Paul the south sea bubble; an economic history of its origins and consequences (2011)

The South Sea Bubble

The South Sea Bubble was a financial bubble that occurred on the London stock
market in 1720. In the traditional story, the Bubble was caused by a mysterious
gambling mania. The directors of the South Sea Company were also apparently
fraudsters. Modern economic history research has found these explanations to be
inadequate. This book aims to explain how a bubble can occur without assuming
that everyone had lost their wits.
The book shows that the South Sea Company’s prospects were bright enough
to encourage investment. The company shipped African slaves to Spain’s American colonies. It was hoped that the company might eventually gain its own
colony there. There were other rational reasons to invest in the company’s
shares, due to features of the financial and legal system of the period. Behavioural finance theories can also help to explain how and why Georgians invested
as they did. Some obviously lost money when the Bubble burst and society condemned their apparent folly. However, the economic consequences of the Bubble
have been exaggerated for effect. Contemporaries used the episode to discuss
their fears about foreigners, Catholics, Jews, women and the nouveau riche.
The book is an economic history of the Bubble. It combines economic theory
and quantitative analysis with historical evidence in order to provide a rounded
account. It brings together scholarship from a variety of different fields to update
the existing historical work on the Bubble. Up until now, economic history
research has not been integrated into mainstream histories of 1720. Technical
work on share prices and ledgers has been inaccessible to a wider audience. As
well as providing new evidence against the gambling mania argument, the book
also interprets the existing economic history scholarship for non-­specialists.
Helen J. Paul is a Fellow in Economics at the University of Southampton, UK.


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49 The South Sea Bubble
An economic history of its origins
and consequences

Helen J. Paul



The South Sea Bubble
An economic history of its origins
and consequences

Helen J. Paul


First published 2011
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
270 Madison Avenue, New York, NY 10016
Routledge is an imprint of the Taylor & Francis Group, an informa business
This edition published in the Taylor & Francis e-Library, 2010.
To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.
© 2011 Helen Julia Paul
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data

Paul, Helen J., 1975–
The South Sea Bubble: an economic history of its origins and
consequences/by Helen J. Paul.
p. cm.
1. South Sea Bubble, Great Britain, 1720. 2. South Sea Company–History.
3. Financial crises–Great Britain–History–18th century. 4. Finance–Great
Britain–History–18th century. I. Title.
HG6008.P38 2010
330.941′071–dc22
ISBN 0-203-84206-5 Master e-book ISBN

ISBN13: 978-0-415-46973-9 (hbk)
ISBN13: 978-0-203-84206-5 (ebk)


To my late father, Alexander Duncan Paul



Contents







List of figures
Acknowledgements
Notes on the text

Timeline
List of abbreviations

  1 Introduction

xii
xiii
xv
xvi
xx
1

  2 The stock market in early modern England

12

  3 Politics, warfare and finance

24

  4 Financial innovation and trade

36

  5 The Bubble and the crash

43

  6 Reasons to invest in the South Sea Company

54

  7 Criticism and financial complexity

75

  8 The social history of the crash

88

  9 The real effects of the crash

102

10 Conclusion

112






Glossary
Notes
Bibliography
Index

118
128

135
149


Figures

6.1 The number of ships arriving in Spanish America carrying
South Sea Company slaves
6.2 The number of slaves brought to Spanish America by the
South Sea Company
6.3 The number of slaves landed from transatlantic South Sea
Company voyages

60
61
62


Acknowledgements

This book has been many years in the making and stems primarily from doctoral
research and a postdoctoral fellowship. I would like to acknowledge the financial
support of the Economic and Social Research Council for funding both. In addition, I received an overseas conference grant from the British Academy. The two
economics departments at the Universities of St Andrews and Southampton have
also funded my conference trips.
I first discovered the South Sea Bubble during my Masters degree at St
Andrews. The course lecturer, Dr Gary Shea, became my doctoral supervisor.
He has been a fount of knowledge about the company and has given me much
support and advice. His work on the Bubble is mentioned in this book. Many
other colleagues at St Andrews also gave their encouragement. I should mention

