At the beginning of the 18th century Europe was in political chaos and by 1710, after a decade of war, the British government was millions of pounds in debt. Robert Harley, the Lord Treasurer, dreamed up a brilliant (if dishonest) financing scheme not unlike the French Mississippi Company.
The South Sea Company was set up in 1711 specifically to underwrite the national debt. The company would make money from a monopoly on all trade with South America (then known as the ‘South Sea’) and lend money to the government at a guaranteed return of six per cent interest. Harley put the company in the hands of financiers who, if nothing else, understood the value of marketing: they set themselves up in plush London offices and issued free shares to several leading politicians so that influential names would be listed as shareholders, giving the South Sea Company a reputable air.
The value of the shares kept rising as rumors of the South Sea Company’s trade potential spread through the drawing rooms of the chattering classes. Before long it was an apparently well-established, rock-solid investment opportunity. Little did anyone realize that trade was more or less non-existent and the company was being kept afloat solely by the continual issuing of shares. As the share price rose, it only confirmed what everyone had been led to believe – that the company was a sound investment – which lured yet more people into investing.
Eventually, in 1720, the supposed success of the company led to a buying frenzy and the share price rocketed from around £100 to nearly £1,000 in six months before crashing spectacularly and bankrupting thousands of investors. Among them was Sir Isaac Newton who, on hearing the news, said ‘I can calculate the movement of the stars, but not the madness of men’.
When: August to September 1720
Death toll: Thousands of small investors were financially ruined. But far worse, the only profitable trade the South sea Company undertook was the transportation of 34,000 West Africans to the colonies, of whom 4,000 (over ten per cent) died in transit; the remainder were sold into slavery.
You should know: The company’s collapse nearly brought down the entire UK financial system and the government had to rush through a series of panic measures to restore stability. Amazingly, the South Sea Company remained in existence: after its directors had been arrested for fraud, the company was restructured and carried on servicing government debt until the 1850s when it was finally wound up.