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The history of English soap bubbles. The South Sea Company and the national debt of England Historical events in Europe at the turn of the 17th - 18th centuries

The history of English soap bubbles. The South Sea Company and the national debt of England Historical events in Europe at the turn of the 17th - 18th centuries

"South Sea Company" - in an engraving by William Hogarth: a carousel with gullible investors and scourged "virtue"

An instructive example of market irrationality is speculation in England at the beginning of the 18th century.

18th century debt to England

The company, known as The South Sea Bubble, began operations in 1711 when Duke Robert Harley founded the South Sea Company - the full name: "The Manager and Company of the South Sea Traders of Great Britain and other parts of America for the purpose of promoting fisheries." She was promised exclusive trading rights with Spanish possessions in South America. These rights were obtained by England for the successful completion of the War of the Spanish Succession in 1714. Parliament granted a monopoly on trade in exchange for the redemption of part of the national debt. The company purchased almost £10 million of government debt against a guaranteed annuity of 6% and monopoly for all trade with Latin America.

In 1717, the King of England proposed the re-"privatization" of the public debt. The country's two major financial institutions, the Bank of England and the South Sea Company, each presented their proposals, and after heated parliamentary debate, South Sea was allowed to purchase another debenture at an interest rate of 5% per annum.

After a short period of time, rumors began to spread about the company’s unheard-of profits from trade in Latin America, where British goods could be exchanged for gold and silver from the “inexhaustible” mines of Peru and Mexico. On the stock exchange, South Sea shares led a quiet existence, the price moving only two or three points a month.

But in 1719, an event occurred in France that was of great importance for the English company. A prominent man named John Law founded the Compagnie d'Occident in Paris to trade and participate in the colonization of the American state of Mississippi. A huge wave of trading in the company's shares raised their prices from 466 francs in August to 1,705 francs in December 1719. The buyers were both French and foreigners. This was the reason that the British ambassador asked the government to do something to stop the outflow of British capital into the Mississippi Bubble. The bubble burst on December 2, 1719. As a result of the collapse, capital began to move back to England from France.

Steady growth

This presented an interesting opportunity for the main shareholders of the British company, who offered to assume the entire debt of the English state. On January 22, 1720, the House of Commons appointed a council to consider this proposal. Despite numerous warnings, on February 2 a decision was made to present the draft to parliament. Investors rejoiced at this prospect of further capitalization of the company. Within days the share price had risen to £176, supported by inflows from France. As the project was further considered, further rumors began to emerge about the incredible profits that were allegedly to be made, and the shares rose in price to £317. In April 1720, sales pushed prices back to £307 and to £278 the next day.

Even at these prices, the company's original founders and directors could withdraw capital gains that were simply uncountable by the standards of the time and realized from the effectively non-operating company. Herself in 10 years of operation, the company has not sent a single commercial or fishing vessel to American shores. The company was much more successful in the stock market than in trading operations - trade with the New World was difficult because hostile Spain controlled the vast majority of American ports, allowing only one English ship a year to enter, receiving one-fourth of all profits for this and 5% from turnover. However, the word “monopoly” had a hypnotizing effect on investors.

On April 12, new positive rumors began to circulate, and £1 million of fresh shares were subscribed at a price of £300 per share. The shares were oversubscribed to twice the originally announced volume, and a few days later they were trading at £340. The company then announced that it would pay a 10% dividend on all new and old shares. A new £1 million subscription was then offered at £400. It was also exceeded. The company was still largely dormant.

All this inspired many to become entrepreneurs, and in the years 1717-20 a new phenomenon arose in the stock market: more and more offers for shares in “blind securities” appeared. These companies, like the Compagnie d'Occident and the South Sea Company, sold nothing but plans, ideas and expectations. They were completely dormant on the date of subscription, run by management novices. The shares were bought with great enthusiasm and quickly grew in price. Stock speculation was nothing more than a rich man's game - everyone and everything, here and there, men and women took part in it. These companies quickly became known as “bubbles,” thanks to their founders often selling their own shares and turning a profit just days or weeks after the new issue, leaving other investors to face a dormant company and inflated stock prices.

George I - King of Great Britain 1717 - 1727.

