The South Sea Bubble Collapse of 1720 and its Effect in Ireland

/ October 23, 2023

Introduction:

The South Sea Bubble was a speculative bubble in the early 18th century involving the shares of the South Sea Company, a British international trading company that was granted a monopoly in trade with Spain’s colonies in South America and the West Indies as part of a treaty made after the War of the Spanish Succession. In return for these exclusive trading rights, the company assumed England’s war debt.

The term “South Sea Bubble” refers to an unhappy experiment in 18th century English public finance.  In February 1720 public creditors were invited to convert their claims on the government into South Sea Company stock.  Since the price of Company shares started to climb the moment the proposal became common knowledge, and further price increases were anticipated, many hastened to take up the offer.

  • By June Company stock had risen seven-fold in value
  • But after hovering a little below this peak for the next two months
  • In September the price suddenly collapsed
  • By the month’s end it was back almost where it had started in February
    • Huge fortunes were made and lost in the interim

Those on the losing end complained bitterly and hunted for villains. Company officials were investigated by parliament and heavily fined. Several leading politicians lost office when it was revealed they had profited extensively from ‘insider trading’ deals. The episode was later labelled a bubble, implying that there had never been any real substance to the sudden surge in price and that from the outset it was destined to collapse more rapidly than it had grown.

Conversion of Government Debt to Private Debt:

The debt conversion operation was designed to reduce public expenses.  During the Nine Years War (1689-97) and the War of the Spanish Succession (1702-13), large sums had been borrowed for long terms and at relatively high interest rates.  Since 1714 successive administrations had worked to restructure this debt – which was often hastily arranged and sometimes under-funded – into more convenient and sustainable forms.  As interest rates were falling at the time, the Treasury also endeavoured whenever possible to wrest better terms from its creditors.

  • In 1717, for instance, one sizeable bloc of lenders earning an average 9% return was offered a choice between having their loans repaid or converted into new government “stock” paying interest at 5%.

In 1720 a different set of creditors was being targeted. An earlier administration had taken out a sizeable war loan and contracted to reimburse lenders by way of annuities, some running to 1742, most to the end of the century. These payment obligations amounted to roughly a third of the government’s annual debt service costs and could not be redeemed without the annuitants’ permission. If the government were ever to reduce this part of its debt, it would have to get the annuitants to accept a substitute asset that could be redeemed at its own will.

  • The South Sea Company stock was the instrument chosen for this purpose.

The basic idea of swapping public debt for private securities was hardly novel and had much to recommend it.  In 1697 new stock in the Bank of England was substituted for £0.8 million worth of Exchequer tallies (short-term public debt).  In 1711 Parliament authorised some public creditors to trade £9.5 million in tallies for stock in the South Sea Company — founded that year as a vehicle for this very operation.  In 1719 “lottery orders” (annual payments to the winners of a lottery held earlier in the decade) worth £1 million were converted into new South Sea stock.

  • And in the same year in France, under the guidance of the Englishman John Law, all remaining government debt (worth 1.5 billion livres or roughly £62.5 million in total) was exchanged for shares in the recently-created Compagnie des Indes.

Participating corporations typically fared well in these deals, receiving a fixed rate of interest from the Treasury per pound of debt converted as well as side payments of various kinds.  New shareholders considered themselves better off since corporate stock was more saleable (and sometimes more secure) than the public securities they had been holding.  It was also expected to pay regular dividends (out of a steady revenue stream proceeding from the Treasury), and might rise in value over time.  Governments benefited too, usually ending up with payment obligations that were smaller, better funded and more flexible.

Conversion of Private Debt into Company Stock:

In January 1720 John Blunt, a South Sea Company director and one of its original founders, proposed converting almost the entire public debt, annuities included, into South Sea stock.  Blunt was no doubt inspired in part by Law’s project, which had been set on foot only a few months earlier and of which his own plan was clearly an imitation.  The price of stock in the Compagnie des Indes had been rising sharply in the latter half of 1719, making a large-scale debt conversion in England seem promising and timely.

