Long before the wolves prowled Wall Street, some of history’s riskiest financial transactions took place in a London passageway during the 18th century. Instead of trading floors, deals were struck in the noisy coffee houses of Exchange Alley, where speculators pored over newspapers for the latest share prices.
“I had need of an interpreter, as if I had landed in Asia,” wrote one Gloucestershire man, who arrived hoping to make a fortune for his family. “For though many of the words perpetually bawling in my ears had a turn of the English idiom, yet the variety of nations, combining in the same syllables, formed sounds as different from each other as Hebrew, from French or English.”
In this confusing environment, one private entity, the South Sea Company, exploited Britain’s growing appetite for easy money on a mass scale.
Established in 1711, the Company took on a portion of the national debt that the government had accrued from wars with France and Spain, in return for a trading monopoly with the Spanish colonies of South America.
In most basic terms, the Company was then able to float shares on the stock market, making profits while easing the government’s financial burden.
Despite only modest success across the Atlantic, the South Sea Company was granted the majority of the debt in March 1720. Their share prices rocketed, which prompted other highly speculative (and occasionally downright ridiculous) ‘bubble’ companies to emerge.
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One allegedly attempted to attract investors with a plan “For carrying on an undertaking of great advantage; but nobody to know what it is”.
THE BUBBLE BURSTS
Lured by exaggerated promises of riches, the public continued to invest in droves, driving South Sea Company shares up from £128 to over £1,000 by June 1720.
But after reaching its peak that summer, the bubble ‘burst’ and the Company’s stock value plummeted.
While some investors managed to sell off in time, many were left bankrupt. A doctor named Sir John Midriff went so far as to publish a satirical book concerning “remarkable cases of persons of both sexes, and all ranks, who have been miserably afflicted with those melancholy disorders since the fall of South Sea and other public stocks”.
An inquiry found that politicians had been accepting bribes to support the South Sea Company in Parliament, while the directors of the scheme had fraudulently manipulated stock for their own benefit.
Thrown in prison or with their estates confiscated, the lives of those responsible lay in tatters, much like the thousands they had conned.