The history of English soap bubbles. South Sea Company

The South Sea Company was founded in 1711. When it was created, the following financial scheme was used: holders of government bonds worth about 9 million pounds sterling received shares of the South Sea Company in exchange for these securities. Thus, the company became a major creditor of the state. An Act of Parliament granted it a monopoly on trade with the rich lands of South and Central America. The seal described the fabulous dividends that would be paid on the shares. After some time, the company undertook new financial manipulations. She offered to exchange almost all government debt for her shares at market prices (a 100-pound share cost 125-130 pounds, and government bonds were valued at par - 100 pounds). The newspapers supported the belief that Parliament would pass a law on the exchange of securities for shares, and the stock price rose sharply. The law was indeed quickly passed by Parliament and signed by King George I. And a few days after the law came into force, the company’s board announced a subscription to the new issue at 300 pounds per share. Instead of the one million pounds that the board had hoped for, two were raised, and soon another issue was announced, at 400 pounds per share, which was also very popular.

In the subsequent period, the rate continued to rise and by the summer of 1720 it reached 900 pounds. But gradually the belief began to spread that the shares had reached a ceiling, and the rate fell to 640. By the end of August, the rate was artificially raised to 1,000 pounds by the purchase of a large number of shares by the company's agents. But the company was doing poorly. An agreement was drawn up between the South Sea Company and the Bank of England, according to which the bank was to come to the aid of the company. The bank opened a subscription for 5 per cent bonds in the amount of 3 million pounds, which were loaned to the South Sea Company for one year. At first this issue was a success, but very soon there was a turnaround and the subscription stopped. Depositors began selling shares and withdrawing money from the Bank of England. As a result, the share price fell to 130-135 pounds. After some time, the Bank of England refused to fulfill its obligations under the agreement, and the share price fell even lower. The collapse of the South Sea Company came. In many cities of England, meetings of shareholders were held, demanding the punishment of those responsible and the return of money. Some of the money was paid out: shareholders received £30 per £100 share. The South Sea Company was not the only one operating at the beginning of the 18th century. on the territory of England as a financial pyramid. Pyramid companies were created “for the production of boards from sawdust”, for “the creation of a perpetual motion machine, for encouraging the breeding of horses in England, the improvement of church lands, the repair and reconstruction of houses of parish priests and vicars”, a “Company for obtaining consistently high profits from source not subject to disclosure." All of these companies put hundreds of people out of business before they collapsed.

In 1710, the Tory party came to power again in England, and the post of Chancellor of the Exchequer (Chancellor of the Exchequer ) its prominent figure was appointed Robert Harley. The country's finances were upset by the war with France, but nevertheless the immediate task was to find 300 thousand pounds for the next quarterly transfer of the Duke of Marlborough's army stationed in Europe. Having sent auditors, Harley discovered not only a confusion in expenses, but also a number of scandalous expenses, after which in 1711 the House of Commons appointed a committee to specially investigate the issue.

In the same 1710, the charter of a joint-stock company with a very long name was adopted "A company of merchants of Great Britain for trade with the South Seas and other parts of America and for fishing." It went down in economic history with a shorter name - the South Sea Company.

The company was to consolidate the country's internal debt by purchasing its certificates in the amount of 10 million pounds in exchange for its shares. At the same time, income from interest-bearing government securities transferred to the company's assets became a source of payment of dividends to shareholders. Expected profits from trade with South America were seen as an additional source most attractive to rentiers.

These expectations were strengthened in 1713, when, under the Treaty of Utrecht, England achieved the agreement to send one merchant ship and 4,800 slaves to South America annually.

In 1718 and 1719 the speculative fever raging in Paris spread to London. However, speculation in England was gaining momentum regardless of France.

In 1720, the South Sea Company, planning to buy back the domestic debt of £1,750,000, reduced the interest the government had to pay, paying the government and bondholders a premium and making a net profit of £72,000.

During the exchange, holders of government bonds received shares in quantities that allowed them to immediately sell them at a premium. The operation was successful, and the company proposed to consolidate all government debt in the same way. The Bank of England and the East India Company refused to commit their funds to this operation, and the South Sea Company agreed to assume the bulk of the national debt, promising a considerable premium in favor of the government.

For the project to be successful, the shares of the South Sea Company had to be quoted above their par value of £100. A speculative fever began: already on January 30, 1720, shares cost 129 pounds, on March 18 -200 pounds, on May 20 -415 pounds, on June 15 -1000 pounds, on June 24 -1050 pounds.

If in France speculators concentrated on Law's company, then in England the rise in the rate covered all companies. So, if on January 1, 1720, shares of the East India Company were sold for 200 pounds, then on June 24 they were already sold for 440 pounds. Sensing this trend, speculators began to found new companies whose shares began to rise. Buyers could often buy shares for a small down payment.

