Criticism and financial complexity
Many contemporary sources include little that really explains what happened in the market. Pamphlets, plays and ballads appeared that hardly mentioned finance, except as stock-jobbing. This may be termed the social history of the Bubble and it is discussed in the next chapter. The financial analysis undertaken at the time
was brief and often incorrect. The relevant body of financial theory needed to analyse bubbles was not developed until long after the crash. Bypassing the complexities of finance, the public did understand that bribery had occurred. The bribery issue was something for a frightened and confused populace to latch on to. Once the company directors and others had been punished, the fuss started to die down. Whilst bribery is not laudable, it was commonplace. The existence of bribes is no indication of the quality of the underlying scheme. The East India Company had used bribery to maintain its support in the court and Parliament. Sir Josiah Child had set aside ‘great sums of money to bribe the Court before 1688, and Parliament afterwards’ (Trevelyan 1944: 220). Bribery would not come to light when schemes were successful, as there would be no public enquiry. Only failure brought a search for scapegoats. There is a selection bias problem, as only failed schemes were investigated. If bribery was a constant factor in Georgian life, then it is not a sufficient reason for a bubble to appear in 1720 and not in other years. Archibald Hutcheson condemned the directors for more than mere bribery. He accused them of deliberately setting out to ruin the kingdom.1 He has been singled out as a financial savant. His theories have been used by Dickson and Scott, and through their works have become more influential. Dale (2004: viii) called Hutcheson ‘the unsung hero of the South Sea Bubble’. There has been a tendency to cherry-pick from Hutcheson’s writings so that he appeared to have understood the stock market. A wider selection of his work shows a different picture. (Some of his ideas are discussed in the next chapter.) For example, Hutcheson (1718) argued that the existing social order should be maintained at all costs. If the landed elite had lost money in the stock market, then it should be returned to them (Hutcheson 1721b). They were not to be held responsible for their mistakes or bad luck. There was no notion of caveat emptor. Hutcheson’s class prejudice was joined to xenophobia. It was the trader’s social background, rather than the legality of the bargain, that mattered to him. Hutcheson’s grasp of economics was not as strong as has been claimed.2 He would have preferred it if there was no National Debt and no long-term borrowing. Ideally, he wanted the government to raise sums to match its annual expenditure within the year (Hutcheson 1718). This system of short-term borrowing was expensive and inflexible. Clearly, in lean years, it was almost impossible. Hutcheson (1720) also wanted to ban option contracts in the stock market. For a fee, the trader has a right to buy (or sell) a share or asset at a specified price in the future. A modern European call option allows someone the right, but not the obligation, to buy an agreed number of shares at an agreed price on a particular date.3 So, if the market price happens to be higher than this agreed price (strike price) then the trader can buy shares more cheaply than in the market. If the market price happens to be lower, the trader can simply let the option lapse and buy directly in the market. The trader will never have to pay more than the strike price (minus the fee for buying the option). Option contracts limit risks for a trader and the fee is analogous to an insurance premium. If Hutcheson had had his way, then this useful type of contract would have been made illegal.