Financial innovation and trade
The South Sea Company was designed to be both a private trading company and part of the state’s debt-management programme. It was a hybrid, like other jointstock companies. In return for its help with the nation’s war debts, it was granted trade concessions from the Treaty of Utrecht. The previous chapter outlined how expensive war-mongering encouraged financial reform. It also made clear that wars could bring positive economic outcomes, at least for the victors. This chapter will consider the initial phase of the company’s life. The South Sea Company was formed in 1711 to allow the Tory ministry to restructure part of the National Debt without becoming dependent upon the Whigs. The scheme was designed to appeal to Tory landowners, who had borne the brunt of taxation (Baskin and Miranti 1997: 109). The Whigs dominated the boards of the Bank of England and the East India Company. The Tories wanted a scheme of their own. Their previous attempt, the Land Bank, had failed. As its name suggests, the bank was tied closely to the very asset which imparted social status and political power. Roseveare (1991) noted that the idea of a land bank had been around for some time. A land bank would hold registered land as security. It would allow landowners to raise money, without selling their land. This part was crucial, because of the perceived importance of maintaining the elite’s control over land. However, the idea was not a success. Other schemes also relied on land as the solution to the country’s problems. Archibald Hutcheson (1718) proposed that a further tax on land would pay off the nation’s debts. As landowners had already been taxed to the hilt, Hutcheson thought that they should sell off part of their estates. Many were unable to sell for legal reasons, such as jointure, dower or entail.1 Hutcheson proposed that these restrictions should be lifted. The scheme would not have suited the landed class. It would probably have meant selling land to financiers and foreigners. Thirty years later, David Hume argued that it was unworkable (Hume 1985). The Tories had to change tack and copy the Whigs. The two largest (Whig) companies were models for the fledgling South Sea scheme. The use of a trading monopoly was already well-established. The East India Company (EIC) predated the Financial Revolution by some margin. It was granted its charter in 1600 by Elizabeth I (Chaudhuri 1965). The charter outlined its (national) trading monopoly in its chosen region. This was the basic concept enshrined in the South
Sea’s charter over 100 years later. The EIC was supposed to be free from competition from other English traders in its defined territory. (The monopoly was challenged when a New East India Company was granted a charter in 1698. The two companies merged in 1709.) However, other nations could issue their own monopoly rights. The Dutch East India Company (VOC) was founded in 1602 (de Vries and van der Woude 1997). The EIC and VOC developed alongside one another to become leviathans. Curiously, the South Sea Company had its own twin in the Mississippi Company of France. If the EIC and VOC were proven successes, the Bank of England was a more recent creation. The Bank had been founded in 1694 after at least two years of public debate. Roseveare (1991) noted that the landed interest had been hostile to any idea of a bank as it meant to them ‘usury, debts and foreclosures’. The government agreed that taxes on shipping and liquors should be earmarked for the Bank. Subscribers would receive interest on the money they had entrusted. The Bank would then lend money to the government. This money was paid in paper, not in coin. As Roseveare pointed out, the Bank had created credit ‘in the form of circulating paper’. It received Exchequer tallies in return. The Bank did not immediately fulfil all the functions of a modern-central bank. It dealt with private clients, but its primary role was to lend to the state. The creation of the Bank of England has, with hindsight, been lauded as one of the main events of the Financial Revolution. The name ‘South Sea’, in contrast, has always been associated with failure. Indeed, it is often written about as a scheme that was clearly doomed to fail. However, the Bank was a more outlandish concept to contemporaries than the trading companies were. It was predicted by some pamphleteers that the country would be ruined by the Bank. One, John Briscoe (1694), claimed that he had a better scheme that would allow the landed gentry to avoid taxation. His concern was to avoid the country falling into the hands of the monied interest. Another anonymous pamphleteer (1708) argued that the Bank’s charter should not be extended. (Charters were usually granted for a specified number of years and then subject to renewal.) This writer did accept that the Bank’s decision to issue paper notes was beneficial in time of crisis, but as that crisis had passed, there was no further need for the Bank to exist. Today, the Bank of England is one of the most potent symbols of the establishment. At its creation, it