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The South Sea Bubble and the birth of modern financial crashes · Economy & Finance

• 0:00
  Speaker 1: This was the first time. People didn't know what was happening.
• 0:04
  Speaker 2: Do you see these kind of episodes of mania as
• 0:07
  Speaker 2: being intrinsic to capitalism?
• 0:09
  Speaker 1: I mean, one of the things about the Selsky bubble
• 0:11
  Speaker 1: itself is it's almost always told as a morality tale.
• 0:14
  Speaker 3: Look at what greed does for you. It drives you mad.
• 0:18
  Speaker 3: It ruins nations and so forth.
• 0:19
  Speaker 1: You know, it reflects the badness of the individuals involved
• 0:22
  Speaker 1: and the system.
• 0:33
  Speaker 4: Today on the story of money, one of the most
• 0:37
  Speaker 4: notorious financial crashes in history.
• 0:41
  Speaker 2: The scene is autumn 1720 and we're in London in
• 0:45
  Speaker 2: this tiny quaint cobbled street called Exchange Alley. It's now
• 0:50
  Speaker 2: called Change Alley and it's just 10 minutes walk away
• 0:53
  Speaker 2: from the Financial Times headquarters where I am right now.
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  Speaker 2: But it was once a thriving hub where jobbing traders
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  Speaker 2: gathered in Jonathan's Coffee House to buy and sell shares.
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  Speaker 2: And on this particular morning in 1720, it was absolutely
• 1:08
  Speaker 2: chock-a-block because the news has emerged that the South Sea
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  Speaker 2: Company's share price has fallen below £ 150, which is down
• 1:14
  Speaker 2: a whopping 90% from their peak in the summer.
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  Speaker 4: Yes, we are going to be talking about the South
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  Speaker 4: Sea Company. Thousands and thousands have lost their savings. From
• 1:28
  Speaker 4: working class shopkeepers and footmen to some of the great
• 1:31
  Speaker 4: thinkers of the era like Isaac Newton and Edmund Halley.
• 1:35
  Speaker 4: Even King George himself has lost money. And people are angry.
• 1:40
  Speaker 4: They want somebody to blame.
• 1:43
  Speaker 2: And like any good disaster movie, there is a person
• 1:47
  Speaker 2: in particular in the frame who's called John Blunt. And
• 1:52
  Speaker 2: he was the architect of the South Sea Company. He
• 1:54
  Speaker 2: was a shoemaker's son who'd risen up the social ranks
• 1:57
  Speaker 2: to become the head of the most powerful company in
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  Speaker 2: the country. And the crisis he helped to engineer would
• 2:03
  Speaker 2: take 300 years for Britain to pay it off. Yep.
• 2:08
  Speaker 4: The loss of the South Sea bubble debt was actually
• 2:11
  Speaker 4: only paid back in 2015 under Chancellor George Osborne. I
• 2:15
  Speaker 4: remember that. I actually covered it for the FT. But
• 2:19
  Speaker 4: was it fair to blame the entire bubble, this epoch-defining bubble,
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  Speaker 4: on just one person? Or was there something bigger at
• 2:28
  Speaker 4: play here?
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  Speaker 2: So today, we're telling the story of the South Sea bubble,
• 2:32
  Speaker 2: one of the most famous events in financial history, the
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  Speaker 2: world's first international stock market crash.
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  Speaker 4: But it's a funny one, right, Gillian, because it's also
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  Speaker 4: one of the most poorly understood events in financial history, actually.
• 2:45
  Speaker 4: And at its heart, it's not actually about the South
• 2:48
  Speaker 4: Seas at all, really. It's all about government debt, British
• 2:53
  Speaker 4: government debt specifically.
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  Speaker 2: So, Robin loves talking about debt, but we're going to
• 2:58
  Speaker 2: be talking about a very important wrinkle today. So, welcome
• 3:02
  Speaker 2: to the Story of Money with me, Gillian Tett.
• 3:04
  Speaker 4: And me, Robin Wheelsworth.
• 3:13
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• 3:34
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• 3:37
  Speaker 5: to learn more. Investing involves risk. Principal loss is possible.
• 3:48
  Speaker 2: To get into the South Sea bubble, we're joined by
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  Speaker 2: a special guest who's an expert at this. Thomas Leveson,
• 3:54
  Speaker 2: author of many books, including Money for Nothing, The South
• 3:58
  Speaker 2: Sea Bubble, which of course is relevant today. Tom is
• 4:01
  Speaker 2: a professor of science writing at MIT. So great to
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  Speaker 2: have you with us, Tom.
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  Speaker 3: Wonderful to be here. Thank you.
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  Speaker 4: We are going to start our story in 1710. So
• 4:12
  Speaker 4: this is Britain right at the end of the reign
• 4:15
  Speaker 4: of Queen Anne, the last of the student monarchs. This
• 4:18
  Speaker 4: is a nation bubbling with change. It's the eve of
• 4:22
  Speaker 4: the Industrial Revolution. The Age of Enlightenment is on the horizon.
• 4:26
  Speaker 4: And although there's no steam engines or power rooms quite yet,
• 4:30
  Speaker 4: Britain is starting to build a naval trading empire.
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  Speaker 1: This is one of my favorite periods in English slash
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  Speaker 1: British history.
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  Speaker 6: Yes.
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  Speaker 1: You have wild political change. this is one of the
• 4:44
  Speaker 1: periods when there's the most, not necessarily mobility, but possibility.
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  Speaker 1: Britons were trying everything. There was this sort of wild economic,
• 4:52
  Speaker 1: you know, irrational exuberance. Uh, Daniel Defoe, who's a marvelous
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  Speaker 1: character running through this whole period. One of his early
• 4:58
  Speaker 1: works is an essay on projects, which are, you know,
• 5:00
  Speaker 1: all the basic startups and enterprises that people were doing.
• 5:03
  Speaker 1: And this is a huge tome with all kinds of
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  Speaker 1: wild stuff, you know, that people were willing to try anything. And, um,
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  Speaker 1: privately raised money for what they were doing.
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  Speaker 2: Sounds a lot like the Silicon Valley bubble today, doesn't it?
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  Speaker 4: It really is a bit.
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  Speaker 1: And of course, you know, an awful lot of those
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  Speaker 1: would-be enterprises didn't go anywhere in sort of catastrophic fashion,
• 5:24
  Speaker 1: as do most startups today.
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  Speaker 2: So, Tom, this isn't really a story about the South Sea,
• 5:29
  Speaker 2: is it? It's actually about British government debt. Explain to
• 5:33
  Speaker 2: us what was happening with British government debt, because it
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  Speaker 2: was rising fast back then, wasn't it?
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  Speaker 1: This whole story is basically exclusively about figuring out how
• 5:43
  Speaker 1: to pay for today's expenses with tomorrow's money. That is, say,
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  Speaker 1: the creation, in effect, of the first genuinely national debt,
• 5:52
  Speaker 1: which the British started, the English started doing in 1693
• 5:56
  Speaker 1: or so, and then went gangbusters for a very long
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  Speaker 1: time afterwards.
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  Speaker 3: What was driving.
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  Speaker 1: This whole focus on debt was the fact that Britain
• 6:07
  Speaker 1: from the Glorious Revolution on was, you know, just a
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  Speaker 1: belligerent country. I mean, just, you know, hard men in
• 6:16
  Speaker 1: the pubs late at night on Friday, you know, except
• 6:18
  Speaker 1: it was worldwide.
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  Speaker 4: Well, there's that famous map showing the number of countries
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  Speaker 4: that the UK has invaded over the centuries. Right.
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  Speaker 1: So, I mean, just in the numbers, England and Britain
• 6:31
  Speaker 1: fought wars between 1689 to 1815 when, you know, Wellington
• 6:36
  Speaker 1: and Blucher defeat Napoleon. for 76 of those 126 years with,
• 6:43
  Speaker 1: over the course of the century, larger and more expensive
• 6:45
  Speaker 1: military endeavors. So you can see how that would cost
• 6:49
  Speaker 1: a lot of money and the money has to come
• 6:51
  Speaker 1: from somewhere. And starting very early on in this process,
• 6:55
  Speaker 1: England is already, you know, trying to exert more force
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  Speaker 1: than it has ready money to pay for.
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  Speaker 4: So they have to borrow.
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  Speaker 1: And in essence, the South Sea bubble is all about
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  Speaker 1: trying to figure out how to deal with that debt,
• 7:08
  Speaker 1: and then the mountain of, you know, increasing debt that
• 7:11
  Speaker 1: followed between the end of the Nine Years' War and
• 7:16
  Speaker 1: the start of the actual, you know, stock market craziness
• 7:19
  Speaker 1: in 1720.
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  Speaker 2: And of course, the interest rates were pretty high back then,
• 7:22
  Speaker 2: weren't they? And it was all a bit fragmented and messy,
• 7:24
  Speaker 2: from what I understand.
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  Speaker 1: Early British, English and British debt was a complete dog's breakfast.
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  Speaker 2: You know, known by the technical term.
