The Mississippi Bubble of 1718-1720 | The Mississippi Bubble of 1718-1720 By Jesse Colombo (This article was written on June 23rd, 2012) The Mississippi Bubble was an economic bubble in France in the early 1700s that developed in parallel with Britain’s disastrous South Sea Bubble . The mastermind behind the Mississippi Bubble was John Law, a Scottish financier, gambler and playboy who ascended into the upper echelons of French public finance through his friendship with the Duke of Orléans. Law became the French government’s primary financial advisor and used this power to establish the Banque Générale, a bank with the authority to issue “paper” money, as well as the Mississippi Company (later called "the Compagnie des Indes"), which was granted a monopoly on the development of France’s vast Mississippi Territory in North America. When investors started salivating over the supposedly immense bounty of resources in the Mississippi Territory, including gold and silver, they bid Compagnie des Indes shares up to astronomical heights.

Unfortunately, the company’s prospects turned out to be little more than empty promises and the shares crashed back down to earth, taking down France’s stock market and public finances with it. Events Leading Up to the Mississippi Bubble The Mississippi Bubble saga began in 1715, when the French government was teetering on the verge of insolvency under the burden of debts incurred during the War of Spanish Succession. In time, the government defaulted on a portion of its debt, lowered its interest payments and raised taxes to very high levels, all of which served to depress the French economy and caused the value of its gold and silver-backed currency to fluctuate wildly. The French government, then led by a group of regents because King Louis XV was only five-years old, desperately scrambled to find a solution to the nation’s fiscal and economic woes. The Duke of Orléans, the leader of the group of regents, soon decided to seek the council of his friend, John Law, who was an early theorist of monetary economics. John Law hailed from Fife, Scotland, where he was born into an affluent family of bankers and goldsmiths.

Law became his father’s apprentice at age fourteen and studied the banking business until his father’s death three years later. Soon after, Law travelled to London in pursuit of adventure and earned a living as a gambler thanks to his keen mathematical abilities. In London, the twenty-three year old Law became involved in a duel over a lady friend in which he swiftly killed his opponent and was charged with murder and sentenced to death. John Law spent a brief time in prison before he escaped to mainland Europe, where he studied high finance in cities such as Amsterdam, Venice and Genoa. In 1705, Law published an academic paper in which he argued against the use of precious-metal backed currency in favor of “paper” or fiat currency, claiming that the use of fiat currency would stimulate commerce (Smant, 2001). Due to these distinct views, Law is often considered to be an early Keynesian-style economist. When the desperate Duke of Orléans came looking to John Law for help, Law viewed it as an opportunity to put his monetary theory into action.

In 1716, Law received the French government’s permission to establish a national bank, the Banque Générale, which took in deposits of gold and silver and issued “paper” bank notes in return. The bank notes issued by Banque Générale were not legal tender but were accepted as such by the French public because they were redeemable in official French currency. Banque Générale built up its bank reserves through the issuance of stock and from profits earned through the management of the French government’s finances. Source: Nova Scotia’s Electric Scrapbook In 1717, John Law used his growing rapport within French society to acquire a struggling trading company, the Mississippi Company, which he renamed to “the Compagnie d’Occident” (the Company of the West) and was granted a monopoly on trade with and development of France’s North American colonies along the Mississippi River. These territories (see chart above) spanned a wide swath of area from present-day Louisiana up to Canada and were considered to be valuable for their abundance of resources such as beaver skins and precious metals (which later proved to be untrue).

As Law’s influence continued to grow, the Compagnie d’Occident’s name was changed to “Compagnie des Indes (“Company of the Indies”) and according to David Smant, “expanded to monopolize all French trade outside Europe. In July 1719 the Compagnie purchased the right to mint new coinage. In August 1719 the Compagnie bought the right to collect all French indirect taxes and in October 1719 the Compagnie took over the collection of direct taxes. Finally, a plan was launched to restructure most of the national debt, whereby the remainder of existing government debt would be exchanged for Compagnie shares.” By this time, John Law had amassed an incredible amount of power as his companies now controlled both France’s foreign trade and its finances. The Bubble Phase Chart Source: HenryThornton.com In January 1719, the Compagnie des Indes offered shares to the public for 500 livres per share (livres were France’s currency at that time), which were bought and paid for with Banque Générale bank notes or with government debt.

Compagnie shares soared to an incredible 10,000 livres per share by December 1719 as investors began to lust over the company’s potential value of trade with the supposedly gold and silver-rich French colonies. With share prices at such high levels, John Law had gone from a broke gambler to one of the wealthiest, most powerful men in Europe. People of all social classes invested in Compagnie des Indes shares, causing many paupers to become very rich in a short span of time. Incidentally, the French word “millionaire” originated as a result of the many people that were made wealthy as Compagnie shares soared (Moen, 2001). Explosive demand for Compagnie des Indes shares caused the total amount of “paper” money bank notes in circulation to increase 186% in one year due to the fact that Banque Générale issued as much bank notes as the public demanded. This expansion of the money supply resulted in a powerful inflationary episode in which the price of goods doubled between July 1719 and December 1720.

A good portion of Compagnie des Indes share price gains were due to this inflation as well (Smant, 2001). Paris experienced a “bubble economy”-type boom as real estate prices and rents soared twenty-fold and wealthy speculators clamored to buy luxury goods (Sebastian, 2011). According to Charles Mackay, “New houses were built in every direction, and an illusory prosperity shone over the land, and so dazzled the eyes of the whole nation, that none could see the dark cloud on the horizon announcing the storm that was too rapidly approaching.” Soon, Banque Générale had issued vast quantities of bank notes even though they did not have an equivalent amount of gold and silver-based legal tender for everyone who eventually wished to redeem their notes. It is likely that John Law had expected to fulfill Banque Générale’s precious metals deficit with gold and silver imported from North America by the Compagnie des Indes. The Crash In January 1720, Compagnie des Indes shares began to fall as some investors decided to take their profits in the form of gold coins.