On June 11, 1720, the king declared some of these companies “sources of danger to everyone around him,” and trading in their shares was prohibited, imposing a fine for violation of this. The list of 104 banned companies included the following imaginary activities:

Improving the art of making soap;
Extraction of silver from lead;
Purchasing and equipping ships to suppress pirates;
Transformation of mercury into malleable refined metal;

Despite all the efforts of the government, more and more bubbles appeared every day, and the speculative fever became increasingly worse. The biggest bubble, the South Sea Company, continued to inflate, with shares trading at £550 and reaching £700 in June. During this period, price movements were extremely neurotic, with huge periodic fluctuations. In one day, June 3, in the morning the price fell to 650 pounds, and at noon it rose again to 750 pounds. Many large investors used the summer's high to realize profits that were reinvested in everything from land and commodities to real estate and other shares. However, others continued to buy shares of the South Sea Company, among them the physicist Isaac Newton. During the early price rises he sold all his shares in the South Sea Company, making a profit of £7,000.

Sir Isaac Newton. 1689

The leadership spread rumors that Spain had placed its South American ports at its complete disposal. The collapse of the Mississippi Company in France attracted additional capital from the continent. As a result, the share price increased to £890.

Catching falling daggers

Speculative fever swept across England. All segments of the population, from townspeople to the nobility, rushed to buy shares of the company, the price of which had already reached 1,000 pounds in early August. Only very few were aware that time was running out for investors. Among those who knew this were the company's original founders and its board of directors. They took advantage of high summer prices to dump their own shares. In early August, ominous facts began to leak out to the masses, and stock prices began to fall slowly and steadily.

On August 31, the company's board announced that an annual dividend of 50% would be paid over the next 12 years. This would completely deplete the company, and such news did not stop investors from growing worried. On 1 September the shares continued to fall and panic set in when the price reached £725 two days later. For the rest of the month, stock prices reached their lowest levels.

On September 24, the company declared bankruptcy, the rate of decline increased even more. On the last day of the month the shares could be bought at a price of 150 pounds per share. In just three months, their price fell by 85%. Isaac Newton lost more than 20 thousand pounds sterling, after which he declared that he could calculate the movement of celestial bodies, but not the degree of madness of the crowd. Among those who lost their savings was the writer Jonathan Swift (author of Gulliver's Travels).

In the run-up to the demise of the South Sea Company, banks and brokers found themselves under siege. Many greatly over-borrowed their portfolios of South Sea Company shares, and a wave of bankruptcies swept across the financial world.

In contrast, the South Sea Company bubble did not only affect a limited group of investors. De facto, a significant part of the wealthy population of England, France, Scotland and Ireland speculated in the Company's shares. Thousands of investors were ruined, including many members of the aristocracy, who were then forced to emigrate.

Search for the culprits

Already in December, Parliament was urgently convened, which began an immediate investigation. It revealed cases of fraud among the company's directors. Some of the accused, including the company treasurer, fled abroad. The investigation revealed that many members of parliament took bribes for their votes when passing the royal act. The businessmen were accused of knowing about the real state of affairs, but not informing shareholders and stock exchange players about it (this charge is still brought against unscrupulous managers). Moreover, the Company's managers sold their personal stakes in shares at the peak of their price. The directors of the South Sea Company were punished by the authorities - they were sentenced to huge fines, and their property was confiscated for the benefit of the victims.

As a result of the investigation, the chairman of the company's board and several members of the government, including the Minister of Finance John Aisleby, were sentenced to prison. The South Sea Company was restructured and continued in existence until its final closure in the 1760s. But its main function was no longer trade with the Spanish colonies, but management of the public debt.

The problem was that in 1720 alone, there were 120 companies operating on the London Stock Exchange, operating under the South Sea Company scheme. Their collapse caused a chain reaction of bankruptcies. Business activity in the country has sharply decreased and unemployment has increased. To remedy the situation, the British Parliament passed a resolution prohibiting the creation of new companies in which the government does not participate. As a result, the development of the English economy was slowed down for 50 years.

The company was finally dissolved in 1855. In its 140 years of existence it had never been able to conduct trade in the South Seas on any scale worth mentioning.

Sources: Wikipedia and search engines.

