A Very English Deceit: The Secret History of the South Sea Bubble and the First Great Financial Scandal

John Blunt was on his way to the top, but at a price. The lottery was the first to raise huge sums for the state, triggering a succession of similar enterprises over the next decade, while weighing down the government with the annuities it was obliged to pay to the subscribers. By raising the stakes with such large prize money, the lottery also prepared the ground for the grand speculation of 1720. Eventually, there was to be an explosion of investment which made Wren’s continual pleas for cash to fund his dome seem like requests for loose change, rather than the serious financial commitment that Parliament invariably resisted.

After the triumph of his first lottery, Blunt immediately marketed his second, known as ‘the Adventure of Two Millions’ or ‘the Classis’. Never before had the state attempted to hold a lottery on this scale; the tickets cost £100, which was half the annual income of a middle-class family and ten times the income of a manservant. The top prize was £20,000, the equivalent of the multimillion-pound jackpot today. The tickets were within the reach of only the very rich, except when the stockjobbers sold shares in them. But Blunt’s revolutionary idea was to divide the draw into five ranks, or classes, each with a different level of prizes. In the First Classis (or section), 1,330 tickets would win prizes ranging from £110 to £1,000. Then the prize money was stepped up: in the Second Classis, 2,670 tickets would win between £115 and £3,000; in the Third Classis there were 4,000 prizes, from £120 to £4,000; in the Fourth Classis, 5,340 tickets would win £125 to £5,000; and in the final draw, the Fifth Classis, there were 6,660 winning tickets with prizes ranging from £130 to the top prize, again, of £20,000. In effect, there were five different lotteries, draw succeeding draw so as to build the excitement to fever pitch. If their number did not come up, investors would not know whether to be pleased or disappointed until the last ticket of the fifth and final draw was produced from the box to win the biggest prize of all.

The Sword Blade Company was in charge of marketing the game, and all the tickets were sold within nine days. In this short space of time, Blunt’s two lotteries raised £3.5 million. Some investors were either very lucky, or bought heavily: the Duchess of Newcastle won eleven times, the Dukes of Rutland and Buckingham eight times. In the Second Classis an apothecary from Reading, Robert Dean, won the top prize of £3,000; in the Third, a gentleman from Westminster, Thomas Layton, the £4,000 jackpot. In the Fourth, Thomas Scawen, an alderman from London, won the £3,000 prize; another London merchant, John Upton, £4,000; and a gentleman from Northamptonshire, John Hunt, the top prize of £5,000. In the Fifth Classis, ‘The Hon. Thomas Cornwallis of St Martins in ye Fields, esquire’ won £3,000; a London scrivener, James Colebrook, £4,000, and Samuel Strode, a London surgeon, £5,000. The final ticket to be drawn belonged to Thomas Weddell, a merchant of Gray’s Inn, who scooped the £20,000 jackpot.

Encouraged by their success, Blunt and Harley now set to work on their most ambitious scheme of all: to try to find a way to reduce the national debt. The government owed money everywhere, in a confusing tangle of loans. There were the goldsmiths and moneyed-men who had lent it money; there were the holders of lottery tickets, and the holders of the Treasury’s notched hazel tallies; then there was money raised by the Army, the Navy, the customs, the Commissioners of Victualling – the government’s obligations seemed endless.

Harley’s idea was to found a trading company. It was a move that appeared conventional enough. Trade and war were the unholy twins of commerce. It suited both the financial nostrums and the bellicosity of England to develop a new company which would trade abroad and, if necessary, kill natives in order to repatriate the proceeds. Daniel Defoe, who was a lifelong admirer of Sir Walter Raleigh, had long been captivated by the spirit of Elizabethan adventurism and impressed by the vast profits that Spain was still coining from its colonies. Galleons from Mexico and South America were held to carry dazzling cargoes of gold, silver and jewels, but Defoe had consistently argued that there was an even greater profit to be made if the trade was better managed. There is no evidence that Blunt and Harley were swayed by Defoe’s arguments, but he reflected the spirit of the times. There was, the pair agreed, a huge commercial prize to be won in South America, offering a ready market for English cloth, with an endless supply of gold and silver in payment.

