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

Money, or the lack of it, was still the driving force in politics, and with the presence of the royal mistresses it became even more so. Their grasping nature, the rapidly acquired debts of the new monarch and the shattering of the government Exchequer through war combined to form a corruption which wrapped itself around the very institutions of state. In this the strangeness of King George I also played a part. He was a foreigner, who spoke little or no English; an outsider, who had brought with him not just his own women to share the royal bed, but his own placemen who staffed his court and who needed to be bribed. An American businessman, William Byrd, attended court in the hope of being appointed Governor of Virginia and was advised to bribe one of the leading German courtiers, while the future Duke of Chandos oiled his way through the early years of George’s reign in order that his brother could become cashier of the Salt Office, dishing out 250 lottery tickets here, 400 guineas there. In 1715 he gave £3,000, an enormous sum, to Madame Kielmansegge, followed by a ring for her daughter. The Maypole, in particular, saw that she could make serious money out of her status. She sold the patent for copper coinage in Ireland for £14,000 and she also sold peerages. George’s arrival on the throne had accentuated the establishment’s tendency towards corruption.

The King’s mistresses also played their part in overturning the established political order, to promote the men who were to prove susceptible to the overtures of the South Sea Company. The catalyst for political change was the legal obstacle the two consorts faced in their desire to make their mark on British society, a desire which began to undermine, insidiously, Walpole’s return to office. The mistresses wanted to acquire the status which would be the true sign that they had been accepted by their adoptive country, that their foreign accents and their physical unattractiveness would no longer be the butt of jokes. They considered that the best social defence they could gain against such cruelty was to become aristocrats. But the Act of Settlement of 1701 prevented them from receiving titles or any position of profit under the Crown.

This did not, however, prevent them from working out a cunning way round the difficulty. Madame Schulenburg decided to become naturalised, and campaigned to be granted an Irish title. So it was that the Maypole was transformed into the Duchess of Munster. This merely spurred her rival for the King’s affections into a fury of action. The Elephant too became naturalised, and after much trumpeting of her cause was rewarded with the tide Countess of Darlington, though not until 1722. Here was the formal recognition that the Maypole and the Elephant stood at the pinnacle of society. But it didn’t entirely work. The mistresses were too comic, the King too foreign, for the country to stand in awe. Indeed, the King’s preference for these women was just too alien for popular taste, as the balladeers made clear in scatological vein:

At St James’s of late

On a great bed of State

A dismal Disaster did happen;

For Munster’s good Grace

In her Brunswick’s Embrace,

was taken indeed, but not napping.

But, alas! In this Hurry,

While with too much Fury,

The rampant old lecher embrac’d her

Her Ladyship’s Weight

(which we all know is great)

Brought down on ’em both, the Bed’s Tester.

In the face of such ridicule, the attainment of titular aristocracy was never going to be enough to sate the mistresses’ ambition. The Maypole continued her campaign for social acceptance, deciding that an Irish title was not enough and that she wanted an English one instead. Her preferred route was to exploit the jockeying for position among the ambitious politicians in and around the government.

She had several men to choose from, all of them eager for power. Charles, the third Earl of Sunderland, was a court man to the tips of his well manicured fingers. It was in his blood: he was the son of a minister to three kings and connected through marriage to perhaps the greatest family of them all, the Marlboroughs. He was cunning and clever, self-possessed and rich; he spoke French fluently, and floated easily through the European courts; indeed, he lived and breathed court life, at ease with himself and with greatness. But Sunderland, though he could offer George a window on the world which the introverted king could not see for himself, was not the only Whig with ambitions. James Stanhope, who later became the first Earl Stanhope, was already a master of foreign diplomacy, the war hero who had fought valiantly in the War of the Spanish Succession as commander of the British forces and who had been imprisoned for a year. Politically, he was the friend of everyone, but he was committed to no one.

