Welcome back to the Deep Dive. Today we are opening
a file that sits right at the intersection of
high finance, political corruption, war, and
frankly, the absolute darkest sides of human
nature. It really is an incredible story. It
has everything you could want. It's got a mania
that gripped an entire nation. It involves the
most famous scientist in history losing his shirt.
And it's about a company that became, for a time,
the most valuable entity in Britain. Despite,
and this is the key part, isn't it? Despite having
almost no realistic prospect of doing the business
it was supposedly famous for. Exactly. That's
the core paradox of the whole affair. We're talking,
of course, about the South Sea Company and the
infamous South Sea Bubble of 1720. The Bubble
of 1720, yes. A moment that, you know, completely
changed British history. And I think for most
people, when they hear South Sea Bubble, they
think, OK, a bunch of people in wigs bought some
stuff. The price went up. The price went down.
People lost money. It sounds like a pretty standard
stock market crash. Right. It gets lumped in
with tulip mania. You know, it's one of those
crazy things people did in the past. It's almost
treated like a historical curiosity. But looking
at the sources we have today, which is this really
deep dive into the company's history, its founding,
the actual trading records and the parliamentary
inquiries that followed. This isn't just a financial
story. Not by a long shot. Not at all. I mean,
the finance is just the engine. The story is
about what that engine was running on. It's a
story about the slave trade. It's a story about
bribery that went all the way up to the king's
inner circle, even his mistresses. And it's a
story that actually reshaped the British government
for a century. It really did. And to understand
the scale of this, you have to realize that this
wasn't just a bad day on the market. This was
a national trauma. It was an event that ruined
thousands and thousands of families from, you
know, aristocrats down to their servants. And
it implicated the highest levels of government.
It brought down the chancellor, the exchequer.
And it led Isaac Newton, the man who literally
discovered gravity, the smartest person of his
age, to say that famous line, I can calculate
the movement of the stars, but not the madness
of men. Which is just so telling, isn't it? If
Newton can get swept up in it, what chance did
anyone else have? None at all. So our mission
today is to unpack this. How did a company with
no real business become the most valuable thing
in Britain? Why did the government not only let
it happen, but actively help it happen? Right.
And this was the part that surprised me when
I first looked into it. How on earth did this
company survive for another hundred years after
the crash? That's the crazy part. I always assumed
it just vanished. Poof. Gone. No, it didn't.
It stuck around like a ghost, haunting the London
markets for over a century. A zombie company.
A zombie company. I like that. So let's rewind.
Let's set the stage. We are in the early 18th
century. What is the vibe in Britain? What's
going on? The vibe is expensive. To put it mildly,
we need to go back to about 1710, 1711. Britain
is a rising power, no doubt, but it is under
immense, and I mean immense, financial strain.
Wars are not cheap. No. And Britain was fighting
two of them at the same time. You had the War
of the Spanish Succession, which was basically
a world war of its time. It dragged in France,
Spain, the Holy Roman Empire. Everyone. A massive
continent spanning conflict. And at the same
time, you had the Great Northern War simmering
away in the background, which tied up resources
and attention. So the government is just hemorrhaging
money. To pay for soldiers, ships, supplies.
All of it. Exactly. And the way they had been
paying for it was a complete mess. The sources
described the national debt not as one single
thing, but as a chaotic piecemeal arrangement.
You had different government departments just
borrowing money on their own terms. So there
was no central treasury, no single credit card
statement for the country. Precisely. It was
total chaos. The Navy would issue these things
called Navy tickets to sailors instead of cash.
So you're a sailor, you've been at sea for two
years, you get back to port, and you're handed
a piece of paper. An IOU from the government.
An IOU. And if you need to buy bread or pay your
rent, you have to sell that ticket to a loan
shark on the street for maybe half its face value.
The government's credit was effectively junk.
So nobody trusts that these IOUs will ever be
paid in full. Absolutely not. It was a crisis
of confidence. And in 1710, a man named Robert
Harley becomes the chancellor of the Exchequer.
He's the guy in charge of the money. And he looks
at the books and he realizes they are in a very...
very deep hole how deep the government owed about
nine million pounds in this kind of unsecured
floating debt which in 1710 money is an astronomical
sum it would be like trillions today it felt
completely insurmountable it's a huge number
and the really scary part was there was no income
allocated to pay it off it was just this Big,
scary number hanging over the country's head,
getting bigger all the time. Now, normally, if
the government needed money or needed to manage
its finances, they would go to the Bank of England,
right? You'd think so. The Bank of England was
already around at this point. Yeah, it was established
about 16 years prior in 1694. But here's where
the political friction comes in. And this is
so crucial to why the South Sea Company even
exists. Right. It's not just a financial story.