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  Speaker 3: Exactly.
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  Speaker 1: Private borrowers could borrow at a pretty standard rate. It
• 7:37
  Speaker 1: was based on the expected returns from land and so forth,
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  Speaker 1: and very often, five, 6% maybe. The British government tended
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  Speaker 1: to borrow at a time when it most urgently needed
• 7:48
  Speaker 1: the money and needed large chunks of it. So you
• 7:51
  Speaker 1: can imagine the kind of terms that it would take
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  Speaker 1: to get that cash, especially as it wasn't entirely settled
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  Speaker 1: that the government was an entirely reliable creditor.
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  Speaker 2: So, you know, So it's a bit like a payday
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  Speaker 2: borrower kind of forced to get the, you know, any
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  Speaker 2: debt it could find at really high rates.
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  Speaker 3: Yeah.
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  Speaker 1: And, you know, again, when I talk about the national debt,
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  Speaker 1: that is to say, you know, parliament takes over the
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  Speaker 1: sort of financial governance of the nation from the king,
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  Speaker 1: from the monarch.
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  Speaker 4: Yeah. This is after the glorious revolution, right? Where they
• 8:26
  Speaker 4: kind of import a lot of practices from some of
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  Speaker 4: the Dutch city states and provinces and essentially start issuing
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  Speaker 4: bonds by parliament rather than the king himself personally hitting
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  Speaker 4: up some goldsmiths for some money. That's right.
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  Speaker 3: I mean, it's a huge change in the sort of financial.
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  Speaker 1: Structure of the British state because now anything that was
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  Speaker 1: borrowed was guaranteed not by ultimately a single person. Parliament
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  Speaker 1: says we're borrowing this and we as a nation will.
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  Speaker 3: Pay it back.
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  Speaker 1: And it sounds like a little thing, but it's actually
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  Speaker 1: a huge transformation.
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  Speaker 4: In Yeah, I mean, it's the birth of government debt, basically.
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  Speaker 4: I mean, true government debt, rather than some loans or
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  Speaker 4: bonds issued by a city state or a nobleman or
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  Speaker 4: a king who, let's face it, in some cases could
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  Speaker 4: chop your head off if he didn't want to pay
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  Speaker 4: you back.
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  Speaker 2: And of course, there was another thing going on at
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  Speaker 2: the time as well, wasn't there, in that the growth
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  Speaker 2: of the coffee houses in London that was creating an
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  Speaker 2: ecosystem of wannabe traders sharing informational rumours, you had the
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  Speaker 2: Bank of England emerging as well. And so, It was
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  Speaker 2: a very febrile time from what I understand. And if
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  Speaker 2: we start at 1710, which was a crucial year, that
• 9:35
  Speaker 2: was when you also had a big change of government,
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  Speaker 2: don't you? Tell us about that, because the Tories had
• 9:41
  Speaker 2: come in after 16 years of rule by their arch enemies,
• 9:44
  Speaker 2: the Whigs. And they're the ones at the center of
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  Speaker 2: the South Sea company story.
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  Speaker 4: That's right.
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  Speaker 1: Broadly, the Tories were the countryside, the orthodox religious side.
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  Speaker 1: the landed gentry and aristocracy, you know, the party of
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  Speaker 1: all those people.
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  Speaker 3: And the Whigs were more the party.
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  Speaker 1: Of the cities of, you know, mercantile interests. But the
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  Speaker 1: Tories were interested in what became the South Sea Company
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  Speaker 1: and what it offered because the entire financial apparatus of
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  Speaker 1: the nation that had been built up in this sort
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  Speaker 1: of beginnings of the modern age of financial life, had
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  Speaker 1: grown up under the Whigs and were largely controlled by
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  Speaker 1: Whig interests. So the Bank of England, the East India
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  Speaker 1: Company was a lot older, but was again controlled by
• 10:34
  Speaker 1: the moneyed interests and hence sort of more naturally a
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  Speaker 1: Whig-leaning kind of institution.
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  Speaker 2: What modern day Trumpians would call the swamp. You had
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  Speaker 2: the swamp in charge.
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  Speaker 4: Yeah, exactly.
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  Speaker 1: And boy, did the Tories use rhetoric, at least the
• 10:48
  Speaker 1: equal of Mr. Trump's, to describe their opponents. One of
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  Speaker 1: the great things about this age, just for anyone who
• 10:55
  Speaker 1: wants to dive into it, is the level of eloquent
• 10:59
  Speaker 1: vitriol was just so wonderful. I mean, and you have satirists,
• 11:03
  Speaker 1: vicious satirists like Swift and Pope and many others who
• 11:08
  Speaker 1: just were great at eviscerating their rivals. So what happens
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  Speaker 1: in 1710 is the Tories come in after the Whigs sort.
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  Speaker 3: Of over overreach their power.
• 11:22
  Speaker 1: And they're faced with the War of Spanish Succession that's
• 11:26
  Speaker 1: just been piling up, you know, mountains of debt and
• 11:29
  Speaker 1: debt that is incredibly complicated and confused. Because, you know,
• 11:36
  Speaker 1: the government borrowed in emergencies, they would do anything. They
• 11:39
  Speaker 1: sold lottery tickets that turned into interest bearing bonds over,
• 11:43
  Speaker 1: you know, after the prize drawing. There were tons of
• 11:46
  Speaker 1: pensions and annuities. All this heterogeneous mountain of stuff was
• 11:52
  Speaker 1: sitting on the books, consuming an enormous proportion of British
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  Speaker 1: government revenue.
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  Speaker 4: It's around £ 9 million, right? At the time, it was
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  Speaker 4: astronomically high.
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  Speaker 3: Oh, yeah.
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  Speaker 4: Super complicated, as you say.
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  Speaker 1: I mean, there are different measures of inflation over that period,
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  Speaker 1: but multiply by well over 100 to get the appropriate numbers.
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  Speaker 3: So, you know, basically.
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  Speaker 1: Tory government comes into power after all this time and
• 12:16
  Speaker 1: they can't do anything because there's no money and they
• 12:18
  Speaker 1: don't even know how much no money there is. So
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  Speaker 1: the first thing they do is they try and figure
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  Speaker 1: out what the British government owes. And then they try
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  Speaker 1: and figure out, you know, when they realize it's this
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  Speaker 1: mountain and it's often very high interest and it's often
• 12:31
  Speaker 1: on these really onerous terms for the government, irredeemable, long lasting, high.
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  Speaker 3: Interest rates, you know, all.
• 12:37
  Speaker 4: This stuff is out there.
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  Speaker 1: What do you do about it? Well, What you do
• 12:42
  Speaker 1: about it is you try and figure a way to
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  Speaker 1: transform that debt into something that's more manageable. And that's
• 12:47
  Speaker 1: where the South Sea Company comes in.
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  Speaker 4: You consolidate the debts, basically. So you had this, the
• 12:52
  Speaker 4: Tories come into power in 1710. They are faced with
• 12:56
  Speaker 4: a fiscal black hole, I guess, in modern parlance. Nine
• 13:00
  Speaker 4: million pounds worth of debt, but the debts are also
• 13:02
  Speaker 4: super complicated. And they want to consolidate it into wands
• 13:05
  Speaker 4: of homogenous blob.
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  Speaker 2: So at this point, though, there were essentially two key
• 13:11
  Speaker 2: characters who jump in. So one is Sir Robert Harley,
• 13:14
  Speaker 2: who was Chancellor of the Exchequer at the time, formerly
• 13:17
  Speaker 2: the Lord High Treasurer to Queen Anne. And he's the
• 13:20
  Speaker 2: one who decides to set up a Tory-controlled company. But
• 13:23
  Speaker 2: the other crucial person is John Blunt, our anti-hero, who's
• 13:27
  Speaker 2: a really curious character. I mean, he's one of the
• 13:29
  Speaker 2: most influential people in the financial history of the time.
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  Speaker 2: And what he actually does next is going to impart
• 13:37
  Speaker 2: the world for a very long time, but he's also very,
• 13:40
  Speaker 2: very mysterious. I mean, there aren't any biographies about him, really.
• 13:44
  Speaker 2: I mean, he hasn't even got his own Wikipedia page.
• 13:46
  Speaker 4: Which is just sad, right?
• 13:47
  Speaker 2: I mean, social exile.
• 13:48
  Speaker 4: I know, I know. Does he even exist then if
• 13:50
  Speaker 4: he doesn't have a Wikipedia page?
• 13:51
  Speaker 1: Do you have a Wikipedia page, Geraldine?
• 13:53
  Speaker 4: I don't, though. So clearly, you know.
• 13:55
  Speaker 2: I'm sure you will soon, Robin.
• 13:57
  Speaker 1: And someone out there, get on John Blunt. He should
• 13:59
  Speaker 1: definitely be memorialized.
• 14:00
  Speaker 4: Yeah.
• 14:01
  Speaker 2: Get on John Blunt and Robin Wigglesworth. They both deserve that.
• 14:04
  Speaker 3: Amen.
