In the year 1719, the English public debt was an overwhelming problem that hindered the Parliament as well as the Crown’s ability to effectively manage England’s finances. The manner in which government taxes were collected was inefficient and they often attempted to collect taxes several years in advance in an attempt to gain control over the daunting national debt. At this point in time, the South Sea Company was involved in unprofitable slave-trading ventures and decided to change courses and initiate a debt takeover scheme similar to that being attempted in France by John Law.
This debt takeover plan would eventually lead to the creation of the Bubble Act in an attempt by the governors of the South Sea Company to protect their own interests. This Bubble Act would ultimately prove to be detrimental to the South Sea Company and lead to the worst financial crash yet seen as well as having consequences on English business practice for the next 100 years.
In 1710, Robert Harley was one of Queen Anne’s favorites and recently become the Chancellor of the Exchequer. To his dismay, his new job consisted of serving the country’s debt which had reached over £8 million. (Deceit 18) This debt was mainly divided into two parts: redeemable and irredeemable. The annual cost of servicing the redeemable debt, that debt which could be paid off if the government had the funds, was over £750 000 a year.
The annual cost of servicing the irredeemable debt, which had terms over long periods of time and could not be paid off unless the debt holder agreed to terms which he found favorable, was over £800 000 a year. (Carswell 103). Although Harley first tried to eradicate the debt by means of a lottery, this attempt was unsuccessful and he was sacked from his post in 1714 and shortly after this, the Queen herself died leaving the reign open to King George I.
In the 1715 elections, the director of the South Sea Company was replaced by the new Prince of Wales. However, in 1718 the tides had turned and the Prince was now living apart from the King and had formally been revoked of his titles and responsibilities. (Carswell 73) Although King George acted as a figurehead and did not preside over the director’s meetings he had signaled to the public that the business was to be trusted.
The South Sea Company adapted to the political environment as it had been, “launched by the Tories, [and] had effectively been reinvented as a Whig project with the King as it’s guarantor.” (Deceit 53). By 1719, the company still had not made a profit on its slaving ventures but their capitol exceeded £12 million. (51 Deceit). The company was interested in a new scheme rather than slave trading; they were influenced by the acts of John Law in France and his currency conversion and debt takeover ideas. The National debt was something that impeded the government’s actions and freedom and the monarchy had never managed to get it under control. (Carswell 45, 22)
These circumstances; that the South Sea Company had money to invest, that the governments could no longer service their debt along with the debt takeover schemes being undertaken in France, created an environment in which the South Sea Company saw an opportunity. They decided to make a stock offering to settle the debt of the government. The terms of debt conversion offered by the South Sea Company would save the government over £400 000 a year by allowing debt holders to exchange their debt for shares in South Sea stock. ( Carswell 105).
In order to acquire this privilege of debt conversion, the South Sea faced competition from the Bank of England who did not want to lose its importance to the finances of England. In order to maintain fairness, both the South Sea Company and the Bank of England were allowed to present their terms of conversion to Parliament. In doing so, it forced both parties to raise the amounts they were willing to pay for this privilege. Although the South Sea Company originally was willing to pay £3 million, the rival bids of the Bank of England forced them to raise this sum to a staggering £7 567 000.
This amount was more than double their original offer and accounts partially for the need of all capital to be diverted into South Sea stock, “Those who urged that the Bank of England should be permitted to compete in this singular bargaining were no doubt honest in motive and correct in principle, but in practice, the rivalry thus created proved anything but beneficial in its consequences, since it forced the directors of the South Sea Company to incur so formidable a liability to the Government that they could only hope to discharge it by hazardous and unwarranted expedients.” (61 Reading).
Had the Bank of England not competed against the South Sea Company for the chance to take over this project, such hazardous risks could have been prevented and such a large amount of capital would not have been needed by the Company to fulfill its duties to the Crown. It is precisely this large amount of required capital investment that would inevitably lead to the need for the creation of the Bubble Act to divert the capital towards investment in the South Sea Company.
This venture would only be profitable if the governors of the South Sea Company could inflate the values of the South Sea stock continuously in hopes of people converting larger portions of their debt in exchange for less South Sea stock. In this, they were, according to a saying of the time, “Selling the bear’s skin before they had killed the bear.” (106 Carswell) This continuous requirement of capital necessitated all funds to be invested in South Sea stock and none to be diverted to other companies. Therefore the directors of the South Sea Company had a vested interest in seeing to the creation of the Bubble Act and that it protected the interests of the South Sea Company.
Investing in South Sea stock had become the new form of gambling and was attractive to all members of society. ( Deceit 5) This attraction factor inevitably led to speculation and inflated values of the stock; the goals of the directors had been realized and a bubble had been created. By the spring of 1920, a whole new wave of small companies had sprung up to ride the wave of the speculation hype. The governors of the South Sea Company believed this was diverting capital that would otherwise have been invested in the South Sea Company and helped with the necessary need of constant expansion.(Harris 112)
Furthermore, as non-corporations began to assume rights previously held by only chartered companies the Crown began to lose revenue normally received through the incorporation progress.(Reiffen 163). These two mindsets combined, led to the need for the creation of the Bubble Act. The committee that eventually led to the creation of the Act was formed in February 1920 when the debt conversion plan of the South Sea Company was already in action. (Harris 613).
