Riding the Wave of Delusion: The South Sea Bubble

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In 1710, the appointment of Tory minister Robert Harley as Chancellor of the Exchequer marked a critical juncture in British economic history. Britain had found itself suffering under the economic strain of two simultaneous conflicts; the War of the Spanish Succession (1701-1715) and the Great Northern War (1700-1721). The Treasury was mired in a staggering deficit, and yet the true scale of Britain’s debt was unclear – at the time government borrowing was a largely decentralised and poorly accounted process, where each department had its own budget and took loans when they saw fit.

Harley desperately needed to raise new funds to keep the government afloat. His initial response was an investigation into the government’s debt, concluding that it lay in the region of £9 million – equivalent to £1.2 billion today. The logical recourse to prevent fiscal collapse would have been the Bank of England, an institution established 16 years prior with a monopoly to lend to the Treasury. Unfortunately for Harley, the Bank of England had been created by his political opponents, the Whigs, and its board of governors were not particularly keen to bail out a Tory government. Under these circumstances Harley would be forced to adopt more unconventional methods to keep the Treasury solvent. His solution, the South Sea Company, would prove to be one of the most devastating financial bubbles in history.

At this time a businessman named John Blunt was a director of the Hollow Sword Blade Company – a joint-stock enterprise founded for the manufacture of hollow-ground rapiers. A man with an adept financial mind, he saw the government’s debt crisis as a lucrative opportunity. The British government had recently acquired substantial tracts of Irish land, which it was willing to sell at reduced prices. Lacking the requisite funds to partake in the transaction, Blunt devised a legally questionable scheme. His company purchased army debentures, debt issued by the army, and subsequently declared that the thriving Hollow Sword Blade Company would exchange its shares for these debentures. This move triggered a surge in demand for the army’s debt, enhancing the value of Blunt’s stockpile of army debentures. In due course, he would use this appreciating asset to acquire Irish land from the government, which welcomed any chance to reduce its debt. The scheme was immensely successful, leaving Blunt with a surplus of £20,000, which he generously lent to the government at a favourable rate.

Blunt and Harley eventually joined forces as the government sought both new revenue and debt reduction, both of which Blunt was providing. Impressed by Blunt’s contributions, Harley granted the Hollow Sword Blade Company the right to administering a national lottery, which had been run ineffectively by the Bank of England. Blunt transformed the lottery’s fortunes, heavily advertising the fact that each ticket guaranteed a prize of at least 10% of its value. The first lottery competition, held in March 1711, saw tickets sell out within four days. Crucially, Blunt ensured that all prizes were paid back over a decade, minimising immediate costs while maximising revenue, albeit accumulating more debt. The government had successfully raised the £300,000 needed to endure the quarter.

Harley and Blunt now began to collaborate on a more permanent solution to address the government’s fiscal predicament. Drawing inspiration from Blunt’s earlier Irish land scheme, in which company shares were exchanged for debentures, they decided to charter a new trading firm, the South Sea Company. This company would be granted a government-sanctioned monopoly to engage in trade with South America. Holders of government debt would be invited to swap their bonds for shares in the South Sea Company, effectively consolidating the government’s debt in the hands of one organisation. Then, instead of having to pay high-interest rates to thousands of private investors, the government would only have to pay 6% interest to the South Sea Company; roughly £560,000. The company, in turn, would use these funds to pay dividends to its shareholders, with Blunt assuming the role of Chief Executive and Harley as Governor.

For this to succeed, the government had to convince investors that the new company’s shares would ultimately surpass the value of the government bonds they exchanged. Blunt and Harley embarked on an extensive advertising campaign extolling the prospective riches of South America. Talk of the “South Seas” trade, coupled with comparisons to the flourishing East India Company, began to circulate among the general public. Popular writers and political pamphlets helped this  build excitement, with Daniel Defoe writing that the South Sea Company “will […] open such a Vein of Riches, will return such Wealth, as, in few Years, will make us more than sufficient Amends for the vast Expences.”

Unfortunately, the entirety of Central and South America happened to be under Spanish control, a nation with which Britain was at war. This rendered any prospects of trading with the Spanish colonies virtually impossible. In an audacious bid to resolve this issue, Harley launched a radical peace campaign, even going so far as to imprison key Whig politician Sir Robert Walpole and the Duke of Marlborough, a hero of the Spanish war. Eventually, an agreement with Spain was reached, granting Britain the right to annually trade 4,800 slaves in South America for the next thirty years. Although a relatively minor concession, Harley and Blunt heralded it as a major victory.