• 14:05
  Speaker 4: Let's stick to John Blunt. He sounds like a far
• 14:07
  Speaker 4: more fascinating character than I ever will be.
• 14:09
  Speaker 3: He is a fascinating character.
• 14:10
  Speaker 1: And I have to confess, I mean, this sort of
• 14:13
  Speaker 1: maybe Stockholm syndrome, seeing as I was shut up in
• 14:15
  Speaker 1: a room with him for so long. But I've come
• 14:17
  Speaker 1: to have a great deal of sympathy for him.
• 14:19
  Speaker 4: You know, he was.
• 14:20
  Speaker 1: you know, he's been characterized as a villain, but I'm
• 14:24
  Speaker 1: not sure that you can attribute malice or a sort
• 14:28
  Speaker 1: of deliberate intention to defraud the nation, which is what
• 14:33
  Speaker 1: he was eventually accused of. You know, the background on him,
• 14:35
  Speaker 1: you know, there is very, very little, you know, primary
• 14:38
  Speaker 1: source material on him. His father was a shoemaker and
• 14:40
  Speaker 1: quite a successful one, ultimately, but, you know, clearly a
• 14:44
  Speaker 1: working class person. And Blunt himself was a, you know,
• 14:51
  Speaker 1: a sort of go west young man figure. He came
• 14:53
  Speaker 1: to London from the hinterland and really without any, you know,
• 14:59
  Speaker 1: significant connections or boost up, set out to make something
• 15:03
  Speaker 1: of himself and did. And at that point, Change Alley,
• 15:06
  Speaker 1: Exchange Alley was, and the financial world it symbolizes was
• 15:12
  Speaker 1: one of the only really immediately accessible places for someone
• 15:16
  Speaker 1: with no capital to come in and start, you know,
• 15:20
  Speaker 1: Doing business.
• 15:20
  Speaker 4: Yeah, he was a scrivener, wasn't he?
• 15:22
  Speaker 6: Yes.
• 15:22
  Speaker 4: Somebody who basically arranged his legal contracts. A clerk, essentially.
• 15:26
  Speaker 1: Yes, he was that, and he apparently was decent at it.
• 15:30
  Speaker 1: Most importantly for him, it appears to be where he
• 15:32
  Speaker 1: made his first contact in the sort of financial world properly.
• 15:37
  Speaker 1: And fairly shortly sort of after his stint or into
• 15:40
  Speaker 1: his stint as a scrivener, he begins to get directly
• 15:43
  Speaker 1: involved with kind of dicey stock market stuff.
• 15:48
  Speaker 4: Weren't they all dicey, though, back in the day? I mean,
• 15:51
  Speaker 4: the jobbers of Change Alley or Exchange Alley were infamously
• 15:55
  Speaker 4: dicey characters. Weren't they chucked out of the royal exchange
• 15:57
  Speaker 4: for being too loud, too boisterous, too everything, essentially? Yeah.
• 16:03
  Speaker 1: I mean, again, I think certainly if you remember the
• 16:07
  Speaker 1: sort of go-go 80s when you couldn't go to a
• 16:10
  Speaker 1: restaurant and have a quiet meal without a table full
• 16:12
  Speaker 1: of young bankers behaving badly. Think of that sort of
• 16:18
  Speaker 1: on steroids in the 1690s.
• 16:20
  Speaker 6: Okay.
• 16:21
  Speaker 4: Well, okay, let's pivot to the South Sea Company and
• 16:24
  Speaker 4: how he starts involved in that. So it's 1710. Tories
• 16:29
  Speaker 4: are back in power and they want to make their mark.
• 16:32
  Speaker 4: They have this unruly pile of debts they want to
• 16:35
  Speaker 4: deal with. Robert Harley, the Lord High Treasurer, turns to
• 16:41
  Speaker 4: John Blunt, wants him to do something essentially. Can you
• 16:45
  Speaker 4: walk us through the South Sea Company, how it was
• 16:49
  Speaker 4: set up? What was the plan?
• 16:52
  Speaker 1: Absolutely. They were really trying to respond to the changes
• 16:57
  Speaker 1: that were already undergoing with this national debt and this
• 17:00
  Speaker 1: profusion of financial instruments.
• 17:03
  Speaker 3: And they had two models.
• 17:05
  Speaker 1: One, they had the Bank of England, which was a
• 17:07
  Speaker 1: banking concern that raised capital and loan money on fractional banking.
• 17:11
  Speaker 1: And the East India Company, which was, of course, you know,
• 17:13
  Speaker 1: this fantastically successful mercantile trading company and then Empire. So
• 17:21
  Speaker 1: those were the two sort of big models for financial powerhouses.
• 17:25
  Speaker 1: And the South Sea Company was an attempt to kind of,
• 17:27
  Speaker 1: you know, mush both of them together into a single entity.
• 17:32
  Speaker 1: So what it was going to do is from the
• 17:34
  Speaker 1: government side, they were trying it out first with, I think,
• 17:36
  Speaker 1: on the order of a million pounds worth of debt.
• 17:39
  Speaker 1: And what they want to do is take in those
• 17:41
  Speaker 1: debts and and exchange them– this is what sort of
• 17:45
  Speaker 1: Blunt offered Harley and then they worked up together– offer
• 17:50
  Speaker 1: the people who handed in their debt shares in the
• 17:53
  Speaker 1: South Sea Company. The British government would continue to pay
• 17:56
  Speaker 1: interest on that debt, but it would be a reduced
• 18:00
  Speaker 1: rate and all these various debts that had been owed
• 18:03
  Speaker 1: to different people suddenly became this one sort of tranche
• 18:07
  Speaker 1: of a million pounds worth of exactly the same kind
• 18:10
  Speaker 1: of note or instrument. advantage for the people who traded.
• 18:17
  Speaker 1: They weren't just trading in their debt and getting a
• 18:18
  Speaker 1: lower interest rate. They got two other things out of it.
• 18:21
  Speaker 1: One is they got the possibility of sharing in profits
• 18:25
  Speaker 1: from the trading half of the South Sea Company. And
• 18:26
  Speaker 1: the other thing is they got liquidity.
• 18:28
  Speaker 2: So just to jump in there, it's a bit like
• 18:30
  Speaker 2: saying to people who might own treasury bonds today, you know,
• 18:33
  Speaker 2: we'll take your treasuries and we're going to swap them
• 18:36
  Speaker 2: for a bunch of, say, Elon Musk's latest speculative dream
• 18:41
  Speaker 2: vision company or whatever. Is that roughly what's going on here?
• 18:44
  Speaker 2: Because it's a pretty novel concept, taking government debt and
• 18:47
  Speaker 2: swapping it for a pie-in-the-sky new venture instead.
• 18:51
  Speaker 1: It wasn't simply pie-in-the-sky because they were doing– the punters
• 18:55
  Speaker 1: got two genuine benefits out of it. As I say,
• 18:59
  Speaker 1: there was the possibility of profit from a trading company.
• 19:01
  Speaker 1: And this was– the South Sea Company was promised a
• 19:05
  Speaker 1: monopoly on British trade with the Spanish– colonies of South America.
• 19:11
  Speaker 1: So they were promised this monopoly of trade, including trade
• 19:15
  Speaker 1: in slaves, as well as trade in trade goods. This
• 19:19
  Speaker 1: was a valueless proposition at the time.
• 19:23
  Speaker 4: Yeah, they were at war with Spain at the.
• 19:25
  Speaker 6: Time, right?
• 19:25
  Speaker 4: Exactly.
• 19:26
  Speaker 1: So this was a, you know, when we get to
• 19:28
  Speaker 1: this peace stuff, you know, if we get, whenever we
• 19:31
  Speaker 1: get there, you'll be able to make out like bandits.
• 19:34
  Speaker 1: And they explicitly held up the East India Company as
• 19:37
  Speaker 1: the model for what they expected and hoped to be
• 19:41
  Speaker 1: able to do. Again, huge hype, sort of Musk levels
• 19:45
  Speaker 1: of hype at the time, but still not entirely meaningless.
• 19:50
  Speaker 1: There was in fact the possibility of that trade. But
• 19:52
  Speaker 1: the other thing that was actually important to people, and
• 19:54
  Speaker 1: I think this is one of the biggest reasons why
• 19:57
  Speaker 1: the trade was ultimately, this first debt for equity swap
• 20:01
  Speaker 1: was effective, was if you held government debt in its
• 20:05
  Speaker 1: sort of undigested form, You couldn't sell it to somebody else.
• 20:08
  Speaker 1: You would get your six pounds or 100 pounds a
• 20:10
  Speaker 1: year or whatever it might be.
• 20:12
  Speaker 4: But that was it.
• 20:13
  Speaker 1: But if you had shares in a chartered joint stock company, well, yeah,
• 20:18
  Speaker 1: you just go down to Exchange Alley and you sell them.
• 20:20
  Speaker 1: You can get access to your capital.
• 20:21
  Speaker 3: And that was a big deal.
