Financial History Issue 132 (Winter 2020) | Page 19

South Sea Bubble from mid−1719 to end of 1720
South
Sea
Stock
startups x10
Sea
Sea
venture capitalists or, even more, to general
“blind pools”? Such investors do not find
out “full particulars” of what is done with
their money for quite a while.
Just how much was this £2,000 that the
“great man” of the Mackay version of the
story is supposed to have made? Based
on GDP per capita, which grew by about
1,000 over the last three centuries, the
gains reaped by the projector are compa-
rable to about £2 million, or $2 million
today. That is not shabby. But it pales when
compared to the sums collected by pro-
moters of the innumerable ICOs (initial
coin offerings) in the last few years.
Various observers have doubted the literal
truth of the anecdote, and some details in
the Oldmixon/Mackay narrative are simply
not consistent with how new ventures were
set up in 1720. The most plausible scenario
is that this story is an amalgam and embel-
lishment of several actual occurrences, an
account that is “too good not to be true.”
But it is only a slight embellishment. Old-
mixon’s version of this story concluded with
an observation about the irrational behavior
that crowd psychology lures investors into.
He wrote that, “What, at another time, when
people were in their senses, and knew what
to do with their money, would have occa-
sional a hue and cry after the cheat, was then
only a matter of laughter, and the crime and
the sum hardly thought worth taking notice
of.” And that seems very accurate, as specula-
tive excitement does warp people’s percep-
tion of what is sensible. It did so in 1720,
and does so today.
Before considering projects from the
1720 era that may have contributed to the
creation of the anecdote, let us say a few
words on the background of the South Sea
Bubble. There is much publicly available
material on this historical event online. A
short overview is available in a chapter in
Edward Chancellor’s book, Devil Take the
Hindmost. The main book-length recent
treatment is in John Carswell’s The South
Sea Bubble. This episode of extreme inves-
tor excitement had huge financial flows
centered on the South Sea Company. Fig-
ure 1 shows the price of its main security.
The South Sea Bubble was largely
inspired by John Law’s Mississippi
Scheme in Paris, which reached its peak
at the end of 1719. Both the French and
the British manias were enabled by the
return to relative peace and tranquility
after several prolonged and debilitat-
ing wars. Interest rates were dropping,
1719.5
1720
1720.5
1721
year
Year
Figure 1. South Sea stock price and the number of new projects announced
in London each month from July 1719 to December 1720. The scatter plot shows
10 times the number of start-ups each month, so that the one for June 1720 corresponds
to the 88 ventures that, according to one count, were announced that month.
and investors’ “animal spirits” were
stirring. The ebullient atmosphere
of 1719 offered new opportunities to
promoters, and they began soliciting
money from investors. Figure 1 shows,
in the scatter plot, the number of new
projects announced each month, but
multiplied by 10, so that the 88 projects
of June 1720 correspond to 880 in the
figure. These numbers are taken from
William Scott’s The Constitution and
Finance of English, Scottish and Irish
Joint-stock Companies to 1720. As can
be seen, out of the almost 200 projects
that Scott tabulated, only 13 were started
in 1719. But they were noticed by many
observers. Also noticed was what seemed
to many skeptics to be the inordinate
credulity of the public that was eager to
get involved. This led to the first of the
events that likely inspired the “under-
taking of great advantage, but nobody to
know what it is” fable.
Starting on Friday, December 18,
1719, the Daily Post carried for sev-
eral days an ad for an “extraordinary
scheme for a new insurance company
to be proposed, (whereof publick notice
will speedily be given in this paper),”
with “permits to subscribe” offered for
£0.05 each. No names of projectors,
nor details of the scheme were cited.
The sale of the “permits” took place on
Thursday, December 24. Two days later,
this same paper had an ad which offered
refunds for the “several hundred” of
those permits that had been sold and
explained that the whole thing was a
hoax designed to show how easy it was
to “impose upon a credulous multitude.”
The ad mentioned that the person who
had collected the money was unknown to
anyone in the crowd, and signed receipts
with a name made up from the initials of
the six people who concocted the scheme.
While this spoof did show that British
investors were “a credulous multitude,” it
was far less extreme than the Oldmixon/
Mackay fable. Even if all 1,000 permits
were sold, the total take was only £50, not
the £2,000 of the fable. Furthermore, for
an individual buying a single permit, the
price of £0.05 was only the cost of a dozen
cups of coffee. So the “credulous multitude”
were not risking very much individually.
Furthermore, they were not putting their
money into an “undertaking …nobody
to know what it is,” but into an insur-
ance scheme. Actuarial science was in its
infancy, so insurance was underdeveloped,
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