When Queen Anne died without an heir in 1714, Parliament chose George I, Elector of Hanover, as the new King. The Whigs returned to power and Harley lost his position as Chancellor of the Exchequer. To maintain his role in the South Sea Company Blunt replaced most of the board of directors with Whigs, and in a major propaganda coup managed to convince the King’s son, the future George II, to replace Harley as Governor. The Royal Household even invested in the company, which boosted its prestige and fuelled public faith in the firm. Three years later, after the King fell out with the Prince of Wales, George I appointed himself the Governor – making the King directly associated with the firm.

In a further move to ingratiate himself with the new government, Blunt pardoned the Treasury for failing to pay interest to the company for the past two years. In return the Whigs allowed Blunt to issue more than £1 million in new shares, bringing the total value of South Sea stock to £10 million; half the value of all shares issued across the whole country.

Over the next two years, the government unloaded the debt it had incurred from Blunt’s lottery onto the South Sea Company, allowing it to issue even more stock. And as increasingly more people bought in the stock price kept rising. After the failure of the Jacobite rebellion in 1719, Blunt spread rumours that the leader of the rebellion and pretender to the throne had been captured, fuelling a sense of elation amongst the general public. This drove the stock price from £100 to £114. Despite this, as Britain once again went to war against Spain in 1718, any hopes of trading with South America evaporated. The company had never made a single penny in the ‘South Seas’, and from now on it would be a purely financial institution.

This did not stop Blunt from taking the final step in 1719; assuming almost all of Britain’s unconsolidated debt, by now roughly £31 million, in exchange for issuing more shares. While to an unbiased onlooker this would seem a ludicrous proposal, Blunt paid out million-pound bribes to MPs and Whig leaders to win their vote in Parliament, as well as gifting them stock in the company, giving them a vested interest in seeing the share price grow. Even Sir Robert Walpole, who raised concerns about the scheme, quietly purchased government debt to buy into the company.

As ordinary investors saw prominent leaders snap up South Sea shares, they too began to buy. The stock price soared to £330 in March 1720. But as the shares began to slide, Blunt was forced to step in; after all, his company’s only source of revenue was a rise in stock price. Therefore, he introduced a new sales strategy where the company would only ask for 20% up front, and the rest in regular instalments. This not only allowed people to buy more shares but opened up a huge new market of less well-off investors.

By May, after the South Sea Act received royal assent, the stock price had risen to £550. But again, the value of the shares began to falter. This time Blunt came up with an even more desperate strategy; loaning people money just to invest back in the company’s shares. And again, the stock rebounded.

Now at the peak of his affluence, John Blunt was honoured with a baronetcy. In August 1720 the stock price hit an all-time high of £1000, with the company valued at almost £300,000,000 – 80% of the nation’s GDP. But it was clear that this could not continue, and many – including Sir Robert Walpole – took the opportunity to cash out before the bubble burst. By September the stock had fallen to just £150.

The fallout was devastating. Those who had invested late, and those who had taken out loans to buy stocks, were financially ruined – including famous figures such as Sir Isaac Newton, who is thought to have lost £20,000. Some even committed suicide. The King, who had not sold his shares before the collapse, was also bankrupted.

Under these circumstances Walpole saw an opportunity to seize power. To gain public support he convinced the Bank of England and East India Company to swap their shares for the now almost worthless South Sea stock, as well as working to cancel the debt people had taken on to buy South Sea shares. Walpole responded to popular outrage over the crisis by championing a parliamentary inquiry into the scandal, convicting many senior Whig rivals such as Chancellor John Aislabie, while Walpole secretly moved to protect his allies from prosecution. He also ensured that the King was saved from disrepute, while he negotiated with Blunt to prevent him from exposing too much about the government’s corruption; he did not wish to see his entire party nor the entire political system dismantled. As such, Blunt walked free, and, indeed, the Blunt family has kept their baronetcy to this day. In April 1721 Walpole was appointed First Lord of the Treasury, Chancellor and Leader of the House of Commons, gaining unprecedented power over the government. Today historians widely regard him as the first Prime Minister.




Paul, H., 2010. The South Sea Bubble: An Economic History of Its Origins and Consequences. Routledge.