• 20:23
  Speaker 2: So for the creditors, people holding British government debt, the
• 20:27
  Speaker 2: idea of suddenly having liquidity in a way to cash
• 20:30
  Speaker 2: out or what people today in Silicon Valley like to
• 20:33
  Speaker 2: call a liquidity event was pretty attractive. And then for
• 20:36
  Speaker 2: the British government, I would imagine they probably not only
• 20:39
  Speaker 2: managed to consolidate the debts but get a much lower
• 20:41
  Speaker 2: rate of interest, didn't they?
• 20:42
  Speaker 4: That's right.
• 20:43
  Speaker 1: This was always billed as a win-win-win proposition every time
• 20:47
  Speaker 1: this particular maneuver was tried. The government got lower interest
• 20:50
  Speaker 1: rate and a more manageable debt, better terms. They could–
• 20:53
  Speaker 1: if the debts being swapped were irredeemable, this move turned
• 20:57
  Speaker 1: them back into debts that the government could pay off
• 21:00
  Speaker 1: before term. So they got very valuable things from the
• 21:05
  Speaker 1: government point of view. debt holders got still some income,
• 21:10
  Speaker 1: a reduced interest rate, but they still got it. And
• 21:12
  Speaker 1: they got both the gambler's flutter on the possibility of
• 21:15
  Speaker 1: future profits and whatever the company was going to do.
• 21:18
  Speaker 4: Kind of makes sense to me. I mean, it's kind
• 21:21
  Speaker 4: of easy to dismiss as financial engineering, but it does
• 21:24
  Speaker 4: actually sound like a genuine win-win-win in that it's an option.
• 21:29
  Speaker 4: You can exchange a piece of highly liquid alone basically
• 21:34
  Speaker 4: to the the uk government it's a hodgepodge of it
• 21:37
  Speaker 4: for something more homogenous a homogenous stock of tradable uh
• 21:42
  Speaker 4: stock that pays a dividend that kind of kind of
• 21:46
  Speaker 4: walks talks and quacks a little bit like an interest
• 21:48
  Speaker 4: payment as well but you have liquidity and you have
• 21:51
  Speaker 4: that kind of option on the air maybe at some
• 21:53
  Speaker 4: point there'll be peace and and this company will enjoy
• 21:58
  Speaker 4: this is the trade bonanza to the west albeit with
• 22:01
  Speaker 4: slaves let's not gloss it over as the East India
• 22:04
  Speaker 4: Company had on the eastern side of the hemisphere. So
• 22:07
  Speaker 4: I can see why this was actually a really smart idea.
• 22:11
  Speaker 4: It was.
• 22:11
  Speaker 2: It was a bit like Elon Musk trying to persuade
• 22:13
  Speaker 2: everyone to back a mission to Mars. It's like, yes,
• 22:15
  Speaker 2: we'll get there in the end. Don't worry about it.
• 22:17
  Speaker 2: I mean, it sounds ludicrous.
• 22:19
  Speaker 4: Well, I mean, defense of blood. I think this sounds
• 22:22
  Speaker 4: far more credible, slavery aside, than Elon Musk. Kind of
• 22:27
  Speaker 4: colonizing Mars. Yeah.
• 22:29
  Speaker 1: We must wake me up when they figure out the
• 22:31
  Speaker 1: radiation problem traveling between here and there.
• 22:33
  Speaker 4: Details, schmietels.
• 22:35
  Speaker 6: Exactly.
• 22:35
  Speaker 4: We don't care about those kind of things. You need
• 22:37
  Speaker 4: the vision to see the Mars colony.
• 22:39
  Speaker 3: Exactly.
• 22:40
  Speaker 1: But, I mean, the thing about this, I think, Robin,
• 22:42
  Speaker 1: you're exactly right. This was not a bad idea. It
• 22:45
  Speaker 1: was actually a really good idea and the foundation of
• 22:47
  Speaker 1: much financial development that followed. But just because it's a
• 22:53
  Speaker 1: good idea doesn't mean you can't torque it into something
• 22:56
  Speaker 1: quite different, which is kind of what happened.
• 22:57
  Speaker 2: Absolutely. And of course, one of the other bits to
• 23:00
  Speaker 2: this story, which has got glossed over in history so much,
• 23:03
  Speaker 2: is that the economic opportunity everyone was getting excited about,
• 23:08
  Speaker 2: to put that in quotation marks, was actually about human
• 23:11
  Speaker 2: beings in slavery. And, you know, again, Cambridge, like Oxford,
• 23:16
  Speaker 2: like almost every British institution right now is having to
• 23:18
  Speaker 2: recognize slavery. that its antecedents had a role in the
• 23:22
  Speaker 2: slave trade, whether that was, you know, Isaac Newton or
• 23:26
  Speaker 2: Alexander Pope, Daniel Defoe. There was almost nobody at the
• 23:30
  Speaker 2: time who was entirely disconnected from the slave trade. And
• 23:33
  Speaker 2: that just is a grubby truth about this period in history,
• 23:37
  Speaker 2: isn't it?
• 23:38
  Speaker 1: Well, yeah, there is this sort of moral crater at
• 23:43
  Speaker 1: the heart of a lot of this early, I mean,
• 23:48
  Speaker 1: one might say not just this early, but certainly present
• 23:50
  Speaker 1: in the early rise of British imperial capitalism. So, I mean, yes,
• 23:57
  Speaker 1: the South Sea Company was deeply involved in the slave trade.
• 24:00
  Speaker 1: They weren't, particularly in the beginning, they weren't particularly good
• 24:02
  Speaker 1: at it. It turns out there are skills involved even
• 24:06
  Speaker 1: in the brutal trade in human bodies and lives. But,
• 24:11
  Speaker 1: you know, when it was first set up, that wasn't
• 24:13
  Speaker 1: the emphasis. You know, it was, again, trading with Spanish
• 24:16
  Speaker 1: colonies was entirely notional. But, you know, in a couple,
• 24:19
  Speaker 1: three years time, there was, you know, the war finally,
• 24:22
  Speaker 1: you know, subsided to an exhausted end. And there was
• 24:27
  Speaker 1: a treaty of, you know, it was called the Treaty
• 24:29
  Speaker 1: of Utrecht that formalized the peace. And as part of
• 24:32
  Speaker 1: that process, the South Sea Company gained, you know, in
• 24:36
  Speaker 1: addition to its alleged trade monopoly, it got a license
• 24:42
  Speaker 1: to exclusively deliver, I And though they were not, as
• 24:52
  Speaker 1: I say, initially very good at it, ultimately, as the
• 24:55
  Speaker 1: company played out over the years, that was one of
• 24:58
  Speaker 1: its few for some time reliable sources of income, of profit.
• 25:03
  Speaker 4: So the South Sea Company was formed by 1711 formally.
• 25:07
  Speaker 4: And as Tom mentioned, you had this peace treaty with
• 25:11
  Speaker 4: Spain and this war finally subsides. So they have this
• 25:16
  Speaker 4: at least potentially lucrative, if unsavory, monopoly on slave trade
• 25:21
  Speaker 4: with Latin America. But the reality is that, as Tom said,
• 25:25
  Speaker 4: they weren't very good at this and it wasn't super valuable.
• 25:29
  Speaker 4: And the share price doesn't really take off. It's kind
• 25:33
  Speaker 4: of just bobbing along. And that's why I think it's
• 25:34
  Speaker 4: so interesting that it were many years before the South
• 25:38
  Speaker 4: Sea Company, the share, became kind of the mega famous
• 25:42
  Speaker 4: bubble that we know of. John Blunt, of course, is
• 25:45
  Speaker 4: getting richer. And Tom, I'd love to hear what happens
• 25:50
  Speaker 4: next after this peace treaty and after essentially the company
• 25:53
  Speaker 4: is kind of in operation and John Blunt is on maneuvers,
• 25:58
  Speaker 4: but hasn't quite taken off yet. How does we get
• 26:02
  Speaker 4: to that point?
• 26:03
  Speaker 1: It's really interesting because, you know, for most of its
• 26:06
  Speaker 1: early life, the South Sea Company is an ordinary, moderately successful,
• 26:12
  Speaker 1: very boring business. They do try a bunch of expedients
• 26:17
  Speaker 1: to make the trading side of the company work. That's
• 26:20
  Speaker 1: where the dream of wealth beyond imagining lay for Blunt
• 26:24
  Speaker 1: and his associates and presumably their shareholders. But really what
• 26:28
  Speaker 1: it was was very close to just a pass-through bank.
• 26:33
  Speaker 1: It was just kind of like take the money in
• 26:35
  Speaker 1: from the government every six months and send it out
• 26:37
  Speaker 1: to the shareholders and clip your coupons and take your
• 26:40
  Speaker 1: percentage off the top and that was it. And, you know,
• 26:43
  Speaker 1: you can live a comfortable life running, you know, something
• 26:46
  Speaker 1: like that, but it's not dramatic.
• 26:49
  Speaker 3: It's not exciting.
