1 For their helpful advice upon earlier versions of this article I am particularly grateful to Christopher Fauske and two anonymous referees. I thank Dianne Strang for her assistance with archival documents. And I am indebted to participants in the colloquia of Money, Power & Print for the interdisciplinary home they provide.
2 Anonymous [Reference John1722] is often attributed to Theodore Janssen, one of the directors. But this is only a guess and, even if it were correct, the author by his own account had no role in designing or implementing the scheme.
3 The latter work is not attributed to Paterson on ECCO. But in his review of the book in Political State, Boyer wrote as though everyone knew Paterson was the author (Mar. Reference Paterson1717, pp. 260ff.).
4 Though this passage appears in a work published in 1721, according to its author it was written in Dec. 1717. I can find no sign of its having been published separately at that time.
5 Law had engineered a stock-market bubble around the Mississippi Company in order in part to reduce the general interest rate. He was aiming for a combination of a share price and dividend payout that would give new investors, i.e. those buying shares in secondary markets rather than directly from the Mississippi Company, a rate of return of 2% per annum (Neal Reference Neal and de la Escosura2004, p. 184). Since Mississippi shares were destined to become the sole public asset available for purchase in France, this would naturally have had implications for the general interest rate. British officials were aware of Law's objective. Thus, for instance, in Dec. 1719 Daniel Pulteney (the British representative in Paris) reported back to his superiors in London that ‘the people here will find themselves strangely disappointed when [Law brings the bubble operation to a close and] they [discover] themselves reduced to an interest of 2 p cent, which will very ill answer the extravagant rate of living they now put themselves on’ (NA SP 78/166, 11 Dec. 1719). Law's goal had been achieved by the final day of Dec. 1719, when the Company's dividend rate for the coming year was set at 200 livres per share and the market price of Mississippi stock had been stabilised around 10k livres per share. In that same month Law's new national bank, the Banque Royale, was lending to the general public, on security of Company stock, at 2% per annum (Murphy Reference Murphy1997, p. 209). In Mar. 1720 Law issued an edict fixing the legal maximum interest rate on private debt contracts at this same rate (Faure Reference Faure1977, p. 401; Anonymous 1720e, pp. 1–19). In mid May it was declared that the crown was prepared to lend to its subjects for commercial purposes at the rate of 2% per annum (Buvat Reference Buvat and Campardon1865, p. 93). According to Pulteney, Law intended in another year to go further still and reduce the general interest rate to 1% per annum (NA, SP 78/166, 10 May 1720).
6 See also BEA, G4/1, 19 Apr., 30 Aug. and 11 Oct. 1711; and 6 and 27 Mar. 1712.
7 The specific document is entitled ‘An accot. of the publick debts at the Exchequer’, dated 23 Nov. 1719.
8 This was never explicitly declared in any of the associated statutes or corporate proposals. But the redeemable debts in question were not included in the list specified in the authorising statute as eligible for conversion into Company stock (6 Geo. I, c. 4). And in Mar. 1720 the Commons gave the Bank the requisite one year's notice that they were to be redeemed (Great Britain, Parliament, House of Commons 1803, p. 319).
9 Gilbert Heathcote, a Bank director, was said to have remarked: ‘[I]f the South-Sea Company be wedded to the Bank, he ought not to be allowed to keep a mistress’ (cited in Political State, Sep. 1720, p. 187). It is not clear whether in the end the Bank insisted upon this condition. It is not mentioned in the celebrated ‘Bank Contract’ that Walpole drew up on 23 Sep. as a formal statement of the agreement reached. But one contemporary writer, very well informed about developments during the crisis period, implied it was part of the deal struck and indeed the cause of the run on the Sword Blade Bank a few days later. ‘It was but reasonable, in this case, that the Sword-Blade partners, who had been the chief bankers to the South-Sea Company, should cease to be so for the future. It was not fit they should have the profit, while the Bank had the burden of supporting the scheme’ (Anonymous 1720b, p. 15).
10 I estimate that the Company would have had to pay out £3,030,452 in bonds and cash. Scott ( Reference Scott1968, vol. 3, pp. 354–9) derived a very similar estimate.
11 Bonds totalling £3m were issued between 23 Aug. and 21 Oct. It is clear they were issued to pay the Company's new shareholders because they bear the appropriate issue and maturity dates. The statute authorising the debt-conversion project (6 Geo. I, c. 4) directed that the Company begin receiving the annuities for (and thus be obligated to start paying dividends on) its new stock from the quarterly feast day immediately preceding the dates upon which a given amount of public debt was transferred to them. The Company acquired subscriptions of irredeemable debt in two stages: a relatively large part in Apr. 1720 and a smaller component in August. It would thus have been obligated to issue stock and pay out bonds for these subscriptions from 26 Mar. and 25 Jun. respectively. The directors ordered bonds to be created with these issue dates, bearing interest at 4% and payable in two years (BL, Add. MS 25499, 19 May and 12 Aug. 1720). From payment terms and subscription data I estimate that for the two instalments of debt the Company would have had to pay out £2.587 and £0.444m in bonds and cash respectively. The actual amounts of bonds created with these two issue dates were £2.6 and £0.4m respectively. The maturity dates are as expected for the March issues, though the June bonds were made payable in one instead of two years as ordered.
