A History of England, Period III. Constitutional Monarchy

by J. Franck Bright

It was still early in the history of finance. It was only of late years that the moneyed interest had become so important in the country as to admit of the discharge of the public liabilities by means The South Sea Scheme. of large and regular loans. But when once the practice had been begun it had been largely adopted, and during the wars of the reign of Queen Anne the debt had risen from sixteen to fifty-two millions. Ignorant of the resources of the country and of the ease with which such a debt might be supported, the financiers of the day were in constant terror of its rapid increase. A member of the House, a certain Mr. Broderick, was expressing the general feeling when he said, "I agree with the ministers, that until the National Debt is discharged, or in a fair way of being so, we cannot properly call ourselves a nation." But besides the general dread of the amount of the debt, there was a very well-grounded dislike to the high terms on which much of it had been contracted. The money having been borrowed in time of war and difficulty, the terms offered to the lender had been proportionately favourable. A settled Government, the success of the Hanoverian succession, and the continued and rapid increase of wealth which had followed it, had rendered money much cheaper, and Government was paying seven or eight per cent. upon its loans, when private individuals could borrow on good security at four per cent. But the manner in which much of the money had been raised forbad any effort at changing the rate of interest. The loans had been largely contracted in the form of annuities, many of them for ninety-nine years; and of these a considerable portion were irredeemable, that is to say, Government was pledged to the payment of the interest as originally arranged, unless some change could be made with the consent of the creditors.

Financiers had therefore two objects in view,—to lessen the whole amount of debt, and to lower the interest payable on what remained. The establishment of the Bank of England had shown the value, in a mercantile point of view, of the Government credit. It became an understood principle that money lent to Government, and thus secured upon the credit of Government, was an excellent form of capital; and when advances were required, or when it became convenient to substitute a single great creditor for a number of little ones, this principle had been brought into use. Two such attempts had been made, the one by Harley in 1711, the other by Walpole in 1717. Harley, when Lord Treasurer, had found a floating debt (a debt, that is, payable on demand of the creditor) of ten millions, and had got rid of the danger of immediate demand by forming a company of the creditors of this floating debt. The ten millions were funded, that is, the interest and not the capital was paid; the interest was secured upon the customs, and the fund of ten millions became Formation of the South Sea Company. 1711. the capital of the company of creditors, who were induced to allow their claims to be thus funded by the promise of the monopoly in the mercantile advantage which Spain had granted England at Utrecht. This came to but little,—the Assiento, or supply of slaves, and the admission of a yearly ship of 500 tons burden to the American colonies. Even this advantage was lost in the difficulties which arose with Alberoni. The first ship did not sail till 1717, and as far as the South Sea trade went Harley's plan was a failure. But the credit gained by the Company in the transaction was good, other lines of trade were opened up, and the Company became great, flourishing and powerful.

In 1717 Walpole had been very desirous to diminish the National Debt. He established the first sinking fund, borrowing £600,000 at only four per cent., using this money to pay off liabilities bearing a higher interest, and applying the money thus saved to the extinction of the debt. He also, taking advantage of the value of Government credit, induced both the Bank and the South Sea Company to accept a lower rate of interest for the money they had already advanced, and to advance between them nearly £5,000,000 more, for the purpose of paying off as far as possible those holders of redeemable debts The South Sea Scheme. 1720. who refused to accept the lowered rate of interest. The great South Sea Scheme of 1720 was in principle nothing but a repetition of this manœuvre. The South Sea Company, believing devoutly in the power of credit, was anxious to extend itself as far as possible. The Government was so eager for the reduction of the debt that the King had made special mention of it in the speech with which he opened Parliament in the close of 1719. Under these circumstances the proposition of Blunt, director of the South Sea Company, found a ready hearing with the ministers. Between them an arrangement was devised, perfectly justifiable and harmless as far as the principle of it went. The bulk of the Government debt consisted in redeemable and irredeemable annuities, on all of which large interest was paid, and on which that interest must continue to be paid unless the holder of the annuity voluntarily reduced it. There is said to have been about sixteen millions of each class of security. Government wished to bring the whole mass into one general fund, bearing a lower rate of interest, and the South Sea Company was so greedy of the Government credit, that it expressed itself anxious to add the whole of this enormous amount to its capital. It is plain that any transaction of the sort, as far as regarded the irredeemable annuities, must have been entirely voluntary. All that the Government could do was to allow the Company to persuade the holders to exchange their annuities for shares in the Company. With regard to the holders of redeemable annuities, payment in full must be offered, but that payment might be given in shares of the Company. In other words, those who accepted the exchange became proprietors in the Joint-stock South Sea Company to the amount of their claim on the Government. With regard to the Government, the South Sea Company alone became creditor, instead of a multitude of old annuitants, and was contented to receive henceforward, instead of the seven or eight per cent. the annuitants had received, five per cent. till the year 1727, and after that four per cent. till the capital as well as the interest should be returned, for the fund was made a redeemable one. If the transaction were thoroughly successful the capital of the South Sea Company would be increased by about thirty-two millions, advanced to Government at five per cent., and Government would have to pay five per cent. interest instead of seven or eight, besides having the power of redeeming the capital.

Competition of other companies.