the support of my internal examiner, Professor Gavin Reid, and my late boss and
friend, Professor Christopher Jensen-­Butler. I was advised to apply for my first
academic post at St Andrews by Dr Laurence Lasselle. The career paths of economic historians in UK economics departments had become quite precarious
under the old system of research funding. My employers at St Andrews, and
later at Southampton, allowed me to continue in my chosen line of research. My
current boss, Professor Grant Hillier, has been very generous in reducing my
teaching load. Dr Jan Podivinsky has had the task of making this possible.
I was very fortunate in gaining an external examiner of the calibre of Professor Pat Hudson. At the time, she was also head of the Economic History Society.
She, and other women in the EHS, have been an inspiration to many early career
female academics. The EHS annual conference is where I gave my first paper.
The EHS aims to bring together economic historians who would otherwise be
spread across a variety of different departments. Through the society, I met
many people who work on some aspect of the Bubble and who have been generous with their time. They include Anne Laurence, Anne Murphy, Larry Neal,
Ann Carlos and Stephan Altorfer. The EHS also funded a postgraduate training
course held, for some reason, in Windsor Castle. This is where I first met Professor Patrick O’Brien, who again has been a great source of encouragement.
I would also like to thank audience members at other conferences who have
commented upon my research. Two research groups have been highly important
and also generously funded conference expenses. One is the Money, Power and


xiv   Acknowledgements
Print Colloquium. The other is the Fiscal–Military State group which formed at
the World Economic History Congress in Helsinki. Through these groups, I have
met others working in my research field. They are too numerous to name here
but I am extremely grateful to them. Joyce Goggin has given me numerous
useful references and has also been a fantastic host.
Clearly all historians must build upon the foundations laid by others. W.R.
Scott, P.G.M. Dickson and John Carswell all wrote books that are the basis for
research into the Bubble. The fact that I disagree with them on some points does
not alter the debt that I owe them. The archival work undertaken is largely from

the Public Record Office (or National Archives) at Kew and the House of Lords
Record Office. The efficiency of these institutions and the helpfulness of their
staff has been important. Likewise, I have found it incredibly helpful that some
unknown souls have made primary source materials available online. (I would
like to thank Stephanie Decker for pointing out the Harvard collection to me.)
The Routledge staff have also been models of patience. They include Terry
Clague, Thomas Sutton, Simon Holt and Emily Senior.
My friends and family have been good sounding boards throughout the
writing of this book and the doctoral thesis that inspired it. Lucinda Bromfield
even proof-­read parts of it. John Bluedorn helped me to come up with the final
title. Sadly, my father died before the final version of the book was finished. My
parents always stressed the importance of a good education. They also instilled
in me a truly Scottish appreciation of the value of saving. Perhaps their influence, and the fact that I grew up in Newcastle-­upon-Tyne, explains my interest
in economic history. My childhood home was only around two miles away from
George Stephenson’s cottage where he built his first locomotive. My teachers
encouraged me to try to get a place at Oxford to study economics, instead of
doing a mathematics degree as I had planned. For that alone, I am grateful.
I apologise if I have inadvertently missed anyone. Any remaining errors in
the text are, of course, my own.
Helen Julia Paul
Southampton 2010


Notes on the text

Dates
England followed the Julian calendar until 1752. Many other European countries
had already changed to the Gregorian calendar.
The Julian (or Old Style) calendar started the year on 25 March. The Gregorian calendar begins the year on 1 January. Therefore, a day in February would
be in 1710 according to the Julian and in 1711 according to the Gregorian calendars. Contemporaries sometimes used the notation 1710/1 or 1710/11 to avoid

confusion.
A further complication was that the Julian calendar was several days behind
the Gregorian calendar. Until 1700, it was ten days behind. Thereafter, it was
eleven days behind.
Dates quoted from primary sources will use the dating system used by the
source. For English documents, that is the Julian dates. However, indications
such as (OS), ‘new style’ or 1710/11 will be added to clarify the dating system
in some places in the text.
Secondary sources use the author’s own convention. P.G.M. Dickson and
John Carswell both rewrote Julian dates as if the year started on 1 January.

