What was the South Sea Bubble? What was “Law’s Swindle on the French”?
These questions were inspired by a passage in J.M. Roberts, The History of Europe, page 214
So began the rise of paper as a substitute for coin, in domestic as well as in international commerce. In the eighteenth century came the first European paper currencies and the invention of the cheque. Joint stock companies generated another form of negotiable security, their own shares. They were long traded in London coffee-houses before the London Stock Exchange acquired a name and location in 1773. By 1800 similar institutions existed in many countries. New schemes for the mobilization of capital and its deployment proliferated in London, Paris and Amsterdam. Lotteries and (at one time) tontines enjoyed a vogue; so did some spectacularly disastrous investment projects, such as the notorious English South Sea ‘Bubble’, or Law’s swindle on the French. But all the time the world was growing more commercial, more used to the idea of employing money to make money, and was supplying itself with the apparatus of modern capitalism.
The South Sea Bubble
A speculation mania that ruined reckless British investors in 1720.
The bubble, or hoax, centered on the fortunes of the South Sea Company, founded in 1711 to trade (mainly in slaves) with Spanish America, on the assumption that the War of the Spanish Succession, then drawing to a close, would end with a treaty permitting such trade.
The company’s stock, with a guaranteed interest of 6 percent, sold well, but the relevant peace treaty, (Utrecht) made with Spain in 1713, was less juicy than had been hoped. It had an annual tax on imported slaves and allowed the company to send only one ship each year for general trade.
The success of the first voyage in 1717 was only moderate, but King George I of Great Britain became governor of the company in 1718, creating confidence in the enterprise, which was soon paying 100 percent interest. In 1720 there was an incredible boom in South Sea stock, as a result of the company’s proposal, accepted by Parliament, to take over the national debt. The company expected to recoup itself from expanding trade, but chiefly from the foreseen rise in the value of its shares. These did, indeed, rise dramatically. Those unable to buy South Sea stock were sweet-talked by overly optimistic company promoters or actual swindlers into bad investments.
By September the market had collapsed, and by December South Sea shares had crashed, dragging the government down with them. Many investors were ruined, and the House of Commons ordered an inquiry, which showed that at least three ministers had accepted bribes and speculated. Many of the company’s directors were disgraced. The South Sea Company itself survived until 1853, having sold most of its rights to the Spanish government in 1750.
The Mississippi Bubble
A financial scheme in 18th-century France that triggered a speculative frenzy and ended in financial collapse. The scheme was engineered by John Law, a Scottish adventurer and economic mystic who was a friend of the regent, the Duke d’Orléans.
In 1716 Law established the Banque Générale, a bank with the authority to issue notes. A year later he established the Compagnie d’Occident and obtained exclusive privileges to develop the French territories in the Mississippi River valley of North America. Law’s company monopolized the French tobacco and African slave trades, and by 1719 it held a complete monopoly of France’s colonial trade. Law also took over the collection of French taxes and the minting of money.
Public demand for shares in Law’s company increased sharply, sending the price for a share from 500 to 18,000 livres. Law hoped to retire the vast public debt accumulated during the later years of Louis XIV’s reign by selling his company’s shares to the public in exchange for state-issued public securities, which shot up in value shortly after, kicking off a speculative mania that spread a general stock-market boom across Europe.
The French government took advantage of this situation by printing increased amounts of paper money, which was readily accepted by the state’s creditors because it could be used to buy more shares from Law’s company. This carried on until the glut of paper money led to runaway inflation, and both the paper money and the public securities began to lose their value.
Profits from the company’s colonial adventures were slow to materialize, and the tangle of the company’s stock with the state’s finances ended violently imploded in 1720, when the value of the shares plummeted and set off a wider stock market crash in France and abroad. The crash was not directly attributable to Law, but he was the obvious scapegoat. He fled the country in December 1720. The enormous debts of his company and bank were consolidated under the state, which raised taxes to clean up the mess.
The Normal Times 