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

A Very English Deceit

The Secret History of the South Sea Bubbleand the First Great Financial Scandal

Malcolm Balen

Dedication

Karen, Mischa and Katya

Contents

Cover

Title Page

Dedication

Prologue

Postscript

Bibliography

Index

Acknowledgements

About the Author

Author’s Note

Copyright

About the Publisher

Prologue

Even the Royal Family has joined the ranks of the dot-com investors hoping to make a fortune from Internet shares. Now it has emerged that the Queen has invested £100,000 in the Internet company getmapping.com. When it floats on the stock market next month, it’s expected to be valued at £40 million, so the Queen’s stake will be worth £1.2 million. But there’s growing concern about how successful investments in such stocks will be. An increasing number of City experts believe the Internet bubble will soon burst. Indeed many are comparing it with the first time a shares bubble fuelled by frenzied speculators burst.

Daily Mail, 20 March 2000

CHAPTER I
The Dome

It could be fair to describe what happened at the turn of the millennium as the Great Silicon Valley Swindle, a popular delusion that will take its place in economics textbooks alongside the Dutch Tulip Mania of the seventeenth century and the South Sea Bubble of the eighteenth. Investors appeared convinced that venture capitalists were capable of generating extraordinary returns on technology and consumer Internet companies. The effect was to drive up prices to ridiculous levels for companies that scarcely had business plans, let alone revenues or profits. The scale of subsequent value destruction is colossal. Most of the money that was invested in those twenty-four months is likely to be lost. When apportioning blame, it would be tempting to single out the venture capitalists. They, after all, are the ones who invested the money in business plans for ideas as ridiculous as online dog food.Financial Times, 20 August 2001

London, 1710.

The city is reaching for the heavens.

More than fifty steeples point towards the sky, raised arms above the dark, narrow streets whose dwellings are so low they appear to be at prayer. From the Thames-side terrace at Somerset House, there is a breath-taking sight – the architectural clutter of later centuries is not yet upon us. Lead and stone, cupolas and towers, crosses and columns stand exuberant against the sky. There is, perhaps, a gentle breeze, carrying with it the smell of sea-coal from the north of England which the bargemen are unloading on the river.

Downriver lie the two domes of Greenwich Hospital, identical twins along the water’s edge, each with a supporting army of columns. To the east, in Cheapside, more than two hundred and twenty feet up, a bronze weathervane in the form of a dragon swings gently in the wind. Below it stands the pencil-slim elegance of St Mary-le-Bow. As the church rises beyond its square tower it narrows sharply: a temple of simple columns yields to a balustrade, above which, tapering together like fingers, a dozen stone bows are gathered. The church soars skyward, ever slimmer, until the steeple touches the dragon’s feet. For the elegance of its buildings, and above all for this, the most beautiful of his creations, the city gives thanks to the genius of Christopher Wren, whose brilliance has led him down a path of magnificent architectural variety in the rebuilding programme he has inspired since the Great Fire. He is a mathematician first and foremost, but over the years he has trained himself as an architect, absorbing style and simplicity from France, Italy and Holland, but showing a uniform adherence to the influence of no one but himself.

No sooner has he completed St Bride’s in Fleet Street with an octagonal stairway, four steps high, than he tops Christ Church in Newgate with a square one; to St Magnus Martyr he gives an octagonal tower, and to St Vedast in Foster Lane a concave crown; most dramatically, he allows St Martin to rise above Ludgate with an octagonal tower topped by the longest, slimmest steeple of them all: a black lance to pierce the sky.

But its sharpness on the eye is blunted by the great grey shield of St Paul’s Cathedral which curves towards the clouds. As yet unfinished, its incompleteness serves only to emphasise human frailty and humility which its eventual perfection will deny, sealing off the worshippers, separating them from direct contact with God. The church roof is open to the elements and inside workmen are still perched on scaffolding in the chancel, making mouldings above the vaulting. In a large hut, sculptors are at work on statues which will stand in the space before the church – Queen Anne in white marble on a black pedestal, and round her the kingdoms of her domain. Sir Christopher himself can be seen, clambering into a basket to be hauled skywards to inspect the progress of this monument to his brilliance, an ascent he makes three or four times a week. It is his lifetime’s work. From start to finish, he has overseen his cathedral’s rise from the ashes of the city.

The dome to which he is travelling has an inner and an outer part, constructed like two layers of an onion skin so that if Wren was somehow able to peel away the outer covering, a cupola would still remain, resting on eight piers whose arches form the Whispering Gallery where the dropping of the lightest coin of the realm can be heard more than a hundred feet away. And it might be appropriate on this day, as Big Tom strikes the hour in the cathedral tower, if a coin was dropped in this temple, if the outer skin of the roof was peeled away, to reveal the true object of England’s worship. Not St Paul, carved above the central pediment and the great oak doors, nor God himself, but money.