It's a political one. The Bank of England was
a Whig institution. The Whigs were one of the
two main political parties. Robert Harley, our
new chancellor, he was a Tory. Ah, so you have
this intense political rivalry baked into the
financial crisis. It's a perfect storm. Harley
cannot go cap in hand to the Bank of England
because he doesn't want to give his political
enemies more power, more leverage over the government.
They would have him over a barrel. So he needs
an alternative. He needs a Tory bank, a financial
institution that is loyal to his party and his
government. He needs to create a counterweight.
a new way to fund this debt that completely bypasses
the Whigs, and that's where the schemers come
in. Enter John Blunt. Now, Blunt is a fascinating
character. He isn't some highborn aristocrat.
He's a scrivener, a professional writer, a dealer
in financial paper. He was a director of a very
ominously named outfit called the Hollow Sword
Blade Company. The Hollow Swordblade Company.
That sounds like a front for a pirate crew or
an assassin's guild. It sounds incredibly ominous,
doesn't it? And it sort of was. It was originally
a company that, yes, made swordblades. But by
this time, under Blunt's guidance, it had pivoted.
It had effectively become an unofficial bank.
A shadow bank, really. A bit of a rogue operation.
Very much so. Blunt was a financial engineer.
He was one of those guys who understood how to
move paper around to create value or at least
the appearance of value. He was a master of the
game. So Harley, the politician, and Blunt, the
financier, get together. They look at this nine
million pound debt mountain. What is their big
idea? The idea is what we now call a debt for
equity swap. This is the core mechanic you absolutely
have to understand to get the South Sea bubble.
It sounds technical, but it's actually a brilliant
piece of financial sleight of hand. OK, let's
unpack this. Break it down for us. How does it
work? OK, so imagine you are a creditor. You're
holding one of those government IOUs, one of
those Navy tickets. The government owes you 100
pounds. But because everyone knows the government
is broke, if you tried to sell that IOU on the
street, maybe you'd only get 55 pounds for it.
It's trading at a huge discount. Because nobody
thinks I'm actually getting my full 100 pounds
back. I'm holding a toxic asset. You're nervous.
You'll never see the full amount. So Harley and
Blunt come to you and say, tell you what. Turn
in that IOU to our new company, the South Sea
Company. We will take that dodgy debt off your
hands. Okay. In exchange, they say, we will give
you shares in our brand new South Sea Company,
and we will value your debt at the full 100 pounds.
So I trade my dodgy government debt, which is
worth maybe 55 quid, for 100 pounds worth of
stock in this new shiny corporation. On paper,
I've just doubled my money. Exactly. And what
happens on the government side is that instead
of owing money to thousands of angry individual
creditors like you, the government now owes all
that money, the whole $9 million to one single
entity, the South Sea Company. It consolidates
the debt. It's much cleaner for the government
to manage. Much cleaner. And the government agrees
to pay the company a fixed interest rate on that
total debt every single year. They promise them...
568 ,279 town annually, which works out to 6
% interest plus a little extra for expenses.
Okay, so the company gets this steady, reliable
stream of income from the government, basically
from tax revenue, which they can then use to
pay dividends to their new shareholders. Correct.
It's a beautiful solution in theory. It takes
thousands of angry creditors and turns them into
happy shareholders in a patriotic new venture.
For the government, it locks in the debt at a
manageable interest rate. It cleans up the books.
But 6 % isn't exactly a get -rich -quick scheme.
That's just a bond yield to create excitement,
to get people to actually hand over their debt,
to create a bubble. You need a story. You need
a kicker. And that is where the South Sea part
of the name comes in. That was the genius of
the marketing. To make these shares irresistible,
the government granted this new company a monopoly
on all trade with the South Seas. The South Seas,
which at the time meant South America. All of
it. The entire Spanish Empire in the Americas.
The land of gold, silver, the Incas. El Dorado.
Exactly. Potosi, the Silver Mountains. In the
popular British imagination, South America was
just a treasure chest waiting to be opened. The
public looked at the Spanish Empire and thought,
if we can just get a piece of that action, we
will all be millionaires. It's a fantastic story,
but there was a catch, a pretty significant catch.
