The Great Swindle: The Story of the South Sea Bubble

The Great Swindle: The Story of the South Sea Bubble

Author: Cowles, Virginia

Cost: $17.99



Includes new introduction by Dr. Marc Faber. First published 1960.


South Sea Bubble, Speculation, London, Eighteenth Century, Crash, Sir John Blunt, Stanhope, Walpole, Craggs, Fraud


The Great Swindle : The Story of the South Sea Bubble

As winter turned to spring in 1720, London was afflicted with a speculative mania unprecedented in British history. As the "Bubble" of the South Sea Company stock reached its peak in the summer, new wealth was apparent throughout the City as profits, or credit on the expectation of gain, was expended in a display of finery, and conspicuous consumption. "We are informed that since the hurly-burly of stock jobbing there has appeared in London 200 new Coaches and Chariots, besides as many more on the stocks ... above 4,000 embroider'd Coats; about 3,000 gold watches at the sides of whores and wives; and some few acts of charity". Other promoters rushed to the market with their own "bubble stocks" keen to tap the public's enthusiasm - "any novelty could be sure of finding an imitator within a few days" - and money rushed in from the provinces. By Autumn, however the dream had turned to nightmare, and it was losses, debts and duplicity that preoccupied the Kingdom, as South Sea stock, and other new offerings, crashed. In the centuries since, this manic cycle has been repeated time and again, as we have most recently been reminded in the great "dotcom" boom.

Cowle's account, first published in 1960, documents the origins of this early speculative episode in the needs of an unpopular monarchy, ambitious politicians, distressed government debt, and the allure of John Law's apparently successful revival of French credit. The latter enterprise (the Mississippi scheme) also ended in catastrophe, though not before giving us the use of the French word "millionaire", yet was not heeded when inconvenient, and thus failed to provide an opportunity to defuse the events in England that euphoric summer.

The text has now been reprinted by Hindsight Books with the benefit of a new introduction by Dr. Marc Faber, an authority of international market behaviour, as part of its library of investment history.



The Earl Of Oxford Page 9


  1. The Court and the Company 34
  2. Mr. Law and the Mississippi Boom 54
  3. The South Sea Scheme 73
  4. Trouble in paris 100
  5. London Goes Mad 117
  6. Crime and Punishment 142
  7. The End of the Affair 174

Chronology 185

Index 187

The South Sea Bubble

A new introduction by Dr. Marc Faber

From time to time a wave of optimism spreads around the world like a bush fire. People believe that they are seeing the dawn of a new era, which will bring unimaginable riches and prosperity to all. Waves of new era thinking are usually associated with discoveries (the Americas, gold deposits in California), the opening up of new territories (the Western territories of the US, the opening of China in recent years), the application of new inventions (canals, railroads, the automobile, radio, PCs, the Internet, wireless communication, etc), the rise in the price of an important commodity (rubber at the beginning of the 20th century, oil in the 1970s), peace treaties (the breakdown of communism), or strong economic performances. A typical feature of new era thinking is that it usually engulfs a country or the world not at the beginning of an era of prosperity, but towards the end of such a period and is associated with some sort of a 'rush' or investment mania. Two of the most well known examples of this phenomenon are John Law's Mississippi Scheme and the South Sea Bubble, which, in the early part of the 18th century, occurred almost simultaneously and are the subject of Virginia Cowles excellent book, 'The Great Swindle'.

In 1711, the Earl of Oxford, better known as Robert Harley, established the South Sea Company in order to take over £10 million of government debt, which it converted into shares of the South Sea Company. In exchange, it received annual interest payments from the government and the monopoly to trade with the King of Spain's subjects in South America. In addition, a year later the company obtained the exclusive rights to sell slaves in South America. Right from the start the company enjoyed great prestige but profits were elusive, because the Spanish King Philip V had refused to let the Company send more than one cargo of merchandise per year to South America, and even from this slim venture, insisted on a share of the profits. Moreover, the 'Assiento', the permission to transport Negro slaves to the South American plantations, was fraught with high risks, since many slaves died on the way, and the unarmed ships were frequently attacked by buccaneers or were driven away by the Spanish coast guards who dealt with privateers and did not tolerate any competition. On top of these difficulties, the South Sea Company lost already in 1715, two of its founders, Lord Bolingbroke and Lord Oxford both of whom were accused of treason. At this point the Company thought it wise to interest King George in their affairs in the hope that he might secure them more advantageous terms with the King of Spain. Since the King had no wish to embroil himself in English business affairs, the Company's directors enrolled the services of the King's two Hanoverian mistresses, Madam Schulenburg and Madam Kielmansegge, both of whom had considerable influence over the King, and eventually managed through political maneuvering, bribes and intrigue to make him accept the South Sea Company's invitation to serve as Governor.

