More on this book
Kindle Notes & Highlights
From the start, then, whatever was to come would emerge from a web of long-nourished relationships and the certain knowledge that insiders would do just fine, thanks very much.
With the success of the 1710 lottery conversion, the new, much larger plan followed the same lines. The real question was the scale to be attempted: how much of the nation’s debts should be included in the new deal.
In this instance, as the historian P. G. M. Dickson uncovered, “the town” was right: Aislabie had started to buy Company shares in January and would continue to do so for several more months.
That phrase, “the best bargain for the nation,” showed that Brodrick had penetrated to the nub of what made this plan different from the 1719 trial run. Then, the South Sea directors had agreed to a straight-up swap in which the only elements to the deal were the firm’s stock and lottery tickets on which the Treasury was obligated to pay interest. This time, Aislabie and Craggs aimed for something more: cash on the nail, a fee the Company would pay for the right to do the deal.
Competing proposals were welcomed, and the members would return in a week to consider whatever might have arrived in the interval. It was at once the obvious move and the first, fateful swerve off the path Blunt and friends had mapped.
DESPITE WALPOLE’S PIOUS suggestion that anyone could offer a counterproposal, there was really just one challenger that could disrupt the pitch. The East India Company did not put up their own bid. It was rich enough to try, but it was the inverse of the South Sea Company: a trading business first and a financial one only as a by-product of what it took to run a mercantile empire.
The Bank pledged £5,547,500, almost double the Company’s original offer, and added other sweeteners: the Treasury could begin to redeem any of the debt taken in by the Bank that it could afford to pay off as early as 1724, three years earlier than the South Sea bid had promised, and it agreed to handle some other, minor financial tasks for the government.
The South Sea men, though, were determined to win, no matter what. At a directors’ meeting, the Company’s negotiators were ordered to “obtain the preference, cost what it would [italics in original].” Blunt and colleagues did so, settling on an offer of a truly mountainous sum: up to almost £7.6 million—just over £1 billion in twenty-first-century currency,
In its final form the South Sea Act filled thirty-five printed pages with each party’s rights and obligations laid out in meticulous detail. The Company was given the choice to exchange official debt held by the public for either cash or shares. The act also specified the conversion formula for the long- and short-term debts.
Given those figures, the total of outstanding British official debt eligible for conversion would be priced at £31.5 million, and the Company’s capital—the sum on which the Treasury would pay interest—would increase by that amount.
The nation’s debts had been valued—the legislation specified the conversion rate to capture ongoing payments in a single number. But they had not been priced: nothing in the legislation required the Company to declare how much stock each creditor would receive for his or her holdings.
Those who agreed to swap their pieces of the long-term national debt for stock would receive seventeen times the return on their holdings, £1,700 in Bank shares at their par value for every £100 of annual interest earned, or about a 6 percent return. But in the legislation before the Commons there was no such provision.
This was critical, the hinge on which all of what was to come would turn: the bill allowed the Company to create new shares at par up to the amount of the national debt exchanged under the deal—the full £31 million.
For the South Sea men, this was the beauty of the deal. Given a valuation at seventeen times its annual payment (the figure ultimately offered by the Company for short-term irredeemables), the legislation allowed the Company to create seventeen new shares for each slice of debt with £100 in yearly income.
Walpole didn’t say how the South Sea men might pump the stock, but as Defoe had already written, it was common knowledge that stockjobbing men knew how to stoke reckless enthusiasm in the coffee rooms and passages of the Alley. Walpole would come to seem astonishingly prescient. In this still-hopeful moment, he went unheeded.
In Britain in that uncertain age, everyone took care of his friends—even Isaac Newton, for example, who as warden of the Mint placed his fellow comet lover and disciple Edmond Halley in an official post.
Some of what happened over the winter of 1719–20 was consistent in form with such behavior. The scale, though, was another matter. Over the two months that Parliament debated the move, South Sea Company advocates pursued a systematic, clever, and ruthless campaign of bribery.
those to be bribed would never have to pay a shilling. The entries in Knight’s notebook worked like those modern-day share warrants that companies often use to reward their executives. Holders of such warrants can choose to exercise them once the underlying stock rises; they pay the price specified in the warrant to acquire the underlying shares, which they can then sell immediately at the higher price available on the open market.