A massive, glaring catch that somehow everyone
decided to ignore. Who controlled South America
in 1711? Spain and Portugal. And who was Britain
in the middle of a brutal, expensive war with?
Spain. There you go. So the government is granting
a monopoly on trade with a continent that is
entirely controlled by an enemy nation that you
are currently fighting a war against. So the
actual realistic prospect of any trade happening
was zero. In the immediate term, absolutely zero.
The founders, Harley and Blunt and the rest,
they knew this perfectly well. The source material
is very clear on this. They knew there was no
money for trade. They knew the ships couldn't
sail. So what was the point? The objective was
never really about trade, not at first. The objective
was to consolidate the debt, make the founders
wealthy through fees and their own stock holdings,
and secure a powerful position with the government.
The trade with South America part was just the
shiny object, the marketing hook to dangle in
front of the public. It's the wrapper on the
product, the sizzle, not the steak. It's pure
marketing. But you know what? People bought it.
They were willing to suspend their disbelief.
They thought, well, the war has to end eventually.
And when it does, we have the monopoly. They
were buying the future potential, not the present
reality. And to be fair, the war did end. The
Treaty of Utrecht was signed in 1713. It did.
Peace broke out. So now the South Sea Company
says, OK. Time to cash in on our monopoly. And
this is where we get into the grim reality of
what this business actually was. Because when
they finally got permission to trade, the big
prize wasn't for gold or silver or tobacco. No.
And this is the dark heart of the story that
often gets glazed over when people talk about
the financial side of it. The main prize that
Britain won in the peace treaty, which was then
handed directly to the South Sea Company, was
the Asiento de Negros. The Asiento. The Asiento,
which was a contract. a 30 -year monopoly contract
that gave the South Sea Company the exclusive
right to supply enslaved African people to the
Spanish colonies. We really need to pause on
this because often when we talk about financial
bubbles, it's about abstract things, you know,
tulips or dot coms or cryptocurrencies. This
bubble at its core was built on the back of the
transatlantic slave trade. Absolutely. That was
the business model. The contract allowed them
to supply 4 ,800 enslaved people per year. That
was their quota. That was the asset that underpinned
the company's value. And were they expected to
just ship them and sell them? Was that the whole
deal? That was the main part. They were also
allowed to send one ship, just one per year,
which was called the annual ship. It was initially
500 tons, later upgraded to 650. And that ship
could trade general goods, you know. British
wool and cloth at the big trade fairs in Portobello
and Veracruz. So to be clear, the entire legal
business foundation for what becomes this massive
bubble is the trafficking of 4 ,800 human beings
and one ship of textiles per year. That's it.
That's the whole thing. And even that business
was a logistical and financial nightmare for
them. The company had set up these trading posts,
which they called factories, which were really
holding prisons in places like Cartagena, Panama
and Buenos Aires. And they had to source the
people themselves. No, they contracted that out.
They made a deal with the Royal African Company,
which was the main British entity involved in
the slave trade on the African coast, to actually
source the enslaved people for them. And the
source material we have mentions the human cost
here pretty starkly. It does. It gives the cold,
hard numbers. It estimates that over the course
of roughly 25 years, the company transported
somewhere in the region of 34 ,000 people. 34
,000. And of those 34 ,000 who were forced onto
the ships, about 30 ,000 survived the voyage.
So 4 ,000 people died on the ships, a mortality
rate over 10%. Yes, an 11 % mortality rate. The
source notes in a really chilling phrase that
this was considered relatively low for the middle
passage at the time, which is a horrific statistic
in itself. Right. But it represents thousands
of lives lost, treated as nothing more than inventory
spoilage on a corporate balance sheet. And from
that cold, hard business perspective, which is
how these directors were looking at it. Was it
at least profitable? Were they making money from
this horrific trade? This is one of the great
ironies of the entire story. No. It wasn't. For
the most part, it was largely unprofitable. They
were committing these atrocities, and they weren't
even making good money on it. How is that possible?
If they had a monopoly, where did all the money
go? Friction. And a terrible deal structure.
First, the Spanish authorities on the ground
hated them. Remember, Britain and Spain were
bitter enemies five minutes ago. Now these British
traders are showing up in their ports, so the
Spanish impose heavy import duties. The company
had to pay a tax on every single slave they brought
in. Okay, so that eats into the margins. Big
time. Plus, the ownership structure of the Asiento
contract itself was terrible for the company.