We continue our excursion into the world of crises, financial bubbles, stock market crashes and economic problems. Most recently, we talked about John Law, a Scottish financier who charmed France with the idea of paper money. Lowe's idea, in addition to issuing money through the printing press, also involved the "Eastern Company", which issued shares and did nothing else. However, Lowe was far from a pioneer in creating a financial bubble around trade with the colonies. Four years before the Scotsman arrived in France, a financial pyramid appeared in his homeland, which promised investors income from trade with overseas colonies. We will talk about this pyramid today. Meet: “South Sea Company”!

Spanish inheritance

Like all the financial bubbles in our series, South Seas was a product of its time. This financial pyramid would not have happened without the major European conflict of the early 18th century - the War of the Spanish Succession.

In the 17th century, Spain was ruled by the famous royal dynasty of the Habsburgs. The last Spanish Habsburg - Charles II - had very poor health due to the frequent close relationships of his ancestors and had no children. Feeling his death approaching, Charles bequeathed his possessions to Philip of Anjou, the grandson of Louis XIV, whom we know from the “John Law system.” When the king died, Louis was already ready to celebrate the victory: in the event of the coronation of his grandson, Spain practically came under his control.

But the Habsburg dynasty is extensive, and the current Holy Roman Emperor Leopold I, also a Habsburg, decides to restore justice and goes to war against Louis. At the same time, the monarchs remember old, and not very old, grievances and claims, and the aggression of the “Sun King” in the Netherlands does not add any allies to him. As a result, everyone was drawn into the war: France, Spain, Mantua and a number of German states - on the one hand, and Austria, the Netherlands, England, Portugal and a number of other German states - on the other.

The war has been raging on the continent for 13 years, with action even taking place in the American colonies of France and England. The result of the bloody conflict was this: Philip of Anjou remains the Spanish king, but does not transfer his power to his heir, Austria acquires many former Spanish territories, France remains practically within its previous borders. What about England? England also gets its share. Firstly, she extracts from France a promise not to support the opposition and pretenders to the English throne. Secondly, the British received the right to trade in the Spanish and Portuguese colonies. Thirdly, the exhausting war removes England’s eternal maritime competitor, the Netherlands, from the game. But, in addition to all the conquests, England also acquires a very substantial public debt.

Changing debt to "South Seas"

The South Sea Company, which turned into a scandalous financial bubble, was founded by Robert Harley, an English politician and Chancellor of the Exchequer. In Britain, this position is equivalent to the Chancellor of the Exchequer. Unlike Lowe's biography, Harley's biography does not stand out much. One can only remember his participation in the Glorious Revolution on the side of William III, but otherwise: politics, career and upward mobility.

The South Sea Company is based on a simple idea: the company buys out part of the national debt accumulated during the war years, and in exchange receives a 6% rent and a unique right to trade with the colonies of Spain. The company appeared in 1711, when the war had not yet ended and the fate of the Spanish colonies was unclear, but Harley acted on luck - he was confident that the war would end favorably for England and the necessary rights would be in his pocket.

However, the company’s trade was not going smoothly: after the peace with Spain, the British received the right to trade black slaves from Africa in only five ports of South America, and no more than one ship per year could arrive in each. Plus, the Spaniards collect huge taxes even from these crumbs. In general, it was difficult to engage in the real business of the South Seas company.

Gradually, rumors are spreading in society about the profits the company receives from trading English goods in Latin America, but they cannot spur up share prices - stock exchange quotes are quiet.

Chance helped. We even know about it: in 1719, John Law's idea failed, and a colossal flow of capital returned from France to England, creating the necessary basis for inflating the bubble. In addition to this, at the beginning of 1720, the English parliament, after much debate, decided to sell all public government debt to the Harley company, and shares finally went up.

Meanwhile, rumors and money from France are fueling the excitement. In the first days after Parliament's decision on the national debt, shares rise in price by 176 pounds. In April 1720 the company issues a million shares at a price of £300. The entire circulation is sold out, the shares rise in price.

The company's management only fuels the excitement by announcing that all subscribers are guaranteed a 10% dividend. And at first they are even paid, but not through trade in the New World, but thanks to new investors - a classic financial pyramid scheme.

By August the shares were trading on the stock exchange at prices above £1,000. The growth was fueled by the rumor that Spain had opened all Latin American ports and trade was booming. In fact, things were just as difficult with trade as before.

The British nicknamed “bubbles” the adventurous and fraudulent companies that collected citizens’ money under the promise of fantastic profits. This is similar to our pyramids of the mid-1990s, like MMM or Chara. The most incredible projects appeared as sources of this income. The main “soap bubble” - the South Sea Company, in turn, resembles our large banks in that it invested assets primarily in the financial obligations of the government. For the sake of her goals, she widely practiced bribery of senior officials and members of parliament.