John Law tried to curb the sell-off by limiting payments in gold of more than 100 livres (Moen, 2001). A scandal ensued in May 1720, when John Law decided that Compagnie shares were overvalued, causing him to start devaluing shares. In addition, Banque Générale notes were devalued by 50%, presumably due to the bank’s precious metals deficit, which was unable to be fulfilled by Compagnie des Indes’ operations in North America because the Mississippi Valley region lacks meaningful deposits of precious metals (the discovery of which resulted in major investor disappointment). Law’s devaluation of shares and bank notes caused an intense public uproar, which resulted in a compromise in which the bank notes’ value was restored but payment in precious metals was stopped. Despite the compromise, the French public was outraged against the Compagnie and its near-worthless paper bank notes. The combination of aggressive investor selling and Law’s devaluations caused Compagnie des Indes shares to collapse from 10,000 livres to 1,000 livres by December 1720 (Moen, 2001).

Compagnie investors were financially-ruined and many former millionaires became paupers. By the end of 1720, John Law was viewed as a scam artist and his rivals were given control over two-thirds of his companies’ shares. Share prices further deflated to 500 livres in 1721 (Moen, 2001). Soon after, John Law escaped France, disguised as a woman for his own safety, and spent the rest of his life as an impoverished gambler in various parts of Europe. The collapse of Banque Générale and the Compagnie des Indes, which coincided with the popping of Britain’s South Sea Bubble , plunged France and other European countries into a severe economic depression and laid the groundwork for the French Revolution that occurred later on in the century. Although traditionally considered a bubble, the Mississippi Bubble wasn’t actually a bubble, in a precise technical sense. A bubble is primarily caused by widespread mania and speculation, followed by a brutal collapse in asset values. In contrast, the Mississippi Bubble was the result of failed monetary policies that caused excessive money supply growth and inflation. Questions? Comments?

Click on the buttons below to discuss or ask me any question about this topic on Twitter or Facebook and I will personally respond: References: Costain, T. B. (1955). The Mississippi Bubble: New York: Random House. Garber, Peter.“Famous First Bubbles,” in Speculative Bubbles, Speculative Attacks, and Policy Switching, Robert Flood and Peter Garber, eds . (MIT Press: Cambridge MA, 1994) Hough, E. (1902). The Mississippi bubble; how the star of good fortune rose and set and rose again, by a woman’s grace, for one John Law of Lauriston; a novel,. Indianapolis: Bowen-Merrill. Hough, E. (1902). The Mississippi bubble. New York: McKinlay, Stone & Mackenzie. Kindleberger, Charles. Manias, Panics, and Crashes, 3rd ed. (Wiley: New York 1996). Mackay, Charles. The Mississippi Scheme (Andrew Pub. Co.: 1980). Mississippi Bubble. (2012). In Encyclopædia Britannica.

Retrieved on 24th April 2012, from Moen, Jon. (2001). John Law and the Mississippi Bubble: 1718-1720. Retrieved on 25th April 2012, from Sebastian, J.F. (2011). The Mississippi Bubble and the French Bailout. The Prepare and Prosper Website.

Retrieved on 7th June 2012, from BOOMS, BUBBLES, BUSTS, DEPRESSIONS, RECESSIONS AND PANICS - A LECTURE BY JOHN HORRIGAN BOOMS, BUBBLES, BUSTS, DEPRESSIONS, RECESSIONS AND PANICS LECTURE AND SLIDE SHOW REFERENCES "Booms, Bubbles, Busts, Depressions, Recessions and Panics: A History of American Financial Crises" Description: New England folklorist and economic historian John Horrigan presents a chronology of recessions, bank crashes, slides, panics and manias in American finance including: The South Sea Bubble, The Mississippi Land Scheme, the Darien Scheme, The Financial Crisis of 1785, Canal Mania and Duer's Panic of 1792, The Panic of 1797, The Panic of 1807, The Panic of 1819, The Panic of 1825, The Jacksonian Financial Crisis of 1837, The Financial Crisis of 1847, The Western Blizzard Panic of 1857, The

 Financial Crisis of 1860, The Silver Panic of 1866, The Panic of 1869, The Panic of 1873, The Financial Crisis of 1878, Grant's Last Panic of 1884, The Panic of 1890, The Silver Panic of 1896, The Panic of 1901, The Panic of 1907, The Financial Crisis of 1920, The Crash of 1929, The Great Depression, The Panic of 1937, The 1953 Recession, The 1958 Recession, The Kennedy Slide of 1962, The Johnson Erosion of 1966, The 1967 Oil Embargo, The 1973 Oil Crisis, The 1979 Energy Crisis, The Recession of 1982-83, Black Monday (October 19, 1987), The Junk Bond Recession (1988-92), The Third Energy Crisis (1990), Black Wednesday (1992), The Mini

 Crash of October 27, 1997, The Slide of '98, The Dot Com Bubble (2001), The 9/11 Slide, The Emerging Markets Correction of May, 2006, The Great Stock Market Draw Down (August, 2007), The Grand Dow Slide of October 19, 2007, The Mortgage Crisis (2008) and The Great Humbling (2009 - 2012).

Horrigan puts these economic troughs in a cyclical historical perspective and also equates them with their subsequent booms. IMAGES Fueled by massive investment, the South Sea Company tried to corner the trade market in South America in the early 1720's. It collapsed and a financial panic ensued. As a secretary to the Board of Treasury, William Duer had made his fortune in land and speculating on the Revolutionary War debt. His exploits failed. This caused a financial panic in 1792. The Panic of 1819 was the first major financial crisis to hit the United States and caused widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing. Speculative investments in Latin America (especially in the fabled imaginary country of Poyais) caused the Panic of 1825. The Panic of 1837 was built on a speculative fever. The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in gold and silver. A five-year depression followed. The Panic of 1847 was a result of the end of the 1840s railroad boom.

