Alright! Last time we left off John Blunt had
just found a new way for the South Sea company to make money. And since the company still wasn’t
making a single cent in the South Sea, it was time for him to roll the dice on perhaps one of the most ambitious
financial schemes in history. He was going to take on the now impossibly
large, 31 million pound unconsolidated debt that the government had racked up by 1719. If successful this would beyond any doubt make the
eight-year-old South Sea company the biggest financial institution in the
world. It would also make anybody
associated with the South Sea company wealthy on a scale we can’t even comprehend today. We covered this a bit last time,
but just to refresh. The scheme was this: The government would allow the South Sea
company to issue an amount of stock equal to the value of the debt. How much
stock that was would be calculated of whatever the
share price was at the time the law was passed. So for example, if the government debt
had been… 10,000 pounds and the South Sea company stock had been
worth 10 pounds a share, they had been allowed to
issue 1000 new shares of stock. 10,000 pounds of government debt, 10,000
pounds worth of stock. The South Sea company would then offer debt holders the opportunity to exchange their government debt for that stock. Which would have seemed like a pretty
good deal to those debt holders at the time, given how successful the South Sea
company appeared. The catch was that the South Sea company
would offer debt holders to exchange their debt for the current value of the stock. This means that if the price of South Sea’s stock continue to raise, they wouldn’t have to trade as much stock
for the debt, as the government had calculated, allowing them to sell off the rest of the stock at market value and just keep the profit for themselves. So… say those hypothetical 10 pound shares, happened to increase in value to 20
pounds each. The company would only have to sell 500 of their new 1000
shares to cover the government debt now. After which they could just pocket the
extra money they made selling off the rest. That’s a pretty good scheme. And with a staggering 31 million pounds of debt on the market, the possibilities here are ludicrous. If they could even managed to raise their share price by a single pound, it could possibly net them a return on a
scale of hundreds of thousands of pounds. Today, the equivalent value would easily
be somewhere in the tens to hundreds of millions of dollars. But, before they could rake in the money with such a scheme, they needed to convince the government
to let them consolidate the debt. And by “convince”, I mostly mean bribe. With so much potential profit at stake, the size of those bribes were set to
match, with individual members of parliament receiving upwards of a
million dollars in today’s money for their vote. But, when the then Chancellor of the
Exchequer John Aislabie presented it to parliament, parliament just sat there silent. The proposal was nearly too ludicrous for
anybody who hadn’t been generously bribed to take in. But inevitably, when they recovered from
the shock of the proposal, rather than reject it outright, they simply started to debate whether the debt should go to John Blunt’s South Sea
Company, or perhaps instead to the Bank of England. As these were both Whig controlled institutions at this point, it was really just a matter of getting the best deal. For some that meant the best deal for
the government, and for others it was the best deal for them personally. As this wrangling was occurring, Blunt thought of an even better way of incentivizing members of parliament to see his way. Instead of straight up
bribing people, which was: A) far more dangerous to do. B) Sometimes required cash up front. and C) Didn’t give them any long-term benefit. Blunt struck on the idea of selling MP’s stock, with the special caveat that they only
had to pay for the stock upon its sale. This required no cash from
the South Sea Company. Was… arguably legal if you wildly stretched your
interpretation of the law. And meant that the MP’s only made money
if South Sea stock rose, which would hopefully keep them
interested in seeing it continue to rise. Even more beneficial, as these
new high-ranking officials were seen publicly buying in to the South Sea Company, it convinced a number of other officials and
members of parliament to actually buy in as well. There was only one last point of
opposition to overcome, and that was Robert Walpole. A man Blunt
had previously got locked up. Walpole wanted to have the government set the
price at which shares could be exchanged for debt regardless of their eventual market value. This would have completely destroyed the
profit potential of Blunt’s whole scheme. Blunt’s manipulation of the House of
Commons won out in the end though. And the deal ultimately went through,
with slightly more favorable terms for the government, and the South Sea Company paying
a few million pounds for the privilege. the South Sea company got the right to consolidate
the remaining unconsolidated government debt. Walpole didn’t totally lose out thou, behind the scenes, even he had been
picking up cheap government debt in anticipation of the share swap. He wasn’t going to let something petty like,
