January 6, 2012

‘Notorious, dangerous and infamous corruption’

The Commission investigating the South Sea Bubble reported back to Parliament on this date in 1721 and the conclusions were shocking – not only had there been widespread fraud and corruption among the South Sea Company directors, but even members of the Cabinet were guilty of same.

chancellor of the Exchequer Aislabie

I’d like to explain the South Sea Bubble – which sounds so delightful – in a few short sentences, but really, it’s quite beyond me.  It had something to do with paying off the debt resulting from the War of the Spanish Succession by using an existing joint-stock company to issue shares.

But paragraphs like this induce narcolepsy: “Crucial in this conversion was the proportion of holders of irredeemable annuities that could be tempted to convert their securities at a high price for the new shares. (Holders of redeemable debt had effectively no other choice but to subscribe.”

Anyway, something called subscription shares were created and they were traded like stocks – the company offered them to politicians, the aristocracy took them up and the savviest among them did not pay for the shares, but waited for them to rise, then returned them to the company, collecting a neat profit on no investment.  Something like that.  And the company and its influential investors – like the King’s mistress – talked up the shares at every turn, even lending money to notables so they could buy.

As a result, South Sea Co. shares rose from 100 pounds per to 1000 pounds per over the period of a year and everyone was buying and not many were selling.  Until the peak, when everyone started selling, of course, and prices began to fall.  By the end of 1720 the price was back down to 150 per. Thousands went bankrupt, including many aristocrats.

(If you’re interested in the financials, there’s a nice piece here by Oxford economist Gary Shea called Understanding financial derivatives during the South Sea Bubble: the case of the South Sea subscription shares.)

By that point the clamor forced Parliament to create a commission to look into the affair and eventually the assertion of fraud and corruption came to light.  Legislation was passed, some estates were confiscated and used to pay back the victims, and two Cabinet Ministers were impeached for corruption.  Only one person went to jail and that was Chancellor of the Exchequer John Aislabie, who was accused of ‘most notorious, dangerous and infamous corruption.’

Not enacted was a Parliamentary resolution that all the bankers be put in sacks filled with snakes and thrown into the Thames.

Greed, fraud, corruption, the mad rush to get rich quick – something civilization apparently never outgrows.


1 Comment »

  1. Bubbles of evil and still bursting greed it’s a sickness.


    Comment by avery zia — January 19, 2012 @ 8:54 am | Reply

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