On June 7, 1720 alone, subscriptions were opened for shares of 19 newly formed new companies with a total capital of more than 50 million pounds. Between September 1719 and September 1720, 190 bubble companies were established to sell their shares. Among them: “Company for insurance of the future of children”, “Hair trading partnership”, “Company for importing materials for mops, brushes and brooms from Norway and Germany”, “Company for trading shares of the South Sea Company”. Perhaps most exotic was the name "Company for the implementation of a project that will be made public sometime in the future."

Feeling that the bubbles were diverting the capital of potential buyers of its shares, the South Sea Company initiated a parliamentary investigation. As a result, it was adopted "anti-scam law" (Bubble Act ), prohibiting the sale of shares for public subscription until state registration is completed.

Although a large number of outlawed companies were cancelled, many still managed to complete the required paperwork. Speculative capital concentrated on their shares, and their prices continued to rise throughout July. It is noteworthy that speculators did not react in any way to the “market collapse” in France.

Carried away by the pursuit of competitors for speculative capital, the South Sea Company accused four companies that continued to operate on the stock market of fraudulent registration of issues. What turned out to be worse for itself, the South Sea Company won all these claims, and in August, along with the shares of its competitors, its stock prices went down. On August 20 they were quoted at £850, on September 19 at £390, on September 28 at £180, and by December their rate had fallen to £120.

These events led to the removal of the first Lord of the Treasury, who was replaced on April 3, 1721 by a representative of the opposition, a Whig. Robert Walpole (considered in English historiography to be the first Prime Minister of Great Britain, although this term began to come into use only in 1870–1880, under Benjamin Disraeli). An active participant in all speculations, he himself came out of them in advance and with huge profits, when, on the advice of his banker, he sold his entire stake in the South Sea Company. In his role as "crisis manager", Walpole saved about 60% of the capital of the government's creditors.

Unlike the Royal Bank in France, the Bank of England was not accused of complicity in speculation. Only at the final stage did Walpole lend to the South Sea Company in order to “save” some capital. Confidence in the Bank of England and its banknotes did not decrease as a result, but rather strengthened.

In addition, it was adopted and was in force until 1825 Bubble Act – a law preventing the creation of companies like the South Sea Company. It is noteworthy that this company itself was not liquidated, remaining a kind of holding company for government securities.

"South Sea Company" - an engraving by William Hogarth allegorically depicts a carousel with gullible investors and the scourged "virtue"

An instructive example of market irrationality is speculation in England at the beginning of the 18th century.

The company, known as The South Sea Bubble, began operations in 1711 when Duke Robert Harley founded the South Sea Company - the full name: "The Manager and Company of the South Sea Traders of Great Britain and other parts of America for the purpose of promoting fisheries." She was promised exclusive trading rights with the Spanish possessions of South America. These rights were obtained by England for the successful completion of the War of the Spanish Succession, which ended in 1714. Parliament granted a monopoly on trade in exchange for the redemption of part of the national debt. The company purchased almost £10 million of government debt against a guaranteed annuity of 6% and monopoly for all trade with Latin America.

In 1717, the King of England proposed the re-"privatization" of the public debt. The country's two major financial institutions, the Bank of England and the South Sea Company, each presented their proposals, and after heated parliamentary debate, South Sea was allowed to purchase another debenture at an interest rate of 5% per annum.

After a short period of time, rumors began to spread about the company’s unheard-of profits from trade in Latin America, where British goods could be exchanged for gold and silver from the “inexhaustible” mines of Peru and Mexico. On the stock exchange, South Sea shares led a quiet existence, the price moving only two or three points a month.

But in 1719, an event occurred in France that was of great importance for the English company. A prominent man named John Law founded the Compagnie d'Occident in Paris to trade and participate in the colonization of the American state of Mississippi. A huge wave of trading in the company's shares raised their prices from 466 francs in August to 1,705 francs in December 1719. The buyers were both French and foreigners. This was the reason that the British ambassador asked the government to do something to stop the outflow of British capital into the Mississippi Bubble. The bubble burst on December 2, 1719. As a result of the collapse, capital moved back from France to England.

This presented an interesting opportunity for the main shareholders of the British company, who offered to assume the entire debt of the English state. On January 22, 1720, the House of Commons appointed a council to consider this proposal. Despite numerous warnings, on February 2 a decision was made to present the draft to parliament. Investors rejoiced at this prospect of further capitalization of the company. Within days the share price had risen to £176, supported by inflows from France. As the project was further considered, further rumors began to emerge about the incredible profits that were allegedly to be made, and the shares rose in price to £317. In April 1720, sales pushed prices back to £307 and to £278 the next day.

