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Book review: The South Sea Bubble and the Invention of Modern Capitalism

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Dick Pitt reviews The South Sea Bubble and the Invention of Modern Capitalism

Three issues led to the South Sea Bubble of 1720. At that time, England’s silver-based currency was vulnerable to clipping—literally shaving off slithers of either silver or gold—and counterfeiting. For a time, traders would also buy silver coins in London, melt them down in France and exchange them for more gold than they had in the first instance. The result was a shortage of coins.

At the same time, the idea of joint stock companies was slowly taking root. Seven men launched The South Sea Company in 1711 in order to trade mainly in slaves with Spanish America, and to hunt for Spanish treasure. It proved highly successful. With the renowned success of the now 100-year old East India Company, it encouraged both investors and speculators to consider buying shares in both companies.  

The third issue was government debt. England went to war with France in 1689, and in 1702 with Spain. The government desperately needed money, so it took out loans. The more desperate the times, the better terms the lenders could get. The national debt was zero in 1693. By 1713 it stood at £40 million. Two yeas later half the nation’s income was being spent on interest.

At its core, like most speculative bubbles, there is a sensible idea. The South Sea Company would swap bonds—government debt—for its own shares. The bondholder would do this if the share price was high enough. The government liked the idea of paying less for the money it borrowed. The company’s leaders knew there was a profit to be made by swapping over-priced shares for government bonds.

For a time, it suited all parties for the share price to rise, so the company used a series of methods to ensure this happened. For example, people could buy shares at only a tenth of the value up front, with the rest of the money lent by the company. In addition, the company was allowed to buy its own shares. People such as Isaac Newton sold his shares in April 1720, then looked on as the price continued rising, presumably regretting selling so early. He bought shares in June at double the price he had sold them for in April.  

The company had no trading history, and was poor at the bloody business of slave trading. There was no possibility that its business activities could justify these high prices. By August 1720, the price of its shares was £1,000. By the end of the year, it had slumped to £100, never to rise above it.

Robert Walpole, who became prime minister in 1721 on the back of the controversy, broke up the company into manageable parts. The Bank of England took a part share, and its notes became currency. Walpole made sure that the bonds remained in private hands rather than the government’s. Importantly he chose to put his political interests first and protect his fellow Whigs, many of whom had taken bribes in the run-up to the bubble, ahead of justice meted out by an angry public. 

Thomas Levenson writes like a storyteller with anecdotes thrown in apparently at random. But his main political point is that Walpole’s decision to allow the Bank to issue paper money, and the offloading of government debt, were important in extending England’s military power and the subsequent enslavement of millions of people.

Levenson’s book is incredibly well-researched, with 72 pages of notes and a 23-page bibliography, adding a depth of detail to this fascinating piece of the history of British imperialism. 

The South Sea Bubble and the Invention of Modern Capitalism. Thomas Levenson. Head of Zeus. £20.00

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