Sunderland and Stanhope were ranged against Charles, the second Viscount Townshend, who had been appointed by George as his first minister. He had none of Sunderland’s sophistication: indeed, upon his retirement a decade hence he would become known as ‘Turnip Townshend’ because of his passion for experimental farming. But what he lacked in finesse he made up for with hard work, notably as a commissioner negotiating the union with Scotland and as an ambassador to the Netherlands.

Townshend’s key political ally was his brother-in-law, Robert Walpole. Walpole, like John Blunt, was physically unattractive. He was short and stout, and had a large head. At first glance, his features appeared to be coarse – a double chin, bushy black eyebrows and a thick lower lip. His eyes were large and wide-spaced, giving him an air of openness, even vulnerability. He played on his looks by affecting the demeanour of a blunt-speaking, unsophisticated Norfolk squire, even munching his little red homegrown apples during debates in the House of Commons. He had let it be known that he always opened his gamekeeper’s letters before any official communication. But appearances were deceptive. Walpole was equally at home in London as he was in the country, relishing the life of a city socialite, and he would rise smoothly through the political ranks. He was a political amphibian, a countryman with Whig ambitions, a Westminster politician with roots, a man who quickly saw the merit of using his rustic image as a camouflage for ambition. His political brain was as sharp as Huguenot steel. He would not have been so trusted had he been lean.

From a modest upbringing, Walpole came to amass riches on a scale never fully explained, living in splendour and taste on his country estate at Houghton, where he built a small palace, and at Orford House, his Chelsea residence, which overlooked the Thames. More than £100,000, the equivalent of many millions today, passed through his bank account when he became Paymaster-General, the most lucrative post in government. Ten acres were added to the grounds of his Chelsea house, where he kept brightly coloured parakeets and goldfinches, and gifts of jewellery were showered on his friends and relatives.

In 1715, George’s yearning for his beloved Hanover played a crucial role in helping to shift the balance of power in Sunderland’s direction, and away from Townshend and Walpole. With the King now abroad, ambition had to travel too. Sunderland was quick off the mark, his speed belying his affected casualness. He set off for Aix-les-Bains with alacrity, covering his tracks by claiming the need of a health cure. Conveniently, it was only a short distance from there to Hanover and the King. So while Sunderland was able to plot with his ruler, helped by the whispering campaign led by the King’s mistresses, the brothers-in-law were stuck at home, without any hope of influencing the King: Townshend and Walpole were now effectively in exile, with the country run from Europe.

On the King’s return, a journey much delayed by bad weather, the duo were sacked in favour of Sunderland and Stanhope, who were to be the government’s two key figures throughout the year 1720. Walpole had been outmanoeuvred this time not by the Tories, but by his own party.

He was in the wilderness again.

John Blunt, surveying the new political landscape, had wasted no time in pressing his cause with George I. He was keen to make the South Sea Company part of the new establishment, and with it secure his own place in society. In order to do this, he wanted to bring some famous names into the Company’s orbit. In place of Harley, he persuaded the Prince of Wales himself to become its Governor in 1715. It was a recognition both of the changed political times and of Blunt’s desire for the royal imprimatur. For the Prince, it was a useful way of making money, given the high running costs of being royal.

George I, too, was amenable to Blunt’s overtures and acquired a large shareholding in the South Sea Company for himself. It did not take long for the Company to change its composition: in the first year of the reign, leading Tory politicians were voted out as directors by the shareholders, to be replaced by Whig businessmen. Even the Duke of Argyll, a Whig and a loyal Hanoverian, became a director of the South Sea Company – an extraordinary step for a man of such social standing and a sign of Blunt’s ability to capture the upper echelons of society with his schemes. But there was another sign, too, of the Company’s future direction: half a dozen of its directors, including Blunt, had begun their careers with the original Sword Blade Bank, and had an eye on manipulation of the markets rather than any genuine interest in trade. The deaths, three months apart in 1718, of two great men among the directors, the sub-Governor Bateman and the Deputy Governor Shepheard, tipped the balance of the Court of Directors firmly towards the Sword Blade men, and away from the experienced financiers.