  • As it turns out, France was also experiencing a speculative mania – the so-called Mississippi Bubble, which eventually collapsed during the very months when England’s own Bubble reached its peak.

Blunt was very likely moved as well by his corporation’s present unhappy condition.  At its foundation in 1711 the South Sea Company had been granted a monopoly over English trade to South America.  At the time Spain controlled all trade to the area.  But England ‘expected’ to acquire important concessions in the near future, either by military force or in the course of peace negotiations.

  • Unfortunately for Company shareholders, the concessions actually obtained in the peace of 1713 were less extensive than expected; nor were they well honoured by Spain.
  • What little trade the Company was able to conduct in the next few years proved only marginally profitable.
  • And its commerce had been at a complete standstill since 1718, a new war with Spain having broken out that year.

Under Blunt’s original proposal the short- and long-term annuities would be assigned lump-sum prices of 14 and 20 times their annual payout respectively, putting their total value at £15 million.  Interested annuitants could exchange their assets at these rates for the equivalent value in new Company stock.  Holders of a range of other, redeemable public debts worth £16.5 million in all would also be invited to convert their assets into South Sea stock.  The Treasury would pay the South Sea Company 5% per annum (to be reduced to 4% after 1727) on the market value of the public securities so exchanged.  In return the Company would supply the government up front with a one-time cash bonus of £1.5 million plus two times the annual payout on any annuities converted (about £1.6 million if all annuitants participated).

When the Bank of England learned of Blunt’s proposal, it hastened to offer better terms for the right to convert public debt into its own stock.  The South Sea Company won the resulting bidding war after committing to terms considerably more generous than its first offer: an up-front payment of a flat £4 million, 4.5 times the annual payout on all annuities traded in, and 1.0 times the annual payout on any long-term annuities not actually converted.

On these terms the crown came out a clear winner.  Little would be saved on the redeemable debts being exchanged (most of which already bore interest at 5%).  But the annuities-related part of the debt would become redeemable at will and the annual servicing cost fall from £800,000 to £750,000.  A one-time windfall payment as high as £7.6 million was of course a great attraction as well.

It is far less obvious how the South Sea Company hoped to profit, especially given the sizeable cash bonus it was offering.  The usual explanation turns on an important ambiguity in the principle that public debt would be exchanged for South Sea stock of “equal value”.  The Company would be authorized to issue one new share for every £100 of public debt subscribed for conversion.  In paying off public creditors, however, the shares would be rated not at their par value of £100 but at their current market price.  Should that price be above par when the swap was actually made (in Early 1720 it stood at £120), only a portion of the new shares need be made over to public creditors.  The Company would profit, so the usual story goes, by selling off the rest and pocketing the proceeds.

Debt Conversion & Re-Financing:

Creditors were indeed allocated shares at their market, not at their par value.  But this does not explain how the Company might profit from the debt conversion.  Those purchasing surplus stock would expect the same dividends as any other shareholder.  As much as half of the new working capital acquired by the sale of surplus shares would already be lost to the one-time bonus payment to the crown.  So any remaining capital would have to be invested most profitably were investor expectations to be met.  One recent commentator speculates the Company must have had plans for expanding its operations in bold new ways.  The secondary literature sheds no light on what these plans may have been.

The conversion process went well at first.  When the Company’s proposal became public knowledge in late January, its share price jumped to £170.  After the authorizing statute passed in Early April, the price climbed above £300.  At the time corporate stock was sold through “subscriptions”; interested buyers were invited to sign specially-provided registers, binding themselves to purchase stock on terms stipulated in the register.  In 1720 two kinds of subscriptions were offered: for those exchanging public debt for South Sea stock and for those paying cash for any surplus stock the Company was entitled to issue.  Contemporaries styled these “subscriptions” and “money subscriptions” respectively.

Company directors started the ball rolling on 14 April with a call for money subscriptions.  They looked to sell £2 million (par value) of stock at £300 per share; buyers would have to pay 20% down and the rest in eight equal bi-monthly instalments.  The subscription was over-filled within an hour; many investors no doubt hoped to flip their stock at a healthy profit before the second cash payment came due.  On 28 April the first debt subscription was held; on this occasion only the annuitants were eligible to buy.  Curiously over half of them had signed on within the week, even though the Company had yet to set exact terms. Another money subscription was held on 29 April.  This time £1 million of stock (par value) was offered for sale at £400 per share.

