Perhaps one of history’s best-known financial bubbles was also among the first. The South Sea Bubble, which inflated and popped in 1720, was the product of the “Financial Revolution” which began in Britain in the late 17th century. The crash is at least familiar to many interested in the history of financial crises. For this, casual and professional historians alike are indebted to the greatest writers of three centuries ago. Financial historians are fortunate that the Financial Revolution coincided with a simultaneous flourishing in English literature, satire, poetry, and journalism. For this reason, numerous firsthand accounts of the South Sea Bubble abound, many from the pens of famous literary persons.
Bubble
Though the bubble of 1720 lifted the stocks of many early corporations, at its center was the South Sea Company, a sort of government sponsored enterprise in early 18th century Britain. The company was a recent creation, formed in 1711 by Robert Harley, then the Chancellor of the Exchequer, Britain’s finance minister. Though the firm was ostensibly designed to trade with Spanish colonies in South America, it was also an instrument of British fiscal policy. At the time, the increasingly indebted British state was looking for ways to consolidate and reduce the cost of that debt.
To achieve just that, prospective investors were required to capitalize the company by trading in their government debt for South Sea Company shares. The company was also given a monopoly on British trade with South America, the bestowing of this being what gave the firm its name. However, in exchange for this, the interest rate paid by the government on the debt contributed by investors to the company was cut. Investors were essentially trading some of the fixed return of their bonds for the variable, equity-like, returns from trade. In the end though the South Sea Company never made much money in South America.
Much was invested in the South Sea Company, both financially and politically. The company was something of a national project. Both the king, George I, and his heir apparent, George, Prince of Wales, the future King George II, were made honorary governors, succeeding Chancellor Harley in the post. The first few years in the company’s history were not particularly profitable though and the stock that came to be at the center of the bubble did not see its price rise much, that is until 1720, the year of the bubble.
South Sea Company shares started the year at £128 yet went on to reach a staggering £1,050 in June. Then prices plunged back to Earth, a force of gravity that famously ensnared the gravity-describing physicist Isaac Newton himself. Newton may have been a brilliant scientist but he was less successful in investing. True, early in the boom, he did manage to sell £7,000 in shares he had acquired at a lower price before the bubble. However, he then bought back in at higher prices before the crash, perhaps losing £20,000 in the process.
After the bubble burst, the South Sea Company lived on, continuing to manage a portion of the government debt while conducting some trade in South America. The firm survived until 1853. More immediately, the bubble did produce some meaningful new legislation, the Bubble Act, which was enacted just before share prices hit their peak in June 1720. The act was transformative to early British finance, banning the incorporation of new joint-stock companies without Parliament’s approval.
All of this, the entire saga of the South Sea Bubble, was widely written about; it was the first widely reported financial bubble in history, a product of the growing print media. Consider that whereas London had just a single daily newspaper in 1702, by seven years later this number had grown to eighteen. There were plenty of journalists and satirists around to cover the events, from Daniel Defoe to Jonathan Swift, and numerous publications available to disseminate their opinions and accounts. Historians of the period are fortunate that such a financial crash occurred in the midst of the ‘Augustan’ age of English literature.
Defoe
Among the writers who were witnesses to the South Sea Bubble was Daniel Defoe, the journalist and novelist. Just a year before the boom and bust, he had published Robinson Crusoe, his most famous work and arguably the first novel in the English language. Defoe was not just a witness to, but was even involved in, the creation of the South Sea Company and the bubble itself. The writer was never far removed from the world of finance. Defoe had been an insurance underwriter and a trader in many commodities, from cattle to wine, before picking up the pen. As a writer, he was a patriot, arguing fervently for the expansion of British power abroad, particularly in South America. Defoe had written on the potential for trade with that continent for years; hence his interest in the South Sea Company.
A challenge in gathering the full story of Defoe’s involvement in the bubble and his views of the mania was that he tended to write anonymously or under a myriad of pseudonyms. Robinson Crusoe was allegedly written by the eponymous castaway himself after all. Defoe even avoided attributing his newspaper writing to himself, making it difficult to identify all of his works. Nonetheless, it is known that Defoe wrote in favor of the South Sea Company’s aims. He promoted the very formation of such a company and contrasted it with another scheme underway in France, which led to the Mississippi Bubble there the same year. Indeed, Defoe was very likely supported financially by the Chancellor, Robert Harley, whom he had previously worked for as something of a propagandist. In fact, the Chancellor had even bailed the writer out of prison when Defoe was jailed in 1703.
“Sir, It would be ridiculous, at this Juncture, to write Letters to you, or give you the Trouble to print anything that did not relate to South Sea Stock; this is the only Theme of all the Pens that are now at Work; the Press is wholly employed about it …” -Daniel Defoe under the pudendum of ‘Anti-Jobber’ in Applebee’s Journal, 1721
Defoe wrote for a short-lived paper called The Director which was devoted entirely to covering the South Sea Company; no wonder it had a brief history. From that platform, he continued to support the project before the bubble years though his position began to change in 1719. In his work, The Anatomy of Exchange Alley, published that year, he began to criticize the financial speculation surrounding the company. After the boom turned to bust, he blamed the bubble on investor avarice and even lauded its collapse. The seemingly abrupt change in position might not have been inconsistent if he believed in the original objective of the company, which was almost ten years old by that point, but not the speculation it spawned. However, it must be noted that the company had not succeeding in generating meaningful revenue from South American trade since the day it was founded.