In 1715, to cement its place in the Hanoverian order, the Company had declined the interest payments which were due from the government for servicing the national debt. This had saved the Treasury more than £1 million, and in return the Company was allowed to increase its capital size by the same amount, so that it now had several thousand shareholders, more than either the Bank of England or the East India Company. In the same year, for the first time, its share price reached par, the value at which the stock had been launched under Harley. Four years later, in 1719, the Company was also allowed, through an Act of Parliament, to convert a further part of the government’s debt into shares. Unlike Harley, who had merely converted the floating debt (the debt that could be paid off if the Treasury could afford it), the government proposed to sell off that part of the debt to which it was committed for years ahead: this was called the funded, or ‘irredeemable’, debt. By transferring its subscribers to a stock-market holding in the Company, this new small-scale conversion scheme aimed to remove the burden on the Treasury created by the lottery of 1710. Two-thirds of the annuitants eventually took up the offer, and under the terms of the deal the Company agreed to lend the government more than half a million pounds. As a reward, the Company was allowed to sell extra stock for itself, on a rising market, to increase its reserves of cash.

By 1719, therefore, the Company’s capital size had risen past the £12 million mark – and this was financially absurd. In the previous two years, forty-five ships had carried a total of thirteen thousand slaves for the Company under the slaving contract, but it had still not made a profit. Nor had it made any money on its direct trade with South America. Yet, paradoxically, the financial health of the Company, as the dispenser of half the entire joint-stock capital in the country, was vital to the economic security of the nation. And it readily embraced this nonsensical reality: its desire to develop the Sword Blade Bank, from which it had emerged, grew stronger than its attempts to sell its goods abroad. Robert Knight, the general manager of the bank, was appointed as the Company’s cashier and became the main conduit between the two sides of the operation, his advancement a tangible sign that the Company was more eager to pursue its role as the holder of the national debt than as a trading concern.

Even as its trading base shrank to nothing overseas, the Company’s political horizons grew wider. Its domestic ambitions were reflected in its plan to move into a magnificent flat-fronted building on the north-east corner of Threadneedle Street. More than thirty windows, on three levels, enabled the directors in South Sea House to look down on to the financial district at its feet; there was a dark basement below the iron railings at the front, while a colonnaded entrance made a grand statement of its claim to be an accepted part of the establishment. Appropriately, its rival, the Bank of England, stood at the other end of the street.

To the Bank’s chagrin, the connection between the Company and the government was close, and becoming closer. John Aislabie, as Chancellor of the Exchequer, appointed Francis Hawes, one of the Company directors, to be Receiver-General of Customs; four directors were also MPs, and another six had posts that had connections with the public purse. These men provided a key link between the Company and the institutions which controlled public money. The South Sea Company had become a fully fledged member of Britain’s political, financial and social order, and, in recognition, the Company’s newly launched ship was called The Royal Prince. The Prince himself, and his courtiers, were treated to a lavish party on board, to celebrate the ship’s impending departure for the South Seas in search of the bottomless riches on which the Company’s foundation was supposedly predicated.

It should have been a big moment in the Company’s history. But the royal establishment which Blunt was courting was far from united. The King’s frequent absences in Hanover had made him ever more intolerant of his son, suspicious as he was that the Prince had been manoeuvring against him, and resentful of having to return to the foreign land he had inherited against his better judgement. All the signals pointed towards there being a familial explosion, and, given the curious nature of George’s family history, it duly came in the happiest of circumstances.

