South Sea Company
The South Sea Company was a British joint-stock company founded in January 1711, created as a public-private partnership to consolidate and reduce the cost of the national debt. To generate income, in 1713 the company was granted a monopoly to supply African slaves to the islands in the "South Seas" and South America. When the company was created, Britain was involved in the War of the Spanish Succession and Spain and Portugal controlled most of South America. There was thus no realistic prospect that trade would take place, and as it turned out, the Company never realised any significant profit from its monopoly. However, Company stock rose greatly in value as it expanded its operations dealing in government debt, and peaked in 1720 before suddenly collapsing to little above its original flotation price. The notorious economic bubble thus created, which ruined thousands of investors, became known as the South Sea Bubble.
The Bubble Act 1720, which forbade the creation of joint-stock companies without royal charter, was promoted by the South Sea Company itself before its collapse.
In Great Britain, many investors were ruined by the share-price collapse, and as a result, the national economy diminished substantially. The founders of the scheme engaged in insider trading, by using their advance knowledge of the timings of national debt consolidations to make large profits from purchasing debt in advance. Huge bribes were given to politicians to support the acts of Parliament necessary for the scheme. Company money was used to deal in its own shares, and selected individuals purchasing shares were given cash loans backed by those same shares to spend on purchasing more shares. The expectation of profits from trade with South America was talked up to encourage the public to purchase shares, but the bubble prices reached far beyond what the actual profits of the business could justify.
A parliamentary inquiry was held after the bursting of the bubble to discover its causes. A number of politicians were disgraced, and people found to have profited unlawfully from the company had personal assets confiscated proportionate to their gains. Finally, the Company was restructured and continued to operate for more than a century after the Bubble. The headquarters were in Threadneedle Street, at the centre of the City of London, the financial district of the capital. At the time of these events, the Bank of England was also a private company dealing in national debt, and the crash of its rival confirmed its position as banker to the British government.
Foundation
When in August 1710 Robert Harley was appointed Chancellor of the Exchequer, the government had already become reliant on the Bank of England, a privately owned company chartered 16 years previously, which had obtained a monopoly as the lender to the government. The government had become dissatisfied with the service it was receiving and Harley was actively seeking new ways to improve the national finances.A new parliament met in November 1710 resolved to attend to the national finances, which were suffering from the pressures of two simultaneous wars: the War of the Spanish Succession with France, which ended in 1713, and the Great Northern War, which was not to end until 1721. Harley came prepared, with detailed accounts describing the situation of the national debt, which was customarily a piecemeal arrangement, with each government department borrowing independently as the need arose. He released the information steadily, continually adding new reports of debts incurred and scandalous expenditure, until in January 1711 the House of Commons agreed to appoint a committee to investigate the entire debt. The committee included Harley himself, the two Auditors of the Imprests, Edward Harley, Paul Foley, the Secretary of the Treasury, William Lowndes and John Aislabie.
Harley's first concern was to find £300,000 for the next quarter's payroll for the British army operating on the Continent under the Duke of Marlborough. This funding was provided by a private consortium of Edward Gibbon, George Caswall, and Hoare's Bank. The Bank of England had been operating a lottery on behalf of the government, but in 1710 this had produced less revenue than expected and another begun in 1711 was also performing poorly; Harley granted the authority to sell tickets to John Blunt, a director of the Hollow Sword Blade Company, which despite its name was an unofficial bank. Sales commenced on 3 March 1711 and tickets had completely sold out by 7 March, making it the first truly successful English state lottery.
The success was shortly followed by another larger lottery, "The Two Million Adventure" or "The Classis", with tickets costing £100, with a top prize of £20,000 and every ticket winning a prize of at least £10. Although prizes were advertised by their total value, they were in fact paid out by instalments in the form of a fixed annuity over a period of years, so that the government effectively held the prize money as borrowings until the whole value had been paid out to the winners. Marketing was handled by members of the Sword Blade syndicate, Gibbon selling £200,000 of tickets and earning £4,500 commission, and Blunt selling £993,000. Charles Blunt was made Paymaster of the lottery with expenses of £5,000.