So great were the advantages understood to be gained by this accession of capital in Government hands, that other companies wished to share in them. It was voted by a large majority that these advantages should be put up to public competition. The Bank of England and the South Sea Company set to work outbidding each other, the latter finally proposing terms which were virtually a payment to Government of seven millions and a half. This money was to be devoted to the public service, to pay off debts contracted to the end of the year 1722, and after that as much as possible of the capital of the South Sea Company itself. It is plain that for the success of this scheme two things were requisite. In the first place, a readiness on the part of the public to accept the Company's shares in exchange for their Government annuities; without that Government would not be freed, nor would the Company get its increased capital. But this exchange would of course bring in no ready money. Secondly, therefore, a large number of new shareholders would be required to subscribe, paying for their shares in ready money, in order to meet the demands of those holders of redeemable annuities who refused all exchange, and to cover the heavy premium of £7,000,000. Now both of these objects were dependent on the popularity of the Company's shares; and it was in this that the mistake of the arrangement lay; Government had in fact made too good a bargain. By an extensive system of bribes large sums of fictitious capital were invented and distributed gratis among influential members of the Government, and still more largely among the hungry Hanoverian courtiers, whose influence it was regarded as all important to secure. All fear of the success of the scheme was almost immediately removed. So great was the belief in the vast Company, backed up by this huge accession of Government credit, so well had the directors done their business, that a very large majority of the annuitants pressed with extreme haste to accept the terms offered, though those terms were very low. The public were then invited to subscribe the new capital. Five separate subscriptions of upwards of a million were in succession opened, and all filled, with equal rapidity.

It was however in its secondary effects, rather than in its immediate consequences, that the scheme exerted the most extraordinary influence. There was a great deal of money in the country, and there was no satisfactory way of using it. Much had been hoarded, for there were not then as now numerous industrial investments in the market in which small sums could be employed. The apparent The rage for stock-jobbing. success of the South Sea Company, and the promises which it held out for rapid fortune-making, excited the spirit of speculation to the highest degree, and companies sprang into existence with unexampled rapidity. Some were real and serious—waterworks, paving companies, and companies for the improvement of all branches of manufacture. Some were mere transparent impostures—as a company for the importation of Spanish donkeys, for the fixing of quicksilver, or for wheels of perpetual motion. It did not matter much what they were, for the rage for stock-jobbing was such that any hardy promoter of a company might hope to float it at all events till he had himself realized a handsome fortune. Change Alley became a scene of the wildest excitement—people in all lines of life hurrying to buy and sell as during the railway mania of our own time. But among all the companies the South Sea Company maintained its pre-eminence, and its shares rose, till in August the £100 share was worth £1000. The Company continued to promise largely, even fifty per cent. profits. The absurdity and danger of such reckless proceedings began to become obvious. The nominal value of all the shares in all the companies then existing was held to be £500,000,000, or twice the value of all the land in England. But many of these companies, being unchartered, were illegal, and had no right to issue shares, and the legitimate companies, especially the South Sea, looked with jealousy at their illegal competitors. Apparently unconscious how much their own success depended upon the universal delusion, they Bursting of the bubble. proceeded to prosecute some companies which had acted illegally. The effect was instantaneous. The nation began to return to its senses; the bubble burst, and the stocks of all unchartered companies fell with extreme rapidity. In the universal ruin they carried with them the South Sea Company. The panic was as rapid as the eagerness to purchase had been. Before the end of September South Sea stock was at 175. The difference between that sum and the £1000 which they had touched will give some measure of the loss involved. The ruin among all classes was unspeakable.

So great was the desolation that it was found necessary for Parliament to intervene. Not that the great Company itself was in any way bankrupt, its shares were still at a large premium, they never fell below 175; not that any law of political economy had been broken; Government had never pledged itself to support the credit of the Company, or to force either its shares or its engagements Punishment of the directors. on the public; but simply because private speculation had caused so vast an amount of misery, and because the nation was exasperated at it, interference became absolutely necessary. Examination into all the details of the plan no doubt proved a considerable amount of venality on the part of the ministry, of bribery and fraud on the part of the directors. But even thus it was freely acknowledged that under no old law had any crime been committed, and it required a retrospective Act of Parliament and the creation of a temporary crime to bring the directors within the reach of punishment. As Gibbon said, the steps taken were in fact an act of popular vengeance and contrary to justice. They consisted in the appropriation of the private property of the directors to the amount of £2,000,000 for distribution among the sufferers, the remission of the £7,000,000 due by the Company to Government, the payment of all the just liabilities to the Company, and a division of the capital that then remained, about thirty-three per cent., among the proprietors.

Supremacy of Walpole. 1721.

These measures are due exclusively to Walpole, the one man specially fitted from his financial abilities to deal with the present crisis, and in whose favour it was remembered that he had been out of office when the plan was set on foot. The official inquiries into the circumstances of the South Sea Scheme left him indeed in a position of undisputed supremacy in the House. Several members of the Government were implicated in the frauds of the Company; Aislabie, the Chancellor of the Exchequer, was found guilty and expelled the House. The younger Craggs died of smallpox before the inquiry was completed, and his father committed suicide. Charles Stanhope was acquitted by a majority of three only, and although Sunderland was declared innocent by a large majority, public opinion was so strong against him that he had to leave the ministry. In the following year he died. During the angry debates which arose on these matters Lord Stanhope had been attacked with virulence by the Duke of Wharton, and the anger which he had felt had been such as to cause a rush of blood to the head, of which he died shortly before his relative Charles Stanhope was acquitted. There remained no possible rival to Walpole, who with his brother-in-law Townshend returned to power as First Lord of the Treasury. Thus, when the new Parliament assembled, he found himself absolute master of the field, at the head of an unbroken Whig party, supported by an overwhelming majority, and for twenty years maintained his position, to the immense advantage of England and to the lasting security of the reigning house.

Revival of Jacobite hopes.