Today we are suffering as a result of the Credit Crunch, which as history buffs will recall, bears canny resemblance to the South Sea Bubble way back in 1720. For those who were asleep during their history lessons, in 1720 the Government needed money badly, so the Treasurer created a trading company to raise cash – The South Sea Trading Company.
Britain reckoned it had exclusive rights to the trading routes of the South Seas, modern day South America, so the Government offered the public to buy up shares in the potentially booming company.
The Company was so confident of the profitability of this scheme they promised huge returns, and this launched a buying frenzy, as more and more extravagant rumours spread about the amazing South Sea Trading company. Shares went from £100 to £1000 and more and more regular people ploughed their cash into different companies. Bankers and brokers created more and more firms promising more and more rewards. The most notable firm was just known as “a company for carrying out an undertaking of great advantage, but nobody to know what it is”.
Britain boomed. But alas, confidence inevitably sagged in the market and stocks plummeted. In two months the South Sea Company went back down to £150 a share – banks and goldsmiths were hit by the crunch and even members of the aristocracy went bust as the economy froze thanks to a lack of confidence. The great Isaac Newton even lost £20,000. Dr. Samuel Johnson later called the bankers: “crafty knaves pursued by multitudes of covetous fools”. Britain went bust and the bubble burst.
So in an unprecedented move, the soon-to-be first Prime Minister Lord Walpole took control of the Company and used Government proceeds to restore confidence to the British economy. Here is a short exert from Charles Mackay’s Madness of Crowds, which explains the fallout. It’s an eerie echo of today: “In every town in the Empire petitions were adopted, praying vengeance on the legislature upon the South Sea directors, who, by their fraudulent practices, had brought the nation to the brink of ruin. Nobody blamed the people’s degrading lust of gain, which had swallowed up every nobler quality in the national character, or the infatuation which had made the multitude run their heads with such frantic eagerness into the net held out for them by scheming projectors.
This was never mentioned – the people were hard-working, ruined by a gang of robbers, who were to be hanged, drawn and quartered without mercy.” So there is hope. We returned from the brink in 1720 thanks to some cunning work by a brave Prime Minister and some harsh retribution doled out on the bankers. But can it work 289 years later? Today’s City bankers should just be thankful that administration of being hung, drawn and quartered is taboo these days.