“… I might give the late South Sea calamity for an example in which the longest heads were most overreached, not so much by the wit or cunning of those they had to deal with as by the secret promptings of their own avarice.” – Daniel Defoe’s The Complete English Tradesman, 1726
Pope and Swift
The serious Defoe was not the only writer enmeshed in the South Sea Bubble; the bubble also caught the attention of, and later provided plenty of material for, famous satirists like Alexander Pope and Jonathan Swift. In the case of Alexander Pope, the poet and satirist, the prospect for riches provided by South Sea Company shares had its allure. He invested in the company and on August 22, 1720, even recommended the stock to a friend, Lady Mary Wortley Montagu.
Pope supported the Tories along with Swift and Defoe, who were part of a concerted effort to publicize the South Sea Company under Chancellor Harley’s patronage. Pope himself likely received Harley’s direct or indirect support since he belonged to one of the literary organizations sponsored by the wealthy Chancellor, the Scriblerus Club.
“I was made acquainted late last night, that I might depend upon it as a certain gain, to Buy the South Sea-Stock at the present price, which will certainly rise in some weeks, or less. I can be as sure of this, as the nature of any such thing will allow, from the first & best hands.” – Alexander Pope’s letter to Lady Mary Wortley Montagu
By the time Pope had recommended the stock to Lady Mary, shares in the company had already begun their descent, peaking earlier that summer at £1,050. They were now at £900 and were soon to begin their most violent plunge. Pope ultimately suffered as the price fell. By the end of the year, shares returned to the levels where they started 1720 and Pope lamented in a poem titled “The Damn’d South Sea”.
“How goes the Stock, becomes the gen’ral Cry.
Rather than fail we’ll at Nine Hundred Buy.
Instead of Scandal, how goes Stock’s the Tone,
Ev’n Wit and Beauty are quite useless grown:
No Ships unload, no Looms at Work we see,
But all are swallow’d by the damn’d South Sea.”
– Alexander Pope, “The Damn’d South Sea”
The writer and satirist Jonathan Swift, author of such well-known satirical works as A Modest Proposal and Gulliver’s Travels would no doubt find plenty to write about in the South Sea Bubble. Like Defoe, Swift had also worked under Chancellor Harley’s patronage and praised the Chancellor in his publication The Examiner. Swift was even responsible for saving Harley’s life in an assassination attempt against him in 1712. However, Swift did not hesitate long when his patron’s project took a sudden turn for the worse. In a poem called “The Bubble”, printed in the Evening Post in January 1721, Swift poked fun at the mania’s abrupt end. The writer had also gone so far as to personally criticize the company’s directors.
“In Stock Three Hundred Thousand Pounds;
I have in view a Lord’s Estate:
My Mannors all contiguous round;
A Coach and Six, and serv’d in Plate.
Thus the deluded Bankrupt raves,
Puts all upon a desp’rate Bett;
Then plunges in the Southern Waves,
Dipt over Head and Ears – in Debt.”
– Jonathan Swift, “The Bubble”
Lesson
It isn’t every day that financial affairs produce a response from the greatest and most prolific literary icons of the era. However, the South Sea Bubble implosion was such a day. Such a fact reveals how some writers were acutely aware of what was happening in financial markets. It also illustrates how significant the South Sea Bubble was to those who witnessed it. It was, as Defoe said, “the only Theme of all the Pens that are now at Work”. Perhaps this was so because the South Sea Company was as much a national project as it was any simple company. Perhaps it was because the events were so novel to those living through the early 18th century’s Financial Revolution. Regardless of the reason, the interest and involvement of such men as Defoe, Pope, and Swift in the mania and its subsequent crash have left us with particularly valuable written accounts of the bubble, which turned three centuries old this year.
More from the Tontine Coffee-House
There is more to learn about the South Sea Bubble, including where the first stock market bubble took place and a simultaneous bubble underway in France at the time.
Further Reading
1. Novak, Maximillian E. Daniel Defoe: Master of Fictions: His Life and Works. Oxford University Press, 2003.
2. Odlyzko, Andrew. “Isaac Newton, Daniel Defoe and the Dynamics of Financial Bubbles.” Financial History: The Magazine of the Museum of American Finance, 2018, pp. 18–21.
3. Reed, Christopher. “The Damn’d South Sea.” Harvard Magazine, 1999.
4. Walsh, Patrick. “Writing the History of the Financial Crisis: Lessons from the South Sea Bubble.” Working Papers in History and Policy: University College Dublin, 2012.
5. Wennerlind, Carl. Casualties of Credit: the English Financial Revolution, 1620-1720. Harvard University Press, 2011, pp. 196–245.
6. Zweig, Jason. “Great Moments in Hot Stock Tips.” The Wall Street Journal, Dow Jones & Company, 8 Aug. 2013.