Even at these prices, the company's original founders and directors could withdraw capital gains that were simply uncountable by the standards of the time and realized from the effectively non-operating company. Herself in 10 years of operation, the company has not sent a single commercial or fishing vessel to American shores. The company was much more successful in the stock market than in trading operations - trade with the New World was difficult because hostile Spain controlled the vast majority of American ports, allowing only one English ship a year to enter, receiving one-fourth of all profits for this and 5% from turnover. However, the word “monopoly” had a hypnotizing effect on investors.
On April 12, new positive rumors began to circulate, and £1 million of fresh shares were subscribed at a price of £300 per share. The shares were oversubscribed to twice the originally announced volume, and a few days later they were trading at £340. The company then announced that it would pay a 10% dividend on all new and old shares. A new £1 million subscription was then offered at £400. It was also exceeded. The company was still largely dormant.

All this inspired many to become entrepreneurs, and in the years 1717-20 a new phenomenon arose in the stock market: more and more offers for shares in “blind securities” appeared. These companies, like the Compagnie d'Occident and the South Sea Company, sold nothing but plans, ideas and expectations. They were completely dormant on the date of subscription, run by management novices. The shares were bought with great enthusiasm and quickly grew in price. Stock speculation was nothing more than a rich man's game - everyone and everything, here and there, men and women took part in it. These companies quickly became known as "bubbles" due to their founders often selling their own shares and turning a profit just days or weeks after the new issue, leaving other investors to face a dormant company and inflated stock prices.

On June 11, 1720, the king declared some of these companies “sources of danger to everyone around him,” and trading in their shares was prohibited, imposing a fine for violation of this. The list of 104 banned companies included the following imaginary activities:

• Improving the art of making soap;
• Extraction of silver from lead;
• Purchasing and equipping ships to suppress pirates;
• Transformation of mercury into malleable refined metal;

Despite all the efforts of the government, more and more bubbles appeared every day, and the speculative fever became increasingly worse. The biggest bubble, the South Sea Company, continued to inflate, with shares trading at £550 and reaching £700 in June. During this period, price movements were extremely neurotic, with huge periodic movements. In one day, June 3, in the morning the price fell to 650 pounds, and at noon it rose again to 750 pounds. Many large investors used the summer's high to realize profits that were reinvested in everything from land and commodities to real estate and other shares. However, others continued to buy shares of the South Sea Company, among them the physicist Isaac Newton. During the early price rises he sold all his shares in the South Sea Company, making a profit of £7,000.

Sir Isaac Newton. 1702 Portrait by Gottfried Kneller

The leadership spread rumors that Spain had placed its South American ports at its complete disposal. The collapse of the Mississippi Company in France attracted additional capital from the continent. As a result, the share price increased to £890.

Speculative fever swept across England. All segments of the population, from townspeople to the nobility, rushed to buy shares of the company, the price of which had already reached 1,000 pounds in early August. Only very few were aware that time was running out for investors. Among those who knew this were the company's original founders and its board of directors. They took advantage of high summer prices to dump their own shares. In early August, ominous facts began to leak out to the masses, and stock prices began to fall slowly and steadily.

On August 31, the company's board announced that an annual dividend of 50% would be paid over the next 12 years. This would completely deplete the company, and such news did not stop investors from growing worried. On 1 September the shares continued to fall and panic set in when the price reached £725 two days later. For the rest of the month, stock prices reached their lowest levels.

On September 24, the company declared bankruptcy, the rate of decline increased even more. On the last day of the month the shares could be bought at a price of 150 pounds per share. In just three months, their price fell by 85%. Isaac Newton lost more than 20 thousand pounds sterling, after which he declared that he could calculate the movement of celestial bodies, but not the degree of madness of the crowd. Among those who lost their savings was the writer Jonathan Swift (author of Gulliver's Travels).

In the run-up to the demise of the South Sea Company, banks and brokers found themselves under siege. Many greatly over-borrowed their portfolios of South Sea Company shares, and a wave of bankruptcies swept across the financial world.

Unlike the Tulip Bubble, the South Sea Company Bubble did not only affect a limited group of investors. De facto, a significant part of the wealthy population of England, France, Scotland and Ireland speculated in the Company's shares. Thousands of investors were ruined, including many members of the aristocracy, who were then forced to emigrate.

Already in December, Parliament was urgently convened, which began an immediate investigation. It revealed cases of fraud among the company's directors. Some of the accused, including the company treasurer, fled abroad. The investigation revealed that many members of parliament took bribes for their votes when passing the royal act. The businessmen were accused of knowing about the real state of affairs, but not informing shareholders and stock exchange players about it (this charge is still brought against unscrupulous managers). Moreover, the Company's managers sold their personal stakes in shares at the peak of their price. The directors of the South Sea Company were punished by the authorities - they were sentenced to huge fines, and their property was confiscated for the benefit of the victims.