Figures
English money was marked as pounds, shillings and pence. The notation used
was l for pounds, s for shillings and d for pence. There were twelve pence in a
shilling and twenty shillings in a pound. Contemporary sources would quote
figures down to the last pence, even for large sums. This level of precision is
usually unnecessary for the purposes of this book, so often sums will be rounded
up or down. For the purposes of calculation, sums have been decimalised.


Timeline

1660
1662
1665

1667

1668
1670

1671
1672


1674
1678
1685

1686
1688

1689


1694
1695
1697
1698
1699

Restoration of the Stuart monarchy
Royal Adventurers granted charter to trade in slaves
James II succeeds his brother, Charles II
Second Anglo-­Dutch War begins
War of Devolution: Louis XIV of France invades Spanish Netherlands
Second Anglo-­Dutch War ends
Triple Alliance of United Provinces, England and Sweden formed
against Louis XIV
Treaty of Madrid forbids English trade to Spanish possessions in the

West Indies and vice versa
Secret Treaty of Dover signed between Charles II and Louis XIV
Stop of the Exchequer (1672 in Julian calendar)
Royal Adventurers become the Royal African Company with monopoly
rights
Franco-­Dutch War begins
Third Anglo-­Dutch War begins
Third Anglo-­Dutch War ends
Franco-­Dutch War ends
Start of Dutch Asiento
Revocation of the Edict of Nantes
League of Augsburg forms against Louis XIV
Glorious Revolution
Nine Years War begins (also known as War of the League of Augsburg
or War of the English Succession)
William and Mary crowned at Westminster Abbey
End of Dutch Asiento
The fighting spreads to the North American colonies (King William’s
War)
Queen Mary dies
Darien scheme begins
Nine Years War ends
New East India Company founded
Darien scheme fails


Timeline   xvii
1700

1701

1702


1707
1709


1710

1711

1712
1713

1714
1715

1716
1717




1718



1719

1720

Death of Princess Anne’s last surviving child
Great Northern War begins
Act of Settlement prohibits Roman Catholics from succeeding to the
throne
Grand Alliance forms to support Austrian Hapsburg claims to Spanish
throne
Anne becomes Queen
War of Spanish Succession begins (Queen Anne’s War)
Destruction of the Spanish treasure fleet at Vigo
Act of Union which abolishes Scotland’s own parliament
Great Frost
Battle of Poltava
Old and New East India Companies merge
Lottery Loan
Sun Fire Office founded
South Sea Company founded
Austrian candidate for Spanish Crown, Archduke Charles, inherits
Imperial Crown
Mississippi Company granted charter to trade to French possessions in
North America
War of Spanish Succession ends with Treaty of Utrecht
South Sea Company establishes factories in Spanish America and
refreshment stations in the West Indies
Queen Anne dies. George I succeeds her
Jacobite invasion attempt

Louis XIV dies
Septennial Act granting seven-­year parliaments
Whig party split
Prince of Wales leaves his father’s Court and establishes his own
British make bargain with French to expel James Stuart. He leaves
Avingnon for Rome.
France, England and United Provinces form alliance against Spain
Walpole establishes ‘Sinking Fund’ to reduce interest on redeemable
annuities
British declares war with Spain
Austria joins anti-­Spain alliance, forming Quadruple Alliance
Byng destroys Spanish navy at Cape Passaro
Charles XII of Sweden dies
James Stuart leaves Rome for Spain
Jacobite rebellion
Sweden signs a peace treaty with Hanover
South Sea Company proposes conversion of remaining government
debt
Bill passed granting conversion of Lottery annuities
Jan.
Felipe V of Spain announces adherence to Quadruple Alliance


xviii   Timeline

Sweden signs peace treaties with Britain, Prussia and Denmark

Law links Mississippi Company with his bank

Feb.Law forced to reopen French stock market and issue more

paper money after he had previously tried to cool down the
economy
Parliamentary committee set up to investigate company
charters

Mar.Law exchanges Banque Royale notes for Mississippi shares,
increasing the money supply and inflationary pressures