Who else was involved? Well, under the terms
of the treaty, they had to give 25 % of all their
profits to the King of Spain. The King of Spain
was a business partner. He was a silent partner.
And originally, Queen Anne of Britain also took
a quarter share, though she later renounced hers
and gave it back to the company. But when you
add up the taxes to the Spanish crown, the bribes
to local officials, the high mortality rates,
and the sheer logistical cost, the margins were
either razor thin or just plain negative. Unbelievable.
So if the slave trade wasn't making money, what
about that annual ship? The one ship a year with
all the goods. Ah. Now, that was where the real
money was, but not legally. The annual ship was
basically a cover for a massive smuggling operation,
industrial -scale contraband. The treaty said
one ship, 500 tons. But what they would do is
they would pack that ship to the gills with way
more than they allowed quota. And once it docked
in Portobello or Veracruz at night, smaller support
ships would sail in from British -held Jamaica
and secretly reload it. So they were basically
selling the same ship's capacity 10 times over
tax free. Exactly. They were just flooding the
Spanish colonies with British manufactured goods,
completely undercutting the official Spanish
merchants. Which I assume the Spanish government
didn't particularly appreciate. They were absolutely
furious. It was a constant source of diplomatic
tension. The company would often refuse to present
its accounts to the Spanish king because obviously
the books would show they were cheating him out
of his share of the profits. This tension just
got worse and worse and actually was a major
contributing factor to another war later on,
the wonderfully named War of Jenkins' Year in
1739. So let's just summarize the business reality,
say, around 1718. You have a deeply unprofitable,
morally bankrupt sleer of trade, a side hustle
and smuggling that's causing endless diplomatic
headaches, and that's it. This is not a company
that should be the darling of the London Stock
Exchange. Not at all. It was a mediocre business
at best. It was basically a government bond wrapper
with a smuggling problem. But you have to remember,
the stock price isn't always about the business
reality. It's about the story. It's about the
hype. And the story gets a massive turbo boost
in 1719. Yes. And for that, we have to look across
the English Channel to France. What's happening
in France? A man named John Law. He was a Scottish
economist, a convicted murderer, a gambler, a
duelist, a real larger -than -life character.
He'd fled Britain after killing a man in a duel
and somehow managed to become the financial wizard
of France. Okay. And Law had started something
called the Mississippi Company. The Mississippi
Company. I've definitely heard of this. Another
famous bubble. It was the mirror image, the French
equivalent of the South Sea Company. He had consolidated
France's massive national debt into this company,
which supposedly held a monopoly on trade with
the French territory of Louisiana. And the share
price in Paris was going vertical. People were
becoming millionaires overnight. And the British
are watching this from across the water. They
are watching with extreme jealousy. I mean, deep
national envy. They are seeing their old rivals,
the French, seemingly getting rich beyond their
wildest dreams and solving their national debt
problem at the same time. And the South Sea directors,
John Blunt and his crew, they think we can do
that. We can do that, but bigger and better.
So this jealousy, this sense of competition leads
to the grand scheme of 1720. The takeover of
the entire British national debt. Right, because
up to this point, they only managed that initial
nine million chunk. Now they want it all. They
go to Parliament and they propose taking over
all the unconsolidated national debt, about 30
million more. That is a staggering amount of
money for the 18th century. It's a huge percentage
of the entire national economy. It's the whole
shooting match. And the Bank of England, the
old Whig institution, sees this happening and
gets very, very nervous. They realize if the
South Sea Company pulls this off, they become
the dominant financial power, not just in Britain,
but maybe in the world. The Bank of England would
become irrelevant. A footnote. So the bank decides
to fight back. They'd try to outbid them. A bidding
war for the right to manage the government's
debt. It was intense. The Bank of England went
to Parliament and offered a huge payment to the
government to win the contract. But the South
Sea Company came back over the top. They offered
what was effectively a bribe well, a payment
to the public purse of 7 .5 million pounds. Wait,
hold on. They offered to pay the government $7
.5 million just for the privilege of taking on
all this debt. Yes. How on earth can they possibly
afford that if their actual business in South
America wasn't making any money? That is the
magic question. And the answer is the key to
the whole bubble. The only way they could afford
to pay the government $7 .5 million was if their
stock price went up. Way, way up. Okay, walk
me through the math on that. How does that work?
Okay, so think of it this way. The company needs
to issue new shares to give to the holders of
government debt. If the stock price is low, say,
100 pounds per share, they have to issue a lot
of shares to cover that 30 million and debt.