In November 1717, the Prince’s beautiful wife Caroline of Anspach had given birth to a baby boy, her fifth child. Instead of celebrating, however, the King and his son fell out in spectacular fashion. It was, strictly speaking, the King’s right as ruler to name the boy’s godparents; but the Prince wished to do so himself, and chose the Queen of Prussia and the Duke of York. The ensuing fall-out was dramatic. The King banished the Prince and his wife from the palace without their children. A few weeks later, the baby boy died. The Hanover family seemed genetically programmed for disaster.

The political impact of the schism was immediate: George had, through his intemperate actions, forced his son into internal exile. A rival court was established, with the Prince choosing Leicester House at St Martin’s in London as his base, barely a mile from St James’s Palace. No longer was the King in total command of all he surveyed. This time, dissent had a focus, a rival power base in which the thwarted ambitions of the powerless and the embittered could find expression. The political tensions were reflected most obviously in the South Sea Company’s make-up, with the rivalry between the King and his son reflected in the efforts made by their respective candidates, in 1718, to be elected to the Court of Directors. Walpole and Townshend’s candidates stood against the government, and by implication the King, with some success. Harley’s brother Edward wrote: ‘the King’s people … have lost it for sub- and deputy-governors of the South Sea, and those who are reckoned of the Prince’s party have carried it’.

Crucially, the row between the King and his son led directly to George I, as an act of revenge, assuming the role of Governor of the South Sea Company. It was the highest accolade the ambitious directors could have sought for their upstart venture, but it was dangerous territory for the monarchy. It signified not just royal approval of the enterprise, but royal entanglement too. By his presence at the head of the company, the King had signalled that the business was to be trusted. But the obverse might be proved, too. If for any reason the Company failed, where did this leave a monarch unloved by his people, assailed by Jacobite incursions, and viewed with intense suspicion, if not animosity, by members of a dispossessed Tory party? The Company, launched by the Tories, had effectively been reinvented as a Whig project, with the King as its guarantor.

The omens were not good. War with Spain broke out again at the end of 1718, and with it the South Sea Company’s last hopes that it would live up to its motto and travel ‘from Cadiz to the dawn’, that it would trade with faraway lands and bring home booty to compare with the Elizabethan adventurers’. Instead, its seven overseas trading posts were seized by Spain. The Royal Prince, its hold crammed with cargo, lay at anchor and could not sail for Spanish America. A full two years were to pass before she made her maiden voyage, to Vera Cruz, at which point the Spanish fleet attacked her: so she gave up and languished in port for half a dozen years more. A second ship, named The Royal George in honour of the King, was launched in 1718 but war prevented her, too, from setting sail. The Company now looked not to a faraway dawn for inspiration, nor to Cadiz, though that was nearer the mark.

Instead, it was the ambitious economic theories of the Scottish outcast John Law that helped to change the destiny of the South Sea Company. Under his leadership, France was transforming its fortunes with a speed and skill that George’s indebted government, and the South Sea Company of which he was now head, could only admire and fear. ‘I wish to God,’ complained a despairing British diplomat in France to an under-secretary back home, ‘there may be something done quickly to put our affairs in order before it is too late; and that the great men of Britain would think of something else than merely of tripping up one another’s heels.’

The unthinkable had happened – France was winning the peace. War had been replaced by something which proved to be far more dangerous for Britain: economic rivalry.

CHAPTER V

Who Wants to Be a Millionaire?

Britain’s financial markets are in the grip of an unprecedented stock-buying fever as punters rush to buy almost any share with a whiff of the Internet about it. The City has been caught on the hop and cannot cope with the surge in demand. People report spending up to a day waiting for a free line to some stockbrokers and then having to wait up to an hour more before it is answered. The City regulator is right to warn people of the risks, but that won’t be enough to stem this get-rich-quick boom as punters everywhere stake their claims to some of the instant fortunes made by Internet start-up companies.Guardian, 11 December 1999