Apr.
First and second money subscriptions

South Sea Company makes loans on stock

May
First subscription of long annuities

First subscription of short annuities

Loans made on stock

Law begins deflationary policies

Jun.
Third money subscription

Loans made on stock

Bubble Act passed

Aug. Second subscription of long annuities

Second subscription of short annuities

Fourth money subscription

Subscription of redeemable debt

Bubble Act enforced

Sep.Bank Contract – Bank of England promises to circulate
South Sea bonds and hand over some redeemable debt in
exchange for South Sea shares

Market drops
South Sea directors discuss altering terms made to
annuitants

Sword Blade Bank fails

Bank of England reneges on Bank Contract

Mississippi share price also begins decline

Dec. South Sea Company shares at low point
1721 Great Northern War ends with Peace of Nystad

Peace with Spain confirmed

Secret Committee set up to investigate South Sea Company
activities

South Sea Company reformed

Financial rescue package developed by Walpole

Henry Elking approaches South Sea Company with plan for
whaling trade
1723 Black Act
1725 First South Sea Company whaling expedition
1726 Conflict with Spain

Admiral Hosier blockades Portobello


Timeline   xix
1727
1729
1731
1739
1740

1745
1748
1750
1853
1854

South Sea Company ship, Luxborough Galley, catches fire
Peace treaty with Spain signed – Treaty of Seville
British make secret agreements with Spain and Austria to stop Ostend

Company’s American trading activities
War of Jenkins’ Ear begins
War of Austrian Succession begins
Admiral Vernon captures Portobello
Last Jacobite uprising
War of Austrian Succession ends
South Sea Company Asiento ends
Act 16. Vict. c.23 passed to redeem or commute annuities held by
South Sea Company
South Sea Company begins to wind up its affairs


Abbreviations

EHS
EIC
IPO
MIT
MP
NS
OS
PRO
RAC
VOC

Economic History Society (UK)
(English) East India Company
Initial Public Offering
Massachusetts Institute of Technology
Member of Parliament

With reference to dates: New Style or Gregorian calendar
With reference to dates: Old Style or Julian calendar
Public Record Office (National Archives), Kew, London
Royal African Company
(Dutch) East India Company: Vereenigde Oost-­Indische Compagnie


1 Introduction

At the end of the War of the Spanish Succession, the Spanish Crown granted the
Asiento contract to Queen Anne. The Asiento gave monopoly rights to import
slaves into Spanish-­held America. Anne passed the contract over to a joint-­stock
company called the South Sea Company. In exchange, the company was to help
restructure part of the National Debt. From the start, the company undertook
public and private roles. It was a quasi-­public entity – a hybrid. It was involved
in a range of activities which to modern eyes might seem to have little in
common. However, it was part of a national project to make England (and after
1707, Britain) strong enough to fight future wars. Trade, government finance and
military strength were thought to be interlinked. It is not for these things that the
South Sea Company is chiefly remembered. Instead, its name is famous because
of a few months when its share price, along with the rest of the stock market,
boomed and then crashed. The architect of the sales of South Sea stock was Sir
John Blunt, who is always cast as the villain of the piece. He and the other directors were accused of fraud. They were brought in front of the House of
Commons and questioned. They had their estates confiscated and were vilified
by the public. Even before the crash, the nascent stock market in Exchange Alley
was held in great suspicion. Critics of the Alley bandied about the term ‘stock-­
jobbing’. The epithet ‘jobber’ is usually pejorative but there is no one definition
of what ‘jobbing’ might be. Machlup (1940) defined a jobber merely as a broker,
or someone who trades on behalf of others. Others use the term to mean a speculator. Many contemporary accounts seem to equate ‘jobbing’ with fraud. Contemporaries had a better understanding of the old rules of warfare and politics,
than they did with the new ways of the stock market.

