creation of the South Sea Company, which was at the center of the bubble. Contrary to popular reputation, this venture at its start in 1711 was a very innovative financial experiment that turned out to be extremely successful. Essentially, it converted a large volume of British government short-term debt into long-term bonds. It continued prospering through the 1710s, and it was only the Bubble of 1720, portrayed in the price chart, that gave it the notorious reputation it still carries. During the earlier halcyon days of the 1710s, the South Sea Company attracted many solid investors, such as Newton and Guy. In addition, investors in the South Sea Company who did nothing during the bubble emerged from that episode with significant profits, as there was a substantial Ponzi element to this scheme.
At the end of 1719, Defoe wrote The Chimera, a strong critique of John Law’ s Mississippi Scheme. This was the first large-scale financial bubble in history.( The Dutch Tulip Bulb Mania of the 1630s was more of a tempest in a teapot.) It was then reaching its height in France, and Defoe pointed out its many defects and warned of its instability. He contrasted Law’ s visionary experiment with the solidity of British finance. However, the apparent flourishing of Law’ s venture, and its success in relieving France of the burden of its giant national debt, inspired Britain to attempt a similar feat via the South Sea Company.
From the beginning of 1720, Defoe ran The Commentator, a newspaper that was likely subsidized by the government. He continued to attack Law’ s French scheme and was vociferous in his condemnation of the various visionary London schemes, such as a company“ For extracting Silver from Lead.” He called them various names, such as a“ lunacy” caused by the“ bubble infection.”
However, he was supportive, with only minor cautions, of the South Sea project, which had most of the financially dubious features of Law’ s venture. Defoe claimed it compared to the Mississippi Scheme like“ a real Beauty and a painted Whore.” In retrospect, it is easy to argue that the Mississippi Scheme had far greater chances of success than the South Sea venture, as it was launched in a richer country and had a larger scope( as well as being inspired
This 1720 letter documenting one of Isaac Newton’ s South Sea Company investments was on view in the Museum’ s 2008 exhibit,“ Art of the Exchange.”
and run by a truly innovative economic thinker, John Law). But that was not how Defoe presented the situation.
The Commentator folded just as the bubble was collapsing in September 1720. A month later, Defoe was put in charge of The Director. This paper was devoted exclusively to the South Sea affair, and it may have been set up by those directors of the company who were not in the inner clique, to deflect blame from themselves. Defoe mounted a valiant but doomed effort to support the market price of South Sea securities, and in the last issue of this paper presented a laughable account of just how much the taxpayers had saved as a result of the bubble.
Exactly what Defoe thought privately is impossible to say, as what he wrote in the cited papers was clearly in line with his sponsors’ desires. Furthermore, it is extremely difficult to determine which of the works from that period may be attributed to Defoe. Almost everything he wrote was published anonymously, including Robinson Crusoe.
The citations in this article are taken from works that are overwhelmingly accepted as by Defoe. However, there are also strong attacks on the South Sea project in other papers that are sometimes claimed to be by Defoe. The attributions there are less certain, but not impossible, as he was known to employ his talents simultaneously on several sides of an issue. With more research, we might obtain more clarity on the positions that Defoe took on the South Sea project.
Half a dozen years after the collapse of the bubble, in his book The Complete English Tradesman, he placed the blame for the debacle on investors in general:“ Avarice is the ruin of many people besides tradesmen; and I might give the late South-sea calamity for an example, in which the longest heads were most over-reached, not so much by the wit or cunning of those they had to deal with, as by the secret promptings of their own avarice.”
One of those“ longest heads” was Newton, who, in addition to his scientific accomplishments that were widely celebrated, was the Master of the Royal Mint and a respected and effective civil servant. Unlike Defoe, Newton has left very little written record of his views on investments. However, he was a very wealthy person, and the records of his financial moves provide a more eloquent and trustworthy testimony to what he really thought, as he was disposing of his money and that of an estate of a friend.
In the past, the anecdote of his cashing out early and then getting back in at the top of the South Sea Bubble was supported by just half a dozen solidly documented figures and a couple of stories written down a generation or two after his death. Recently, substantial additional information has been gathered, based primarily on the records of Newton’ s trading in securities other than those of the South Sea Company, and also on the detailed records of investments of the estate of Thomas Hall, where Newton was one of the executors.
The picture we obtain of Newton’ s investments is still incomplete, and likely to remain so. But it is rather convincing and suggests that at the beginning of 1720, Newton had around 40 % of his considerable wealth( comparable, based on average earnings, to around $ 30 million today) in South Sea stock, which can be thought of as a book-entry equivalent of shares. This stake had been acquired over some years, mostly at considerably lower prices.
20 FINANCIAL HISTORY | Winter 2018 | www. MoAF. org