• 26:49
  Speaker 1: And it's not going to make you epically rich, which
• 26:52
  Speaker 1: is something that clearly Blunt wanted to do. So it's just,
• 26:56
  Speaker 1: you know, poking along and, uh, doing its stuff, uh, until,
• 27:01
  Speaker 1: you know, the point at which, um, there's another change
• 27:04
  Speaker 1: in power in, uh, in London. Um, the Tories, um, uh,
• 27:09
  Speaker 1: get dumped after Queen Anne dies. And, uh, And the
• 27:13
  Speaker 1: Whigs come back in.
• 27:14
  Speaker 4: Yeah, 1714, right?
• 27:16
  Speaker 3: Yeah, 1714.
• 27:17
  Speaker 4: So in 1714, the Whigs come back to power.
• 27:19
  Speaker 6: Right.
• 27:19
  Speaker 1: And then there's a certain amount of time, A, getting
• 27:24
  Speaker 1: revenge on the Tories for the insults they endured the
• 27:26
  Speaker 1: last four years. But by 1717, they're sort of going, wait,
• 27:30
  Speaker 1: we have the same problem that we had in 1710
• 27:34
  Speaker 1: and that the Tories have had since then and we
• 27:36
  Speaker 1: now have, which is the debt hasn't gone away.
• 27:38
  Speaker 3: Quite the reverse.
• 27:39
  Speaker 1: They've been fighting wars more or less continuously. And the
• 27:43
  Speaker 1: debt has grown enormously just in, you know, the intervening
• 27:48
  Speaker 1: seven years between loss of power in 1717.
• 27:51
  Speaker 4: So the new.
• 27:53
  Speaker 1: Chancellor of the Exchequer, Robert Walpole, and his associates say,
• 27:58
  Speaker 1: you know, we got to do something. And, you know,
• 28:01
  Speaker 1: that's where the story takes another turn.
• 28:02
  Speaker 2: And I seem to recall that the doing something meant
• 28:05
  Speaker 2: they went out and consolidated the debts, which were now
• 28:09
  Speaker 2: more than 30 million pounds. into the South Sea Company,
• 28:13
  Speaker 2: which once again seemed to make sense of the time
• 28:16
  Speaker 2: until it all went horribly wrong. So that's where we're
• 28:20
  Speaker 2: going to go to in the second half of this podcast.
• 28:24
  Speaker 2: So come back after a quick break.
• 28:33
  Speaker 6: Investors today are most worried about three key factors, interest rates,
• 28:38
  Speaker 6: the corporate credit cycle, and the impact of artificial intelligence.
• 28:42
  Speaker 6: Artificial intelligence is impacting the jobs market and corporate margins.
• 28:46
  Speaker 6: Interest rates are of concern because people are wondering when
• 28:49
  Speaker 6: will the Fed start to raise or lower interest rates again.
• 28:52
  Speaker 6: And finally, the corporate credit cycle. If the economy is
• 28:55
  Speaker 6: to weaken, what does that mean for the ability of
• 28:57
  Speaker 6: corporate credit to hold up? We are thinking about the
• 29:00
  Speaker 6: next generation and constantly adapting our portfolios to meet their needs.
• 29:10
  Speaker 4: Welcome back to the show, everybody. So it's the beginning
• 29:14
  Speaker 4: of 2017. 20. We're going to get into the action now.
• 29:18
  Speaker 4: The South Sea Company has been authorised to carry out
• 29:22
  Speaker 4: an enormous new debt conversion. And this time, it covers
• 29:26
  Speaker 4: virtually all of the British government's outstanding debts. It's around
• 29:31
  Speaker 4: 30 million pounds worth. And things are about to get
• 29:35
  Speaker 4: a little bit crazy. Exactly.
• 29:38
  Speaker 2: Because for the last nine years, the company's share price
• 29:41
  Speaker 2: has been kind of boring. It's been bobbing around at
• 29:43
  Speaker 2: about £ 100 to £ 130 per share. But then over the
• 29:48
  Speaker 2: next 12 months, it starts behaving like a meme stock.
• 29:51
  Speaker 2: It goes up to £ 1, 000 a share before then collapsing
• 29:56
  Speaker 2: right back to where it started And that, of course,
• 29:59
  Speaker 2: means that not only did loads of investors get involved,
• 30:02
  Speaker 2: but lots of them ended up facing financial ruin. But Tom,
• 30:06
  Speaker 2: before we talk about exactly how the bubble unfolded and burst,
• 30:11
  Speaker 2: can you tell us what happened now? Because the South
• 30:13
  Speaker 2: Sea Company was originally set up in 1711 to carry
• 30:16
  Speaker 2: out a £ 9 million debt for equity swap. So what's
• 30:21
  Speaker 2: different about the new debt swap that happened when the
• 30:24
  Speaker 2: government tried to consolidate the debts And why did it
• 30:27
  Speaker 2: create such a calamity?
• 30:29
  Speaker 1: 1720 was very, very different from the first South Sea
• 30:32
  Speaker 1: Company debt for equity swap, even though in some ways
• 30:37
  Speaker 1: it looked very much the same. I mean, they were
• 30:39
  Speaker 1: still issuing new shares to buy debt with. The punters
• 30:43
  Speaker 1: were getting their shares and liquidity.
• 30:45
  Speaker 3: All that good stuff was still there.
• 30:47
  Speaker 1: But there was a crucial difference in the terms of
• 30:50
  Speaker 1: the deal. As with all financial transactions, you know, the
• 30:52
  Speaker 1: devil's in the details, right? In previous years, debt for
• 30:57
  Speaker 1: equity swaps, the price at which a share would buy
• 31:02
  Speaker 1: some debt was set. And it was set at the
• 31:04
  Speaker 1: par value of the shares, 100 quid. But for the
• 31:08
  Speaker 1: 1720 deal, which remember was going to consume this enormous,
• 31:11
  Speaker 1: you know, unprecedentedly large amount, you know, all the outstanding
• 31:16
  Speaker 1: British government debt, 30 million.
• 31:17
  Speaker 3: It was huge, right?
• 31:18
  Speaker 4: It was just far bigger than the previous one as well.
• 31:21
  Speaker 3: Vastly, vastly bigger.
• 31:24
  Speaker 1: And, you know, The critical detail there was instead of
• 31:28
  Speaker 1: exchanging debt at par, so 100 pounds face value South
• 31:34
  Speaker 1: Sea Company share for 100 pounds.
• 31:35
  Speaker 3: Worth of debt, the price was allowed to float, quote,
• 31:40
  Speaker 3: with the market.
• 31:41
  Speaker 1: The South Sea Company could charge what it could get
• 31:45
  Speaker 1: people to pay, what the market would bear, sort of
• 31:48
  Speaker 1: loosely connected to what this stock was trading for on
• 31:51
  Speaker 1: Exchange Alley. So if people anticipated– enormous gains, they would
• 31:57
  Speaker 1: bid the stock up. And that's exactly what happened as
• 32:00
  Speaker 1: the deal was being negotiated and discussed in parliament, went
• 32:03
  Speaker 1: from 100 some to up into the 200s. So when
• 32:06
  Speaker 1: the time came to actually launch the deal, South Sea
• 32:10
  Speaker 1: Company exchanged its shares for debt at 300 quid per share,
• 32:15
  Speaker 1: three times the par value. The terms of the deal
• 32:19
  Speaker 1: meant they got to make new capital, new shares for
• 32:23
  Speaker 1: for every £ 100 exchange. So somebody comes in £ 100, they create.
• 32:27
  Speaker 3: A new share.
• 32:28
  Speaker 1: But they can sell that share for £ 300. They can
• 32:31
  Speaker 1: do the exchange. So they have 200 quid profit right
• 32:34
  Speaker 1: on top.
• 32:35
  Speaker 4: Wow, nice.
• 32:36
  Speaker 1: Yeah, not so shabby. With all these exchanges, each transaction
• 32:43
  Speaker 1: they did put more cash or more shares, they could
• 32:47
  Speaker 1: issue new shares against the capital, onto the company's books,
• 32:52
  Speaker 1: which made it increasingly appear more valuable. It held more
• 32:56
  Speaker 1: wealth as capital as the share price stayed.
• 33:00
  Speaker 3: High and went higher.
• 33:01
  Speaker 1: And that in essence, both made the company appear wealthy
• 33:05
  Speaker 1: and gave them not just an incentive, but an absolute
• 33:09
  Speaker 1: vital necessity to keep the share price up. So all
• 33:12
  Speaker 1: of a sudden, the business of South Sea Company became
• 33:14
  Speaker 1: not banking, not trading, it became stockpumping.
• 33:18
  Speaker 4: So essentially, they can use the conversion price to continually
• 33:22
  Speaker 4: ratchet the price higher and higher. That would make people
• 33:26
  Speaker 4: wealthy or seemingly wealthy. And then eventually, human psychology played
• 33:29
  Speaker 4: its own role in just keeping the price going higher
• 33:32
  Speaker 4: and higher and higher, almost without them needing to do
• 33:35
  Speaker 4: the continuals of debt conversion ratchet operation, essentially.