South Seas Mirage Company

The South Sea Company was founded in 1711 by a group of wealthy merchants and bankers and enjoyed the patronage of Robert Harley, the leader of the Tories (Conservatives) and, incidentally, the patron of the famous Daniel Defoe, author of Robinson Crusoe. To a large extent, its foundation was an element of the political struggle of Harley and his group against the Whigs (liberals), whose bastion was the Bank of England created at the end of the 17th century. A cunning financial scheme was used: holders of government bonds worth about 9 million pounds sterling received shares of the South Sea Company in exchange for these securities. Moreover, the government’s obligations were reissued with some relief for the treasury. The company became the state's largest creditor, and its policies were now closely linked to its interests.

An Act of Parliament granted it a monopoly on trade with the rich lands of South and Central America, which at that time belonged to Spain. An important business item was the slave trade - the supply of African slaves to America. The press dependent on the company described the fabulous profits that shareholders were supposed to receive from this trade. In fact, the company's business, for various reasons, was not going well, but its owners patiently waited in the wings. They were inspired for new financial manipulations by the events that took place in Paris - the fantastic success of John Law's scam.

The new financial scheme was even more ambitious than in 1711. The company offered to exchange almost all government debt for its shares at the market rate of securities. Since a 100-pound share cost 125–130 pounds, and government bonds were valued at par (100 pounds), this was a very profitable deal for the owners of the company. Bondholders were enticed by the prospect of further growth in stock prices and associated benefits. In addition, the company was obliged to make a large cash payment to the treasury, which could be used to buy back bonds from holders who did not agree to the exchange offered to them. The funds for this payment were supposed to be obtained through an additional issue of company shares.

As soon as rumors spread that parliamentary consent to the adoption of the securities exchange law was guaranteed, shares soared. The company's board and major shareholders hired journalists to make a big fuss about the company's bright prospects. They wrote that an agreement was being prepared with Spain, which would open its colonies to English industrial goods, and that gold and silver would flow from there like a river to England. Fantastic amounts of dividends to be paid on shares were mentioned.

The growth was facilitated by the crisis of the Law system in France that occurred in the first months of 1720: speculators who managed to withdraw their money in time in Paris now invested it in London. As a result, even before the vote in the House of Commons, the share price rose sharply. The final vote was 172 in favor and only 55 against.

The law was quickly approved by the House of Lords and signed by George I, who, by the way, had been the honorary chairman of the company for several years. It subsequently became known that among the persons who received significant "gifts" from the company were the king's favorite and her two "nieces", who were in fact the illegitimate daughters of the monarch.

Five days after the law came into force, the board announced subscription to the new issue at 300 pounds per share. Instead of one million pounds, as the board had hoped, two were raised. When success became obvious, another issue was announced, this time for 400 pounds. Within a few hours, the subscription amounted to one and a half million. An insane thirst for enrichment took possession of the public.

small bubbles

Meanwhile, the example of the amazing success of the shares of the South Sea Company gave rise to a fever for the creation of more and more new joint-stock companies. Inventive projectors put forward all sorts of investment schemes, trying to capture the imagination of precocious shareholders. Noble gentlemen from the highest aristocracy competed with seasoned businessmen to control these “soap bubbles”. The Prince of Wales (heir to the throne) headed one of these companies and, according to rumors, earned 40 thousand pounds from it. In just a short time, up to a hundred “soap bubbles” appeared.

Of course, among them there were reasonable and, in principle, profitable projects, which under normal conditions could be socially useful and beneficial to shareholders. But the trouble is that the founders of the companies did not actually think about real investments, but only sought to drive the stock price higher and skim off the fat. After this, the companies burst like soap bubbles, taking shareholders' money with them. One of the companies intended to produce industrial wood from sawdust. Now this does not seem like a fantasy, but at that time, after its collapse, people considered the founders either jokers or swindlers. But companies arose with completely absurd areas of activity, nevertheless, they managed to survive for several weeks or months.