The Great Swindle : The Story of the South Sea Bubble

In the meantime, in France, a Scottish adventurer, John Law, who having understood the laws of probabilities had made a small fortune as a professional gambler, opened under the patronage of the French Regent a bank, which issued paper money backed by gold and silver. The bank became with the help of the Regent an immediate success and John Law was subsequently successful in convincing the Regent to grant, in 1717, his new venture, the Mississippi Company, the monopoly of all commerce between France and its French territories in North America, which included the present states of Louisiana, Mississippi, Arkansas, Missouri, Illinois, Iowa, Wisconsin and Minnesota in return for accepting outstanding notes of the French Government for the payment for the Mississippi shares, which amounted to nothing else than a partial conversion of France government debt for shares in the Mississippi Company.

The operations of the company did not prove to be profitable and by early 1719, the shares had declined to 300 livres, well down from the issue price of 500 livres. It is at this point that John Law had an ingenious idea. First he announced that he would pay in six months' time 500 livres for shares in the Company, which led the public to believe that future capital gains were almost a certainty. Thereafter he acquired with the support of the Regent the French East India and China companies, the tobacco and coinage monopoly, the mint, the right to collect taxes and the national bank, all this in return for taking over the entire French national debt, which amounted then to 1,5 billion livres. The scheme was brilliant. The Mississippi Company would pay the government 1,5 billion livres, in turn, the government would repay its creditors who would then 'invest the money they receive in the shares which are now offered to them at less than their value', as John Law wrote.

The scheme worked perfectly well for a while, as each time the Company announced some new venture additional shares would be issued at higher and higher prices, which attracted a larger and larger number of speculators to participate in the mania. In particular, the public's enthusiasm was fueled by the government, which churned out money like a printing press. The Regent had namely taken over John Law's bank and whereas John Law had always maintained a balance between gold reserves and paper currency, now he advised the Regent that sufficient confidence had been established among the public in paper money and that gold could be forgotten altogether. As a result, in 1719, the government increased the money supply dramatically and lent money for between 1% and 2%, partly in order to manipulate the shares of the Mississippi Company higher. This vast increase in the supply of paper money combined with the ability to purchase shares in the Mississippi Company on an installment plan (credit) led not only to the shares rocketing towards the end of 1719 to over 20,000 livres, but also to rapid price increases across France. Bread, milk and meat had risen six times in cost, while cloth was up by 300%. The result of this horrendous inflation made the holders of Mississippi shares and of paper money nervous and in January 1720, a number of large speculators decided to cash out, which drove the shares of the Company down, and to invest their money in real assets, such as real estate and gold. As a result the gold price soared and forced John Law, still backed by the Regent, to take extraordinary measures. Banknotes were declared the only legal tender and the ownership of gold exceeding 500 livres in value was declared illegal. To enforce this most blatant expropriation, John Law encouraged the public to turn informer by handing out large rewards to those who had assisted in the discovery of gold, which was confiscated. Moreover, John Law implemented another even more desperate measure. He merged the bank and the Mississippi Company and announced that the price of the Mississippi stock would be fixed at 9000 livres and could be bought and sold at a bureau of conversion for bank notes in exchange, in the hope that this measure would induce speculators to hold on to their shares. But, the speculators had by then lost faith in the Company's shares and selling pressure continued, which led the bank to increase once again the money supply by an enormous quantity with the result of another round of rising prices. John Law realized now that his main problem was no longer his battle against gold, which he had sought to debase, but that inflation was the real enemy. He, therefore, issued an edict by which bank notes and the shares of the Mississippi stock would gradually be devalued by 50%. As one can imagine the public reacted to this edict with fury and after a short period John Law was asked to leave the country. In the meantime, gold was again accepted, as the basis of the currency, and individuals could own as much of it as they desired. Alas, as a contemporary noted, the permission came as nobody had any left.