Again the subscription was over-filled within the day.  During these weeks the open-market price for Company stock fluctuated around £340.  On 19 May Company officials finally announced exact terms for the debt subscription of April 28.  Long and short annuities would be valued at 32 and 17 times their annual payout respectively (compared to the figures of 20 and 14 at which the Exchequer would be crediting the Company for those same debts).  Annuitants would receive 1/6th of their payout in cash and corporate bonds and the rest in new Company stock rated at £375 per share.

The open-market price for Company shares promptly skyrocketed, reaching £500 by the end of the month and over £750 just a week or so later.  A third money subscription was opened on 17 June.  The Company now sought to sell £5 million (par value) at £1000 per share; payment was to be 10% down, the rest in nine semi-annual instalments.  Even for so large a sum and on such exorbitant terms, subscriptions for £8 million (par value) were received within a few hours.  South Sea stock reached a peak open-market price of £950 on 1 July.

Over the next six weeks Company fortunes waned a little but for the most part held steady.  From its peak price stock fell back within a day or two below £900, closing the month around £800 and lingering there into mid-August.  Another debt subscription was opened on 14 July for £6 million of the £13.3 million of redeemable government bonds managed by the Bank of England.  Almost twice the target amount was subscribed that day.  On 4 August the Company opened a debt subscription book for those annuitants who had not signed on in April and for holders of another £3.2 million worth of government bonds.

For the annuities the Company announced targets of roughly half the outstanding value of each type; the new issue was again heavily oversubscribed.  Terms were announced a week later.  Long and short annuities would be rated at 36 and 17.5 times their annual payouts respectively.  Annuities and bonds would be converted to stock at a rate of £800 of debt per Company share.  On 22 August, a fourth money subscription, with stock priced at £1000 per share, was filled in less than three hours.

Speculation & Final Collapse:

Thereafter the open-market price of Company stock quickly collapsed.  By the end of August it stood at £750.  It plummeted to £400 over the next two weeks, fell another £200 in the ensuing week, bounced around between £200 and £300 in the first week of October, settled just above £200 for the rest of that month and dropped into the £150 range by the end of the year.

No one knows for certain why Company stock rose so rapidly during the spring.  Certainly a role was played by heavy speculative buying in anticipation of further price increases.  It is also clear that Company officials themselves deliberately manipulated the price upward by all means at their disposal.

On 14 April they had announced a 10% dividend payable in stock at mid-summer.  At strategic times they offered loans on security of South Sea stock (using proceeds from the money subscriptions), amounting to £9 million in all, to anyone interested in purchasing still more stock.  This raised demand and reduced market supply (stock used as loan security had to be deposited with the Company).  They delayed issuing out any new stock, to keep its supply as low as possible.  And it seems on occasion they quietly bought their own stock, no doubt at markedly higher prices, in an effort to fuel further price increases.

Nor is anyone certain why the market price fell so suddenly in September and October.  The finger of blame is often pointed at the so-called Bubble Act.  Company officials worried during May and June that a growing flood of new English joint-stock companies would divert investors’ cash from their coffers.  As the success of the whole debt-conversion project was at stake, Parliament was persuaded in June to pass a statute making it a criminal offence for their upstart rivals to act as corporations.

The new law was not at first enforced.  But on 18 August the government started legal proceedings against three offending companies.  This allegedly sent a chill through Exchange Alley, ultimately bringing down Company itself.  The bubble’s collapse may have had just as much to do with developments in France; in September Law’s Compagnie des Indes was in the final stages of collapse.