For below Wren’s feet, among the busy maze of streets where some of the capital’s thousand hackney carriages and chairs jolt past, the early signs of financial madness can be detected. This is the kingdom of the ‘moneyed-men’, the stockjobbers who buy and sell their shares in the coffee houses, which are the heart of London’s new financial district, where not just coffee but tea, chocolate, sherbert, sherry and pale ale are consumed and where news spreads as quickly as the Great Fire itself.

Coffee houses are the most popular public places in London: there are more than two thousand of them, the preserve of men who wish to while away the hours free of the opposite sex. Inside, there are long tables and benches, a roaring fire in the hearth, lines of clay pipes and newspapers spread out to read. There is a warm, secure fug of smoke, and drink, and chatter. It is a male club, where the species can protect its own and ignore the world outside, especially the despairing women who once campaigned ‘against coffee and The Grand Inconveniences to their Sex from the Excessive Use of that enfeebling Liquor’.

The terrain of the moneyed-men, marked out by the coffee houses, is small but profitable, a series of narrow passageways called Exchange Alley, which lie within the maze of narrow streets captured at the intersection of Cornhill and Lombard Street. A minute and a half is all it takes to walk through this lively, noisy financial centre, hemmed in on each side by tradesmen and barbers, lawyers and insurance clerks. On the second floor of Wren’s favourite coffee house, Gangway’s, there is a sale room where the jobbers ply their trade from a rostrum between the hours of eleven and three. Nearby, just down the street, is an upstart bank, grown lean and sharp from the days when it was an import company bringing in the Huguenot steel, which was favoured by swordsmen over its English rival. The bank has expanded through land speculation in Ireland and stands on the brink of power, aiming now to cut down its two rivals, the young Bank of England and the East India Company. In this respect, its name does not disguise its intentions. It is the Sword Blade Bank.

The buying of stocks and shares in Exchange Alley is, as yet, in its infancy. The trade was carried out previously in the Royal Exchange, a stockjobber’s shout away on the other side of Cornhill, but this discomfited the traders in the country’s more conventional merchandise, such as their largest export, wool. So the broken moved to ’Change Alley, as it is known, taking with them their ceaseless noise. Here, the practitioners are already versed in the notion of buying and selling more than they can afford. It is the fashionable new form of gambling. There is a growing sense that shares will go ever upward, like one of Wren’s perfectly balanced spires.

The dealers are raucous and seedy, unscrupulous and rough. Their aim, in the saying of the day, is ‘to sell the bear’s skin before they have caught the bear’: they are selling stock before they have paid for it in the hope that they will be able to meet the cost from the profit – or ‘bubble’ – on the deal. One anonymous observer on a journey through England in the year 1710 watches the moneyed-men of’ Change Alley at work, and reports on the scene to a friend abroad in a series of letters; in one, he comments: ‘You will see fellows, in shabby clothes, selling ten or twelve thousand pounds in stock, though perhaps he mayn’t be worth at the same time ten shillings, and with as much zeal as if he were a director, which they call selling a Bear’s-Skin; and these men find Bubble enough to get bread by it, as the others do by gaming; and some few of them manage it so as to get pretty large estates.’

So the city-dwellers go about their money-making schemes, heads down and voices loud, and ignore Wren’s masterpiece as if it has no connection with their lives. And the truth is that it has little: the cathedral belongs to a world which they do not inhabit; it is a beautiful object of refinement and contemplation in the midst of the daily dirty struggle to survive: to earn enough to eat, drink and keep clean. As they walk, London’s citizens keep close to the walls of buildings, fearful of the water which cascades out of crude spouts from each roof; more fearful still of the sewage pumped into the gutters of the street when the houses’ wells are full.

The pavements are crammed with stalls, sheds and signposts; where they end and the road begins is hard to tell: there are no kerbstones to separate the path from the carriageway, although on the wider streets there is a line of posts and chains or wooden palings. The wide expanse of Tottenham Court Road, stretching north, has been paved for only a few years. London is not all that Wren would wish. ‘Natural beauty is from geometry,’ he has declared, ‘consisting in Uniformity and Proportion. Always the true Test is natural or geometrical Beauty.’ But the city is untidy, disorganised, unsymmetrical, full of chaotic winding streets that snake round and disappear. It is a jumble, a jungle, a teeming maze where the people live cheek by jowl – half a million of them, nearly a tenth of England’s population, crammed together in a city that has not yet spread. Piccadilly, to the west, marks its furthermost boundary.