But Harley was also taking a politically radical step: he intended the proposed trading company to become a new financial institution to rival the Bank of England and the East India Company. On 2 May 1711, when he announced the new company’s formation, he declared that not only would it trade in the South Seas but it also aimed to take over the ‘floating’ portion of the national debt, put at £9 million: this was the debt that could be paid off if the government had enough money, rather than the fixed sums it had agreed to pay to annuitants for many years ahead at generous rates of interest. The company would ask the government’s creditors to exchange the money they were owed, directly, for shares in the new trading venture. To help service the interest on the debt, the company itself would be paid more than half a million pounds a year by the government.

Harley’s spirits were high, and found a ready outlet in symbolism. The company was awarded a coat of arms, designed by the College of Heralds and emblazoned with the motto A Gadibus usque Auroram – ‘From Cadiz [still held to be the empire’s last outpost] to the Dawn’. And, in keeping with its heraldry, it was given a suitably grandiose, if overly optimistic, monopoly on trade. It was granted the right to the ‘sole trade and traffick, from 1 August 1711, into unto and from the Kingdoms, lands etc. of America, on the east side from the river Aranoca, to the southernmost part of the Terra del Fuego, on the west side thereof, from the said southernmost part through the South Seas to the northernmost part of America, and unto, into and from all countries in the same limits, reputed to belong to the Crown of Spain, or which shall hereafter be discovered’.

Ominously, however, there would have to be a peace deal with Spain and France if the lands which were ‘reputed to belong to the Crown of Spain’ were to yield their supposed riches to the company’s trading vessels. There were therefore two big catches: peace had to be struck on advantageous terms; and the conceded territories had to yield the fabulous wealth which it was so fondly imagined they possessed. The government’s propaganda machine, ably spearheaded by Daniel Defoe and Jonathan Swift, went into action. They printed lists of exports which might prove suitable on the markets of South America, from silk handkerchiefs to Cheshire cheese, and they spun stories of South American wealth, the ready market for exports and the generous profits to be made from the slave trade. Portugal had been actively engaged in the traffic in African slaves for more than two centuries; Spain had built a lucrative sugar empire by importing slave labour to the New World. Harley was right to think the profits could be immense: between 1698 and 1708 a stake in the Portuguese slave trade to Jamaica had earned the English government £200,000 a year in bullion. Within half a century, Britain would be shipping a third of a million slaves to the New World and the national economy would depend on the trade.

Aided by his propagandists, Harley’s plan succeeded in capturing the imagination of investors. Some of them were political opponents who saw a chance to make money. Some were Dutch or Italian financiers, some were merchants, some were goldsmiths. Blunt and his team of directors also bought thousands of pounds’ worth of shares, believing they would make their fortune from the enterprise. Intellectuals such as Swift and Isaac Newton held stock, as did a large number of women. So too, curiously, did government departments.

But if Harley was genuinely attracted by the bold adventurism of the project, by the prospect of faraway riches which would replenish the war-weary coffers of the Exchequer, there were to be other consequences far closer to home. Blunt had won for himself a political and financial lever, a place in society and a position in the City. The Bank of England, officially, might have managed to protect its position, but a rival had been born and – whether it considered it or not – the Bank could not predict what sort of creature it might become. A company which had begun life by making sword blades had turned to land speculation. From land, it was now venturing out to sea. Where next?

On 10 September 1711 the South Sea Company was formally created, with Harley as its Governor. Nine of the thirty appointments were political, and five came from the Sword Blade Bank itself.

Not one of them had any experience of trading with South America.

For now, the political and financial path which had led to the formation of the company appeared to be one and the same. Harley genuinely wanted peace with Spain and France, and believed he could extract, as its price, the right to trade in the southern seas. But first he had to negotiate a deal. Peace, if it was to be struck, had to be struck quickly, so as to enable the South Sea Company to trade successfully and pay off the portion of the national debt it had shouldered. Harley had already begun the process, but he had failed to inform Parliament, and he did not yet have its consent.