The Panic of 1857 occurred after a loss of confidence in an Ohio bank and subsequently spread as railroads failed. It was followed by widespread protests. 'Black Friday' (also known as the Fisk-Gould scandal) was a financial panic caused by speculators� attempts to corner the gold market on the New York Gold Exchange. The Panic of 1884 happened during the Recession of 1882-85 when European gold reserves were exhausted and the New York City national bank called in outstanding loans. High tariffs and currency issues caused "The Cleveland Ordeal" that lasted from 1893 through 1895. The Panic of 1896 was a slight depression in the United States that was caused by a drop in silver reserves and concerns on the effects it would have on the gold standard. The Northern Pacific Corner occurred when Northern Pacific Railroad stock was quoted at $150.00 a share on May 6th, 1901 and was traded as much as $1,000.00 a share behind the scenes.

The 1907 Bankers' Panic was a financial crisis that was precipitated when the New York Stock Exchange fell close to 50% from its peak the previous year. The Great Depression began after the collapse of stock prices on 'Black Tuesday' (October 29th, 1929) and crippled world economies throughout the next decade. The Dust Bowl, caused by blowing topsoil after drought conditions persisted in the Midwest, exacerbated the Great Depression. "The Great Humbling" began in 2008 after a major drawdown in the stock market and a collapse of mortgage companies and major banks. THIS LECTURE HAS BEEN PERFORMED FOR: Feature: The rise and fall of the South Sea Bubble Financial speculation, irresponsible behaviour in the City, massive government debt, shares slumping: three centuries ago, finance capital was learning its tricks… The rise and fall of the South Sea Bubble WORKERS, SEPT 2009 ISSUE Ruinous financial speculation and bursting bubbles are not new, having happened many times before, occurring as early as the 17th and 18th centuries. Far from being unaccountable accidents, they are a characteristic and a feature of the economic cycle of the capitalist system.

Take for example the South Sea Bubble, one of history’s earliest and worst financial bubbles. By 1710, London had already become the kingdom of the “moneyed-men”, and early signs of financial recklessness could be detected. The stockjobbers, who resided in a series of narrow passageways called Exchange Alley, located by the intersection of Cornhill and Lombard Street, were actively involved in the buying of stocks and shares, but there was a prevailing sense that ‘shares will go ever upward’. In the saying of the day, the dealers’ aim was “to sell the bear’s skin before they have caught the bear”. Enterprises were founded on little more than an encouragement of human greed and corruptibility. The greatest scheme was the South Sea Company (established in 1711 by the Lord Treasurer, Robert Harley) which was granted exclusive trading rights in Spanish South America. Debt In 1710 the Tories had taken power from the Whigs. There was a huge government debt of £10 million, and borrowing money from the Whig dominated City was difficult. Harley wanted to provide a mechanism for funding government debt incurred in the course of the war.

Playing cards mocking the Bubble became fashionable in the 18th century. But Harley could not establish a bank, because the charter of the Bank of England made it the only joint stock bank. He therefore established what, on its face, was a trading company, the South Sea Company, though its main activity was in fact the funding of government debt. The mania started in 1711. Government proposed a deal to the South Sea Company, where Britain’s debt would be financed in return for 6 per cent interest. Britain added another benefit to sweeten the deal: exclusive trading rights in the South Seas, which were expected to prove enormously profitable. The company planned on developing a monopoly in the slave trade. Additionally, it was thought that the Mexicans and South Americans would eagerly trade their gold and jewels for the wool and fleece clothing of the British. Most of these trading plans did not materialise. The South Sea Company issued stock to finance operations and gain investors. Shares were quickly snatched up from the start. The South Sea Company, seeing the success of the first issue of shares, quickly issued even more. Investors had no quibble, despite the highly inexperienced management team. All they saw was that the stock was going to the stratosphere.

Many investors were enamoured by the lavish corporate offices that had been set up, painting an image of success and wealth. It became extremely fashionable to own South Sea Company shares. Thousands of other projects were launched in this age of the moneyed men. Speculators were known as “projectors”. They wanted money for a host of things, including “for a wheel of perpetual motion”. Many schemes were swindles or hoaxes, which were spread by greed. Newspapers reported zealously and daily the changing prices of shares: the gullible felt a new way to make money without toil had arrived. Fortunes it appeared could be made overnight. In 1720 a bill was passed enabling people to whom the government owed portions of the national debt to exchange their claims for shares in company stock, and shortly the directors of the South Sea Company had assumed three-fifths of Great Britain’s national debt – some £9 million. The bill triggered an enormous burst of speculation in company stock – shares rose in value.

Also, in 1720, in return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill, which allowed the South Sea Company a monopoly in trade with South America. In 1720 the whole of England became involved with what has since become known as The South Sea Bubble. The company then talked up its stock with "the most extravagant rumours" of the value of its potential trade in the New World, which was followed by a wave of "speculating frenzy". The share price had risen from the time the scheme was proposed: from £128 in January 1720 to £175 in February, £330 in March and, following the scheme’s acceptance, to £550 at the end of May. The price of the stock went up over the course of a single year from about £100 a share to almost £1,000 a share. Its success caused a country-wide frenzy as all types of people – from peasants to lords – developed a feverish interest in investing; in South Seas primarily, but in stocks generally.

Shares immediately rose to 10 times their value, speculation ran wild and all sorts of companies, some lunatic, some fraudulent or just optimistic were launched. For example, one company floated was to buy the Irish Bogs. The South Sea price finally reached £1,000 in early August and the level of selling was such that the price started to fall, dropping back to £100 per share before the year was out, triggering bankruptcies and short selling. The bubble had burst. Vast numbers of investors were entirely ruined. The stocks crashed. Porters and ladies’ maids who had bought their own carriages became destitute almost overnight. The clergy, bishops and the gentry lost their life savings; the whole country suffered a catastrophic loss of money and property. Suicides became a daily occurrence. The gullible mob whose innate greed had helped feed the mass hysteria for wealth, demanded vengeance. Arrested The South Sea Company Directors were arrested and their estates forfeited. By the end of September the company failures now extended to banks and goldsmiths as they could not collect loans made on the stock, and thousands of individuals were ruined (including many members of the aristocracy).