After the Scottish Parliament’s rejection of his dream of introducing paper money, John Law had escaped once more across the Channel, only pausing in his flight, or so it is recounted, to win an estate worth more than £1,000 a year by gambling. True or not, it would have been of little comfort to him, for there is no doubting the severity of the setback Law had suffered. He was clearly condemned to a life of permanent exile unless the union of England and Scotland failed or the Act of Settlement, which excluded the exiled Catholic James II from the throne, was overturned, for only a political sea-change, it seemed, could now grant him passage home. This was painful enough, but equally hurtful was the knowledge that his cogent analysis of the benefit paper money could bring to a country might not now be put into practice. Law was not only physically in exile, he was in intellectual exile too, fated to be a perpetual academic rather than a participant, forever denied the chance to put his certitude into practice.

So sure was Law that his intellectual vision was accurate, however, that he determined to succeed despite the hand he had been dealt. Just as he had developed a system at the gaming tables that had made him personally wealthy, so he was certain that his system for a whole country would bring it riches too. Neither activity, in his own mind, was a gamble: in both cases his system was a certainty. An enlightened ruler, he was sure, would share his vision, and accordingly he had set out across Europe to try to find a country more amenable to his project. If his homeland could not see the merits of his proposals then he would show what it was missing: as a patriot, he had done his best to convince his own people to take up his ideas.

For nine years, from 1706 to 1715, Law had trudged across Europe, vainly trying to convince a succession of monarchs and ministers to back him with their money. Until 1713, the closest he came to success was in Turin, where he suggested to the Duke of Savoy, Victor Amadeus that he should be allowed to establish a state bank in Savoy-Piedmont. He designed a bank that would issue paper notes and also act as a trading corporation to buy and sell property. It would lend money at a fixed rate of interest and the gold and silver in the ducal treasury would act as its reserves, backing, in tangible form, the authority of Law’s paper currency, which would bear the royal coat of arms. To guard against inflation, Law ruled that there must be a strict ratio between the notes in circulation and the reserves. While the bank would have the power to print notes, he declared that the vaults must never hold less than three-quarters of the value of the paper money it had released into the world beyond.

Victor Amadeus was easily swayed by Law and took little convincing, but the project ran into immediate political difficulties. The powerful finance minister objected, and when the Duke was forced to back down Law once more packed his bags and took off in search of a country that would adopt his system: first, it is said, to Vienna to try to convince the Emperor of his plans; then to The Hague, where he applied his mind, successfully, to making as much money as possible from the state lotteries; finally, in the summer of 1713, he reached France with a fortune put at more than 1.5 million livres. (There were about 14 livres to the £.)

France would be the making, and the breaking, of John Law and his project. The country’s economy was, if anything, in a worse state than England’s. Two wars lasting more than a quarter of a century had left it crippled. In 1715, after the War of the Spanish Succession had ended, the national debt was as high as three billion livres, and the budget rejected all attempts to persuade it to balance. The failure added another eighty or ninety million livres a year in interest payments to the runaway overspend, and the government was living hand to mouth. It could keep going only by anticipating its revenue, begging for advances on future taxes it would levy – and already taxes had been committed three or four years in advance. Louis XIV was forced into the humiliation of borrowing eight million livres from one of the country’s leading financiers, Samuel Bernard, for thirty-two million livres’ worth of credit notes. So dire was its predicament that a full two-thirds of the nation’s running costs were met either by the time-honoured practice of selling offices or by borrowing money. But the King could not pay his creditors and they, in turn, could not pay anyone else. One contemporary commentator wrote that ‘the shortage of credit was universal, trade was destroyed, consumption was cut by half, the cultivation of lands neglected, the people unhappy, the peasant badly dressed and nourished’. Some of the country’s representatives abroad had not been paid regularly for years, nor had they much prospect of ever seeing their money: the finance minister suggested it would take eleven years to balance the books. Indeed, so parlous was the state of the nation’s finances that the Council of Regency, presided over by the Duke of Orleans, which ran the country on the death of Louis XIV, had even considered declaring the state bankrupt.