One company was going to work on creating a perpetual motion machine and tried to raise a million pounds for this project. There was a company that was going to relocate monkeys from tropical countries to England. But, it seems, everyone was surpassed by one witty adventurer, who created a company “to carry out a very profitable enterprise, the nature of which is not yet to be disclosed.” And there were naive people who gave him their money in anticipation of high incomes! This financial genius issued a prospectus calling for the issue of 5,000 shares at £100 each. To entice as many people as possible, he announced that anyone could become a shareholder by paying up front the relatively modest sum of £2. The company's targets were expected to be announced a month after subscription, after which shareholders would be asked to contribute the remaining £98 per share. A dividend of £100 per share was promised for the first year. When the founder opened a subscription in the morning, a crowd of thirsty people besieged his office. By the end of the working day he had collected 2,000 pounds and the next day he wisely disappeared from England along with the money.

Reasonable people, seeing this madness, expressed regret and fear. The most prominent critic was Sir Robert Walpole MP (1676–1745), one of the leaders of the Whig Party. Behind him was a tumultuous political career, which included expulsion from parliament and arrest on corruption charges, ahead of him was a twenty-year tenure as prime minister, a reputation as one of the most prominent political figures of the 18th century, and the title of count. At his insistence, the government took measures against soap bubbles.

It is curious that the main opponent of these small “bubbles” was the South Sea Company, since they took away part of the money that could have been invested in its shares. In June 1720, a law came into force prohibiting the in-person (without an official license) establishment of joint-stock companies under threat of fines and imprisonment. This law, which became known as the Bubble Act, was in force for over a hundred years.

Historians differ in their assessment of the order that emerged as a by-product of the founding and speculative mania of 1720. It is believed that there was some healthy basis in this mania: the founders in many cases were actually able to launch enterprises using already made inventions and useful innovations. The collapse of the bubbles and the prohibition of free association may have delayed for half a century the English Industrial Revolution, which played a huge role in the emergence of modern civilization. There is also the opposite opinion, according to which these measures effectively limited the possibilities of financial fraud. In any case, the founding mania has subsided.

Londoners began to laugh at themselves, at the absurd and fraudulent schemes in which they had recently been blindly carried away. A lot of caricatures and satirical works in verse and prose appeared, ridiculing this hobby. One printer produced a deck of cards on which, in addition to suit and value, were printed caricatures and epigrams dedicated to “soap bubbles.”

Speculative mania During these same summer months of 1720, the fate of the main “bubble” - the South Sea Company - was rapidly changing. In an atmosphere of general excitement, the price of its shares continued to rise and reached 900 pounds. Walpole's skepticism about this fever was widely known, but his reputation as an expert in financial matters was so high that Princess Caroline, the wife of the heir, asked him to become her adviser in the speculations in which she was keenly interested. For personal reasons, and there were various gossip about them, Walpole could not refuse the princess. Together with her, he earned himself some good money. In London it was said that this money was partly used for his famous art collection. By the way, this is the same collection that Sir Robert’s grandson later sold to Russia for the Imperial Hermitage.

Speculators profited, shareholders rejoiced. But as the belief spread that stocks had hit a ceiling, many began selling off stakes and taking profits. It became known that the nobles and people from the royal retinue also acted this way. The rate dropped to 640, which forced board members (directors) to instruct their agents to quickly buy shares. There was a new, completely artificial rise, and by the end of August of that hectic year the rate reached the 1000-pound mark. Now the “soap bubble” has inflated to its limit. It trembled and trembled, shimmering with all the colors of the rainbow, ready to burst at the slightest breath of wind.

Dubious rumors began to spread around the company's affairs. There was a lot of talk about the falsification of shareholder lists. Particular concern arose in the market when it became known that the company's chairman, Sir John Blunt, and other directors were selling their shares. A shareholders' meeting had to be urgently called, at which the company's top officials and their friends tried to outdo each other in praising the results achieved and the prospects.

By this time, the South Sea Company had occupied such an important place in the financial system and social life of the country that its difficulties caused great concern in ruling circles. Messengers were sent to the king, who was in his possessions in Germany (he was also the Elector of Hanover), who conveyed a request to return to England and calm the public. Walpole, who had great influence in the Bank of England and was able to obtain its support for the company, was summoned from his estate.