• 33:40
  Speaker 1: That's exactly right. I mean, a lot of the bubble
• 33:42
  Speaker 1: turns on human emotion. You see a share going up.
• 33:46
  Speaker 3: You want to get in on that?
• 33:47
  Speaker 1: Yeah.
• 33:47
  Speaker 4: I mean, can we go back to Blum? What role
• 33:50
  Speaker 4: is he playing here now? What kind of tactics does
• 33:52
  Speaker 4: he use to make sure that he's allowed to kind
• 33:55
  Speaker 4: of almost like inflate the South Sea company?
• 33:58
  Speaker 1: Well, you have to remember, this was a period in
• 34:02
  Speaker 1: politics where sort of a certain amount of corruption was routine.
• 34:07
  Speaker 1: You know, if you were you could get very rich
• 34:10
  Speaker 1: being a politician in certain certain jobs.
• 34:13
  Speaker 4: Nothing like that happens these days.
• 34:16
  Speaker 1: I'm sure it does not, of course.
• 34:17
  Speaker 4: Never.
• 34:19
  Speaker 1: But there were sort of norms and expectations. There was
• 34:22
  Speaker 1: sort of a limit to the amount of corruption you
• 34:24
  Speaker 1: were supposed to do. And John Blunt, one of his
• 34:28
  Speaker 1: great innovations, him and his close associates in the company,
• 34:32
  Speaker 1: was to figure out how to bust through those norms
• 34:34
  Speaker 1: in a gloriously, hideously, ultimately traumatic way. Basically, what they
• 34:39
  Speaker 1: did over the course between January when the deal was
• 34:42
  Speaker 1: first made public— And the middle of spring when the
• 34:45
  Speaker 1: deal went live, they bribed everybody.
• 34:48
  Speaker 3: Who could possibly influence the decision.
• 34:51
  Speaker 1: Almost every major politician who was in power at the time,
• 34:54
  Speaker 1: you know, many members more or, you know, more regular
• 34:56
  Speaker 1: members of parliament who could vote on the right side,
• 35:00
  Speaker 1: people in the court very close to the king. You know,
• 35:03
  Speaker 1: it was, you know, they locked down as much support
• 35:08
  Speaker 1: as possible by basically promising democracy. each of these people's
• 35:12
  Speaker 1: shares in the South Sea company that they would create
• 35:15
  Speaker 1: when this capital came in and that they didn't have
• 35:18
  Speaker 1: to pay for. They received the shares at a nominal
• 35:21
  Speaker 1: price on the books, but they never paid that price
• 35:24
  Speaker 1: until they cashed out.
• 35:25
  Speaker 2: So the question I have then is, why didn't the
• 35:27
  Speaker 2: existing investors look at this and cut and run? If
• 35:31
  Speaker 2: they were going to be diluted out, why not panic
• 35:33
  Speaker 2: and get out?
• 35:34
  Speaker 1: That gets into sort of matters of the human heart.
• 35:37
  Speaker 3: One of the reasons.
• 35:39
  Speaker 1: people didn't get out is that for a considerable amount
• 35:42
  Speaker 1: of time in the bubble, everybody was, at least on paper,
• 35:47
  Speaker 1: making insane sums of money. If you will notice that
• 35:50
  Speaker 1: the structure of the deal, given that the South Sea
• 35:52
  Speaker 1: Company can decide what price at which it will exchange shares,
• 35:58
  Speaker 1: it looks like the company is getting richer and more powerful. Well,
• 36:01
  Speaker 1: that's worth more money, isn't it? If you don't think
• 36:04
  Speaker 1: deeply into what's going on, it can look like this
• 36:07
  Speaker 1: transaction is a perpetual money machine.
• 36:10
  Speaker 2: And of course, John Blunt himself is enjoying this alchemy too, because,
• 36:13
  Speaker 2: I mean, he had, what, 300,000 pounds worth of company
• 36:16
  Speaker 2: stock on paper. And the modern day equivalent of that
• 36:20
  Speaker 2: is 165 million pounds. I mean, that's extraordinary alchemy, isn't it?
• 36:26
  Speaker 1: Not bad for a shoemaker's son. You know, this is a,
• 36:29
  Speaker 1: you know, hellacious mobility in that time. And, you know,
• 36:32
  Speaker 1: enough so that we may be leaping ahead in the story, but,
• 36:35
  Speaker 1: you know, he was made a baronet for his services
• 36:38
  Speaker 1: to the nation and managing the debt and making so
• 36:40
  Speaker 1: many people so rich, including the people who award baronetsies.
• 36:45
  Speaker 1: So it's easy to feel okay about hanging on to
• 36:51
  Speaker 1: your shares, even as you're, you know.
• 36:53
  Speaker 4: Being diluted.
• 36:54
  Speaker 1: It's easy to feel okay about being a latecomer, buying
• 36:57
  Speaker 1: in at an increased price compared to what it had been,
• 37:00
  Speaker 1: you know, months ago. If you believe that this is
• 37:05
  Speaker 1: somehow cracked the you know, financial decoder ring secret or whatever. And,
• 37:12
  Speaker 1: and can only keep going up.
• 37:15
  Speaker 4: No, but it makes sense to me. I mean, as
• 37:16
  Speaker 4: much as you know, I guess John Blunt is kind
• 37:20
  Speaker 4: of the villain in our story. And you know, he
• 37:23
  Speaker 4: deserves a lot of the blame for having ramped up
• 37:27
  Speaker 4: almost deliberately the South Sea Company's shares and then then
• 37:31
  Speaker 4: using those shares to essentially co-opt and compromise the entire
• 37:36
  Speaker 4: British establishment in the process. But obviously it seemed to
• 37:40
  Speaker 4: come at this era of financial euphoria, of excitement. It
• 37:46
  Speaker 4: was all new and the future was bright. So you
• 37:49
  Speaker 4: had all these kind of other crazy companies also going nuts.
• 37:52
  Speaker 4: Some of the Bank of England's shares also went nuts.
• 37:55
  Speaker 4: The Bank of England, of course, was at the time
• 37:57
  Speaker 4: a normal commercial bank. You had the East India Company's
• 38:00
  Speaker 4: shares also went nuts. You had all these kind of
• 38:02
  Speaker 4: new crazy companies that were going to make square cannonballs,
• 38:06
  Speaker 4: flying machines, were going to plant walnut trees in Virginia.
• 38:11
  Speaker 4: There's obviously that famous example of somebody satirically posting a
• 38:15
  Speaker 4: notice to raise money for a company for carrying out
• 38:20
  Speaker 4: an undertaking of great advantage, but nobody knows what it is,
• 38:24
  Speaker 4: which is obviously almost like now, almost a famous... expression
• 38:29
  Speaker 4: of how kind of demented things became at the peak, right?
• 38:34
  Speaker 2: Of course, you had even some brilliant minds like Isaac
• 38:36
  Speaker 2: Newton getting sucked in. I mean, we talked about him
• 38:39
  Speaker 2: on an earlier episode, and he got sucked into the
• 38:41
  Speaker 2: mania as well. So with everyone going gangbusters for this,
• 38:46
  Speaker 2: I mean, was there the sense that there was this
• 38:48
  Speaker 2: mass hysteria that was beyond anyone's control?
• 38:51
  Speaker 3: I think so.
• 38:52
  Speaker 1: And I think, you know, there's this whole sort of
• 38:54
  Speaker 1: formal economics debate is, you know, are bubbles real? Are
• 38:57
  Speaker 1: people making rational decisions even in the midst of the bubble?
• 39:02
  Speaker 1: And the answer is some people are, but I think
• 39:05
  Speaker 1: you have to take seriously the experience of people on
• 39:08
  Speaker 1: the ground during a bubble. And absolutely, there was a
• 39:13
  Speaker 1: money mania going on. Defoe is a wonderful chronicler. He's
• 39:17
  Speaker 1: one of the first sort of really lived by his
• 39:20
  Speaker 1: pen professional journalists. And he sort of would do kind
• 39:23
  Speaker 1: of color pieces in which you'd go around to churches
• 39:26
  Speaker 1: on Sunday and see what people were talking about. And
• 39:28
  Speaker 1: at the height of the bubble. you know, God wasn't
• 39:31
  Speaker 1: in it. It was like, how goes the stock? Goes,
• 39:33
  Speaker 1: it flies, you know, it was that.
• 39:35
  Speaker 3: Kind of thing.
• 39:35
  Speaker 1: So, and one of the things about the South Sea
• 39:38
  Speaker 1: bubble to remember that genuinely makes it different from every
• 39:41
  Speaker 1: subsequent bubble is this was the first time. People didn't
• 39:46
  Speaker 1: know what was happening. We should be smarter than we are.
• 39:50
  Speaker 1: The fact that we keep repeating the same mistakes that
• 39:52
  Speaker 1: they made in 1720 does not reflect well on the
• 39:55
  Speaker 1: capacity for the human species to do.