Right. A lot of paper. But. If they can get the
stock price high, say 500 pounds or 800 pounds
a share, they only have to issue a relatively
small number of shares to buy up that same 30
million of debt. So they have leftover shares.
Exactly. That leaves them with millions of pounds
worth of extra authorized shares that they don't
need for the debt swap. They can then sell those
extra shares on the open market for cash. And
that cash is what they used to pay the $7 .5
million to the government. So the entire scheme,
the whole financial model, was explicitly designed
to create a bubble. It relied on the stock price
skyrocketing. It's an engineered bubble from
day one. They needed a mania. If the stock price
stayed flat, the company was instantly bankrupt
because they couldn't make their payment to the
government. The whole thing is a self -fulfilling
prophecy or it was nothing. But to get this deal
approved, they needed Parliament to say yes.
And you'd think some MPs would look at this and
say, hang on, this seems incredibly risky. This
whole thing is built on thin air. Which is why
they didn't just rely on clever financial arguments.
They relied on good old fashioned corruption,
massive systemic top to bottom corruption. The
sources mentioned these things called bribe shares.
How did that work? This is devilishly clever.
If you just walk up to a politician and hand
him a bag of gold. Yeah. That's bribery. Yeah.
It's illegal. It's risky. It leaves a paper trail.
All right. It's crude. Very. So Blunt and his
team did something much more sophisticated. They
would go to a powerful member of parliament or
a government minister and say, I'm going to put
your name down in my secret ledger for, say,
5 ,000 pounds worth of South Sea stock. You don't
have to pay for it now. We'll just hold it for
you on credit. So they have zero risk. No skin
in the game. Zero risk. Then they'd say. Later,
when the stock price goes up, you can sell it
back to us at the new higher price and you just
keep the profit. It's a risk -free bet. If the
stock goes up, they get a pile of free money.
If the stock goes down, they lose nothing because
they never paid for it in the first place. Precisely.
But what this really does, the genius of it,
is it perfectly aligns the politician's personal
financial interest with the success of the bubble.
Now that politician wants the stock to go up,
he will vote for the bill. He will talk up the
company's prospects to his friends. It turned
the government into a hype machine for the company.
It did. And they gave these bribe shares to everyone
who mattered. The chancellor of the Exchequer
himself, John Aislabie, got a huge junk. The
postmaster general, key members of the House
of Lords. They even gave them to King George
I's mistresses. The king's mistresses? Seriously?
Oh, yes. The Duchess of Kendal and the Countess
of Platten. They were nicknamed the Elephant
and Castle. These were the German mythresses
of King George I, and they had immense influence
at court. You couldn't get to the king without
going through them. Giving them shares was a
direct line to the throne. So the fix was well
and truly in. The fix was in. The bill passed
Parliament. The South Sea Company won the contract.
And then the real marketing began. The mania.
This is section four of our story. The mania.
The spring and summer of 1720. The moment the
madness took hold. So give me the numbers. Where
did the stock price start in 1720 and where did
it go? Okay, so in January 1720. Before the big
scheme was approved, the stop was trading around
128 pounds per share. OK, respectable price.
By February, as the bill was being debated, it
hit 175 pounds. Once the bill passed in March,
it jumped to 330 pounds. It's more than doubled
in two months. And it's just getting started.
By May, it's at 550 pounds. And what's driving
this? Is there any actual good news coming from
South America? Did they announce, oh, we finally
signed a new trade deal with Spain? No. That's
the incredible thing. There was zero positive
news from the actual business. It was all rumors.
Extravagant rumors, the source calls them. The
company directors would deliberately plant whispers
in the coffee houses of London. What kind of
things? Things like, a treaty is about to be
signed with Spain that will give us free and
unlimited trade. Or... my favorite, they whispered
that Britain was going to trade the Rock of Gibraltar
to Spain in exchange for gold mines in Peru,
which would be handed over to the company. And
none of it was true. Not a word of it. It was
cure fiction. But the public ate it up. A frenzy
gripped the nation. And it wasn't just the rich
elite in London. It was everyone. Peasants, lords,
merchants, scientists, widows. Everyone was trying
to get a piece of the action. It's the fear of
missing out. 300 years before we had an acronym
for it. It really was. You would see crowds of
people in Exchange Alley in London, just desperate
to buy shares. And this incredible success spawned
hundreds of copycats. This is one of my favorite
parts of the story. These are the other famous
bubbles, right? The really absurd ones. The most
ridiculous business proposals you can imagine.