The bank did not want to interfere in the company's affairs, fearing for its prestige. But it seemed that the voice of the entire nation demanded that the bankers save the company, in whose shares the money of thousands of people, both noble and influential, and the middle class - merchants, artisans, farmers - was invested. The fall of shares by several tens of pounds caused a groan throughout London that was echoed in the provinces. Walpole found himself under intense pressure. He agreed to draw up a draft agreement between the company and the Bank of England, according to which the latter would come to the rescue. This eased the panic in the market, and shareholders became emboldened.

The Bank of England was required to act to “maintain public credit,” in essence, to save the country’s finances, which had become hostage to the South Sea Company. The bank's board met for several days almost continuously, with and without the participation of company representatives. Eventually the bank agreed to subscribe for £3 million of 5 per cent bonds and loan the money to the South Sea Company for one year. At first this issue was a success, and it even seemed that the target subscription amount would be collected in one day. But very soon there was a turnaround, and the subscription stopped. This was perceived by the public as a signal of disaster. People rushed not only to sell shares, but also to withdraw money from the Bank of England. He had to issue deposits faster than he had collected money by subscribing to bonds the day before. The bank withstood the pressure, but for the company it was tantamount to the ringing of a funeral bell. Shares fell to between £130 and £135, eight times their peak two months earlier.

The huge issues of shares of the South Sea Company and transactions with them required a lot of money. Unlike the situation in France, where the stock exchange boom was supported by the issue of banknotes from the Bank of Law, in England many private banks issued their own bills of exchange such as banknotes. For the time being, these bills were equivalent to specie and were widely used in all transactions with shares of the South Sea Company. The fall in the company's share price made it impossible for many debtors to repay their debts to banks, and they, in turn, found themselves in a difficult situation. The Sord Laid Bank, which was close to the company, was unable to pay specie on its paper obligations. The bills of other banks were called into question. All this meant not just the depreciation of the shares of one company, albeit the largest, but a credit crisis that hit the economy of the entire country.

Seeing the futility of their efforts to save the company and fearing that the hurricane would sweep them away, the members of the Board of the Bank of England decided to refuse to implement the agreement prepared by Walpole. As a result, the shares depreciated even more.

It goes without saying that they began to look for those to blame. As the company's collapse shocked the nation, a parliamentary investigation was launched. The commission quickly discovered several shameful episodes and promised to fully expose the perpetrators. But she also exposed the unreasonableness of the people, who indulged in gambling on the stock exchange, like the most reckless gambler. In the following months, Parliament kept the matter of the collapsed company in its own hands and determined the punishments itself.

The events of the “year of bubbles” had a noticeable impact on all social life and people’s behavior. Suddenly it turned out that in a few hours it was possible to create a fortune that, in the normal course of affairs, would have required many years of hard work and abstinence. Carelessness and wastefulness have become common even among careful and thrifty people. People who, thanks to a successful stock market game, became rich, behaved with outrageous impudence. This was especially true of the directors of the South Sea Company, although many of them had previously been men of impeccable reputation.

Meanwhile, in many cities, meetings of local shareholders of the South Sea Company, with the participation of other citizens, accepted petitions addressed to parliament demanding an approximate punishment for the perpetrators and recovery from them of the money people had lost. At the same time, however, it never occurred to anyone to blame themselves and their neighbors for gullibility and greed, for the thirst for easy money. No, according to everyone’s understanding, the British were an honest and hardworking people, robbed by a gang of money-grubbers who should be hanged, wheeled, quartered...

The mood was the same in both houses of parliament, although, as it soon became clear, some of the members were pretty much in over their heads. Since ancient associations were in vogue, one of the speakers in the upper house demanded for the directors of the company the same execution that was punished in ancient Rome for parricides: they were sewn up in a bag and thrown into the Tiber. Walpole was wiser than others, insisting that repairing the damage and restoring public credit was more important than punishing the perpetrators. He said in the House of Commons: “If London were burning, then all prudent people would first of all put out the flames and prevent the fire from spreading, and then they would start looking for the arsonists.” Everyone still remembered the Great Fire of London in 1666, which destroyed the medieval city. Walpole developed and presented to Parliament a plan for liquidating the debts and affairs of the South Sea Company. This was entrusted to two financial giants of the time - the Bank of England and the East India Company. The House of Commons approved Walpole's plan.