• 39:57
  Speaker 3: One trial learning.
• 39:58
  Speaker 1: Even John Blunt, justifiably maligned as he is, I don't
• 40:04
  Speaker 1: think he fully realized how this had to end. He
• 40:08
  Speaker 1: knew and he admitted in writing early on during the
• 40:12
  Speaker 1: rise of the stock that the businesses of the South
• 40:15
  Speaker 1: Sea Company had become the business of keeping the stock
• 40:18
  Speaker 1: price high. Again, that doesn't sound so unfamiliar to contemporary markets,
• 40:23
  Speaker 1: does it? But, you know, he said that explicitly.
• 40:25
  Speaker 4: Well, we know that things start going wrong, right? I mean,
• 40:29
  Speaker 4: as we know today, that things inevitably crest. And that
• 40:33
  Speaker 4: happened the summer of 1720. And I'd love to hear,
• 40:37
  Speaker 4: you know, why the bubble burst? Why did this euphoria
• 40:43
  Speaker 4: suddenly get, essentially disappear all of a sudden? so quickly
• 40:48
  Speaker 4: and things just collapsed. Was there one thing that triggered it?
• 40:52
  Speaker 1: There was a singular event that really sort of ended
• 40:55
  Speaker 1: the mania, but it was building over the course of summer.
• 40:59
  Speaker 1: I mean, when John Blunt said it was his business,
• 41:02
  Speaker 1: the company's business to pump the stock, they did all
• 41:04
  Speaker 1: kinds of things. They sold on the layaway plan so
• 41:07
  Speaker 1: people didn't have to put up all the money.
• 41:08
  Speaker 3: There were options available.
• 41:10
  Speaker 1: They loaned money. And even You know, the one, basically
• 41:13
  Speaker 1: the only financial regulation at the time, they even secretly went,
• 41:16
  Speaker 1: you know, the South Sea Company went onto the market
• 41:19
  Speaker 1: and bought back their own shares to, you know, keep
• 41:22
  Speaker 1: pumping up the price. And there were a whole bunch
• 41:23
  Speaker 1: of maneuvers like that that continued to sort of create
• 41:29
  Speaker 1: the appearance of lots of demand when, in fact, there
• 41:33
  Speaker 1: was much less.
• 41:34
  Speaker 2: But then, of course, as I understand it, the issue
• 41:36
  Speaker 2: that basically started to create the crash was that with
• 41:40
  Speaker 2: all these shenanigans going on, we then had the Bubble Act,
• 41:44
  Speaker 2: lovely name, of 1720, when actually Parliament began to say,
• 41:49
  Speaker 2: this is not okay. We're going to ban joint stock companies.
• 41:53
  Speaker 2: You began to get a liquidity crisis. And then classically,
• 41:56
  Speaker 2: some of the South Sea Company directors began to start selling,
• 42:00
  Speaker 2: even including John Blunt.
• 42:01
  Speaker 4: Absolutely.
• 42:02
  Speaker 1: I mean, over the course, you know, they started selling
• 42:05
  Speaker 1: relatively early in the rise of the bubble. You know,
• 42:08
  Speaker 1: these were not stupid people, right? And there were some
• 42:12
  Speaker 1: private investors without inside information who also were clever enough
• 42:16
  Speaker 1: to sell early and made real fortunes. And there were
• 42:20
  Speaker 1: some who very much did not. But the South Sea
• 42:24
  Speaker 1: Company supported the Bubble Act really as part of their
• 42:27
  Speaker 1: attempt to keep the stock high because they felt that
• 42:29
  Speaker 1: every pound that went into a company that isn't going
• 42:33
  Speaker 1: to tell you what it does or whatever is a
• 42:35
  Speaker 1: pound that wasn't available to serve as.
• 42:37
  Speaker 3: Demand for its shares.
• 42:40
  Speaker 1: And they had– basically it said any company that doesn't
• 42:42
  Speaker 1: have a royal charter can't trade on the stock market.
• 42:46
  Speaker 1: They had a royal charter, so they thought they were safe.
• 42:48
  Speaker 1: And basically what happens immediately after the Bubble Act passes
• 42:54
  Speaker 1: is not much. Nobody enforces it. They're still trading all
• 42:56
  Speaker 1: these bubble companies. And in August, as demand seems to
• 43:01
  Speaker 1: have plateaued– I mean the shares peak at 1,050 I
• 43:05
  Speaker 1: think it was in June and then noodle around– between
• 43:09
  Speaker 1: 850 and low 900s for much of the summer until
• 43:14
  Speaker 1: August when the company goes back one more time offering
• 43:19
  Speaker 1: more shares to the public at, again, this 1,000 pound.
• 43:23
  Speaker 3: Per share price.
• 43:24
  Speaker 1: And in August, that subscription is well subscribed. Isaac Newton, again,
• 43:29
  Speaker 1: invests in that August subscription. So this is after six
• 43:34
  Speaker 1: weeks or two months of kind of flat performance.
• 43:39
  Speaker 3: Somehow still the hype and.
• 43:41
  Speaker 1: Allure of the company finds its last bigger fools, I guess.
• 43:47
  Speaker 1: But then again, noting that they.
• 43:50
  Speaker 3: Have to pump up demand.
• 43:51
  Speaker 1: The share price hasn't gone up and the fall stock
• 43:55
  Speaker 1: trading season is almost upon them. I don't think they
• 43:57
  Speaker 1: thought of it that way then, but that was what
• 43:59
  Speaker 1: was going on. The South Sea Company itself urged the
• 44:05
  Speaker 1: government to start enforcing the Bubble Act and they did.
• 44:10
  Speaker 1: shutting down four smaller companies that were trading, including one
• 44:17
  Speaker 1: that had the Prince of Wales as an investor, which was,
• 44:21
  Speaker 1: you know, I guess folly is no respecter of rank.
• 44:25
  Speaker 4: No, and it's quite delightful that the South Sea Company
• 44:27
  Speaker 4: itself encouraged the government to enforce this act that would
• 44:31
  Speaker 4: inevitably or eventually contribute to its own demise or decline.
• 44:36
  Speaker 2: And of course, then the crash happens and the shares
• 44:38
  Speaker 2: go from a thousand pounds a share to 120 in December.
• 44:43
  Speaker 1: So you have this, you know, you have these bubble
• 44:45
  Speaker 1: companies that are closed. And I think that, I mean,
• 44:50
  Speaker 1: and I think, you know, smarter people than me have
• 44:51
  Speaker 1: thought that that's one of the things that kind of
• 44:54
  Speaker 1: shocks the trading public. And they realize that there's no
• 44:58
  Speaker 1: more justification for the South Sea valuation than there was for,
• 45:01
  Speaker 1: you know, some of these smaller companies trading at, you know,
• 45:04
  Speaker 1: ridiculous sums. And there was one more thing. In order
• 45:07
  Speaker 1: to continue to pump up the stock, one of the
• 45:08
  Speaker 1: things that had worked earlier was the company offered a
• 45:13
  Speaker 1: 50% dividend. You get half a share for every share
• 45:16
  Speaker 1: you owned early on.
• 45:18
  Speaker 3: Paid in shares, not in cash.
• 45:19
  Speaker 1: Always a useful trick that this company used over and
• 45:22
  Speaker 1: over again. And then in this period, in late in summer,
• 45:28
  Speaker 1: they offered another dividend. And this was 5% on par value.
• 45:32
  Speaker 4: Well, it's starting to feel a little bit desperate, basically.
• 45:35
  Speaker 3: Well, both desperate.
• 45:36
  Speaker 1: And if you think about it, if you paid £ 1, 000
• 45:37
  Speaker 1: for a share.
• 45:38
  Speaker 3: At £ 100.
• 45:39
  Speaker 1: Par value, and you're going to get £ 5 for that share,
• 45:41
  Speaker 1: that's a half a percent interest on your £ 1, 000 investment.
• 45:44
  Speaker 1: And even worse, 5% dividend on £ 100 was the same
• 45:58
  Speaker 1: amount of money basically you could get by lending money
• 46:01
  Speaker 1: out on a perfectly ordinary private concern that had collateral
• 46:05
  Speaker 1: and was much safer and so forth. And if the
• 46:07
  Speaker 1: only thing this company was doing was delivering the sort
• 46:10
  Speaker 1: of same old regular return you could get anywhere else,
• 46:14
  Speaker 1: I think the penny dropped for a lot of people
• 46:16
  Speaker 1: and they started running.
• 46:18
  Speaker 3: For the exits.
• 46:20
  Speaker 2: So they start running for the exits and inevitably– this
• 46:24
  Speaker 2: starts to feed on itself. And you have a classic crash,
• 46:27
  Speaker 2: which sucks in a lot of famous people like Jonathan Swift,
• 46:31
  Speaker 2: Alexander Pope, Daniel Defoe. And of course, what happens next
• 46:36
  Speaker 2: is everyone starts looking for someone to blame. And John
• 46:41
  Speaker 2: Blunt is in the frame. So what happens to him?