As a result of the investigation, the chairman of the company's board and several members of the government, including the Minister of Finance John Aisleby, were sentenced to prison. The South Sea Company was restructured and continued in existence until its final closure in the 1760s. But its main function was no longer trade with the Spanish colonies, but management of the public debt.

The problem was that in 1720 alone, there were 120 companies operating on the London Stock Exchange, operating under the South Sea Company scheme. Their collapse caused a chain reaction of bankruptcies. Business activity in the country has sharply decreased and unemployment has increased. To remedy the situation, the British Parliament passed a resolution prohibiting the creation of new companies in which the government does not participate. As a result, the development of the English economy was slowed down for 50 years.

The company was finally dissolved in 1855. In the 140 years of its existence it had never managed to conduct trade in the South Seas on any scale worthy of attention.

The South Sea Company was founded in 1711 by a group of wealthy merchants and bankers and enjoyed the patronage of Robert Harley, the leader of the Conservatives. A financial scheme was used: holders of government bonds worth about 9 million pounds sterling received shares in the South Sea Company in exchange for these securities The company became the largest creditor of the state, and his policies were now closely connected with its interests.

It was given a monopoly right to trade with the rich lands of South and Central America. The South Sea Company. An important business item was the slave trade - the supply of African slaves to America. However, the South Sea Company had no real business, so its shares had no value beyond the amount which the company spent on the issue

She offered to exchange almost all government debt for her shares at the market rate of securities (a 100-pound share cost 125–130 pounds, and government bonds were valued at a par value of 100 pounds). The company's board announced a subscription to the new issue at 300 pounds per share. And instead of 1 million pounds, as planned, they raised 2 million

At the end of the investigation, the House of Commons began the trial of those involved in fraud with the shares of the South Sea Company. The first to stand trial was Charles Stanhope, one of the heads of the Treasury - he was acquitted. The chairman of the board of the company, Blyth, and some employees of the Treasury were sentenced to imprisonment. Also, Chancellor Ailsby was was found guilty. He was imprisoned in the Tower and his property was confiscated to compensate for the losses of ordinary shareholders

Results of the company's activities: The Bubble Act was adopted and was in force until 1825 - a law preventing the creation of companies like the South Sea Company. The company was finally dissolved only in 1855. Over the 140 years of the company's existence, it never managed to achieve visible results in trade

At the beginning of the 18th century in 1711, Lord Treasurer Duke Robert Harley founded the South Sea Company. He planned to repeat the manipulation of people's trust, which a year earlier had been carried out by John Law in France (meaning the Mississippi Company), gaining a monopoly on trade with North America.

The only difference was that Robert Harley's company had a monopoly on trade with the ports of the South Seas. Of particular interest to the entrepreneur were the rich colonies in South America. In return, the South Sea Company helped England pay off the national debt that arose after the war with Spain. The holders' government bonds amounting to about £9 million were exchanged for shares in the South Sea Company, which has since become a creditor to the government. At this time, international finance was just beginning to develop. There were reports in the press every now and then about fabulous dividends on shares of the South Sea Company, and people believed it.

Artificially inflating the value of securities

But in 1718, England and Spain went to war again. This could mean that profitable prospects are at risk. Although even in this situation, speculators promised the public incredible prosperity after the end of hostilities. The company offered to exchange all government debt for its shares at the rate of a 100-pound share for 125-130 pounds, and each government bond had a face value of 100 pounds.

Thanks to the active circulation in the press of the idea that parliament would certainly pass a law on the exchange of securities for shares, the latter were able to significantly increase in price. And indeed, the law was quickly adopted and signed by the king. Then the company began to artificially inflate the prices of its shares and announced a subscription to a new issue. Now the share was worth 300 pounds. Two million pounds was raised and a further edition followed. The shares rose in price by another £100. And again their popularity was wild.

Drop: from 1000 to 100

Not only the British, but also the Dutch became shareholders; all of them gradually inflated this “bubble” with their contributions. Eventually the share price rose to £1,000. And this, according to economists, is a kind of psychological barrier for investors. Many felt that stocks had hit a ceiling. There were more and more rumors that the company's management and individuals began to sell securities. In just a few months the share price dropped from £1,000 to £100. The Bank of England refused to pay the funds under the agreement. Thus the South Sea Company was destroyed. The management still paid part of the money to shareholders: 30 pounds per 100-pound share.

Retribution

Parliament launched an investigation, which revealed cases of fraud by the company's directors. And members of parliament were convicted of bribery when passing the royal act of exchange of securities. The chairman of the board of the South Sea Company and some members of the government, including the Minister of Finance John Aisleby, went to prison.