Parliament was recalled in December and an investigation began. Reporting in 1721, the investigation revealed widespread fraud amongst the company directors and corruption in the Cabinet. Among those implicated were the Chancellor of the Exchequer, the Postmaster General and other Ministers. Some were impeached for their corruption; the Chancellor was imprisoned. The events of 1720 caused suffering across the land. England at its most corrupt became the target of satirists, principally the ruling classes and the elected politicians (462 members of the House of Commons and 112 Peers were implicated). King George I and his two mistresses were heavily involved and publicly blamed. When reality returned, the old industries of shipping, farming and landownership, too dull for the exciting times of the stock-market rollercoaster, were the places to put hard cash. South Sea Bubble | Article about South Sea Bubble by The Free Dictionary South Sea Bubble | Article about South Sea Bubble by The Free Dictionary Also found in: Dictionary , Acronyms , Wikipedia . Related to South Sea Bubble: Tulip bubble South Sea Bubble, popular name in England for the speculation in the South Sea Company, which failed disastrously in 1720.

The company was formed in 1711 by Robert Harley Harley, Robert, 1st earl of Oxford, 1661–1724, English statesman and bibliophile. His career illustrates the power of personal connections and intrigue in the politics of his day. ..... Click the link for more information. , who needed allies to carry through the peace negotiations to end the War of the Spanish Succession Spanish Succession, War of the, 1701–14, last of the general European wars caused by the efforts of King Louis XIV to extend French power. The conflict in America corresponding to the period of the War of the Spanish Succession was known as Queen Anne's War (see French and ..... Click the link for more information. . Holders of £9 million worth of government bonds were allowed to exchange their bonds for stock (with 6% interest) in the new company, which was given a monopoly of British trade with the islands of the South Seas and South America. The monopoly was based on the expectation of securing extensive trading concessions from Spain in the peace treaty. These concessions barely materialized, however, so that the company had a very shaky commercial basis.

Nonetheless, it was active financially, and in 1720 it proposed that it should assume responsibility for the entire national debt, again offering its own stock in exchange for government bonds, a transaction on which it expected to make a considerable profit. The government accepted this proposal, and the result was an incredible wave of speculation, which drove the price of the company's stock from £128 1-2 in Jan., 1720, to £1,000 in August. Many dishonest and imprudent speculative ventures sprang up in imitation. In Sept., 1720, the bubble burst. Banks failed when they could not collect loans on inflated stock, prices of stock fell, thousands were ruined (including many members of the government), and fraud in the South Sea Company was exposed. Robert Walpole Walpole, Robert, 1st earl of Orford, 1676–1745, English statesman. Early Life and Career He was the younger son of a prominent Whig family of Norfolk. ..... Click the link for more information.

became first lord of the treasury and chancellor of the exchequer and started a series of measures to restore the credit of the company and to reorganize it. The bursting of the bubble, which coincided with the similar collapse of the Mississippi Scheme Mississippi Scheme, plan formulated by John Law for the colonization and commercial exploitation of the Mississippi valley and other French colonial areas. In 1717 the French merchant Antoine Crozat transferred his monopoly of commercial privileges in Louisiana to Law, who, with ..... Click the link for more information. in France, ended the prevalent belief that prosperity could be achieved through unlimited expansion of credit. Legislation was enacted that forbade unincorporated joint stock enterprise. Bibliography See studies by L. S. Benjamin (1921, repr. 1968), J. Carswell (1960), and V. S. Cowles (1960).

South Sea Bubble May-June 1999: "The Damn'd South Sea" Main Menu · Search · Current Issue · Contact · Archives · Centennial · Letters to the Editor · FAQs Photographs by Jim Harrison After the shattering and scandalous crash of 1720, financial pamphleteering boomed, one writer proposing that all bargains made during the Bubble should be construed as made by lunatics and should therefore be annulled. This grouping includes The Snake in the Grass, The South-Sea Scheme Detected ("By a Lover of his Country"), Exchange-Alley: or, the Stock-Jobber turn'd Gentleman (a "tragi-comical farce"), News from Hell, and A Panegyrical Epistle of 1721, said to be the work of John Gay. To his friends Gay pronounced himself "fixed for life" when his South Sea stock zoomed to £20,000, but he held on too long and lost it all. Seven years later he would write The Beggar's Opera. Irrational exuberance pervades the stock market. Speculators pay ever-higher prices for shares despite scant evidence of underlying value.

Skeptics warn that the bubble will burst. This must be England in 1720. The South Sea Company was founded in 1711 by Robert Harley, who wished to create political allies. The leader of the Tory party and soon to be lord treasurer, Harley wanted an end to the unpopular War of the Spanish Succession. The South Sea Company, as set up by act of Parliament, had a monopoly to conduct England's trade with Spain's colonies in the West Indies and South America. Harley advanced the notion that permission to conduct such trade would be ceded by the Spanish king as part of the price of peace. The company had the further splendid purpose of relieving the government of its burdensome unsecured public debt--obligations for which Parliament had assigned no funds--which then amounted to £9,000,000. South Sea was organized under the newish joint-stock principle, as a corporation with transferable shares. Holders of the national debt were obliged to exchange their government securities for shares at par in the company. The company could raise working capital--a huge amount of it--by borrowing on the security of the debt due from the government.

In addition to its trade monopoly, the company would get an annual payment from the Exchequer of £568,279 10s., or 6 percent of the debt taken over. Stockholders had no promise that they would see any of this as dividends, but who could blame them for thinking that capital gains based on trading profits were a certainty? It was an optimistic age. People had a passion for business and followed developments avidly through a newly burgeoning medium, the newspaper. In 1702 London had one daily newspaper; by 1709 there were 18. Harley had able propagandists, Jonathan Swift and Daniel Defoe among them. (Critics included Joseph Addison and Richard Steele.) The managers of the South Sea Company understood the value of publicity (as well as fine print) in the advancement of their affairs and once issued a press release, surely an early example of that genre. Historians wishing to study the company and the era can be awash in source material if they go to the right place--the Kress Library, Harvard Business School's rare-book collection, housed in Baker Library.

