England: South Sea Bubble - Too Big to Fail - Extra History - Part 2

Summary

The video delves into the intriguing rise of the South Sea Company, a scheme devised by Harley and Blunt to manage Britain's growing debt. By promising lucrative South Sea trade rights, they convinced the public to exchange their government debt for shares. Despite the company’s shaky financials and a war with Spain, the project gained royal support, eventually becoming a massive financial institution. Through clever manipulation and political maneuvering, the South Sea Company issued stock and profited, leading to a market bubble. The video highlights the complex, often shady dealings that led to one of Britain’s most infamous financial scandals.

Takeaways

• 😀 Harley and Blunt, frustrated by the Bank of England's refusal to help, created the South Sea Company as a way to handle government debt.
• 😀 The South Sea Company allowed debt holders to exchange their government debt for shares in the company, offering a lower interest rate and a monopoly on trading in the South Seas.
• 😀 The South Sea Company’s success was largely based on the hype about potential riches from trade in South America, even though Britain was at war with Spain, which controlled the relevant ports.
• 😀 Despite the lack of actual trading power in the South Seas, the South Sea Company was sold as a lucrative opportunity due to the perceived potential for riches, similar to the East India Company.
• 😀 The company’s trading privileges were limited to sending one ship per year to Spanish-controlled ports, which was far less lucrative than anticipated.
• 😀 When Queen Anne died in 1714, the Whigs regained control, leading Blunt to remove his former ally, Harley, and replace Tory members with Whigs in the South Sea Company.
• 😀 Blunt leveraged the royal family’s involvement, with George II becoming the ceremonial Governor, helping to solidify the company’s prestige and trust.
• 😀 The South Sea Company’s mounting stock value led to the government allowing it to take on more debt, further expanding its influence and size.
• 😀 The company’s stock price rose rapidly in 1719 due to fabricated stories about the Jacobite threat, helping to inflate the company’s value and increase its power.
• 😀 Blunt and the South Sea Company took advantage of the rising stock price by selling extra shares that weren’t needed to cover debt, pocketing the profit in the process.
• 😀 The South Sea Company’s inflated stock and expansion continued to grow, leading to an unsustainable valuation that eventually contributed to its downfall.

Q & A

What was the main purpose behind the creation of the South Sea Company?

The South Sea Company was created as a scheme to manage the British government's debt. It allowed individuals holding government debt to exchange it for shares in the new company, which would assume the debt and pay a lower interest rate than the government had been paying.

What unique element made the South Sea Company appealing to investors?

The South Sea Company offered a monopoly on trade in the South Seas, which was promoted as a source of unimaginable riches. This, combined with the potential for high dividends, made it an enticing offer despite the lower interest rate.

Why was the South Sea Company’s claim to trade in the South Seas problematic?

The claim was problematic because the major ports in Central and South America, which the company aimed to trade with, were owned by Spain. Britain was at war with Spain at the time, making the idea of lucrative trade uncertain and unrealistic.

How did the South Sea Company manage to gain political support despite its shortcomings?

The company gained political support by using propaganda and influence. They enlisted famous figures, including Daniel Defoe and Sir Robert Walpole, and even manipulated the House of Lords by creating new peers loyal to their cause.

What significant change occurred in the leadership of the South Sea Company after Queen Anne's death?

After Queen Anne’s death, Harley, the company's main supporter, fell out of favor with the new government. Blunt, the principal operative, replaced the Tory board members with Whigs and secured the King's son, George II, as the company's ceremonial governor.

What was the role of George II in the South Sea Company?

George II was made the ceremonial Governor of the South Sea Company after Blunt replaced Harley. His involvement provided the company with royal prestige and trust, which helped solidify its status as a major institution.

Why was the South Sea Company seen as 'too big to fail' by the government?

The South Sea Company became 'too big to fail' because it had strong royal backing, with the King himself serving as the figurehead. This created a situation where the collapse of the company could undermine faith in the monarchy, making its survival crucial.

How did the South Sea Company manipulate the stock market in 1719?

In 1719, the South Sea Company spread fabrications about the Jacobite threat being ended, which inflated the stock price from £100 to £114 per share. This increase allowed the company to sell excess stock for profit, even though they no longer needed it to cover government debt.

What did the South Sea Company do with the excess shares they issued?

The company sold the excess shares they had issued when the stock price rose, pocketing the profit. This helped fuel Blunt's ambition for further financial gain.

What was the government’s response to the South Sea Company’s financial activities?

Instead of investigating the company’s activities, the government continued to offload more of its debt onto the company, even though it had no clear source of income other than managing the government debt itself.