In subsequent parliamentary investigations it was revealed that Company directors had resorted to bribery to help secure passage of the statute authorizing the whole debt conversion exercise.  Perhaps as many as forty or fifty potential supporters were involved, including the First Lord of the Treasury (Earl Sunderland), the Chancellor of the Exchequer (Aislabie), the junior Treasury Secretary (Charles Stanhope) and the King’s two mistresses.  All were credited with fictional purchases of £574,000 (par value) worth of Company Stock at low prices and were then “paid back” the market value of this stock once the price had risen to some agreed level.  Company officials also filled most of the first several subscriptions from their own list of names, using political connections to decide who should be so favoured and in what quantities.  They had also extracted healthy profits for themselves long before the bubble finally collapsed.

Blame, Compensation & Retribution:

Parliament was left to assign blame and to decide on compensation to the losers.

Those debt holders who had signed on in August naturally complained the loudest.  They were eventually offered substantially more generous terms.  All other debt subscribers were forced to live with the bargains they had made, though money subscribers were excused from making any further installment payments.  In the end Parliament forgave most of the £7 million payment initially expected of the South Sea Company.

Its directors were not let off so lightly.

  • Six were removed from their crown offices.
  • The four who were MPs were expelled from the House of Commons.
  • All had their estates assessed and sold by trustees; those deemed most responsible had almost the whole of these proceeds confiscated.

The politicians fared a little better.  Stanhope was cleared of charges of corruption by just three votes, Sunderland by a larger margin.  Aislabie was expelled from the Commons and committed for a time to the Tower; a portion of his estate was sold off.

Robert Walpole stepped into the ministerial void thereby created, parlaying it into what is still England’s longest tenure of the office of prime minister.

The Effects of the South Sea Bubble in Ireland

The effects of the collapse were felt in Ireland in a number of ways:

  • 136 individual investors from Ireland holding £184,651 of stock lost their money
    • These people were the third-biggest source of foreign investors in the South Sea Company
    • Those figures, however, would have been dwarfed by the investments of Irish “wild geese” investors based in France who took positions in the South Sea Bubble
  • Trust in bankers, banking and investment were at an all-time low and there was ‘a run’ on the Dublin banks in October 1720
    • This was halted by the intervention of Speaker William Conolly of Castletown
    • Conolly used his own immense fortune to bolster the Dublin banks’ line of credit
  • Irish money supply also severely contracted owing to the exodus of Irish money to London
    • This directly reduced the volume of Irish trade
    • It also compounded economic hardship caused by successive harvest failures from 1718–20

The collapse of the scheme led to suspicions of bankers and financiers, as well as a collapse in confidence of the Irish banking system as a whole. This suspicion and general distrust of credit reached its peak in Ireland during a public debate over attempts to establish a Bank of Ireland in 1720–1.

  • The proposed bank was intended to stop the flow of Irish capital to London and to increase the level of credit available in the Irish economy, as well as providing paper currency as an alternative to the scarce coinage then in circulation.
  • Public perception of the role of bankers and the ‘moneyed interest’ in the South Sea affair, aided by polemics by writers such as Jonathan Swift, ensured the bank’s failure
  • Although many of these critiques were based on misunderstandings of the South Sea or Bank of Ireland schemes, widespread suspicion of the motives of Irish bankers ensured that there was little Irish appetite for any schemes of high finance
    • There would be no Bank of Ireland until 1783
    • The Irish economy entered a decade of recession in the 1720s

An attempt by wealthy landowners and merchants to form a National Bank of Ireland failed because MPs in the Irish Parliament feared that a national bank would overwhelm other businesses – many of which belonged to them – the ruling class. They were especially worried if members of the merchant class were to be among its governors – a role that was solely populated by them.

The Aftermath:

Despite this massive financial crisis, two new private banks were formed in Dublin in 1720.

  • Elnatan Lumm (Dublin) 1720
    • A Goldsmith banker from Yorkshire
  • Sir Abel Ram (Dublin) 1720
    • A Goldsmith banker

Amid the economic recession that followed, banking in Ireland progressed at a snail’s pace and new entries to the Irish banking eco-system were few and far between.