The Great Swindle : The Story of the South Sea Bubble

The initial success of John Law's financial dealings had not gone unnoticed in England. Inspired by John Law's scheme, John Blunt, a shady character that was the dominant figure on the board of directors of the South Sea Company obtained the right from the government to convert a large portion of the government debt into shares of the South Sea Company. Blunt had beaten the Bank of England's proposal, which was similar in nature because of the South Sea Company's excellent connections to influential politicians, and the King and his entourage who were all richly rewarded (bribed) for their support. Blunt had spotted an opportunity to make a lot of money by having the permission to issue £100 of South Sea stock for every £100 of debt it converted. At the time a Parliamentary Act granted permission to the conversion, the price of the South Sea Stock stood at £128. But assuming the price of the stock could be driven to £300, then, if an individual owning £1,200 of government debt wanted to convert, the company would have the right to issue 12 shares, but only give the creditor 4 shares. £400.

The Company could then sell the remaining 8 shares in the open market and book the proceeds as profit, making the whole scheme's success entirely dependent on a rise in the price of the stock. In fact, when the House of Commons passed the South Sea Bill, only the conversion price of government's redeemable debt was fixed while the conversion of irredeemable debts or annuities was left open. In April 1720, at about the time the Mississippi scheme was already in deep trouble, the Company placed two very successful issues of shares - first at £300 and then at

The South Sea Company had, however, unlike John Law not the ability to print money; in other words it did not have the power to increase the money supply, in order to push up its share price. Blunt, found another way to make sure the stock would rise and this was done by announcing that the Company would grant loans to holders of the South Sea shares and that for the purchase of a third issue of shares, in June 1720, at £1,000 only a 10% down-payment was required. Since the shares had risen from around £100 at the beginning of the year to close to 1,000, the public went wild and also bid up the prices of other rather suspect companies such as 'for insuring marriages against divorce', 'for a wheel of perpetual motion', 'for planting of mulberry trees and breeding silk-worms in Chelsea Park' and for 'a Company for carrying on an undertaking of Great Advantage but no one to know what it is.' This flood of new 'bubble companies', most of which were fraudulent, endangered the South Sea Company, which depended on a steady flow of new money to boost its share price in order to keep the party going. Therefore, in an attempt to reduce the number of competitors for the speculators' money, John Blunt issued writs against a number of companies, who he claimed were operating illegally.

The Great Swindle : The Story of the South Sea Bubble

The Lord Justices ruled that indeed a few companies had been operating illegally and subsequently the 'out-lawed' companies collapsed dragging along with them also the stocks of other companies, including the South Sea Company, since everybody had been investing on credit. Once the mood among the speculators had changed there was nothing which could stop the South Sea shares from a vicious collapse. Having sold for around £1000 in July, they tumbled to £190 by the end of September. Blunt, who himself had already cashed out of the shares, had in the meantime tried to arrange for an emergency loan from the Bank of England to stabilize the price of the South Sea shares at £400, but the Bank backed out in the last minute, because of the continuous fall in the price of the South Sea Company. Following the collapse in the shares an inquiry was launched as the public and the landed gentry, which had suffered colossal losses had become vindictive and looked for a scapegoat.

In the end all the Company's directors had to pay back most of profits they had gained from highly questionable practices the Company had engaged in. Blunt was also called upon to testify, but at a first hearing to whatever question that was asked he simply replied that he did not remember. In the meantime, the treasurer of the Company skipped town. In the end, however, after he had been promised leniency, Blunt testified at that point, it became evident that the Company had engaged in all sorts of schemes to defraud its shareholders to the benefit of close associates and directors. The Company was eventually wound up with each shareholder receiving £33 for each share.

Virginia Cowles' 'The Great Swindle' is an excellent account of the events that surrounded the South Sea Bubble and the Mississippi Scheme and although in the following 300 or so years the stage of investment manias repeatedly changed, the script, the accessories, and the nature of the actors participating in the bubble have largely remained the same.