was viewed with some suspicion. The fear of novelty is perhaps understandable, but not necessarily justified. Other new projects were the insurance companies. In the modern developed world, they are key components of a functioning economy. The basic principle behind them is that risks are pooled. Nowadays, an arrangement whereby a large number of individuals contribute to a common fund is uncontroversial. However, it was not always so. Marine insurance was well-established, but life and fire insurance were both in their infancy. Fire insurance companies only really became viable after the rebuilding of London in durable materials after the Great Fire. The earliest schemes failed. Of the second wave, the most famous was the Sun Fire Office (Dickson 1960). It had existed in an earlier format, but it is generally dated from the year 1710.2 Life insurance also appeared in these years, but it
was subject to various problems. There were concerns about the morality of trying to interfere with the workings of Providence. In addition, some people used the contracts to speculate and took out policies on neighbours and strangers alike. Eventually, policies were restricted so that people could only insure the lives of people they were connected to. This ensured that the motivation for buying insurance was prudence not speculation (Clark 1999). The early history of life insurance shows how difficult it can be to identify the motives of financial actors. Many of the innovations of the Financial Revolution period were debated by contemporaries. However, with hindsight, most have been successful. There is a selection bias problem with regard to the South Sea Company. Later authors have used contemporary criticisms of the scheme as justification that it would fail. It should be remembered that many other ideas, such as the Bank of England or life insurance, were also slated. Likewise, contemporary ideas about the profitability of the scheme were based on issues that later authors have overlooked. (This point will be discussed in further detail in later chapters.) The foundation of the South Sea Company was not an innovative move. The joint-stock company format had been used before and the slave trade was also well-known. The company’s charter granted it the monopoly of trade on the east of South America, from the River Orinoco to the south of Tierra del Fuego. It was also allowed a monopoly for the entire west coast and any place within 300 leagues of the west coast. The monopoly did not apply to Portuguese or Dutch possessions (Scott 1911: 295). The House of Commons (1711) records show that the company was also supposed to ‘encourage the fishery’ and to sell unwrought iron to the subjects of Spain. Before the South Sea Company, the main English slave trader was the Royal African Company. It was granted a charter in 1662 to trade in slaves under the name of the Royal Adventurers (Fisher 1928). It was then reorganised in 1672 as the Royal African Company (RAC), and granted the monopoly of English slave trading with Africa. The monopoly was lost when the new government of 1698 was hostile to the company, and refused to uphold its rights (Davies 1970). However, the RAC had important diplomatic links to the African kingdoms. It also maintained a string of forts and fortified warehouses (Paul 2006). Private traders might have claimed that they did not need these advantages in order to trade, but the government still believed that the forts were essential. These forts were the RAC’s trump card. It could threaten to sell them off unless given a government subsidy (Paul 2009d). Despite setbacks, the company continued to ship large numbers of people across the Atlantic. Its expertise was important in such a complicated trade. The African traders demanded a mix of goods in exchange for slaves. The goods required varied by location and across time. The South Sea and the RAC co-operated with each other and also with the Royal Navy. For instance, when the South Sea Company brought its goods and personnel to Spanish America, they went with a protection of four men-of-war (South Sea Company 1711). At George I’s accession in 1714, there was a government debt of around £48 million. Various measures were used to improve the situation. Tax funds were consolidated. The Sinking Fund was established to pay off the principal. Portions
of the debt were converted to lower the interest rate. Between 1715 and 1719, several such conversions took place. In the spring of 1719, a bill was passed allowing for the conversion of lottery annuities. It was successful (Roseveare 1991). The South Sea Company was granted the opportunity to restructure around £9.5 million of unsecured government debt, provided the holders of the debt offered to have it converted into South Sea Company shares and debt. The exact amount of the company’s liabilities depended on the extent to which this happened. Nearly the entire amount had been committed for conversion within six months (Sperling 1962: 25). The conversion process was made easier due to the fact that the company had acquired the Asiento.