The story of the South Sea Bubble is that of an unprecedented fraud which spread from the City to ruin the lives of hundreds of ordinary people, destroy trust in government and cause a widescale rewriting of the monetary rules.
It’s not the banking crisis or even LIBOR fixing. It didn’t even happen in the last one hundred years. The South Sea Bubble did, however, cause financial devastation which could have brought the City to an end.
All this destruction emerged from a coffee house in an unassuming passageway directly opposite the Royal Exchange, Change Alley.
Jonathan’s Coffee House
Built by Jonathan Miles in 1680, Jonathan’s Coffee House became a mainstay of the City. The coffee houses of the 17th and 18th century weren’t the depressing identikit shops of today.
Three hundred years ago there were no Frappuccinos and no overpriced yoghurt-coated nuts at the tills to persuade you to break your diet. Instead, coffee shops represented cultural, political and economic powerhouses.
Jonathan’s was one of the meeting places where an assassination plot was developed by Jacobites to kill King William III. The plan was to lie in wait on the North Bank of the Thames just opposite Kew.
There was no bridge in those days so a ferry would take the King from the South Bank to the North. He would be temporarily separated from much of his armed escort, at which point the conspirators would attack the six horses that accompanied the King’s carriage while a special group “kidnapped” the King.
Not unusually, this plot was infiltrated and the conspirators arrested. Interesting from a legal perspective is the considerable debate which took place about whether the accused were entitled to defence counsel.
Under the 1695 Treason Act, people accused of treason were allowed some legal representation for the first time. After close analysis on their arrest dates, however, it was decided that most of the defendants had been arrested before the act came into force, and therefore weren’t entitled to legal counsel.
Stocks and commodities
Jonathan’s Coffee House was also the first place to post the price of stocks and commodities in 1698. The prices were literally written on the walls of the coffee house and organised by John Castaing.
Castaing went on to found a newspaper, the Course of the Exchange, which listed financial information including the exchange rates of major European currencies. It would evolve into The Stock Exchange Daily Official List and become the third oldest continually published newspaper in the world.
There is a widespread view that “in the good old days” data moved more slowly and things could be left for a substantial period before they became urgent. Electronic communications have definitely made things faster, but information has always meant power and a quick profit.
In the 17th and 18th centuries, it was not unusual for couriers – often young boys – to be seeking out and delivering correspondence to individuals attempting to arbitrage securities in the various coffee houses across London. Deliveries of notes and letters six times a day were not unheard of.
The South Sea Bubble
Despite all its rich history, Jonathan’s Coffee House really came into its own during the South Sea Bubble of 1720.
The South Sea Company was founded in 1711 and was granted a monopoly to supply African slaves to the islands of the South Seas and South America. Recent studies suggest that over 30,000 slaves were transported by the company.
Quite apart from the obvious issues with the government essentially supporting the slave trade, the plan was fairly flawed from the start. The South Seas and South America were the preserve of Spain and Portugal, it was always going to be an uphill struggle to make any income from the area.
Despite its PR campaign, the real purpose of the company was to consolidate the growing national debt wracked up whilst fighting the War of the Spanish Succession and the Northern War.
At the time, the government borrowed money in a haphazard way with particular departments getting cash where they could and with little clear idea how the money could be paid back.
To deal with this situation, the government debt was consolidated into the South Sea company and government creditors were issued shares in place of their debt. The government would then pay annual interest to be re-distributed to the shareholders by way of dividend.
During the 1710s, more and more national debt was dumped in the South Sea company and with it, more and more corruption. Government officials were given stock and various options based on speculation as to increasing share price.
Remarkably, even George I’s mistress was given an option on a £120 pay-out per pound rise in the share price. Insider trade was rife; company employees used information fed from the bribed government officials to learn the dates of national debt consolidations and speculate using this knowledge.
Meanwhile in the foreground some ridiculous statements about the likely financial success of the company were made. In a burst of enthusiasm that makes things going “viral” today look rather tame, Jonathan’s Coffee House became the centre of speculation in the company across the City.
The company’s share price went from just over £100 at the end of 1719 to almost £1,000 by the middle of 1720. Everyone wanted shares and people were desperate to acquire them, as an advert from the Daily Courant on 21 November 1720 attested:
“LOST out of a pocket at Jonathan’s Coffee House in Exchange Alley on Saturday 19th instant, a plain vellum pocket book wherein was a first subscription to the South Sea Company of £1,000 South Sea Bonds. Whoever brings the said book, with the papers therein contained to Mr Jonathan Wilde in the Old Bailey shall have five guineas reward and no questions asked.”
Almost as quickly as the share price rose, it came tumbling down with a sudden realisation that the company wasn’t worth anything near the price people were paying for stocks.
Those buying on credit were ruined and bankruptcies were rife. Banks and goldsmiths also began to go under as the debts remained un-paid and the financial devastation began rippling across the country.
Even Isaac Newton lost substantial sums in the collapse, somewhere in the region of £20,000, or £20 million in modern day money. In his own words:
“[he could] calculate the motions of the heavenly bodies, but not the madness of people”
A statement probably caused by the fact he sold his shares early in the crisis, making a substantial profit before being persuaded to reinvest at the peak.
The political casualties of the South Sea Bubble were extreme, the Chancellor of the Exchequer, the Postmaster General, the Southern Secretary and various others were identified and impeached.
It fell on Robert Walpole, the new First Lord of the Treasury, to restore confidence in the financial system – which he did by stripping the wealth of the 33 directors of the company and distributing it back to those who had lost money.
Despite all this, the company survived and was still administering 80% of the total government debt in early 1722. It would continue to exist until the 1850s.
The South Sea Bubble is an example of a clever financial structure being overused and abused, leading to national collapse. It’s good to know that some things never change.