getting locked up in the Tower of London keeping from making a little money out of this. Throughout this process, everything was coming up roses for Blunt and the South Sea company. By March the share price had risen to 330 pounds, By April though, the company’s share
price began to slide, and Blunt couldn’t have that. After all the company’s only source
of revenue was an increasing share price, so he stepped in with yet another
ingenious scheme: He offered to sell the stock, in the same
way you might a used car, 20% down, and regular payments
on the remainder, every 2 months. Which, allowed people to buy far more
stock than they could actually afford. Unlike a used car though,
the stock price could go up and so long as it did, all people had to
do was sell their purchased stock every two months, and they could cover
their initial purchase and keep the profit. This resulted in many people owning five times as much South Sea stock as they could actually pay for. And when they did profit, much as Blunt expected, many of them simply reinvested whatever
they made to do it all again in the next two months. This helped push the price of
South Sea’s stock even higher. And by the time the Royal Seal was on
the debt swap agreement, the share price had risen to a ludicrous
550 pounds. Now technically this agreement, the “South Sea Act”, explicitly forbid Blunt from
selling more stock until the company began to trade its stock for debt. But, since most of Parliament and the
King himself were making a killing, nobody seemed to remember this clause at the time. As the weeks wore on though, despite all of these shenanigans, the share price began to waver. So mister Blunt proposed to
the board of the South Sea company yet another novel plan: Why don’t we use
all this profit we’ve made to lend money to people wanting to buy
South Sea stock? They were going to offer loans of up to 3000 pounds to individuals looking to buy into the South Sea company. This is getting really close to the
point of paying people to buy their stock. But, it had the desired effect.
And the stock continued to rise. Seeing the meteoric rise of the
South Sea company, everybody wanted to get into
the stock market game. Companies all over Britain began
selling stock to raise capital. Some of these were legitimate
enterprises which were established to develop
sections of the British economy that hadn’t taken off yet,
simply due to lack of capital. Others offered such exciting products as:
“A device to draw the vapors out of human brains!” Or: “A flying machine!”
(to be developed in the near future…) But, as Blunt finally began to actually convert
the government debt to South Sea’s stock, the government, probably at the
behest of Blunt and crew, began to crack down on these new
ventures. You see, if money was being
invested in these other new ventures, it meant there was less money to invest in the South Sea company. That’s the staggering scale
that South Sea is at by this point. They have to worry that there’s
not enough money in the entire country to support their share price, and
having other companies on the market. So… in a feat of unfathomable irony, to defend the profitability
of the South Sea company, the government began to
close down those other startups for “unwarrantable practices”. Unfortunately this had the
opposite effect that Blunt desired. As these other companies failed, the people
who invested in them lost a great deal of money and began to sell their South Sea stock
in order to cover their debts. But for right now, the stock
was still on the raise overall. And with no rivals on the market,
and a fresh injection of loans from Blunt, South Sea shares skyrocketed from 503 pounds, to 830 pounds apiece, over the course of a week. Yet, all was not actually well for South Sea… Between the copious bribes, the annuity
payments, the loans, and the dividends, South Sea had spent over 8.5 million
pounds over a handful of months. And because many people
were only paying twenty percent of their share price for their shares now,
the company had little in reserve. Despite the shaky state of things behind the scenes, Blunt was given a knighthood in June, and
made a Baronet. And the South Sea company made
plans to move to opulent new offices down the street from its
old rival, the Bank of England. Soon the company would be
valued at close to 300 million pounds. Ten times the amount of government debt
they were originally supposed to take on. And, due to the loans and the low money
down share price offers, they would be owed about 60 million pounds, more than the total amount
of money in the economy a Britain. Just to put this in perspective, if a company had that ratio of valuation
to national economy in the modern-day US, it would be worth 85 trillion dollars.Apple, the highest valued
company in the world right now, is sitting in about 2/3 of $1 trillion. And they actually make money.
As you might have guessed, the center cannot hold. This type of fanciful madness
can only be sustained for so long. And even as the company is reaching its peak, people are beginning to realize
just how out of kilter things really are. Join us next time to watch the bubble burst, and to see the consequences for our
reputable Mr. Blunt and all the other players.