming interest from the government, they fancied themselves to be in the fabled catbird seat. The limeys felt that this was the economic opportunity of a lifetime. The news that was not heeded was, in hindsight, somewhat crucial: King Philip V of Spain let everybody involved know that he was only willing to let one ship squeak in a year. We refer to Charles MacKay in his Extraordinary Popular Delusions and the Madness of Crowds [previously cited in Tulipomania] for the details: "The Earl of Oxford declared that Spain would permit two ships, in addition to the annual ship, to carry out merchandise during the first year... [but] the first voyage of the annual ship was not made till the year 1717 [the deal had been made six years earlier], and in the following year the trade was suppressed by the rupture with Spain." Unfortunately, nobody heard that one and instead followed a rumor that claimed that Spain had offered the South-Sea Company unlimited use of the ports rather than two or three piddling ships.

As with other promises of instant wealth, folks went nutty with investing. The South-Sea Company made millions overnight, and in no time there were plenty of other trading companies popping up to take advantage of the speculative frenzy. Not a few set up and vanished in a week or two, skipping off gaily with investors' money, ostensibly to the New World to return their investment but really just down the street to the local bar or bordello. It takes but a modicum of cunning to realize that people wildly throwing their money away are easy targets. Stranger still, investors bought rising stocks no matter how outrageous their design, anticipating lines of idiotic speculators to form behind them eager to gobble the stock at a higher price. Most of the semi-legitimate businesses claimed to go gold-hunting in the New World, or some such silk or tobacco trading. However, plenty of the illegitimate ones didn't. Here's but a small sample of juicy, if preposterous, business propositions [MacKay's list is over four pages long]:

For supplying the town of Deal with fresh water.
For trading in hair.
For assuring of seamen's wages.
For importing pitch and tar, and other naval stores, from North Britain and America.
For insuring of horses.
For improving the art of making soap.
For improving of gardens.
For insuring and increasing children's fortunes.
For a wheel for perpetual motion.
For importing walnut-trees from Virginia.
For making of rape-oil.
For paying pensions to widows and others, at a small discount.
For making iron with pit coal.
For the transmutation of quicksilver into a malleable fine metal.

And the all-time classic,

For carrying on an undertaking of great advantage; but nobody to know what it is.

While the directors of the Company insisted profits were just around the corner, and even outbid the Bank of England for an additional 31,000,000 of government debt in 1719, one dreary day in September 1720 no one wanted to buy stocks. All around there were shouts of "sell, sell!" With no buyers, the poor bastards who had bought stock for thousands of pounds could hope to unload it for only a fraction of the price they had paid. The few that figured this out before it happened made out like bandits (One Alexander Pope comes to mind). An entire generation lay in pieces. A pamphlet published in Boston in 1721 notes:

...many poor Families have been ruined, brought to Poverty, and turned beggars. The Trade of the City of London, one of the finest in the World, hath been very much shortned, few Ships have been built, or fitted to Sea, during the Reign of the South-Sea Company.

The rest of the country languished in misery and poverty. The investors were equally split between two strategies: (1) buying stock with no real value (i.e., walnuts from Virginia) hoping to sell it at a higher price to stupid persons, and, of course, (2) plain stupidity. [We here at History House would like to note that while its success rate is low, stupidity is probably the most-often used strategy in humanity's playbook.] The directors of the South-Sea Company, the suddenly-wealthy authors of this bubble, got together with disgruntled investors and told them what great deeds the Company had done for England. MacKay tells us they claimed, "none had ever performed such wonderful things in so short a time as the South-Sea Company... monied men had vastly increased their fortunes; country gentlemen had seen the value of their lands doubled ...in short, [they] had enriched the whole nation." And then they ran, much to the consternation of everybody else who had suddenly found themselves in the poorhouse.

One such sucker, Lord Molesworth [remember, this whole event took place with the endorsement of the British Parliament, of which he was a member], decided that while no law existed to punish this company, they ought to make one in a hurry: "In his opinion," MacKay recounts, "they ought upon this occasion follow the example of the ancient Romans, who, having no law against parricide, because their legislators supposed no son could be so unnaturally wicked as to embrue his hands in his father's blood, made a law to punish this heinous crime as soon as it was committed. They adjudged the guilty wretch to be sewn into a sack and thrown alive into the Tiber... he should be satisfied to see [the South-Sea Company directors] tied in like manner in sacks, and thrown into the Thames." A few directors and Parliament members were subjects of fairly uneventful inquiries, save for Earl Stanhope. He managed to whip himself into a frenzy after brunting some accusations, and passed out in the House of Commons. He "let blood the on the following morning, but with slight relief." It was eighteenth-century England, and everyone knew that a good healthy bleeding would make you fresh as a daisy. However, MacKay follows that sentence with, "The fatal result was not anticipated." Oops.

Meanwhile, again according to MacKay, "The public mind was in a state of unwholesome fermentation... men were running to and fro in alarm and terror, their imaginations filled with some great calamity, the form and dimensions of which nobody knew." Public complaints, exhortation of lamentations and looting were rampant. They spent their time rioting and lauding politicians who claimed that the entire populace of England was unwittingly duped by these evil merchants. These politicians efficiently directed public attention away from themselves to these elderly rich gentlemen, who either had the good sense to flee the country or stuck around and got prosecuted on some trumped-up charges. As for the poor, neglected peoples who had run helter-skelter and had thrown their money about, their luck and dreams of riches had departed. They didn't even have Social Security to run out on them when they got older.

Bibliography

  1. Charles MacKay. Extraordinary Popular Delusions and the Madness of Crowds. Crown, 1841.

 
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