12 Scott thought that the Company arranged to pay its new shareholders in bonds only because it wanted to issue stock in multiples of £25 (par value) and bonds and cash were needed to cover the odd sums remaining ( Reference Scott1968, vol. 3, p. 309). But the Company could easily have offered more in stock and still kept to nice round sums. For instance, for every £100 of so-called ‘long annuities’ it offered £700 in shares (par value, but in the market worth £2625) and bonds and cash for a further £575. Yet the total purchase price of £3200 could have been met with £850 in shares (par value, with a market value of £3187.5) and only £12.5 in bonds and cash.
13 Specifically see an untitled enclosure dated 23 Nov. 1720. Though this document was not signed, I attribute it to Caswall on the following grounds. Also to be found in this set of papers was a letter signed by him, undated but clearly pertaining to the period shortly after the Bubble had collapsed. In the letter Caswall refers to an enclosure in which he gives his thoughts upon a proposal from the Bank of England for how to rescue the debt-conversion project – a plan that Caswall complained was designed mostly for the Bank's advantage. The Bank's proposal is almost certainly another document in the set, one entitled ‘Some thoughts humbly proposed for the relief of the proprietors of S. Sea stock & c.’. The piece I am attributing to Caswall begins with a sentence that echoes the first sentence of the Bank memorandum but then outlines a plan that would have been much more advantageous to the Company.
14 The ‘Wednesday Club’, of whose debates this book is ostensibly a record, was purely fictional. But the positions reported in Club debates I nevertheless take to be representative of the range of contemporary attitudes.
15 Thus Aislabie, speaking to the Lords in defence of his own conduct during the Bubble, remarked that ‘the scheme was adapted to the notions and opinions of those gentlemen who for two sessions before had oppos'd all measures for reducing the interest of the publick debts, 'till the long annuities were made redeemable’ (Aislabie Reference Aislabie1721, p. 9).
16 Contemporaries complained that the market for term annuities was very limited, causing their market values to decline very rapidly with even modest surges in the quantities being offered for sale ([Paterson] Reference Paterson1717, pp. 122–3, 133). And the procedures for transferring them were cumbersome and antiquated. Corporate shares were far easier to transfer and the market for them much deeper. Neal attributes entirely to ‘advantages of liquidity’ the willingness of investors in the Company's early years to accept a rate of return on South Sea stock that was half that available on the public debt it had replaced (Reference Neal1990, pp. 91–2). But the liquidity premium in 1720 on South Sea stock over public annuities was surely much lower. The naval bills the Company had taken into its stock in the early 1710s were nominally short-term instruments that were difficult to sell because repayment dates were uncertain and distant and interest payments were not always timely (Dickson Reference Dickson1967, pp. 403–4, 69–70). The annuities the Company was trying to bring into its stock in the 1720s were long-term debts with no repayment date and dependable interest streams.
17 I will ignore the Company's trading operations and existing bond liabilities (both were relatively minor and would have offset one another) and its operating costs (it received management fees from the Treasury to cover much of this). I proceed by supposing that the Company paid for public debt with new shares (partial payment in bonds at 4% would not have changed the basic outcome much) and that it redistributed to shareholders the whole of the interest received annually from the government. Before 1720 the Company had issued 117,468 shares and was receiving £587,342 in interest per year from the state. The authorising statute identified as eligible for conversion £666,821 and £127,260 in long and short annuities, on which the state set official prices of 20 and 14 years' purchase respectively. So with a further £11,779,669 and £4,766,821 in redeemable debt bearing interest at 5% and 4% per annum respectively, a total of £31,664,553 of public debt was eligible for conversion. By the terms of the statute, were all of it converted the Company would have received £1,535,559 more in interest annually from the government and owed the Exchequer a one-time payment of £7,729,674. Assuming it had paid market prices of 24 and 15 years' purchase for long and short annuities respectively, and with South Sea stock priced at £135, the Company could have bought out the annuitants for 132,686 shares. Had it paid owners of redeemable debt the same 5% premium actually offered during the summer, a further 128,695 shares would have sufficed to finance that debt. Finally, the directors would have had to sell another 57,257 shares to raise the Exchequer payment. Aggregate annual rates of return can be estimated for the four types of shareholder (old proprietors and those buying new shares with irredeemable debt, redeemable debt, and cash respectively) by dividing their shares of the total dividend pool by the values of their pre-conversion assets. Calculating the latter using the market prices prevailing in early Nov. 1719 (namely of £116 per Company share and 20 and 14 years' purchase for long and short annuities), the rates work out to 4.2%, 4.3%, 3.8% and 3.6% respectively.
18 To obtain this result I used the assumptions of the previous note and determined the varying number of shares that would have to be paid to each investor group at any given market price. I assumed the years' purchase prices of irredeemable debt would vary with the market price of South Sea stock as per the best-fit relationships for the period Jan. to Aug. 1720 (using the values reported in Course of the Exchange and converting forward to spot values as in Shea Reference Shea2007). For long and short annuity prices the resulting functions are 7.0595 * ln(share price) −13.227 and 0.9616 * ln(share price) + 9.7494 respectively. Rates of return were obtained by dividing the total interest revenue from the government by the total number of shares issued at each market price. On this simplified model, at prices of £250 and £350 those buying shares with cash would have earned annual rates of return of 2.92% and 2.47% respectively.
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