Punishment of criminals

However, the “raking of dirt” continued in full force. A bill was introduced in the House of Commons that would prohibit directors and senior employees of the company from leaving England. They had to declare all their valuables, including movable property; they were prohibited from disposing of the property in any way until the investigation was completed. During the discussion of this bill, one of the deputies accused the Secretary of the Treasury (Deputy Secretary of the Treasury) James Craggs, who was present at the meeting, of selfishly aiding the directors.

The meetings of the House of Lords were no less stormy. The aristocrats, who only a few months earlier had been energetically engaged in founding and speculation, now angrily demanded punishment for those responsible for the collapse. Here the accusations against senior government officials became even more scandalous. At the same time, Craggs was accused of corruption and abuse by Chancellor of the Exchequer (Minister of Finance) Ailsby. The House of Lords decided to immediately begin an investigation into the involvement of both in the affairs of the South Sea Company.

The Lords also decreed that all brokers dealing with a company's securities must furnish details of what shares they had sold and bought on behalf of any Treasury officer or his agent. When such data were presented, it appeared that a large number of shares had fallen into the hands of Ailsby. The scandal was such that the chancellor had to resign.

During the investigation, it turned out that several officials and members of parliament received shares of the company from its board even before the law on its privileges was passed, and therefore were selfishly interested in its adoption and in increasing the stock price. It was further confirmed that during the period of the highest prices, the directors secretly sold shares in their company, which was found to be “a clear fraud and breach of trust”.

The case became increasingly criminal in nature. The company's treasurer, who knew all its dangerous secrets, disappeared from London along with its books and documents. Having changed into someone else's clothes, he went down the Thames in a small boat, boarded a specially hired ship at the mouth of the river and ended up in the French port of Calais, from where he soon moved to Belgium. There he nevertheless fell into the hands of the authorities and was placed in prison in Antwerp. The English government demanded that Austria, which then owned these lands, hand over the treasurer, but the matter dragged on. While correspondence was ongoing between London and Brussels, he escaped from prison by bribing officials.

After the disappearance of the treasurer, almost all the directors were arrested. Those of them who were also members of parliament were deprived of legal immunity.

Meanwhile, the House of Commons took up the matter more thoroughly, creating a special secret committee to investigate. He exposed a lot of abuses. The Committee reported to the House that many of the persons it interrogated did their best to confuse the matter, evaded direct answers and obstructed justice. In some of the accounting books presented to the committee, fictitious entries were found; the receipt of money was noted without indicating the names of the payers. In others, the sheets were torn out, and a number of important documents were completely destroyed or disappeared without a trace.

However, the meticulous members of the committee established that before the adoption of the law on the company's privileges, its management fictitiously (without actual payment) sold shares at a low price to several officials and members of parliament. If the law had not passed, these people would have lost nothing. In fact, the large increase in the exchange rate after the adoption of the law brought them huge profits. These transactions were rightfully recognized as bribes. The size of these bribes turned out to be enormous - 250 thousand pounds.

The House of Commons ordered the committee's report to be printed and thus made available to the public. She adopted a resolution that demanded that the directors of the company and other persons who illegally enriched themselves from its shares compensate from their property “the damage caused to the people.” A bill was introduced that would define which categories of innocent victims were entitled to compensation. As a result, the company's directors, whose number reached 33, were severely punished. A total of more than two million pounds were confiscated from them, with each being given a share of his property, determined by the degree of guilt and the position he occupied in the company. Blunt had it the worst of all - parliament left him only five thousand out of a fortune estimated at 183 thousand pounds sterling.

Later, these procedures and decisions were sharply criticized by human rights defenders in the then sense of the word: people, in essence, were found guilty before trial; they had no lawyers and were not allowed to fully defend themselves; all business was conducted hastily and biasedly; The very principle of collective responsibility was flawed.

But many contemporaries and historians recognized the fairness and usefulness of a public parliamentary investigation and punishment of fraudsters and bribe-takers, even if innocent people also suffered. The sad experience with the “soap bubbles” and the South Sea Company contributed to the gradual development of legislation and moral standards that define the rules for handling money that people entrust to bankers and founders of joint-stock companies.

As for the fate of the company itself and its shareholders, Walpole's cunning plan involving the Bank of England and the East India Company ultimately did not work. It was decided to distribute the cash assets and money confiscated from the directors among the shareholders; each got less than £30 per hundred-pound share. Just as France lived in the 18th century with memories of the collapse of John Law's enterprises, in England everyone for a long time remembered the heyday of the “soap bubbles” and the collapse of the South Sea Company.

