famous financial bubbles --6/16/2026
Today's selection-- from The Great Man by Edward Pearce. In 1720, there were two massive, era-defining financial calamities that happened at almost the same historical moment. In France, it was the Mississippi Company, the brainchild of John Law, and in Britain, the emulative South Sea Company:
“As the historian of the Bubble, John Carswell, remarks, the moving spirits of the [South Sea] Company were very little interested in trade, not one of the directors having knowledge or experience of South America. What they understood was finance–creative, manipulative, confidence-exploiting finance. With the status of a state-created and state-endowed company on a level with the East India Company, they were placed to do that wide and deep. The men doing this were taking a lead from John Law, whose Mississippi Company in France had initially rather more to do with the Mississippi than the British group with the South Seas, but whose thinking was anyway large and imaginative rather than fraudulent.
“Broadly, Law could see the enormous potential for economic expansion in a seemingly poor country like France if investment capital were released. As early as 1713 he had made a fortune of over £100,000 at the values of the day (at ours, perhaps five million!). Despising gold as a superstition and a shackle on trade, Law favoured a national paper currency kept stable by banking rules and the underwriting hand of the state. This could not immediately be had from the government of the French Regent, Orléans. But, in 1716, Law was allowed to create a private venture with known government approval, printing and issuing a currency convertible at the quality of coin measured at time of issue. He correctly guessed that confidence in his issue would keep demands for redemption to a level which could be met when, inevitably, the chaotic national finances required the currency to be debased. His Banque Générale, blessed with public confidence and royal/governmental favour, demonstrated its clout by obtaining a decree, of 20 April 1717 (New Style), that all tax collections should be passed to the Treasury in Banque Générale notes.
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| Arms of the South Sea Company: |
“Having created a national private currency, Law moved on to the international scene by a device extraordinarily like the South Sea Company. The Mississippi Company had been floated in 1712 for the trade of the area in the vast south-western part of North America known as Louisiana. It was in a lingering and unhealthy condition, but Law intended it for exploitation of the American West, long before transcontinental railways, cattle drives, gambling cities or the film business had been contemplated. His official name for it, inspirational but never much in circulation, was the Company of the West.’ Again, he would canalise the resources of the state so as to use its money productively. A quarter of the company capital, 100 million livres (about £150,000 sterling), would be subscribed in hard cash, the rest in state bonds which at the moment, autumn 1717, could be bought at a discount of 80 per cent.
“In effect, Law was taking up a great part of the French state debt in return for an annuity paid by that same state to his company. In these early stages, he bribed no one with dividends, telling investors to wait for trade to earn profits; meanwhile, serious trading, notably in furs and tobacco, was undertaken. What he was doing was closely followed abroad, not least in Whig Great Britain. The men coming to the fore in that country after 1714 were business-minded and, if not drunk on greed, felt that they could get to like it.
“Law would ultimately be confounded by market pressure from men less rational than himself. But his was a sound and creative idea which would be corrupted. The British imitation began with the day trader’s instinct for making something out of nothing. The trade of Louisiana might be less than Law hoped for, but it was a real venture for something tangible. The South Sea Company did not even make much of a fist of selling Negro slaves. There might be a contract with Madrid for providing 4,800 a year to seven ports on the continent, but they ran into the sullen bureaucracy of the colonists who blocked the first ship 1 (its shackled cargo discounted cheaply in the West Indies), on the grounds that not all the formalities over the Asiento had been completed. The slave trade never made the directors much money, but it was perhaps symbolic of their whole cunning but unreflective approach to business that South Sea ships had a higher mortality rate among their valuable cargo than was usual. They were regularly and lethally overloaded.
“And after three years of cooling relations with Harley's government, the South Sea men found themselves obliged after the end of Tory rule and the Stuart dynasty, to make new friends. They wasted no time. Joseph Addison, a senior Whig without the means of his grandee colleagues, wrote to Lord Halifax in November 1714 about the job he had hoped for and not received and the payments expected for work done, also unforthcoming. Complaining of 'the unhandsome treatment I have received from some of our new Great Men in every circumstance of that affaire', Addison grumbled that he had been offered nothing except that 'I was offer'd a present by the South Sea Company. I never took that nor anything else for what I did, as knowing I had no right to it.?’ Addison could be insufferable about virtue but he did try to practise it.
“In the same letter he describes his rejection for the Board of Trade and the bearer of the news: 'Young Craggs told me about a week ago that his Mty, tho' he did not see fit to gratifie me in this particular designed to give me a recompense for my Service…’ Addison, who insisted that he was worth a job paying £1000 a year, was writing at the end of November 1714. By Christmas the names of Craggs and the Earl of Halifax, whom the essayist had solicited, were listed among those holding more than £10,000 of South Sea stock!