Harley had the support of his party and of the country: both thought the war had to end. But the Whig-dominated House of Lords was in a rage, and mobilised for attack. Their aim was to bring down the Tory ministry in a political contest that ranged the old aristocratic Whig order against the upstart who was running the country. In some desperation, Harley tried to delay the return of Parliament, which was in recess. But confrontation at some point was inevitable, a sure sign of which was the propaganda war unleashed by Harley and his pet pamphleteer, Daniel Defoe.

For polemical persuasiveness Defoe had few equals. In his pamphlets on The Balance of Europe, an Essay upon the National Credit of England, and in Reasons why this Nation ought to put a Speedy END to this Expensive WAR, where Defoe argued his most trenchant case of all, the ink flowed as thick and fast as the imagery:

How have we above twenty years groaned under a long and a bloody war? How often has our most remote view of peace gladdened our souls and cheered up our spirits. Our stocks have always risen and fallen, as the prospects we had of that amiable object were near or remote.

Now we see our treasure lost, our funds exhausted, all our public revenues sold, mortgaged, and anticipated, vast and endless interests entailed upon our posterity, the whole kingdom sold to usury, and an immense treasure turned into an immense debt to pay; we went out full, but we are returned empty.

But even with Defoe on his side, Harley faced a struggle to get his policy accepted. When he could avoid a vote on his peace moves no longer, he found himself defeated by a majority of one. His policy lay in tatters. But Harley was adamant that he would not be forced from office, and circumvented the Lords’ hostility by creating a dozen peers to back his peace policy, and with it secure the future of the fledgling South Sea Company. Emboldened, he moved against his Whig enemies by charging the Duke of Marlborough and Robert Walpole with corruption over the Army’s accounts, sending Walpole to the Tower.

For Harley it was now imperative to circumvent Parliament and strike a peace deal, whatever the cost. Despite the peace negotiations led by the poet and diplomat Matthew Prior the spring campaign against the French was about to start, with the Duke of Ormonde leading British, German and Dutch forces in Flanders. So the British politicians decided to sabotage their own battle plan. The allied forces were ordered by the leading Tory minister Henry St John, Viscount Bolingbroke, to avoid fighting. Worse still, and with official sanction, via a go-between he revealed the battle plan to the French foreign minister. Then he sent the infamous ‘Restraining Orders’ to the Duke of Ormonde: ‘It is the Queen’s positive command to your Grace that you must avoid engaging in any siege, or hazarding a battle, till you have further orders from Her Majesty.’ Ormonde was in an impossible position: he was the leader of an army which had been forced to keep the peace by not fighting at all. He was not even allowed to tell his allies, but was ordered to make excuses for the attack’s delay, until finally – to the amazement of the allies – the French and British announced their truce.

But the French now advanced on the allied army, capturing town after town, inflicting defeat after defeat on a force which, until the British treachery, had confidently expected to win the war. It was one of the most discreditable episodes in British history. It was peace, but not with honour. In the light of future events it was appropriate that it was on the back of this disgrace that the South Sea Company was launched. Bonfires were lit around the country to celebrate its foundation.

But political and financial interests now started, unnoticed, to spin apart. They were two halves of a lottery ticket which at first sight appeared to join but whose flourishes failed to match. In September 1711, Harley addressed the South Sea directors but, significantly, failed to admit he had abandoned his peace demands for trading settlements in South America. In January 1712, the South Sea directors, secure in their ignorance, informed Harley, now Earl of Oxford, that they wanted to raise an expeditionary force of four thousand soldiers, forty transport ships, twenty men-of-war, plus store ships and hospital ships. Harley, keeping his secret to himself, began to stay away from the directors’ meetings. By September, twelve hundred tons of merchandise lay rotting in London warehouses, awaiting dispatch to the South Seas.

In March 1713, eighteen months after he had conceived the South Sea Company, a peace deal was finally signed at Utrecht. Harley had triumphed over the old generation, steeped in war. But in return for the decades of fighting, Britain had won a comparatively trifling prize: a thirty-year slaving contract, and a licence to send a single merchant ship a year on a direct mission to one of the seven ports where the Company was allowed to set up trading stations, but not to establish settlements: Buenos Aires, Caracas, Cartagena, Havana, Panama, Portobello and Vera Cruz. Britain had won no territorial guarantees near the South Seas as a result of the peace treaty. The war was over, though, and Harley stood at last unchallenged on the political stage.

