Financial History Issue 124 (Winter 2018) | Page 22

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