Conception of the company
The national debt investigation concluded that a total of £9 million was owed by the government, with no specifically allocated income to pay it off. Robert Harley and John Blunt had jointly devised a scheme to consolidate this debt in much the same way that the Bank of England had consolidated previous debts, although the Bank still held the monopoly for operating as a bank. All holders of the debt would be required to surrender it to a new company formed for the purpose, the South Sea Company, which in return would issue them shares in itself to the same nominal value. The government would make an annual payment to the Company of £568,279, equating to 6% interest plus expenses, which would then be redistributed to the shareholders as a dividend. The company was also granted a monopoly to trade with South America, a potentially lucrative enterprise, but one controlled by Spain – with which Britain was at war.At that time, when the continent of America was being explored and colonised, Europeans applied the term "South Seas" only to South America and surrounding waters. The concession both held out the potential for future profits and encouraged a desire for an end to the war, necessary if any profits were to be made. The original suggestion for the South Sea scheme came from William Paterson, one of the founders of the Bank of England and of the financially disastrous Darien Scheme.
Harley was rewarded for delivering the scheme by being created Earl of Oxford on 23 May 1711 and was promoted to Lord High Treasurer. With a more secure position, he began secret peace negotiations with France.
Initial speculation
The scheme to thus consolidate all government debt and to manage it better in the future held out the prospect of all existing creditors being repaid the full nominal value of their loans, which at the time before the scheme was publicised were valued at a discounted rate of £55 per £100 nominal value, as the lotteries were discredited. The government's ability to repay in full was widely doubted. Thus bonds representing the debt intended to be consolidated under the scheme were available for purchase on the open market at a price that allowed anyone with advance knowledge to buy and resell in the immediate future at a high profit, for as soon as the scheme became publicised the bonds would once again be worth at least their nominal value, as repayment was now more certain a prospect. This anticipation of gain made it possible for Harley to bring further financial supporters into the scheme, such as James Bateman and Theodore Janssen.Daniel Defoe commented:
The originators of the scheme knew that there was no money to invest in a trading venture, and no realistic expectation that there would ever be a trade to exploit, but nevertheless, the potential for great wealth was widely publicised at every opportunity, so as to encourage interest in the scheme. The founders' objective was to create a company that would enable them to become wealthy and offer opportunities for further government contracts.
Flotation
The royal charter for the company, based on that of the Bank of England, was drawn up by Blunt who was paid £3,846 for his services in setting up the company. Directors would be elected every three years and shareholders would meet twice a year. The company employed a cashier, secretary and accountant. The governor was intended as an honorary position, and was later customarily held by the monarch. The charter allowed the full court of directors to nominate a smaller committee to act on any matter on its behalf. Directors of the Bank of England and of the East India Company were barred from being directors of the South Sea Company. Any ship of more than 500 tons owned by the company was to have a Church of England clergyman on board.The surrender of government debt for company stock was to occur in five lots. The first two of these, totalling £2.75 million from about 200 large investors, had already been arranged before the company's charter was issued on 10 September 1711. The government surrendered £0.75 million of its debt held by different departments. Harley surrendered £8,000 of debt and was appointed Governor of the new company. Blunt, Caswall and Sawbridge together surrendered £65,000, Janssen £25,000 of his own plus £250,000 from a foreign consortium, Decker £49,000, Sir Ambrose Crawley £36,791. The company had a Sub-Governor, Bateman; a Deputy Governor, Ongley; and 30 ordinary directors. Nine of the directors were politicians, five were members of the Sword Blade consortium, and seven more were financial magnates who had been attracted to the scheme.
The company created a coat of arms with the motto A Gadibus usque ad Auroram and rented a large house in the City of London as its headquarters. Seven sub-committees were created to handle its everyday business, the most important being the "committee for the affairs of the company". The Sword Blade company was retained as the company's banker and on the strength of its new government connections issued notes in its own right, notwithstanding the Bank of England's monopoly. The task of the Company Secretary was to oversee trading activities; the Accountant, Grigsby, was responsible for registering and issuing stock; and the Cashier, Robert Knight, acted as Blunt's personal assistant at a salary of £200 per annum.