NCFP Opinion | Crash for Dummies

NCFP Opinion | Crash for DummiesNCFP Opinion – Crash for Dummies

South Sea Bubble and 2008…

Having watched Lucy Worsley’s new televised offering, the first episode of The First Georgians, I realised how similar the situation was during the reigns of Queen Anne and George I to our present day – and particularly, the events of the South Sea Bubble. I won’t go into great detail, but, put simply, the South Sea Bubble was a scam very similar in concept to the banking crisis of 2008.

The government had large debts in the early 1700s, no definable income to pay them off, and was embroiled in a war with France, being prosecuted in Europe by John Churchill. The war was judged a success and went so well that Churchill was given Blenheim Palace by a grateful, but increasingly broke, nation. The question was how to pay off the debt. The great storm of 1703 had cost the nation dearly (it is said around £7 million at the time), and there were no notions of an austerity budget.

The then private company, The Bank of England, came up with a plan. A cunning plan! It would sell the debt to a company that would be granted exclusive rights to trade with South America, called “The Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America, and for the encouragement of fishing”; the directors comprised 9 MPs, and 21 others taken from a bank, the Hollow Sword Blade Company (yes, it WAS a bank!) plus several financial tycoons. The government would, in exchange for the company taking over its £9 million debt, pay the company over £500,000 per annum to be paid as share dividends. The main shareholders were the 421 MPs and members of the House of Lords. There was, however, a snag. Trade with South America was exclusive to Spain – and the Spanish weren’t about to hand it over! To cut a long story short, huge numbers of ordinary people were sold shares: clerics, artisans, country squires, and so on. A large part of the profit was diverted to be paid to the Queen, and later King George and the Prince of Wales; losses mounted, despite slave trading, after nine years of trading plus changes of management, and stock values soaring. In the run up to the crash, even more government debt was sold to the company: most of the national debt, an amount of £31 million pounds, by 1719 (GDP was about £65million). The dividend offered was improved. And war with France broke out in 1718, as well as war with Scotland’s Old Pretender – but, when the directors spread a rumour that he was captured, the shares soared even more. However, interest rates were falling generally, and the company could do one thing only: fail. The bubble burst by September 1720, by which time the share price had risen to £1000 per share. Many thousands of ordinary people, and including some aristocrats, became destitute overnight. Then banks and goldsmiths began failing. But not so the monarch or the other main shareholders. One of those main shareholders was one Sir Robert Walpole. Those main shareholders became very rich very quickly, mainly through one artifice: insider trading. A government investigation in 1721 revealed the scope and extent of the fraud and corruption (and not just of the South Seas Company).

Robert Walpole was tasked with rooting out the cause and trying to return stability – one of the poachers had turned gamekeeper – and that one wasn’t going either to admit to his part in it, nor that of his friends, who had also become seriously rich by trading in the South Sea Company shares. Directors were impeached, some had estates confiscated to help relieve the suffering caused by the crash, but not one person went to jail for what was a monumental fraud by the bankers and serious corruption in the highest levels of government. The South Sea Company continued to trade, however, and manage its part of the national debt; every monarch up to and including Queen Victoria was its governor, until its dissolution in the 1850s.

Who did the public blame? Initially, Parliament blamed the bankers – “they should be tied in sacks… and thrown in the Thames.” But then pamphlets were distributed blaming the Jews, and proposing that Jews should be drowned wherever they were encountered. The economy was devastated; Isaac Newton alone lost £21,000 – £2.4 million in today’s money – even though he had criticised the concept of the South Sea Company and the ‘madness’ of the population in investing in it, so did he. Ultimately, other than those investors – members of the House of Lords, and MPs – who should have been prosecuted for insider trading, no-one was truly brought to book for the huge fraud of the bankers and corruption in the Cabinet.

This has considerable resonance with the events of 2008 and afterwards. Like 2008, it wasn’t an exclusively British phenomenon; bubble companies had also sprung up on the Continent. After 2008, no-one in Britain was prosecuted (although there were a large number of prosecutions in the US) for what was effectively fraudulent practice leading to banking collapse, and devastating to our modern economy. Agreed, the bankers in 2008 had not sold dodgy shares to a gullible public, and so far as we know, there was not the corruption in government of 300 years ago; but the selling of toxic debt to banks that had not the assets to cover it, the selling of insurance of the toxic debts to other banks that could not cover the losses if things went wrong, and all the other nuances that were possible for an insufficiently regulated banking culture must surely be comparable to the crash of 1720? The banking community of 1720, along with a number of members of government, were akin to a mafia in culture and behaviour, and little appears to have changed to this day. We appear to have learned nothing from history, indeed from a history of many similar incidents of perhaps not such large scale as the Bubble but designed to make a few people rich in a short time, starting with a State Lottery in 1569, and through various incarnations including major banking failures in Victorian times, and still with us today. When will the next such crash occur?

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