Most of the people who made up this committee were proven to have interests in the South Sea Company, which was not surprising when it was revealed in the aftermath that at some point in time over 450 MPs held South Sea Stock. (Harris 615, Deceit 181). Because this committee was well aware of the need of the Act to protect the South Sea Bubble, it was simple to design an Act that would confine the profitable business of speculation to the South Sea Company. (Harris 112)
When the Bubble Act was passed by the King on June 11th, 1920, the King immediately left for Hanover and was not to return until after the bubble had burst. Given that the Bubble Act was rushed through Parliament by supporters of the South Sea Company it contained two unrelated matters but it had effectively achieved its goal.
The formal name of the Bubble Act was, “An Act for better securing certain Powers and Privileges, intended to be granted by His Majesty by Two Charters, for Assurance of Ships and Merchandize at Sea, and for lending Money upon Bottomry; and for restraining several extravagant and unwarranted Practices therein mentioned”(quote) and was comprised of 27 clauses. The first 17 clauses of the Act discussed the affairs of two insurance companies and had little to do with the South Sea Company.
Clause 18 specified activities which would now become illegal except if the company in question was chartered. Clauses 19 to 21 described the punishments and 21 to 27 protected the interests of the South Sea Company as well as the Bank of England. (Harris 614) Therefore although the Act is commonly known as the Bubble Act, less than half of the content had anything to do with the protection of the bubble; however it is these clauses that would later hold historical significance.
Although it has been assumed in the past that the Bubble Act was passed after the crash of the South Sea stock, which caused the stock to plunge an astonishing 87 percent, the worst in history up to that point, a close examination of dates reveals that the Act was passed in June whereas the crash did not occur until September. (Reiffen 163) In August, Parliament began to enforce the Bubble Act against several of the South Sea’s competitors.
However, it had the opposite effect than that intended for the reasons that it placed downward pressure on the whole market of stocks and not just those of the companies towards which the Act had the authority to act. (Quote?) This caused a rush for liquidity which almost caused the Bank of England to default and not have enough available funds. This caused the experiment to be terminated with the Parliament no longer supporting the venture but although a crash had occurred that does not mean the venture was a failure in some historians eyes, “The South Sea scheme was, after all, executed successfully, solving the pressing problems of the national debt by lowering interest payments, putting debt on a funded basis and attracting new public creditors.
The trauma sent English public finance into a new era- more efficient, more financially sound, and less corrupted by private interests.” (Harris 625) In this, the Bubble Act could now protect the public against further bubbles because Parliament had an even tighter amount of control over who received charters and the benefits they were to receive.
In the course of restricting the availability of charters, Parliament, therefore, increased their value and in turn the profit they were able to extract in means of payment to receive the benefits of a charter.(165 Reiffen)Subsequently, the benefits of the Bubble Act were two-fold in enabling Parliament to restrict access to the formal capital markets and increase their revenue earned from charters.(169 Reiffen).
Nonetheless, Parliament did not retain absolute power because in 1623 a Statute of Monopolies had been enacted preventing the issuance of charters which guaranteed its holders a monopoly, therefore Parliament had more of an incentive to issue charters and were forbidden from limiting the issuance so tightly that no competition would be allowed.
For the twenty years following the ratifying of the Bubble Act, the policies of the Act were a dominating factor in English business practices and proved to create a decline in the market for joint-stock shares. (171 Reiffen, Dubois 24). The author of The English Business Company After the Bubble Act 1720-1800, argues that “It’s restraining force was perhaps enhanced by the circumstance that the precise meaning of its rambling clauses had ever remained in doubt.” (Dubois 2) To the extent that the directors of the South Sea Company had needed the Bubble Act to serve their interests, they had never been thinking long term in their financial plans and had no thought to the future of the Act or its consequences.
After the crash of the South Sea bubble the Crown was very prudent in conferring the benefits of incorporation onto businesses for fear of bankruptcy or a monopoly which would rock the English finances to the same extent that the South Sea Company had done. (Dubois 29) However, English business still needed to carry on and in spite of the Bubble Act companies needed a way in which to raise funds to further their business interests. (Dubois 38) It was such that partnerships were encouraged by the Crown and unincorporated companies using stock became accepted by the public. (Dubois 34).
Society’s view was still hampered by the effects of the South Sea Company in that they mistrusted chartered companies and believed that these companies would, in turn, become monopolies that could rock the economic boat. (32 Dubois) However, no matter how much the public mistrusted these companies their role was essentially being replaced by the unincorporated companies, and with the effect of the industrial revolution taking place in subsequent years, there was an increase in charters accorded as well as a slow change in public opinion. (Dubois 28, 32).