“Young Craggs would be placed rather to offer South Sea bribes than take them. He and his father would become close enough to the directors of the South Sea Company to be regarded as their confederates. The Craggses, father and son, were as keenly observant of what was going on in Paris as they were to the front of the new British regime, close to George's court and deeply committed to James Stanhope. The elder Craggs, rich anyway, grew richer as Postmaster General where he supervised the decoded correspondence between the (mostly very poor) Jaco bites and the Pretender's little court in Avignon. The younger Craggs had risen via a court position with the Prince of Wales (before the royal split), to Walpole's old job as Secretary at War, to the splendour of junior Secretary of State. Craggs senior kept himself very fully informed of the Company of the West, the money it raised, the way it was raised, through a transfer of indebtedness from the state to a private company as, far more heavily than cash subscriptions, state bonds were taken for the purchase of stock. It all seemed to have handy application in Britain.
“As one of the first monitors and enthusiasts for the Law system, he would be drawn early into patronage of South Sea undertakings. But at this stage, inducements refused or accepted existed for the pursuit, at least as ministers saw it, of a high and aspiring purpose. The mood late in 1719 was euphoric. The new Spanish war had been a success, and at home the defeat of ‘the Fifteen’ had been followed by the complete fiasco of a projected rising earlier in that very year. It was the time of the Peerage Act, about which Walpole had been so unhelpful, and of projected and defeated university reforms. It was time to think big.
“The state, in the way of states, had a debt, which, in the way of debts, had to be serviced. If somebody else was competent to take up all or most of this in return for a large privilege and immediate working cash, the government politicians would be able to talk in the virtuous way of politicians about economy and reductions in expenditure and look to tax cuts and public gratitude. There was no particular reason why the South Sea Company should qualify for this role. It had not been a spectacular success as a trading company. It was run by businessmen, many of them connected with the Sword Blade, who had handled lotteries well enough, but whose personal reputations were not of the highest. Their old nay-sayer, Daniel Defoe, said that 'these men with a mass of money which they command, of other people's as well as their own, will in time ruin the jobbing trade'. He then added prophetically 'But 'twill only be a general visitation ... like a common calamity ... that drowns lesser grievances in a general deluge.'
“Careful orthodox thinking in government would have wanted such an undertaking, if it were to be done at all, safe in the prudential hands of the Bank of England. The Bank thought so too and would bid for it. The men who ran the South Sea Company rated the opportunity and bid higher. They also spread largesse like silage, several ministers, as already noted, holding pleasant amounts of equity. And they worked through congenial ministries–Aislabie, Chancellor of the Exchequer, Sunderland, second in the Ministry only to Stanhope, and the elder Craggs.
The largest single part of the burden was war debt, money raised to pay for Marlborough and Louis XIV, debt raised at high interest and being repaid by long-term annuities. Service on these amounted to £800,000 annually. Combined with an armful of smaller obligations, some of them going back to Charles II, at only a little less, total yearly service stood at around £1,500,000. This was represented as a capital sum. The redeemable debts worked out realistically at £16 million, the non-redeemables, by a variety of elaborations which generally disadvantaged the holders of longer and more recent annuities, at £15 million.
“The government for its part undertook to pay the company by annuity a pound for every pound of debt relieved, but in the case of one group of debts, they needed to pay only r as, a saving for the Treasury of £40,000 a year. And if, after seven years, the South Sea Company's operation had fully succeeded, the percentage on which the annuity was calculated would fall from 5 to 4 per cent, saving the Treasury £400,000 annually. This, as Carswell stresses, was a dazzling inducement, only a little less than the annual cost of the armed forces. The purpose was to establish a sinking fund, by means of which, as the South Sea Company achieved its ends, a sixth of the national debt would be cleared in seven years and the debt to a whole in twenty-five. What Blunt and his associates offered ministers, what a Sword Blade had done modestly and Las so far splendidly, should be undertaken now by the South Sea Company.
“The operation was to work by way of rising value in the stock of the South Sea Company, an increase good enough to persuade the holder of a government annuity to convert to South Sea stock. The company would have authority to create more stock. The exchanger of annuity income for stock would benefit by the Company's rising dividends as its value rose, and, as that stock rose, he could also look to capital gains. This was a stock which could not work through ordinary good trading, one which, never on the most hopeful terms, would answer and about which the company's Court of Directors had no illusions.
“Confidence was to do all. It would contribute the higher price at which stock would be attractive; and, as a gap opened between the par value at conversion and the market value, the surplus could be sold as profit. It was to be, in Ramsay MacDonald's famous rambling phrase, 'On and on and on and up and up and up' ... until it wasn't. The effect of a puff operation was to put all resources into the inducement of sale, few if any into valuable trade. The effects were what they always are, inflationary, money with nothing to do injected into a boom."
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