South Sea Company was now officially empowered to take in government obligations in exchange for its stock. There was still much to do. The Company had to raise enough money to cover the outlandish payment it now owed the Treasury for the chance to absorb the national debt, and it had to handle the tricky accounting involved in creating new shares as that debt came in.
it’s also true that no one seems to have been bribed into doing something they actively opposed. There was, after all, very recent precedent to show that however ambitious this new move might be, it was not obviously programmed for disaster.
Yet for all such confidence Defoe’s anonymous antagonists could make some reasonable arguments for their unease. South Sea share prices had been ticking up nicely since January and the first public mention of a possible deal.
from a St. Valentine’s Day quote of £138, they leapt to £155 on February 15, a 12 percent gain in twenty-four hours. It is almost certainly no coincidence that this leap came just as the South Sea Act was being drafted and the Company’s campaign of judicious bribery began to reach more and more of its targets.
The Company’s shares stood at £198 on March 29, £220 on the thirtieth, £255 on April 1, £275 on the second, when the House of Commons approved the South Sea Act—and then, stunningly, £350 on the fourth.
April 14 was a special date: it was the Thursday when the first money subscription in South Sea stock opened and investors with cash could buy shares directly.
Demand was so high that the amount to be sold reached £2,250,000—all of which was, at least on paper, instantly in the black: at the same moment that subscribers jammed themselves into the South Sea Company’s office, brokers at Garraway’s and Jonathan’s just a few hundred yards away were offering £317 to buy South Sea shares, almost 6 percent profit in an instant.
Offer isn’t quite the right word. Investors were invited to surrender their assets in exchange for “such Terms and Conditions as the said Company shall appoint”—that is, whatever Blunt and friends deigned to give them.
Recall that the Company could value its shares at any price it could get away with. For this first debt-for-equity exchange, that number turned out to be £375: 25 percent higher than the money subscribers had paid two weeks earlier, and almost four times
Each hundred pounds of income from one of the long-term, irredeemable obligations, valued at £3,200, that came onto its books became that much new capital for the Company—thirty-two new shares at a face value of £100.
Setting an above-par price for the shares that debt holders received in exchange meant, in effect, that the Company—and only the Company—could buy that debt at a discount.
There was an obvious way such a fortune could evaporate. If all its new owners rushed to turn their holdings into cash, South Sea stock would flood Exchange Alley, lowering prices and hence insider profits. So Blunt and friends simply blocked such inconvenient competition. Instead of transferring stock to its new owners at the time of the exchange, they postponed the exchange for months, all the way to December 30.
The tricks and tools Blunt and his associates deployed to pump their stock along Exchange Alley haven’t changed much in the three hundred years since. Then as now, such devices—the ones the South Sea directors used early in the transaction like the games with delivery as above, and many more that would appear over the course of the South Sea spring and summer—can produce innocuous results in ordinary circumstances but can become gasoline on a fire when deployed maliciously, ignorantly, or some luckless mixture of the two.
when an investor buys on 50 percent margin (the current standard in the United States), she puts up half the price of a financial purchase while borrowing the rest, usually from the broker handling the sale. That doubles the number of shares she can purchase with the same amount of her own money, allowing her to potentially double her profit, while also doubling the impact of any market drop.
Margin buying is an exercise in what professional investors term leverage—using borrowing to increase the amount of an asset under either an individual’s or an enterprise’s control. Where whole stock markets are concerned, such leverage is another way to funnel more demand for shares into an exchange, and hence to boost prices, at least for a while.
At the first money subscription in mid-April, purchasers needed to come up with only £60, just one-fifth of the issue price of £300, paying off the balance at intervals for another sixteen months. Two weeks later, the second money subscription opened at a higher price—£400—but this time it took just £40, or 10 percent, to buy into the issue, with the schedule for the rest of the installments stretching out even longer, all the way out to the end of 1722.