British Treasurer Robert Harley. The shareholders were promised asiento - the exclusive right to trade with the Spanish part of South America. In exchange for privileges, the company promised to buy back the national debt, which had increased significantly during the Duke of Marlborough's wars. Moreover, these rights were based on England's successful completion of the War of the Spanish Succession, which ended only in 1714. In fact, the rights granted were not as complete as the founder intended. The company did not undertake commercial activities until 1717, especially since already in 1718 diplomatic relations between Great Britain and Spain had seriously deteriorated.

Boom [ | ]

However, in 1720 the share price began to rise rapidly: from £128 in January; £175 in February; £330 in March; £550 in May. Shares were purchased by many titled persons. By advertising the names of these elite shareholders, the company was able to attract other buyers.

In June 1720, a royal act was passed (repealed in 1825) prohibiting the public sale of shares of limited liability companies without a royal charter, which indirectly served to protect the company's activities from competition from certain other companies in areas of Central and South America. The company's management spread rumors that Spain had put its entire ports at its disposal (in fact, no more than three ships were allowed per year). Collapse in France attracted capital due to the Canal. As a result, the share price increased to £890. The frenzy swept the whole country - from peasants to lords - everyone bought shares, the price of which reached £1000 in early August.

Collapse [ | ]

In September 1720, the exchange rate began to fall sharply. By the end of September the share price had fallen to £150, and on 24 September the company's bank declared itself bankrupt. Thousands of investors were ruined, including many famous figures of science, culture and members of the aristocracy (among them were Jonathan Swift and the scientist in the field of physics and mathematics Isaac Newton). In particular, Newton lost more than 20 thousand pounds on the collapse of the company, after which he declared that he could calculate the movement of celestial bodies, but not the degree of madness of the crowd.

Famous people [ | ]

Among the victims of the company's collapse were many famous people, including: Jonathan Swift and Isaac Newton (lost £20,000).

The South Sea Company was founded in 1711. When it was created, the following financial scheme was used: holders of government bonds worth about 9 million pounds sterling received shares of the South Sea Company in exchange for these papers. Thus, the company became a major creditor of the state. An Act of Parliament granted it a monopoly on trade with the rich lands of South and Central America. The seal described the fabulous dividends that would be paid on the shares. After some time, the company undertook new financial manipulations. She offered to exchange almost all government debt for her shares at market prices (a 100-pound share cost 125-130 pounds, and government bonds were valued at par - 100 pounds). The newspapers supported the belief that Parliament would pass a law on the exchange of securities for shares, and the stock price rose sharply. The law was indeed quickly passed by Parliament and signed by King George I. And a few days after the law came into force, the company’s board announced a subscription to the new issue at 300 pounds per share. Instead of the one million pounds that the board had hoped for, two were raised, and soon another issue was announced, at 400 pounds per share, which was also very popular.

In the subsequent period, the rate continued to rise and by the summer of 1720 it reached 900 pounds. But gradually the belief began to spread that the shares had reached a ceiling, and the rate fell to 640. By the end of August, the rate was artificially raised to 1,000 pounds by the purchase of a large number of shares by the company's agents. But the company was doing poorly. An agreement was drawn up between the South Sea Company and the Bank of England, according to which the bank was to come to the aid of the company. The bank opened a subscription for 5 per cent bonds in the amount of 3 million pounds, which were loaned to the South Sea Company for one year. At first this issue was a success, but very soon there was a turnaround and the subscription stopped. Depositors began selling shares and withdrawing money from the Bank of England. As a result, the share price fell to 130-135 pounds. After some time, the Bank of England refused to fulfill its obligations under the agreement, and the share price fell even lower. The collapse of the South Sea Company came. In many cities of England, meetings of shareholders were held, demanding the punishment of those responsible and the return of money. Some of the money was paid out: shareholders received £30 per £100 share. The South Sea Company was not the only one operating at the beginning of the 18th century. on the territory of England as a financial pyramid. Pyramid companies were created “for the production of boards from sawdust”, for “the creation of a perpetual motion machine, for encouraging the breeding of horses in England, the improvement of church lands, the repair and reconstruction of houses of parish priests and vicars”, a “Company for obtaining consistently high profits from source not subject to disclosure." All of these companies put hundreds of people out of business before they collapsed.