Because the South Sea Company was making so much
money on paper, hundreds of other bubble companies
popped up to try and catch the wave. Give me
some examples. There were companies formed for
turning quicksilver into a malleable metal. There
was one for importing jackasses from Spain. Wait,
literally importing jackasses, as in donkeys?
Literally donkeys. And people bought stock in
it. There was a company for a wheel for perpetual
motion. There was one for improving the art of
making soap. And people were just throwing their
money at these things. They were lining up. But
the most famous one, the one that perfectly captures
the madness, was a company described in its prospectus
as being for carrying out an undertaking of great
advantage, but nobody to know what it is. Give
us your money. We won't tell you what we're doing
with it, but trust us, it'll be great. And the
promoter opened the subscription list in the
morning. took in 2 ,000 pounds of fortune at
the time, and reportedly fled for the continent
by that afternoon with the cash. That is absolutely
incredible. But here's the twist, isn't it? The
South Sea Company, the mother of all these bubbles,
looks at all these little bubbles popping up
around it and gets annoyed. They did. They got
very territorial. They saw these other companies
as competitors for capital. Every pound that
an investor put into a jackass import company
was a pound that wasn't being used to bid up
the price of South Sea stock. So what did they
do about it? They used their political influence.
Remember, they basically owned the government
at this point to get Parliament to pass a new
law, the Bubble Act of June 1720. The Bubble
Act. This law essentially forbade the creation
of new joint stock companies without a royal
charter. Basically, it made it illegal to start
one of these new public companies unless you
had explicit and very hard to get permission
from the king. So they were trying to legislate
their competition out of existence. They were
trying to clear the field so that all the speculative
money in the country would have only one place
to go into their stock. And did it work? It worked
too well. And this is the great, beautiful irony
of the whole story. This is the real aha moment
for the listener. OK, unpack it for me. When
the Bubble Act passed. It caused a panic among
investors who had put their money into those
smaller, now illegal companies. They all tried
to sell their shares at once to get their cash
out. And the prices of those small bubbles collapsed.
Instantly. But here's the thing. Many of these
investors had bought those shares on credit.
They had borrowed money to speculate. When the
small bubbles popped, they were suddenly facing
margin calls. They needed cash, and they needed
it fast to pay their debts. They had a liquidity
crisis. Exactly. And where was most of their
remaining cash tied up? In South Sea stock. Precisely.
So to cover their losses in the small bubbles,
they were forced to sell their South Sea shares.
So by popping all the little bubbles, the South
Sea company accidentally triggered a massive
wave of selling in its own stock. They pricked
the pin that popped their own balloon. That's
almost poetic justice. It's a perfect lesson
in unintended consequences. You can't just destroy
confidence in one part of the market and expect
it not to bleed over into the rest. Confidence
is contagious, but so is fear. So we hit the
peak. Early August 1720. The stock price touches
1 ,000 pounds a share. And even 1 ,000 pounds.
At that price, the company is valued at more
than twice the value of all the land in England.
It's a valuation completely disconnected from
any possible reality. And then the selling starts.
The selling that their own act triggered. It
starts slow at first. Just a trickle. But then
it cascades. The price falls. People who borrowed
money to buy shares get margin calls, forcing
them to sell, which pushes the price down further,
which triggers more margin calls. It's a death
spiral. What were the numbers on the way down?
From 1 ,000 pounds in early August, it was down
to 700 pounds by the end of the month. By the
end of September, it was back down to 150 pounds.
From 1 ,000 pounds to 150 pounds in about two
months. A complete and total collapse. And because
the company itself had been lending money to
people to buy its own shares, this was another
one of John Blood's genius ideas, the company
was destroyed along with the shareholders. Explain
that loan scheme. That seems insane. It was.
To keep the price rising over the summer, the
South Sea Company let you borrow money directly
from them to buy their stock. So you could buy
a share for, say, 500 pounds. But you only had
to put 50 pounds down and the company would lend
you the other 450 pounds. But the collateral
for that loan is the share itself. Exactly. So
when the stock price drops from 500 pounds down
to 300 pounds, the collateral is now worth less
than the loan. The borrower defaults. The company
doesn't get its money back. The borrower loses
their deposit. Everyone goes broke simultaneously.