But the child of Harley’s peace project, the South Sea Company, was in fact becalmed. The next year, seven ships, including the Hope and the Liberty, carried more than 2,500 slaves – voyages financed by the Company raising £200,000 in bonds. But it never made a profit in its cargo of human flesh, not least because the Spanish charged such heavy taxes. Then Queen Anne declared that she had the right to keep a quarter of any profits. But the Company must take its share of the blame for its failure to make money: in 1714 it took woollens to Cartagena, where there was no market for them, rather than to Vera Cruz, where there was, so they were left behind to be eaten by the moths and rats. By default, if not intention, the Company had become nothing more than a financial corporation, a ship to float the national debt. As a trading enterprise, it effectively lay at anchor.

By 1713, Harley, too, was going nowhere. The political combination of middle-ground Tories he had put together had proved to be a temporary structure without firm foundations. Harley was hemmed in, too, on the other side, by the Tory hardliners in the October Club, whose members drank together in Westminster and proudly took their name from the month in which the strongest beer was brewed. Their constant harassment of the government to try to shake it out of its moderation on occasions ground the Commons’ business to a halt. With the war over, and with credit seemingly restored, Harley could not give his party what it most wanted: clear and decisive Tory leadership. He had not even managed to rid himself of the national debt: by the end of his rule, the government owed another £9 million from the lotteries which Harley had continued to run. Ironically, this sum exactly matched the amount of government debt the South Sea Company had taken over.

The pressure told. Like many a politician, he had found solace in drink. On 25 July 1714 Anne was finally forced to sack Harley from his post. She told the Lords he ‘neglected all business; that he was seldom to be understood; that when he did explain himself she could not depend upon the truth of what he said; that he never came to her at the time she appointed; that he often came drunk; that lastly, to crown all, he behaved himself toward her with ill manner, indecency and disrespect’. She would not reign long without him: she was dead within the week.

The Hanoverian era was upon the country and with it a change in political power. George I had a distaste for the Tories matched only by the contempt he held for a foreign kingdom which could never match his beloved homeland. Harley was to be impeached for ‘high treason and other crimes and misdemeanours’. In contrast, his Whig rival, Robert Walpole, who had been sent to the Tower for corruption, had been handed a route back to office. Before he left his prison, he penned a note to his sister Dorothy:

Dear Dolly,

I am sure it will be a satisfaction to you to know that this barbarous injustice being only the effect of party malice, does not concern me at all and I heartily despise what I shall one day revenge, my innocence was so evident that I am confident that those who voted me guilty did not believe me so.

His enemies should have taken note. Robert Walpole would prove to have a long memory.

CHAPTER IV

Walpole and the Maypole

The most fundamental overhaul ever carried out on the rules governing the way members of the royal family run their business lives was announced by Buckingham Palace last night. In an attempt to ensure that family members do not exploit their position for financial gain, the palace said new safeguards would ensure a ‘complete separation’ between official engagements andcommercial projects. ‘It is entirely in tune with today’s world that members of the royal family should be allowed to pursue careers, including in business, if that is what they wish to do,’ a Palace statement saidlast night.Observer, 8 July, 2001

King George I exhibited his eagerness to take over his new throne by dawdling all the way from Hanover to London. Weeks went by before his pernickety nature was satisfied with the detailed preparations for his forthcoming ordeal. When he finally set out, he made sure he stopped all the way along his route to receive the congratulations which befitted his new status and which put off the point at which he could no longer avoid stepping on to the timber-clad deck of the royal yacht for the sea journey to the grey, cold, inhospitable island which it was now his fate to rule. So disagreeable was this prospect that he clung to Holland as if it was home, meandering through its cities and basking in the receptions he was accorded, so that he did not embark for England until 27 September 1714, nearly two full months after Anne’s death.