The South Sea Bubble of 1720 is one of the most famous financial market
crashes in history. Indeed, it has become a byword for folly and fraud. Its name
is evoked every time a devastating crash occurs. Journalists mentioned the South
Sea Bubble when reporting the Dotcom Bubble of the late twentieth century and,
more recently, during the Credit Crunch of the early twenty-­first. No doubt, journalists will mention it again when the next crash occurs. At each economic
setback, a crop of books appears on the financial history of crashes. Some cover
a number of episodes and often look for similarities between them. Some concentrate on just one event in detail.


2   Introduction
Work on the South Sea Bubble traditionally blames the rise in share prices on
the outbreak of a mysterious ‘gambling mania’. There are plenty of contemporary accounts of jobbing and of uproar in Exchange Alley that are used to
promote this view. However, professional economic historians do not tend to
believe that such a mania existed. For a variety of reasons, insights from economic history have not permeated mainstream academic history writing. They
seem to have had no effect at all upon the popular histories of bubbles and
crashes. This book differs from others in the field because it dispenses with the
‘gambling mania’ approach. It gathers much of the existing economic history
research and makes it accessible to a wider readership. However, it differs from
much of the cliometric (or mathematically based) economic history work in that
it looks at more than share prices and stock ledgers.1 It considers the wider
context of the South Sea scheme. It analyses the company’s trading activities in
detail and also the company’s social context. There were many good reasons for
investors to be hopeful about the trading side of the company. The book also
includes some insights from modern financial theory, especially the field of
behavioural finance. Ultimately, it is not necessary to explain a financial bubble
by claiming that everyone has lost their common sense. Behavioural finance
allows bubbles to be explained even when some, if not all, investors are behaving rationally.
The three classic books on the Bubble provide the basis for most research on
the episode. (They all promote the gambling mania argument.) W.R. Scott wrote
his history of the joint-­stock companies in 1910s. P.G.M. Dickson’s work on the

Financial Revolution was published in 1967. John Carswell’s book focused on
the Bubble itself and is a more historical approach. It was initially published in
1960 although Carswell did publish a revised edition in 1991. All three authors
have provided valuable, detailed information about the South Sea Company.
However, all three predate the cliometric work on the Bubble and sometimes use
arguments that do not make sense in economic terms. Their mistakes or omissions are important, as they have provided the key secondary texts for other historians. Many readers are unable to unravel economic theory for themselves and
must take what Scott, Dickson and Carswell have told them on trust. For
example, all three authors felt that the company’s trading prospects were negligible. None of them used slave trade records to test this assertion.
Cliometric work on share prices has been difficult for non-­economists to
access and understand. However, this type of research sheds more light on how
the early financial system functioned than the standard catch-­all theory that the
Georgians were gambling mad. If early Georgians were complete fools, then it
seems incredible that their economy recovered and the new Hanoverian monarchy survived. The glee with which some commentators damn our ancestors
mixes schadenfreude with a prejudiced attitude to those who have gone before
us. This book will try to rescue something of the Georgians’ reputations, whilst
acknowledging that some of them did make poor bargains. The book aims to be
an economic history with a balance between economics and history.
Economic history should be a marriage of two major disciplines. In practice,


Introduction   3
the field has faced a number of problems. These difficulties might help to explain
why cliometric work has not found its way into mainstream history books on the
Bubble. For organisational purposes, historians and economists are located in
separate university departments and are usually in different faculties. The
methods they use and their worldviews usually have little overlap. Economic
historians should be able to bridge this gap. In previous years, many mainstream
historians were alienated by the use of a highly mathematical approach to economic history called cliometrics. The Cliometric Revolution promoted the use of
mathematical techniques to analyse historical data. The movement coincided
with the development of powerful computers that could process large quantities