It was financial dynamite. Banks failed. Goldsmiths
who acted as proto -banks failed. Thousands and
thousands of people were utterly ruined. The
sources talk about suicides, people fleeing the
country. It was a national trauma on a scale
that's hard to imagine. And this brings us back
to Sir Isaac Newton. Poor Isaac. A genius in
physics, but not in market timing. He was actually
in early, wasn't he? He was one of the smart
ones. He was. The story goes that he bought in
early in the year, made a very handsome profit
of about 7 ,000 pounds, and sold out. He cashed
in his chips. But then he had to sit and watch
as the price kept going up and up and up. He
watched his friends and his colleagues, people
he considered not nearly as smart as him, making
absolute fortunes. And the FOMO, the psychological
pressure, it just broke him. He couldn't stand
it. He jumped back in near the top. Oh, no. And
he wrote it all the way down. He lost something
like 20 ,000 pounds. Which in today's money is
millions. A huge portion of his personal wealth
wiped out. And that's when he supposedly made
that famous quote. I can calculate the movement
of the stars, but not the madness of men. It
just shows you, doesn't it? Raw intelligence
is no defense against the psychology of a mania.
None whatsoever. So the bubble has burst. The
country is in financial ruins. The public is
furious. They want heads to roll. They want blood.
They want scapegoats. Parliament is recalled
in December, and the investigation begins. And
this is where all the skullduggery, as the sources
call it, starts to come to light. Because the
directors of the company didn't just lose money
like everyone else. They had been selling, hadn't
they? Oh, of course they had. The insiders, Blunt
and his cronies, had been quietly cashing out
at the top all summer. But the problem for the
investigators was proving it and finding the
evidence of the bribes. The key was the company
cashier, a man named Robert Knight. He was the
one who kept the books. Kept the famous green
book. a secret ledger that had the names of all
the politicians who had been given the bribe
shares. It was the smoking gun. The evidence.
The absolute proof. So Parliament summons Knight.
They want to see the book. Knight flees the country.
He grabs the green book, escapes to the continent,
and disappears. It's widely believed he was tipped
off and allowed to escape by powerful figures
in the government, because if he had testified,
he would have implicated the king, the mistresses,
half the cabinet. the scandal would have brought
down the entire establishment. So he was the
fall guy, but he was allowed to get away to protect
the people at the very top. Exactly. But others
weren't so lucky. John Aselby, the chancellor
of the Exchequer, the man in charge of the nation's
finances, was found guilty of corruption. He
was impeached, stripped of his assets, and locked
up in the Tower of London. Wow. Imprisoned. James
Craggs the Elder, he was the postmaster general
and another key player, he conveniently died,
supposedly of apoplexy, right before he was due
to be questioned. It's widely suspected he took
poison. His son, James Craggs the Younger, who
was also implicated, died of smallpox around
the same time. A lot of very convenient deaths.
And the company directors, the businessmen behind
the scheme. They were rounded up and stripped
of their wealth. Parliament passed a specialized
act just for them. They went through their finances
with a fine -tooth comb and confiscated their
estates. On average, the directors were forced
to give up 82 % of their total net worth to create
a fund to help repay the victims. That's actually
a surprisingly harsh punishment compared to how
we often treat financial criminals today. It
was brutal. They were publicly shamed and left
with just enough to live on, a few hundred pounds
a year, but their fortunes were completely wiped
out. But someone had to clean this mess up. The
entire British financial system was on the brink
of collapse. Enter Robert Walpole. Walpole, a
huge figure. He is a giant of British history.
He is widely considered to be the first de facto
prime minister, though the title wasn't official
yet. He had been a critic of the South Sea scheme,
so he had clean hands. He was brought in as the
first lord of the treasury to fix the crash.
He was the ultimate fixer. The ultimate political
operator. His job was twofold. First, restore
confidence in the economy and prevent a total
meltdown. Second, and maybe more importantly,
screen the king and the royal court from the
scandal. Because if the public found out the
king and his mistresses were personally profiting
while they were being ruined. It could have been
the end of the monarchy. You have to remember,
the Hanoverian dynasty of King George III was
new and not very popular. The Jacobites, who
supported the old Stuart line of kings, were
still a major threat. A massive royal scandal
could have easily tipped the country into civil
war or revolution. So Walpole had to perform
this incredible balancing act, bury the evidence
against the king while still looking like he
was punishing the guilty directors. Exactly.