• 46:44
  Speaker 1: It's really interesting. So, you know, after the crash, it
• 46:49
  Speaker 1: becomes clearly irreversible. You know, People rush to parliament and say,
• 46:53
  Speaker 1: do something.
• 46:54
  Speaker 3: What are you going to do?
• 46:55
  Speaker 1: Well, one of the things you can do is start
• 46:57
  Speaker 1: prosecuting everybody who was involved. And they prosecuted members of
• 47:01
  Speaker 1: the government who had been bribed. Everybody had been bribed,
• 47:04
  Speaker 1: but they selected a few prominent figures.
• 47:08
  Speaker 3: So there's this.
• 47:11
  Speaker 1: Kind of, yes, we are chopping the heads off our own.
• 47:13
  Speaker 1: Aren't you satisfied yet? And they pursued a lot of
• 47:16
  Speaker 1: South Sea Company directors. And, you know, they would emerge
• 47:19
  Speaker 1: with most of their fortunes taken away. But for John Blunt,
• 47:23
  Speaker 1: there was no mercy at all. You know, in June,
• 47:25
  Speaker 1: he'd been made a baronet and lauded as the greatest,
• 47:28
  Speaker 1: you know, hero the nation had seen in centuries. Now
• 47:33
  Speaker 1: he is, you know, the gum on the sole of
• 47:34
  Speaker 1: your shoe, the scum of the scum, the worst you
• 47:37
  Speaker 1: could imagine.
• 47:38
  Speaker 3: And his 300,000 pound fortune is enormous.
• 47:43
  Speaker 1: Is basically seized. He's allowed 5,000 pounds, which is not
• 47:48
  Speaker 1: a trivial sum of money by any stretch, but its
• 47:52
  Speaker 1: annual income based on the sort of 5% return rate
• 47:55
  Speaker 1: was about 250 quid, which is more than enough to
• 47:59
  Speaker 1: keep a family's body and soul together, but it's not
• 48:03
  Speaker 1: wealth by any stretch of the imagination.
• 48:05
  Speaker 4: And he was allowed to keep his baronetcy, right?
• 48:07
  Speaker 6: Yes.
• 48:08
  Speaker 4: Even today, the blood baronetcy still exists. And apparently one
• 48:13
  Speaker 4: of his descendants, I'm delighted to have learned, is credited
• 48:16
  Speaker 4: with bringing Morris dancing back to the UK in the
• 48:19
  Speaker 4: 20th century. So you could argue that the Blunt family
• 48:22
  Speaker 4: has committed two horrific crimes on British society.
• 48:25
  Speaker 3: Indeed. I'm not sure you can forgive the latter.
• 48:27
  Speaker 1: But no, he was basically sort of banished from public
• 48:32
  Speaker 1: life and banished from the business of trying to get
• 48:35
  Speaker 1: rich quick.
• 48:36
  Speaker 2: But one of the things I find fascinating is that
• 48:38
  Speaker 2: he becomes this villain, if you like, who has... a lot,
• 48:42
  Speaker 2: but not all of his money taken away, but keep
• 48:44
  Speaker 2: his baronetcy. And yet, the reality is that it's way
• 48:50
  Speaker 2: too easy just to blame John Blunt for everything, because
• 48:53
  Speaker 2: there clearly was something else much bigger going on. And
• 48:56
  Speaker 2: recognizing that really matters for how we look at the
• 49:00
  Speaker 2: financial world today, doesn't it? Or any vision of capitalism.
• 49:03
  Speaker 2: I mean, do you see these kind of episodes of
• 49:06
  Speaker 2: mania as being intrinsic to capitalism?
• 49:09
  Speaker 1: I mean one of the things about the South Sea
• 49:11
  Speaker 1: bubble itself is it's almost always told as a morality tale.
• 49:14
  Speaker 3: Look at what greed does for you.
• 49:16
  Speaker 1: It drives you mad. It ruins nations and so forth
• 49:19
  Speaker 1: and so on. You know, it reflects the badness of
• 49:22
  Speaker 1: the individuals involved and the system. Is our bubbles, you know,
• 49:27
  Speaker 1: inevitable in capitalism? Capitalism writ large, I think, no, they're
• 49:32
  Speaker 1: not inevitable. But certainly, you know, in the forms of
• 49:36
  Speaker 1: financial capitalism, that we have evolved in which we certainly
• 49:41
  Speaker 1: go through regular periods when we forget the dangers and
• 49:45
  Speaker 1: relax oversight of the markets, oversight of the particular developments
• 49:49
  Speaker 1: of the markets. It's very, very easy to construct, you know, new,
• 49:54
  Speaker 1: sometimes very potentially very good financial ideas that nonetheless can,
• 49:59
  Speaker 1: you know, basically follow exactly the same pattern as a
• 50:02
  Speaker 1: South Sea bubble and shoot out of sight. I mean,
• 50:05
  Speaker 1: We're not all so terribly young and forgetful that we've
• 50:08
  Speaker 1: forgotten the subprime mortgage crisis, which the mathematics is much
• 50:12
  Speaker 1: more complicated. The derivatives involved are much more elaborate than
• 50:16
  Speaker 1: the simple options available in 1720. But if you look
• 50:19
  Speaker 1: at it sort of phase by phase, what was initially
• 50:22
  Speaker 1: a very, very good idea– you have hundreds of thousands
• 50:26
  Speaker 1: of individual mortgages that are serviced by one mom and
• 50:30
  Speaker 1: pop bank in somewhere and whoever– If you instead create
• 50:35
  Speaker 1: a secondary market in mortgages, just as you created a
• 50:38
  Speaker 1: secondary market in government debt out of the South Sea bubble,
• 50:43
  Speaker 1: and you financialize them, it becomes much easier to trade mortgages.
• 50:46
  Speaker 1: Money becomes cheaper. It becomes cheaper for people to buy
• 50:49
  Speaker 1: homes and cars.
• 50:51
  Speaker 3: And that's all.
• 50:51
  Speaker 1: Great until you blow it up by layering more and
• 50:56
  Speaker 1: more leverage on top so that a single adverse event
• 51:00
  Speaker 1: can knock the whole thing down. That's almost sort of
• 51:03
  Speaker 1: step for step what happened in the South Sea bubble, right?
• 51:05
  Speaker 1: So I think it's not necessarily inherent in capitalism per se,
• 51:11
  Speaker 1: but you put capitalism and human nature together, then yeah,
• 51:14
  Speaker 1: bubbles are part of our daily life, I'm afraid.
• 51:17
  Speaker 3: Yes.
• 51:18
  Speaker 4: Well, I mean, sadly, we are getting to the end
• 51:21
  Speaker 4: of this week's episode that we do love talking bubbles.
• 51:24
  Speaker 4: And there is so much more to say about the
• 51:26
  Speaker 4: South Sea bubble and the bursting of left obviously a
• 51:29
  Speaker 4: huge mess in its wake. It took centuries to pay
• 51:32
  Speaker 4: back some of the perpetual debt that it left. And
• 51:36
  Speaker 4: also we needed some to clean the mess up. So
• 51:39
  Speaker 4: there are lots of lessons to be learned and somebody
• 51:42
  Speaker 4: needs to put those lessons into action. So if this bubble,
• 51:47
  Speaker 4: as you say, kind of represents the birth of modern capitalism,
• 51:51
  Speaker 4: the marriage of financial capitalism and human nature, well, We
• 51:56
  Speaker 4: needed somebody to kind of maybe put this new capital
• 51:58
  Speaker 4: markets to better use.
• 52:01
  Speaker 2: Absolutely. And I mean, at this point, enter stage right
• 52:04
  Speaker 2: or stage left, depending on your political persuasion, in comes somebody,
• 52:08
  Speaker 2: none other than Sir Robert Walpole. He became the country's
• 52:13
  Speaker 2: first ever prime minister. In fact, his longest serving prime minister.
• 52:18
  Speaker 2: And he was a person who ended up riding to
• 52:21
  Speaker 2: the rescue.
• 52:23
  Speaker 4: Yes, but that is a tale for next week's episode,
• 52:26
  Speaker 4: I think, Gillian. Until then, I'd love to thank you,
• 52:29
  Speaker 4: Tom Levinson, for joining us this week. And I hope
• 52:32
  Speaker 4: you'll be back here next week to help us talk
• 52:34
  Speaker 4: about the cleanup operation after the South Sea bubble.
• 52:38
  Speaker 3: Again, thank you so much for having me.
• 52:40
  Speaker 1: And, you know, there's nothing more fun than talking, you know,
• 52:43
  Speaker 1: massive human craziness and failure from a safe distance.
• 52:48
  Speaker 4: Very true. Absolutely.
• 52:50
  Speaker 2: We all love disaster movies, particularly financial disaster movies. But sadly,
• 52:55
  Speaker 2: that's it from us and this week's episode. I'm Gillian Tett.
• 52:59
  Speaker 4: And I'm Robin Wigglesworth. Thanks for listening and we'll see
• 53:01
  Speaker 4: you all here next week.