Its books, broadsides, pamphlets, acts of Parliament, manuscripts, and sundry ephemera concerning the South Sea Company and the speculative fevers that racked England and the Continent in the early eighteenth century form one of the four great collections of such material in the world, and the most numerous. The items illustrating this article are a miniscule sampling of the archive. Almost all of it was assembled by Hugh Bancroft, A.B. 1897, A.M. '98, LL.B. '01, president of Dow, Jones and Company. After his death in 1933, his wife presented the Bancroft collection to Harvard. It offers true value to scholars wishing to explore a seminal lunacy. Het Groote Tafereel der Dwaasheid (The Great Mirror of Folly), Amsterdam, 1720.

"The wind-buyers or wind-catchers, who, for wind, lose money and goods, and ruin their wives and children," one of 74 prints in a stout folio volume "showing the rise, progress, and downfall of the bubble in stocks and windy speculation, especially in France, England, and the Netherlands in the year 1720." These excesses, wrote the late Harvard professor of business economics Arthur H. Cole, in The Great Mirror of Folly, "seem to have caused a long continued delay in the evolution of the corporation in England, France, and Holland. The South Sea Company was a confection of politics, commerce, and finance. None of its governors or directors had any experience of trade with the New World, but John Blunt, who wrote the charter and was the company's dominant director, had been a scrivener and then director of the Sword Blade Bank. He and cohorts had a fine understanding of financial manipulation. The late historian and civil servant John Carswell, former secretary of the British Academy, wrote an esteemed study, The South Sea Bubble (Sutton, revised edition, 1993), chronicling the heady, fraudulent proceedings launched in 1711.

He characterizes Blunt as of "powerful jowl and heavily-lidded eyes, an industrious, domineering man whom it was equally difficult to like and to resist." His lieutenant was young Robert Knight, company cashier. "Blunt provided cunning, bluster and technical draftsmanship, but Knight's was the power of innovation, charm and the ingenuity that made the thing possible...." Scottish economist Adam Smith, born three years after the Bubble burst, would write of "the knavery and extravagance" of the South Sea Company and of "the negligence, profusion and malversation" of its staff. The Peace of Utrecht, reached in 1713, yielded few trading concessions from Spain. Why should it have?

asked Defoe (whose support of Harley waxed and waned), "Unless the Spaniards are to be divested of common sense, infatuate, and given up, abandoning their own commerce, throwing away the only valuable stake they have left in the world, and in short, bent on their own ruin...." The company did secure a contract to transport and sell annually in Spanish America 4,800 "piezas de Indias" (a pieza was a black slave, with no defects, at least 58 inches tall) and could send to Cartagena or Vera Cruz one ship of no more than 500 tons loaded with British woolens and the like. The company lost money with the slaves, managed the other trade ineptly, and had to contend with venal Spanish officials. War with Spain in 1718 ended any pretense of a commercial basis for the South Sea Company. There it then sat, an enterprise with vast, if nominal, capital and nothing to do that it had been chartered to do. "The directors were not long idle because they now turned to stock-jobbing," writes John G.

Sperling, formerly professor at San Jose State College and now chairman and chief executive officer of the Apollo Group, in The South Sea Company: An Historical Essay and Bibliographical Finding List (Baker Library, 1962). "Within a year and a half the Company was to become the central institution in the greatest financial speculation in English history." In 1719 the government again found itself awkwardly in debt. Blunt and his fellows again proposed that the debt--£30,981,712 of it--be converted to company stock, this time voluntarily, at terms to be named later, saving the government much in annual interest and bringing it, as well, a fee from South Sea of £7,500,000, potentially, for the privilege of making the conversion. (To put these sums in perspective, Carswell points out that a middle-class family could live very comfortably at the time on £200 a year.) Top left: The Bubblers Mirrour: or Englands Folley, 1720. An engraving depicts a "Canting Miser," who sold his estate to buy stock and now despairs.

Flanking him is a list of 26 major and numerous minor bubbles of the time, with subscription prices and what each stock sold at when highest. Thus, investors in rock salt got in for £1 5s. and might have sold at £15. Top right: "The Stock-Jobbing Ladies," sheet music, ca. 1720. Satirical songs, poems, plays, and the like appeared in profusion as the Bubble expanded and then burst. Bottom: A receipt for a dividend of £21 from the South Sea Company, 1717, signed by dramatist William Congreve, author of The Way of the World. Lest influential folk doubt the attractiveness of the scheme, Knight distributed £1,259,325 of fictitious company stock-- bribes, later to be paid in cash with the public's money--to 40 or 50 members of Parliament, including Charles Spencer, earl of Sunderland (first lord of the treasury) and Charles Stanhope (secretary to the treasury), and to the Duchess of Kendal, the king's mistress. This was corruption on an audacious scale.

In early 1720 "Parliament accepted the South Sea Company offer and thereby committed the nation to a thrilling financial adventure," writes Sperling. "It was clear that the Company could only pay the £7,500,000 to the government if they exchanged South Sea stock for government obligations at prices far above par 100. And, the higher the price of stock at the time of conversion, the greater the profits which would accrue to the Company. In addition to the profits the directors could make by holding South Sea stock were those available through stock manipulation which, in this case, included transactions in non-existent stock. The directors could create and purchase stock at a low price and sell it for an inflated price. It was a foolproof way of making a large fortune and it proved to be an irresistible temptation." Carswell employs a hydraulic metaphor to describe the action. The company first created £2 million in new South Sea stock, at £300 a share, and let investors pay for it in installments. Subscribers eagerly bought it up, and the company covertly issued £250,000 more for good measure.