But the capital is not just a commercial and trading centre. It is a gambler’s paradise. In the inns, bets are taken on brutal, bloody sports: bull-baiting, bear-baiting and cock-fighting, the vicious pastimes of a nation frequently at war. One German visitor to London in 1710 notes, with surprise, the aggressive nature of the English crowds:

In the afternoon we went to see the cockfighting. This is a sport peculiar to the English … a special building has been made for it near ‘Gras Inn’. The people, gentle and simple, act like madmen, and go on raising the odds to twenty guineas and more. It is amazing to see how the cocks hack with their spurs. Their combs bleed terribly and they often slit each other’s crop and abdomen with the spurs … they belong to great Lords who have brought them from Kent and other places and win a great deal of money by their wagers. Towards evening we drove to see the bull-baiting. First a young ox or bull was led in and fastened by a long rope to an iron ring in the middle of the yard; then about thirty dogs, two or three at a time, were let loose on him. Then they brought out a small bear and tied him up in the same fashion. As soon as the dogs had at him, he stood up on his hind legs and gave some terrific buffets. But the worst of all was a common little ass who was brought out saddled with an ape on his back. The ape began to scream most terribly for fear of falling off.

Later the same traveller watches two men fighting for money at the Bear Garden at Hockley in the Hole, on the outskirts of town by Clerkenwell Green, cheered on by spectators who crowd into the galleries of raised seats.

They went for each other with sword and dagger and the Moor got a nasty wound in his hand, which bled freely. When they had attacked each other with broadsword and shield, the good Moor received such a dreadful blow that he could not fight any longer. He was slashed from the left eye right down to his cheek to his chin and jaw with such force that one could hear the sword grating against his teeth. Straightaway not only the whole of his shirt front but the platform too was covered with blood. The onlookers began to cheer and threw down vast quantities of shillings and crowns.

London is a brutal, dirty, lively, joyous place. Plague and fire, and civil war, have done their worst and departed; fear of God is subsiding. Life is rushing back.

But there are warning signs that the established order can still be threatened, that England may not yet be built on firm foundations. Behind the remains of the Palace of Whitehall, torched by a recent fire, lie the marks made by the scaffold where Charles I was beheaded. And despite the splendour of Wren’s church-building, the view from Somerset House is deceptive: a thin layer of dirt has gathered upon his stonework. Already his masterpiece is tarnished, blackened by the smoke from the sea-coal, shipped from the northern mines. The coal, named from its journey rather than its origins, is taxed when it is unloaded at the Port of London in order to raise money to rebuild the city. But it is slowly eating into it instead, discolouring its buildings, clogging the nostrils of its people, coating their tongues and clouding their eyes.

Wren’s professed aim was to defy the corrosive elements and stretch across the centuries, ignoring fashion to appeal to an ideal, immutable form of design. He insisted: ‘Architecture aims at Eternity; and is therefore the only Thing uncapable of Modes and Fashions.’ His great vision was of a cathedral dome that would be grander than any other, capping not only St Paul’s, but his career. It would signify, architecturally, the might of the capital and the grandeur of England. It would lift spirits. And it would celebrate the stability of the country, its monarchy and people, after the trials of the Civil War and then the Glorious Revolution of the previous century.

For all his splendid dreams, however, it was as hard for Wren to raise money for his great project as it was to quarry the blocks of stone for the cathedral’s construction. The Act of 1670 which allotted St Paul’s four and a half pennies in tax for every chaldron, or twenty-five hundred-weight of coal, brought it only some £4,000 a year, and in 1677 the cathedral’s commissioners were forced to mount an appeal to the nation. Even the monarch was enlisted to the cause. Sermons were preached around the country, collections taken, and gradually the ordinary people sent in their pennies and their pounds to the rebuilding fund. Still, the greatest building the country had seen was in danger of being left uncompleted – until the workmen themselves came up with the solution: they suggested that their wages should be considered as a loan to the building project, and they would work instead for the interest on the money they were due. By the end of 1697, more than £24,000 was owed to them, including £1,500 to the master carver Grinling Gibbons. The cathedral slowly rose.

Thirty years after he first started, Wren’s task is nearly done. Above the Derbyshire lead and Kentish timber of his dome, a ball and lantern top out his mighty work, three hundred and fifty-five feet above the streets. His is the largest, most beautiful cathedral in England, a fitting homage to the patron saint of the City of London whose wealth has helped make the country one of the grandest on the globe. Out of a total of three-quarters of a million pounds, it has cost Sir Christopher Wren £2,000 of his own money, a small fortune for the times.

Soon, however, such a sum will appear to be a trifle. The financial world is about to be turned upside-down in the streets below.

Ten years after Wren completed his cathedral, to mark his vision of eternity, a city which had survived plague and fire to prosper as a mercantile centre – a city which, to the untrained eye, had risen gloriously from its ashes – was beginning to live only for the moment, chasing financial liberation by buying shares in extraordinary new projects that had no foundation. The Age of Reason, which held that science could explain all, was giving way, indeed was being unceremoniously elbowed aside, by the Age of Insanity. The country was rushing headlong into enterprises founded on little more than an understanding of human greed and corruptibility. By speculating on the stock market, a humble bookseller trading near the cathedral churchyard would win a third of the total cost of building St Paul’s.

