Author: Self-Control
Reviewers: Guanfu · Juntian

  Eighteenth-century Europe was an age of extraordinary growth. In one short century, European society seemed to release all the energy accumulated through a thousand years of the Middle Ages. Oceanic exploration brought immense wealth and opportunity, religious reform liberated thought, and scientific progress transformed society. Meanwhile, the last of the classical era’s three great financial bubbles was slowly taking shape, nourished by this wider environment and preparing to inflict another heavy blow.

  In the eighteenth century, Britain defeated the Netherlands in commerce and competed with powers such as France and Spain for overseas colonies. At home, the Glorious Revolution had brought an institutional transition from monarchical rule to capitalist society. Britain already showed signs of becoming the workshop of the world and the empire on which the sun never set.

  Behind all this, however, the British government faced the same problem as France: a heavy national debt. France responded with John Law’s poisonous prescription and produced the severe Mississippi Bubble. Across the sea, at almost the same time—both events occurred in the early eighteenth century—Britain gave rise to another serious financial bubble: the South Sea Bubble.

  The two crises appear highly similar, yet differ completely at several key points. If the Mississippi Bubble was a failed dose of fiscal poison, the South Sea Bubble resembled an elaborate, carefully designed fraud whose leading actors were corruption, greed, frenzy, and deception.

  The Whigs and Tories dominated eighteenth-century British politics, struggling fiercely for power. George I took the throne in 1701, but the Elector of Hanover from continental Europe was a native German speaker and could communicate with his cabinet only in French after arriving in Britain. The Whigs, who then controlled the cabinet, used this opportunity to sideline him further. His prime minister, Walpole, even told a confidant with satisfaction, “I control George with bad Latin and good mixed sweet wine.” George I consequently felt little affection for the Whigs, which gave the Tories an opening.

  When the Tories came to power in the early eighteenth century, they faced severe national debt and had to contend with the Whig-controlled Bank of England. Acting on the advice of the merchant John Blunt, Chancellor of the Exchequer Robert Harley proposed to Parliament that a South Sea Company be established to convert and repay the national debt.

  The plan was to establish the South Sea Company and grant it a monopoly over trade in the South Seas—that is, South America; convert £9,471,325 of national debt into South Sea Company shares, with the government paying 6 percent interest; and secure the arrangement with customs duties on wine, vinegar, tobacco, East India Company goods, silk, whalebone, and other commodities. The South Sea Act quickly passed both houses and was signed into law. In September 1711, Harley received a royal charter, formed the South Sea Company, and became its first governor. Blunt, who had proposed the scheme, became a company director and later a central figure in creating the financial crisis. Their method converted national debt into an equal value of South Sea Company shares, each with a face value of £100.

  In this respect, the South Sea Company closely resembled France’s Mississippi Company. Both were backed by the state, held out the economic benefits of colonial regions as their growth prospects, and were established to address national debt. This was also a nearly inevitable response to Europe’s political structure at the time. Governments could not raise enough through taxation to repay their debts because taxes would fall on landed interests, whose members largely controlled Parliament, while foreign wars still required enormous funding. Resolving debt through commercial means was therefore highly tempting. Yet debt’s immense effects did not disappear. As with equivalent exchange in alchemy, the vast debt was merely transformed into vast potential risk.

  Like the Mississippi Company, the South Sea Company used a debt-for-equity swap. The government’s heavy national debt was converted into company shares: the original creditors ended their direct debt relationship with the state and became shareholders in the new company, while the company, as an independent legal entity, became the government’s creditor. This did not normally make government debt disappear, but it substantially reduced the cost of organizing and managing many complex obligations. In return for easing the pressure of government debt, the company obtained various commercial privileges. In some respects, this was a suitable way to manage sovereign debt. Greed and frenzy, however, can magnify risk until people end up sacrificing themselves.