Then it announced that its cash position was so strong that it could lend shareholders money on the security of their South Sea stock. The price of the old stock at once rose to £325. The company issued yet more stock and made more loans, again and again. "So Blunt...had constructed a financial pump," writes Carswell, "each spurt of stock being accompanied by a draught of cash to suck it up again, leaving the level higher than before." Success required that the level keep rising. It did. Speculative zeal had risen steadily in the English breast during the preceding 30 years, the childhood of the London Stock Exchange. A gargantuan Mississippi Bubble had expanded in France. Cupidity was not unknown in Holland. From September 1719 through August 1720, 190 English speculative ventures had their initial public offerings. Some were honest, many not. "In order to pay out profits, the South Sea Company needed both to raise more capital and to have the price of its stock moving continuously upward," writes the economist and MIT professor emeritus Charles P.

Kindleberger in his classic work Manias, Panics, and Crashes: A History of Financial Crises (Wiley, third edition, 1996). "And it needed both increases at an accelerating rate, as in a chain letter or a Ponzi scheme." The company repeatedly raised cash through new issues of stock as its price spiraled upward in the summer of 1720. "The maxim that credit was not wealth unless it rested on a wealth-producing asset had been ignored...," writes Carswell. Greed blinded many, but not all. One unidentified observer saw clearly: "The additional rise of this stock above the true capital will be only imaginary; one added to one, by any rules of vulgar arithmetic, will never make three and a half; consequently, all the fictitious value must be a loss to some persons or other, first or last. The only way to prevent it to oneself must be to sell out betimes, and so let the Devil take the hindmost." Top: Playing cards, ca. 1721, sketch ruination in variety.

Lower right: "A Ruin'd South-Sea Jobber of Renown, Leaps from a Lofty Window, Head long down, When taken up, he crys Adzounds I'm broke, Who gives Eight Hundred Pounds for South Sea Stock." Left: "A certain Lady when the Stocks run high, Put on Rich Robes, to Charm her Lover's Eye, But South-Sea falling, Pawn'd her fine Brocades, And now appears like other homely Jades." On January 1, 1720, the price of a share of South Sea stock stood at £128. On June 24 it hit £1,050. In September came the crash. By December the stock had returned to £128. Thousands declared themselves ruined. Banks could not collect loans on inflated stock and failed. Specie was in short supply. Work stopped on half-built homes. Investigations and revenge ensued, and a long struggle to restore stability. Some of the guilty were thrown in the Tower, brought to trial, and separated from part or almost all of their estates to replenish the company's coffers and help restore its credit.

The House of Commons left Blunt only £5,000 of his £183,000; a back-bencher had suggested one shilling. Postmaster-general James Craggs the elder, who denied complicity in the affair (although his son, secretary of state, had been active in it), killed himself on the eve of his trial. Others of the miscreants were protected for political expediency. Alexander Pope declared: How goes the Stock, becomes the gen'ral Cry. Rather than fail we'll at Nine Hundred Buy. Instead of Scandal, how goes Stock's the Tone, Ev'n Wit and Beauty are quite useless grown: No Ships unload, no Looms at Work we see, But all are swallow'd by the damn'd South Sea. Fury was widespread. Speculators who had thought themselves wealthy now found themselves not. Yet, for many of the players, those who had held on until the crash, something roughly akin to the status quo ante was restored.

Robert Walpole, who became first lord of the treasury and chancellor of the Exchequer in April 1721, persuaded Parliament and the public to accept a scheme of reconstruction by which, writes Carswell, "thousands of private bargains--and this was the most remarkable thing of all--were statutorily cancelled or adjusted, so that imaginary wealth could be sucked out of the system." "The next age," writes Carswell, "was one of cautious conservatism, hardening social distinctions, ever more clearly formalized patronage, and hostility to change." The so-called Bubble Act of 1720, passed at the urging of the South Sea Company to squelch competing speculations, had banned all joint-stock corporations without parliamentary or royal authority. That helpful way of raising capital was thus not available. The Bubble may have stifled economic development for years. Carswell notes "a strange sense of arrest" in the 50-year interval of conservatism between the decades of innovation at the start of the century and the start-up of the Industrial Revolution. What if the lull had been shorter?

Carswell imagines "Doctor Johnson holding forth in his compartment as the Edinburgh train puffs northwards." For those who had realized big losses or gains, the mania redistributed wealth. The largest honest fortune was made by Thomas Guy, a stationer turned philanthropist, who owned £54,000 of South Sea stock in April 1720 and sold it over the following six weeks for £234,000. Sir Isaac Newton, scientist, master of the mint, and a certifiably rational man, fared less well. He sold his £7,000 of stock in April for a profit of 100 percent. But something induced him to reenter the market at the top, and he lost £20,000. "I can calculate the motions of the heavenly bodies," he said, "but not the madness of people." One of numerous manuscript documents in the Kress Library concerning the South Sea Company. On a company form, the Most Noble Henry Duke of Kent gives Henry Allen power of attorney to sell, assign, and transfer £6,600 of stock. Lucipher's new Row-Barge, 1721.

Devils convey Robert Knight, the South Sea Company's former cashier, into the jaws of Beelzebub. A master dispenser of bribes, Knight was a central figure in the swindle and made more money out of it than anyone else. When the frothy scheme collapsed, he absconded to the Continent but was imprisoned in Antwerp. King George publicly demanded his extradition for trial, but the king's mistress secretly assured foreign officials that His Majesty would be grateful if Knight and his secrets remained abroad. Through the connivance of the British and Austrian governments, he was allowed to escape from jail and lived in exile for more than 20 years until receiving a royal pardon. Knight was "a man of exceptional abilities, unlimited ambition and complete lack of scruple," wrote historian John Carswell. The legend on his hat in this engraving reads, "How Glorious was my Beginning." Christopher Reed, a stranger to high finance, is managing editor of this magazine. 1690 - 1774 A.D. The Dawn of Capitalism | Armstrong Economics ©Copyright PEI 1690 – 1774 AD The eighteenth century was a period of strong economic and political growth for Britain.