The third and fourth subscriptions came over the summer on similar terms, allowing individual punters to leverage themselves five and ten times over—that last a rate that meant each £1 invested would control £10 worth of stock—which would provide outsize returns in a rising market, and the reverse as well: potentially devastating losses in any decline.
in a margin trade today, some third party (usually the broker handling the trade) lends the money needed to cover the full cost of a purchase. The seller of the asset gets all their cash at the time of the sale. In 1720, though, the seller and the notional lender were the same: the Company.
The advantage for the Company was clear: all the shares it retained at every debt swap priced above par would rise in value as the market climbed. The risk was less obvious: if the market moved against its shares hard enough, those who owed on their partly paid-up purchases might default—fail to come up with the balance of what they owed for their stock.
New money had chased shares along Exchange Alley in March, just as Parliament worked out the details of the deal. But it was when the deal went live that Exchange Alley began to live the dream. Shares traded at £328 at the end of April. On May 2, jobbers at Jonathan’s could get £339 for the stock. It hit £352 by the end of the next week, £375 on the nineteenth, and £400 on the following day—and at that, the market was just warming up.
Just as earlier in the spring, nothing had actually happened to justify such a move. There had been no change in the numbers for the deal, no land bought or projects launched…nothing. This was the triumph of hope, or perhaps a demonstration of just how easy it was to push the unwary along Exchange Alley—with more to come.
In late April the Company’s shareholders voted to allow the directors to lend money with South Sea stock as the collateral—creating a kind of circular financial engine, pumping more cash into a rising market, where each step up inflated the nominal value of the pledged shares, which could then be used to justify more lending, more cash, and, when brought to Jonathan’s or Garraway’s, more demand and hence higher prices on the Exchange.
“The profit of the Company,” shareholders were told, “do’s chiefly depend on the price of the Stock,”—and the point of making those loans was to allow more and more buyers to acquire more and more shares, thus keeping the market price high.
Most important: these were no mere one-off gambits to get the deal off to a running start. The directors made it clear that market manipulation was to be the Company’s strategy for the foreseeable future.
John Carswell was a South Sea historian with a fine eye for folly, and as he put it, Blunt and his closest associates had built “a financial pump, each spurt of stock being accompanied by a draught of cash to suck it up again, leaving it higher than before.”
As the market shot upwards, powered by and inflaming the passions of the crowd, Defoe scowled: “I thought once, that Love and Jealousy were the only Two Things that could make the World mad; but I see now that Avarice and eager Flight of the grasping soul after money is capable of all the Fury and Rage” of any human desire.
Financier and Company director Sir Theodore Janssen had been a founding investor in the Bank of England, a financial polemicist, and, as of 1717, a member of Parliament. He had thus been perfectly situated to get in on the game early. By late spring his Company holdings were said to be worth a million pounds, and he was seen in public sporting a new diamond ring, a gift, it was known, from the Prince of Wales—the reward for services the public could infer.
Janssen’s baubles and building spree were matched over and over in a town awash in paper fortunes.
Sounds familiar
Such piety aside, Defoe documented throughout the month a popular obsession with the market, its tokens of riches, with a sequence of numbers that promised the pot of gold, today, tomorrow, perhaps soon.
As shares continued to gain in June, the Duchess of Marlborough, once the most powerful woman in the realm after Queen Anne and still a force to be reckoned with, badgered the Earl of Sunderland to make sure that her friends would be able to sign up for more shares in the latest money subscription to the point that “to make your Grace as easy as I can,” he interrupted his work as the head of government long enough to contact the Company’s cashier, Robert Knight, on her behalf.
(In this correspondence Sunderland ignored—or may not have noticed—the fact that the financially sophisticated duchess wanted to reserve stock for her friends, but not for herself.)
James Windham, an official of the Salt Office (administering the taxes on salt), was no nabob. In May, he wrote to his mother, overcome with joy, “I grow rich so fast that I like stock jobbing of all things. Since the South Sea have declared what they give to the annuitants, Stock has risen vastly.”