1721

  • Nuttall, Joseph & Co (Dublin) 1721-1738
  • Swift, James & Co (Dublin) 1721-1746
  • Newcomen‘s Bank (Dublin) 1722-1825
    • Customers were mainly aristocratic and professional
    • The bank closed in 1825 following the death of its owner who reportedly committed suicide by shooting himself
    • A creditors committee found the bank was managed ‘slovenly and wastefully’ with significant defalcations surrounding expenses related to family members

In 1724, the bankers of Dublin issued a statement that they would not receive Woods’ halfpence as this would be detrimental to His Majesties Revenue and the trade of this kingdom. They were:

  • Benjamin Burton & Francis Harrison (1700-1733)
    • A former Dublin Goldsmith banker, who established a new banking business in 1700 at 4 Castle Street, along with a business partner, Francis Harrison.
    • He died in 1728 and the bank became known as Samuel Burton & Co
  • Hugh Henry & Ephraim Dawson (voluntary liquidation in 1737)
  • James Swift & Co (taken over by Gleadowe & Co in 1746)
  • Joseph Fade (1715-1748, thenceforth known as John Willcox & Co)
  • Mead & Curtis (failed in 1727)
  • David La Touche & Nathaniel Kane
  • Richard & William Maguire
  • Joseph Nuttall (failed in 1738)

Subsequent analysis shows that there was little wrong with the new coinage so denigrated by Swift (and consequently distrusted by the public) in one of his infamous Drapier’s Letters – a series of letters allegedly penned by a Dublin draper criticising the government of the day on a wide range of issues.

The rest of the 17th century, in banking terms, was a bit of Wild West story with dodgy new banks opening, banking scandals, runs on banks and bank closures. The shortage of good coin (silver and gold) meant that the public had little choice but to use their paper notes. Meanwhile, harsh banking laws and regulations meant that the ruling class kept their local monopolies, culminating in the rise and fall of the ‘silver banks’ but that’s a story for another day.

Banking in 18th C Ireland became a high risk sector – especially for their creditors and something had to be done to improve standards. New laws were urgently needed. Nonetheless, new banks continued to appear in Ireland over the next 30 years or so… and many of them were short-lived.

  • Dublin (Thomas Dillon & Co) 1736-1754
    • Took over from his father, Theobald Dillon in 1736
  • Dublin (Mitchell, Henry & Co) 1739-1757
  • Dublin (Richard Dawson & Co) 1740-1760
  • Dublin (Lunell and Dickenson) 1742 – 1746 – failed due to financial panic after the Scottish Rebellion of 1745
  • Dublin (James Dexter, Fleece Alley) 1745
  • Dublin (Lunel & Dickson) 1745
  • Dublin (Thomas Gleadowe & Co) 1746-1799
  • Dublin (John Willcox & Co) 1748-1755
    • Willcox took over from Joseph Fade in 1748 and re-named the bank)
  • Cork (Lawton, Hugh & Co) 1750-1760
  • Belfast (Mussenden, Daniel & Co) 1751-58
  • Dublin (Lennox & French) 1751-1755

Happily, the Irish got their central bank in the 1790s but although it was, in theory, a central bank of sorts, it was run as a private bank for the aristocracy by the aristocracy and made little or no attempt to expand its branch network outside of Dublin.

An interesting divergence emerges from the interconnectivity in financial innovation that existed between London and both Ireland and Scotland during the 18th century:

  • Scotland wisely (as it turned out) innovated in banking, producing joint stock banks
    • Bank of Scotland (founded in 1695)
    • Royal Bank of Scotland (founded in 1725)
    • These banks would develop to finance a large part of the Scottish Industrial Revolution
    • To this day, both of these banks still issue their own banknotes
  • Ireland, on the other hand, financially innovated in the area of taxation, with its predominantly Anglican parliament voting for new methods of taxation and the creation of the national debt in order to pay the costs of the occupying regiments of the British army
    • The Irish Parliament rejected a plan to create a national bank in Ireland in 1721
    • This decision proved costly as the Irish Industrial Revolution was a much smaller affair

Further Reading:

Walsh, Patrick, “The South Sea Bubble and Ireland. Money, Banking and Investment, 1690-1723″ (Boydell Press, 2014). ISBN-13: 978-1843839309

Other Online Resources:

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