Constitutional parliamentary government, which had replaced the monarchy, appeared to foster great national expansion. The currency of Britain remained very stabled during the eighteenth century. There were no debasements and gold was made officially legal tender in 1717. By 1774, payments in silver were limited to 25 pounds, which effectively created a gold standard by defacto. Nonetheless, the British government was indeed the biggest primary borrower. The national debt grew always due to war efforts. A usury limitation on interest was finally established at 6% but was later reduced to 5% in 1714. Private debt was set according to government rates and maturities. Because of this limitation of interest, private borrowings could be funded only when government demand for borrowings declined. This often created small credit crunches particularly during periods of war. The English national debt rose from 1 million pounds in 1689 to 900 million by 1800. Interest rates tended to decline on government debt from an 8% high down to 3% by the mid-1730’s. However, as government debt escalated, rates began to rise.

The steepest advances came after the government floated the famous 3% consols of 1751. From 1754 onward, rates tended to rise. By the end of the eighteenth century, consols fell by 50% in price and the government was forced to pay rates as high as 6.5%. Eighteenth century Britain was also a period of inflation and speculation. As capital concentrated once again and prosperity blossomed, speculation took the form of many strange circumstances. Insurance companies prospered during this period and the policies that they issued were the target of speculators. Life insurance was bought when one wished to gamble on another’s life. Insurance on ships was another commonplace speculation. More organized speculation was also present. A large and liquid market had sprung up in the trade of company shares. Government often floated debt through the means of attaching lotteries. Of course, the famous South Sea Bubble took place in 1720. This was actually promoted by a government scheme to convince holders of government debt to convert it into the shares of an official trading company known as the South Sea Company. In theory, this government-sponsored company would hold the government debt as an asset.

The problem was that the share prices rose from 128 pounds to 1000 pounds per share that year. Holders of debt were enticed to swap their debt for shares as they stood by and watched share prices soar. When the bubble burst, share prices collapsed back to the 135 level. The outrage was so indignant that the Chancellor of the Exchequer was imprisoned and Parliament passed the “Bubble Act” which greatly restricted the formation of any new companies. A similar speculation, but less known, was the Mississippi Bubble. This was of French origin also involving a government sponsored trading company intended to promote trade between New Orleans and France. The venture failed to attract reputable emigrants and New Orleans remained no more than a dismal collection of wooden shacks. The entire affair turned out to be yet another stock speculation that sent many French investors into financial ruin. Although history would like to classify these two incidents as unusual, the truth is that investors were eager for speculation of any kind. Commodities were also the target of speculation as were many shares of private companies. Both the Mississippi and South Sea stocks received the greatest attention because they were the leading speculative issues of the time.

But it is important to keep in mind that speculation was not restricted to these issues and was widespread showing up even in the Americas. In fact, speculation was also widespread in Japan, which had no financial connection with that of Western Europe or America. The shogun Yoshimune banned all expensive clothing, furniture, cakes, candies, and other extravagances in an austerity decree in hopes of controlling inflation. The words “Stock Exchange” first appeared in 1773 over the door of New Jonathan’s Coffee House when a fee was levied on admittance. Stock trading was traditionally done on the “curb” outside. Often, traders would congregate in coffeehouses. Jonathan’s was a central meeting place and served as the cradle for the London Stock Exchange which eventually moved into its own building in 1802. Industrialization was flourishing in Britain while in France the guilds fought hard to retain their monopolies and refused to accept any new ideas. This closed mind approach in France eventually set the stage for its economic decline and British dominance. France had lost most of its colonial empire but gained somewhat as a military power in Europe.

The Italians had never recovered from the defaults of France and Spain and Germany was still a group of small states restricting trade and imposing tariffs against one another. French defaults to some extent still occurred during the eighteenth century. The previous debt issues that paid 7% to 8.5% were simply reduced by force in 1710. By this it is meant that the government simply stated that it would no longer pay the higher rates of interest. Government debt tended to yield higher rates of interest in general by 1-2% over that of good quality private issues. Therefore, in 1720 when the Mississippi Bubble arose, a similar scheme to exchange government debt for stock was fairly well received particularly since the same scheme was in effect in Britain. The Dutch lost most of their trade as nations expanded ports. Their alliance with Britain increasingly made them the smaller partner in the pact and eventually, the Dutch gravitated more toward a center of finance than trade. In the United States, the colonists had brought with them the English laws regarding usury that for the most part set the legal maximum rate at 6%. But this limitation on interest rates was not uniform throughout all the colonies.

Massachusetts had established the maximum rate at 8% in 1661. Virginia set the legal usury rate at 5% while Pennsylvania established its rates ranging from 6% to 10%. The invention of paper money within the western world is largely credited to the American Colonies. Although Marco Polo during the 1300’s brought back news of how the Emperors of China circulated mulberry bark paper as money, the news had little more effect upon Western minds than to serve as a humorous joke. But one of the early paper money issues in Europe came in 1661 and was issued by Stockholm’s Banco to avoid a constant movement of payments in Swedish copper plate money which was heavy and bulky to say the least. In the Americas, paper money began as an emergency measure in 1685 in Canada when the French military payroll failed to arrive. In order to pay the troops, the intendent, Jacques Demuelles took normal playing cards and cut them into quarter sections. He then inscribed denominations, signed the scraps of paper and declared them to be legal tender as well as redeemable when the “ship came in” – which gave rise to that memorable phase.