The 'Bubble' Model always involves a 'displacement', which leads to extraordinary profit opportunities, overtrading, over-borrowings, speculative excesses, swindles and catchpenny schemes, followed by a crisis during which fraud on a massive scale comes to light, followed by the closing act during which the outraged public calls for the culprits to be taken to account. In each case, excessive monetary stimulus and the use of credit fuels the flames of widespread speculation and public participation, which involves a larger and larger group of people seeking to become rich without any understanding of the object of speculation. The saga of the Mississippi and South Sea Company is historically relevant because it contains all the major features of subsequent manias. Shady characters, corruption, fraud, dubious practices, the creation of money and the extension of risky loans in order to keep the speculative orgy going, the catalyst, which leads to the initial collapse - usually the revelation of fraud, the inability of a large speculator to come up with the money to meet a margin call, the revelation that insiders cashed out, or some adverse economic or political news - and then the panic during which greed and euphoria is replaced by fear and the speculators' desire to get out at any price.

What is also important to understand is that, both the promoters of the South Sea Company and John Law attempted to support the market at any cost, but at some point the market forces proved to be far more powerful than any price supporting measures, which could have been taken. In particular, John Law's policies remind us of current central banks' policies that aim at solving any problem by increasing the money supply. That such monetary policies will lead to the same price increases, which, at the time of John Law's Mississippi scheme, destroyed people's faith in paper money, ought to be clear. Whether at that point, current central bankers and government officials will conspire to expropriate investors' gold, and holdings of real assets, remains to be seen, but we should not forget that in 1933, in the midst of the Depression, the US government declared the possession of gold by individuals to be illegal.

Dr. Marc Faber
April 2002



The Great Swindle : The Story of the South Sea Bubble

May 2 Harley introduces to Parliament his blueprint of the South Sea Company's acquisition of Government debt
In the event the company took on £10 million of the government debt, on which it earned 5% - this became the main source of revenue for the company in the absence of trade with South America in its early years.
18 South Sea Bill passes both Houses Company began to take in subscriptions in July.


John Law settles in Paris


Prince of Wales joins South Sea Company, Duc d'Orleans becomes French Regent.
France teeters on edge of bankruptcy.


May Law's Banque Generale opens in Paris
Later in year converts to Banque Royale, with notes guaranteed by the Crown.


South Sea company proposes to take on lottery debts from government and the 3% annuities
King George I becomes Governor of South Sea Company
August Law's Mississippi Company established in France
Granted a monopoly of trade between France and the province of Louisiana, Mississippi, Arkansas, Missouri, Illinois, Iowa, Wisconsin and Minnesota), and plant colonies there, administer taxes and raise armies.


South Sea company proposes to takeover Government annuities from the 1710 lottery South Sea Stock at £106
Having risen on rumour of a pending "big project".
May Law announces plan to buy Mississippi stock at 500, six months hence
The start of a program of manipulation, the stock had been trading only 300 livres.
July Mississippi company aquires monopoly of coinage - stock jumps to 2,000
Follows acquisition of the Tobacco monopply in 1718, and the East India, China and Africa trading companies. With these moves new shares were issued, and although still more followed (to buy right to farm taxes, and then to pay off the national debt), the price continued to rise and touched 18,000 livres (£900). Over this same period, the Government had been producing huge amounts of paper money...
November King's speech to Parliament. "I must desire you to turn your thoughts too all proper means of lessening the debts of the nation."


January Law made comptroller General of France's finances
12 South Sea's fourth public subscription, 10,000 shares
18 Writs to close down activities of major "rivals" to the Company
Their stocks crash, but so too does the public fortune and confidence.
30 Company tries to support stock with announcement of dividend hike.
At this time the Company is also buying its own shares in an attempt to hold the price up.
September 1 South Sea stock begins month at £770
8 Company holds stockholders meeting at Tailors Hall to calm nerves
9 South Sea shares down at £575
19 South Sea stock at £380
Company meets with directors of Bank of England to seek support.
24 South Sea's banker, Sword Blade, closes
28 South Sea shares down at £190

Publisher: Hindsight Books Date Published: 2002 Available Formats: Softover (192pp., 5.5" x 8", 250g.) ISBN: 0954156714