The British weather retaliated, responding to George’s preconceived view of his kingdom as a damp and chilly outpost by exceeding his expectations. Dense fog shrouded London on his arrival, drifting ethereally over the waters of the Thames as his yacht neared port, wrapping itself around Wren’s masterpieces and obscuring the soaring cathedral. George could no more make out the spiritual grandeur of the city’s horizon than his bulging blue eyes could penetrate the narrow, twisting streets to glimpse the temporal realities of his subjects’ lives. So slow was his progress that he was forced to come ashore at night. Then he was rowed to Greenwich in his barge to avoid damage to the royal yacht. As he stepped ashore, to be greeted by ranks of fawning politicians, George could just make out the symmetrical splendour of Wren’s seamen’s hospital. But his kingdom was still a mystery. Even when the clinging fog finally relented, and throughout the rest of his reign, it remained so.

On dry land, the torchlit reception which greeted George appeared both to lend some atmosphere to the occasion and to give appropriate recognition to his new-found status. The Whigs, loyal throughout their parliamentary difficulties to the House of Hanover, were there in force to reap their reward. George singled out their standard-bearer, the Duke of Marlborough, for attention, while Harley was relegated to the background, his hopes that the King intended to rule without favourites or party already dead. With George the power of the Whigs would come irresistibly flooding back.

For the leading players in the South Sea drama which was about to unfold, the ground had also shifted. John Blunt had to court the new regime, as he had courted Harley, but Robert Walpole, at the age of thirty-eight was back in power. He held office first as Paymaster of the Forces, and then, within a year, as Chancellor of the Exchequer, posts which allowed him to see at first hand the debts of the nation, and which also gave him a licence to line his own pockets.

Political stability was absent at the start of George’s reign. He was a contingent king, an interloper who had taken the throne after a political battle of wills, not through divine right or the hereditary principle. His presence assured the Protestant succession, but not the warm embrace of his new countrymen. Both sides in this convenient compact eyed each other warily, not knowing quite what to expect; neither felt an emotional pull towards the other. George was an administrative convenience, a fruit grafted on to Anne’s barren reign, a foreigner who would have to win the respect of his citizens, but who possessed neither the charm nor the intellect to do so. Cruelly, the traveller and letter-writer Lady Mary Wortley Montagu noted: ‘The King’s character may be comprised in a very few words. In private life he would have been called an honest block-head.’

This was an exaggeration. George was a complicated man, not clever but not entirely stupid either; idle, but energetic enough to want to rule in his own way without interference, and short-tempered enough to cast out those who did not fall into line. At fifty-four, he was not in the full flush of youth; nor was he handsome, but he more than made up for this with an extraordinary appetite for women which was to make him an object of ridicule in his kingdom – less for his sexual charge per se, more for the way he chose to express it: the objects of his desire were, by common consent, downright ugly. Added to which, there was something positively medieval about his family background. His wife Sophia had once taken a lover, perhaps in retaliation for her husband’s considerable dedication to his extramarital activities. George’s revenge was terrible to behold. The lover, the Swedish Count von Königsmark, disappeared after he was lured to a false rendezvous with his lady. George probably ordered the murder, though he was away in Berlin when it happened. Sophia was divorced and incarcerated in the Castle of Ahlden, near Hanover, forbidden to see her children again. For her, there was no fairy-tale rescue by a handsome prince. For thirty-two years she languished there until her death, while George frolicked with his mistresses.

The two mistresses he brought with him to England were both, in their own ways, improbable recipients of their monarch’s favours. Baroness Eremengarda Melusina von der Schulenburg was tall and bony. She was called ‘the Maypole’ by the King’s subjects; Madame Carlotte Sophia Kielmansegge, fifty and fat, was known as ‘the Elephant’. As a child, the writer Horace Walpole was scared witless by her: ‘I remember being terrified at her enormous figure … [she] was as corpulent and ample as the Duchess was long and emaciated. Two fierce black eyes, large and rolling beneath two lofty arched eyebrows, two acres of cheeks spread with crimson, an ocean of neck that overflowed and was not distinguished from the lower parts of her body, and no part restrained by stays – no wonder that a child dreaded such an ogress!’