An age inspired by the genuine achievement of men like Christopher Wren and Isaac Newton had the misfortune to collide at full speed with the age of the moneyed-men. Hundreds of projects were launched in these vertiginous times. Here was invention, inspiration and downright fraud, all merging in a pot-pourri of frenzied activity. Schemes arose thick and fast with just enough scientific credibility to fool the layman. ‘Projectors’ – as such speculators were known – were held to want money

For a wheel for perpetual motion

For extracting silver from lead

For carrying on a trade in the river Oronooko

For trading in hair

For paving the streets of London

For furnishing funerals to any part of Great Britain

For insuring and increasing children’s fortunes

The country appeared to have discovered a new industry with new rules of credit which held out the prospect of immense riches, removing traditional class barriers to wealth. It was an exciting, vibrant era in which huge fortunes could be created overnight by a simple share launch.

One of the most famous projects was launched by James Puckle, who designed a flintlock machine-gun for making a ‘total revolution in the art of war’. The Puckle gun was mounted on a tripod and fired nine shots a minute, one after the other and three times faster than a soldier’s musket. Puckle had two versions of his design. One weapon, intended for use against Christian enemies, fired conventional round bullets. The second, designed to be used against the Muslim Turks, fired square bullets, which were believed to cause more painful wounds.

But some of the schemes were not half as sensible as this. There was even said to be a ‘Company for carrying on an undertaking of Great Advantage but no-one to know what it is’. Crowds of investors were reported to have surrounded the company’s office in Cornhill, snapping up shares at £2 each. Some of the schemes were swindles, others were hoaxes – not with a view to making money but simply to illustrate the country’s madness. Spread by greed and by the newspapers’ zeal in reporting daily on the changing prices of shares, the new way to make money without having to do an honest day’s toil appeared to be obsessing the whole country.

Speculators scrambled to invest in the thousands of new projects, launched in the wake of the grandest scheme of them all, a scheme which would grow to such a size it seemed as if there was not enough money in the kingdom to support it. Some would make or lose up to a quarter of a million pounds in the madness of 1720, when shares in some ventures rose as high as the cathedral itself. Few investors kept their feet firmly on the ground; many felt under pressure to join in as they watched their neighbours climbing a new social ladder through the sudden acquisition of riches. Politicians, the clergy, landowners and the poor all joined in the scramble. Social mobility appeared to race out of control, with barriers between the classes seemingly removed by the chance of easy money. Women, defying convention, invested too – to claim, albeit briefly, an equal place in society. A there porter in Exchange Alley was said to have made £2,000 – ten times the annual income of an entire well-to-do family and a hundred times his own likely yearly earnings. Investors flocked to Britain from Holland and France. The canton of Bern in Switzerland made a corporate decision to invest. The streets of Exchange Alley heaved with desperate souls seeking to place their money in the mushrooming schemes. Fortunes, it appeared, could be made overnight.

The story of the events of 1720 holds more than just the elements of greed and pathos. It was, to those on the edges of the affair, so ridiculous that it inspired a generation of satirists to make fun of the human condition. And it was cruel, causing suffering among many families across the land. Ultimately, it showed England at its most corrupt, exposing the poisonous underbelly of the monarchy, of the ruling classes and of the elected politicians.

The three actors in the drama would be John Blunt, the aspiring son of a Kent shoemaker; John Law, a Scottish gambler; and Robert Walpole, a scheming Whig politician from Norfolk with an ambition as large as his girth. Blunt and Law would, in very different ways, lead the search for the alchemy that would overturn the vast debts of two nations and fill ordinary people’s pockets to overflowing. From 1710 to 1720 their careers would collide, and the impact would change the political and economic direction of two great countries, England and France. One was a shallow schemer, who conned a nation; the other a brilliant economist, far ahead of his times, whose intellectual theories blinded him to reality; but both would be condemned as charlatans when their inventions failed. On the backs of their triumphs and disasters, Walpole would, through cunning and ability, rise to unparalleled political power.

When reality returned, as inevitably it would, the old industries of shipping, farming and land-ownership, too dull for the exciting times of the stock-market ride, would once more be seen to be the places to put hard cash. The same would be true of the trade of which Wren was the architectural master: bricks and mortar would come back into favour. Those who had transferred their allegiance to the share market would be left to bemoan their fate and mourn their thumping losses. The Duke of Portland quietly applied for, and was granted, the governorship of Jamaica. A more ignominious position for a member of the eighteenth-century aristocracy can scarcely be imagined. But he needed to draw a salary.