He screened the king, as they called it. He masterfully
managed the parliamentary inquiry so it didn't
look too high up the chain of command. And he
restored financial confidence by coming up with
a plan to divide the South Sea Company's stock
between the Bank of England and the East India
Company. He stabilized the market. And in doing
so, he made himself the most powerful and indispensable
man in the country. He did. He essentially ruled
Britain for the next 20 years. The South Sea
bubble, in a strange way, created the office
of the prime minister as we know it today. Now,
here's the part that completely blew my mind
when I was reading the source material. You would
think, after all this, the fraud, the collapse,
the suicides, the imprisonment, that the South
Sea Company would be dissolved. just burned to
the ground and its name erased from history.
You would absolutely think so. It was a national
disgrace. But it wasn't. No. And it survived.
How is that even possible? Because it still held
all that government debt. The fundamental financial
structure that Harley created in 1711 was still
there. The company was still the legal entity
to which the government owed tens of millions
of pounds. Walpole just restructured it. He cleaned
house, put in new management, and the company
became a kind of glorified semi -public management
firm for government bonds. So its main job was
just collecting interest from the government
and paying it out as dividends. Did they still
try to do any actual trade? They did. And this
is the tragic comedy of the afterlife section
of the company. Wailing. From South American
slaves to Arctic whales. That's quite a pivot.
A big pivot. They just couldn't give up the dream
of being a trading company. It seems not. They
built a fleet of 12 state -of -the -art whaling
ships, later expanded it to 25. They sent them
up to Greenland to hunt whales. And how did that
go? Let me guess. It was a complete and utter
disaster. It turned out Britain had no experienced
whalers. The company had to hire expensive Dutch
and Danish captains and crews to even man the
ships. And they caught no whales. They caught
very few whales. And the same culture of mismanagement
and corruption that defined the company in 1720
was still there. The costs were out of control.
Over eight years, they accumulated a net loss
of over 177 ,000 pounds on their whaling venture.
Even with government subsidies. They just could
not get it right. They were fundamentally incompetent
at actually running a business. They finally
gave up on whaling in 1732. But the company itself,
the shell of it, the debt management part, it
just kept going and going and going until 1853.
1853. That's Victorian England. That's Charles
Dickens time. We're talking steam trains and
factories. In fact, Dickens actually mentions
the South Sea House in his essays. He describes
it as this sleepy, dusty old office in the city
of London where a few ancient clerks sat around
doing basically nothing, managing the last remnants
of this hundred -year -old debt. So the ghost
of the bubble literally haunted London for more
than a century. It did. A strange long afterlife.
So bringing it all together, what's the big takeaway
here? When we look back at the South Sea bubble
from the 21st century, what should we learn?
I think there are three really big things. First,
it created the template for almost every modern
financial bubble since. The hype, the use of
leverage, the insider trading, the talk of a...
new paradigm that turns out to be a lie. It's
all there in 1720. It's the same script, just
with different costumes and different technology.
Exactly. Second, the political impact was immense.
It cemented the power of the Bank of England
as the government's lender of last resort, and
it created the position of the prime minister.
It literally shaped the modern British state.
And the third. The unintended consequences of
regulation. That bubble act. A law passed by
the company to protect its own monopoly ended
up being the very thing that destroyed it. It's
a timeless lesson that trying to rig the market
often blows up in your face in ways you can't
predict. And there is one final really provocative
thought from the source material that I want
to leave our listeners with. The connection to
America. Yes. The source mentions that the public
outrage over the corruption, the anger at the
king's ministers, the bribery, the self -dealing
it, inspired a series of hugely popular essays
called Cato's Letters. Cato's Letters were written
by two radicals, John Trencher and Thomas Gordon.
They were these fierce anonymous attacks on corruption
and government tyranny written directly in response
to the South Sea Bubble scandal. And who were
the biggest fans of Cato's Letters? The American
founding fathers. Benjamin Franklin, Thomas Jefferson,
John Adams. Those letters were incredibly popular
and influential in the American colonies. They
became a kind of foundational text for the arguments
against British tyranny and for Republican government.
So in a weird, winding, historical way, a fraudulent
stock market scheme in London in 1720 helped
to plant the intellectual seeds for the American
Revolution in 1776. It's the butterfly effect
of history, isn't it? The greed of a few men
in Exchange Alley may have inadvertently helped
to inspire the creation of the United States
and cost Britain its American empire. That is
a lot to process, from debt schemes and royal
mistresses all the way to the Declaration of
Independence. It's quite a... story yeah one
that just keeps on giving thank you for taking
us through it and thank you all for listening
to the deep dive we'll catch you on the next
one