of data. Many sources, such as account books for slave plantations, had not been
fully exploited before. In addition, many historians lacked the relevant mathematical skills to use quantitative data properly. A few economic histories had
been written using large data sources, but only with the mainframe computer did
the new field of cliometrics appear. Today, the term ‘cliometrics’ has different
meanings. Economists think of any mathematical approach to history as cliometrics. Many economic historians and historians use it only for research which is
extremely mathematical and uses advanced econometric techniques.
One of the key works in the early years of cliometrics was A Time on the
Cross by Robert Fogel and Stanley Engerman. It is a good example of how
quantitative data (such as accounting data) and written texts may tell two opposing stories. Fogel and Engerman had been taught that slavery in the southern
United States of America should have withered away of its own accord. The
consensus was that it was unprofitable and was only kept going by the intransigence of southern slave-­owners. Numerous books had been written on the
subject and, as is the way with research, authors had cited other authors in order
to make their case. They had not used plantation account records to calculate
profits directly. This is what Fogel and Engerman did and they found, to their
surprise, that slavery was profitable after all. The implications of this result were
immensely important. Mainstream historians had thought that if slavery was
unprofitable, it should have eventually ceased and the American Civil War need
not have been fought. According to cliometric evidence, if the American Civil
War had not been fought, slavery would have continued on.
Although it had its critics, A Time on the Cross encouraged other economic
historians to attempt large-­scale cliometric exercises.2 Mainstream historians
worried that too much attention was being paid to numbers and not enough to
traditional sources, such as written texts. Cliometricians countered that written
texts had given the misleading impression that slavery was unprofitable. Historians had used abolitionist propaganda as fact, without attempting to consider
economic issues for themselves. (Abolitionists had claimed slavery was unprofitable in order to induce slave-­owners to free slaves and use paid labour instead.)
When cliometric studies were in their infancy, computing was something of a
black art and computers were highly expensive. A whole generation of historians
was genuinely bamboozled by the techniques of the cliometricians. Cliometrics
was a dirty word in some quarters.3 However, our forebears communicated their

4   Introduction
ideas in a variety of different forms, including texts, objects and numbers. They
did not live in modern economies, but they did have an economy and made economic decisions.
Economic history is not the most widely known of the branches of history, or
of economics. Political histories of great men and battles are more popular with
the public. Even within academic history, there is a gap between economic
history and practically all other fields (Coleman 1995). Likewise, there is a gap
between economics research and the type of economic history which borders on
social history. Often, individuals who are mathematically minded and interested
in economics have different capabilities from those working in the humanities.
Whilst economists like to create elegant models and theories, historians pay a
great deal of attention to contextualisation. Based in different faculties, the two
tribes have little contact. Yet they can stray into each other’s territory. History
written by economists or economics explained by historians can produce
­Frankenstein effects.
The economic historian Sir Alexander Cairncross (1989) recalled that when
he first started his studies there was no great divide between economics and economic history. This is no longer the case, and economists can fall into the trap of
writing a Whig history.4 Whig history is a disparaging term for any model which
shows an inevitable stage-­by-stage progression from a low level to a high one.5
Whig histories have been used to explain society’s political development, industrialisation, legal changes and much more. They all assume that the later stages
are better than the earlier ones and that there are no reversals of fortune. Despite
its critics, the Whig history model is surprisingly pervasive. It easily lends itself
to the works of economists. Economic theory is often the history of success,
when success is measured in economic growth and material wealth. One issue
which counters the idea of inevitable, irreversible progress is the existence of
crises such as bubbles. The complacency inherent in Whig history is undermined
by the recurrence of economic setbacks.
The South Sea Bubble presents problems both to mainstream economic
theory and mainstream history. It is difficult for neoclassical economic theories

to explain the existence and timing of financial bubbles, other than by claiming
that investors become irrational.6 Historians have often relied upon the explanation that the Bubble was caused by a gambling mania. At first glance, the idea
that bubbles are due to an outbreak of gambling or irrational investing is a persuasive one. It would explain why prices rose to such heights. However, it would
also mean that people took leave of their senses for no apparent reason. Such a
catch-­all theory is worse than no theory at all. A wave of gambling would have
had to appear and then just as quickly recede. Dickson (1967) thought that Georgian society was more risky than later periods and that this state of affairs
encouraged risk-­taking. However, the Georgian stock market was very similar to
modern markets and Dickson’s explanation cannot be used for modern bubbles.
A major school of financial theory, called behavioural finance, has emerged to
tackle issues such as bubbles. It considers how people actually approach financial decisions. It does not assume that humankind is all-­knowing and perfectly