After a while, this seemed to be a fool’s game and sooner than expected, additional playing card issues emerged as money in 1686, 1690, 1691 and 1692. Payment of course was deferred from one year to the next and the scheme was suppressed for a while in 1701. However, card money continued until eventually a collapse of the monetary system in Canada took place in 1757. The first official governmental issue of paper money began in the Province of Massachusetts Bay before the Bank of England attempted it in 1694 followed by the Bank of Scotland in 1696. But by far, America would become the greatest experiment for paper money economics. England had adopted the policy of extracting gold and silver coin from the American Colonies and most transactions during the 17th and 18th centuries were accomplished with paper money or drafts for goods from British merchants. The real start of this paper money experiment came in 1690 when Massachusetts Bay paid for a military expedition to Canada during King William’s War with paper money referred to as Bills of Credit.

To encourage circulation, the Bills of Credit would gain you a 5% discount when used to pay your taxes. From this point on, most other Colonies followed the lead and issued paper money in payment largely for military expenses. This form of paper money was called specifically “Bills of Credit” since the Crown did not extend the right to any Colony to issue “money.” Money was a term reserved to mean a unit of circulating medium of exchange whereas the “Bills of Credit” were borrowed for a public expenditure following in the European tradition. Of course, inflation had long since been a problem within the Colonies even before paper money came into general circulation. An example of this inflation can be seen by studying the official valuations of the coins in circulation at the time. Specifically, in 1645 Virginia had placed an official value on the Spanish dollar from 6 shillings, then down to 5sh and later back to 6sh when just in 1642 it had been circulating at the rate of 4sh.

Inflation and the constant revaluation of silver Spanish dollars resulted in complaints from British merchants that culminated in the Act of Parliament in 1707 which effectively set a limit of 6sh as a maximum value that Spanish dollar could be used for in trade. At first, paper money was generally being issued for war expenditures that came about as the result of King George’s War (1741-1748) and the French and Indian War (1754-1763). At times, the Crown itself virtually ordered the New England Colonies to cover the expenses of these wars by issuing paper money thereby avoiding the need to use gold and silver. But during 1733, paper money began to be issued for such things as the building of courthouses, jails, lighthouses, harbors, forts and many other forms of public expenditures. In 1769, Pennsylvania issued paper money for the relief of the poor in Philadelphia. The early part of colonial economic history began to take a much more volatile path with the invention of quasi-banks. The “loan office” was a scheme for economic manipulation as well as corruption. Commissioners supervising the loan offices were designated by the Colonial Assembly.

Paper money was then issued and lent to private individuals who in turn placed their land or silver belongings up for collateral. The first loan office was set up in 1712 by South Carolina and by 1737, all other Colonies had followed with the exception of Georgia. Many loans were repayable with the notes, however, the interest was in some cases payable only in coin (hard currency). In 1741 Parliament required the immediate redemption of all such private paper money since the economy had become quite flooded with various forms of paper currency. This period in history was filled with frequent financial panics. Of course the earliest recorded economic panic took place in 1683 but strangely enough, it was worldwide. In Japan the Prime Minister Hotta Masstoshi was assassinated and the shogun Sunayoshi was left with no able counselors. Inspired by Buddhism, Sunayoshi issued an edict that prohibited the killing of any living creature. He extended special protection and privileges to dogs and in the process sent the Japanese economy into ruin. In 1683 Charles II compelled the City of London to surrender its charter and injected his own various aldermen and officers by royal appointment.

Municipal charters throughout England were revoked in an effort to give the Tories control over municipal governments and their officers. Some defeated Whigs conspired to assassinate the king in what became known as the “Rye House” plot. The conspirators, and some falsely accused political adversaries, were put to death but the affair aided in creating a severe economic panic at the time. Again speculation was bursting forth in many areas around the world. The first commodity futures trading actually had its humble beginnings not in Europe or America but in Japan as merchants banned together to trade rice receipts in 1690. Numerous financial panics followed the period in 1711, 1720, 1731 and in 1745. Utilizing the exchange rate for paper currency from the Massachusetts Colony, we can achieve some sense of how inflation was taking place in America which was contributing to wild speculations and the eventual economic panics. Massachusetts Exchange Rate 1749 1100 Looking at the exchange rate for only Massachusetts, we find that accumulative inflation during this period had reached 752%. Paper money had been issued at an uncontrollable rate that had caused inflation to move in leaps and bounds.

In 1740, England had become so concerned with the depreciation of the American Colonial paper money, that each Colony was required to prepare a completely detailed report on the status of their currency. In 1749, England had actually sent sufficient English silver and copper coins to redeem the paper currency at the rate of 7.5 to 1 shilling sterling. This action aided in bringing about a temporary end to runaway inflation that had inflicted the Colonies in America. It was formalized by an act of Parliament that became effective September 29th, 1751 with the following provisions. No extensions, reissue or deferment in the redemption dates or amounts of existing paper money issues within the New England Colonies. No change in the legal tender status of existing issues. No relaxed enforcement or extensions of mortgage loans that were used to secure paper money issues. No new legal tender issues of any kind. No new issues of paper money for emergency expenses unless redeemable from taxes at face value plus legal interest to be paid within 5 years. No new issues of paper money for normal expenses unless it would be redeemable from taxes within 2 years.

The stringent controls on paper currency provided by the Act of Parliament in 1751 began to be ignored by the Colonial Assemblies. Each colony was ruled technically by a governor who had to sign the laws passed by the Assemblies. Growing resentment towards England and the Crown was building up over the 1751 Act which virtually transferred control of the currency to the Crown. Despite the fact that the Crown was just stepping into a situation that had become intolerable, this transfer of control to the Crown was not appreciated to put it mildly. The Colonial Assemblies had grown dependent upon their habit of printing money whenever they chose. Therefore, the Assemblies began to ignore the Act of 1751. When a Colonial Governor would refuse to sign their decrees to issue more money, the Assemblies were not without means of forcing him to comply. In New York, the Governor’s salary, which was paid by the Assembly, was simply not paid for over 1 year until he finally signed their bill allowing the Colony to issue more paper money. Other Colonies used the same tactics to win over their Colonial Governor’s approval for paper money issues. Register for Blog Update Alerts Subscribe Form

Question: In 1720, the ‘bursting’ of what in England caused widespread financial loss?
Answer: The South Sea Bubble