This is the sad story of an unprecedented fraud that spread from the City to ruin the lives of hundreds of ordinary people, destroy trust in government and cause a widescale rewriting of the monetary rules. It’s not the banking crisis or even LIBOR fixing. It didn’t even happen in the last one hundred years. In the third stop on my journey through crises that have stricken the City, I look at the South Sea Bubble and the financial devastation that it brought. 

Today, I am right in the heart of the City, and the few interested pedestrians and cyclists near St Pauls and Smithfields have been replaced by almost entirely empty streets. No one wants to visit the incredible locked-down glass and steel monuments that dominate Bank and the City “proper”. The normal suited workers hitting Itsu and going to meetings are replaced by me and my camera. 

It’s with some glee that I stroll into the middle of the Bank roundabout and start taking pictures. However, despite the novelty of it all, what I am actually here to see is down an unassuming passageway directly opposite the Royal Exchange in Change Alley.

Built by Jonathan Miles in 1680, Jonathan’s Coffee House became a mainstay of the City. It’s worth remembering that the coffee houses of the 17th and 18th century weren’t the depressing identikit shops of today. Three hundred years ago there were no Frappuccinos and no overpriced yoghurt-coated nuts at the tills to persuade you to break your diet. Instead, coffee shops represented cultural, political and economic powerhouses. 

To give you some flavour (pun entirely intended), Jonathan’s was one of the meeting places where an assassination plot was developed by Jacobites to kill the King (William III). The plan was to lay in wait on the North Bank of the Thames just opposite Kew (not far from where I live). There was no bridge in those days so a ferry would take the King from the South Bank to the North where he would be temporarily separated from much of his armed escort. At that point, the conspirators would attack the six horses that accompanied the King’s carriage while a special group “kidnapped” the King (a fantastic euphemism). 

Like all of these plots around the time, it was infiltrated and the conspirators arrested. Interestingly (from a legal perspective), there was a considerable debate about whether the accused were entitled to defence counsel (under the 1695 Treason Act, for the first time, people accused of treason were actually allowed some legal representation). This meant a close analysis on the arrest date of the various individuals to see how their trials would pan out (unsurprisingly, for most, it was decided they were arrested before the act came into force and therefore weren’t entitled to any form of legal counsel). Incidentally, the Treason Act is a bit of a corker with some of it being in force to this day (a three-year limitation period – except on an attempt on the life of the King) (http://www.legislation.gov.uk/aep/Will3/7-8/3).   

Jonathan’s Coffee House was also the first place to post the price of stocks and commodities in 1698. The prices were literally written on the walls of the coffee house and organised by John Castaing. Castaing went on to found a newspaper (the Course of the Exchange) that listed the various financial information (including exchange rates of major European currencies). It would evolve into The Stock Exchange Daily Official List and become the third oldest continually published newspaper in the world.    

One of my favourite reflections on history is the rather vain belief that we all have that our current times are more difficult or different to those before. This includes the idea that email has created an environment where we are all more accessible and that “in the good old days” data moved more slowly and things could be left for a substantial period before they became urgent. Electronic communications have definitely made things faster, but we should be under no doubt that information has always meant power and a quick profit. In the 17th and 18th centuries, it was not unusual for couriers (often young boys) to be seeking out and delivering correspondence to individuals attempting to arbitrage securities in the various coffee houses across London. Deliveries of notes and letters six times a day were not unheard of – probably mildly preferable to the barrage of invites we have all had over the last four months to lectures about frustration of contract.

But, despite all the rich history above, Jonathan’s Coffee House really came into its own during the South Sea Bubble of 1720. The South Sea Company was founded in 1711 and was granted a monopoly to supply African slaves to the islands of the South Seas and South America. Quite apart from the obvious (and particularly topical) issues with the government of the day essentially supporting the slave trade (and most recent studies suggest that over 30,000 slaves were transported by the company), the plan was fairly flawed from the start. The South Seas and South America were the preserve of Spain and Portugal, it was always going to be an uphill struggle to make any income from the area.

Despite its PR campaign, the real purpose of the company was to consolidate the growing national debt that had been wracked up fighting the War of the Spanish Succession and the Northern War. At the time, the government borrowed money in an entirely haphazard way with particular departments getting cash where they could and with little clear idea how the money could be paid back. To deal with this situation, the debt would be consolidated into the South Sea company and government creditors would be issued shares in place of their debt. The government would then pay annual interest which would be re-distributed to the shareholders by way of dividend. 

During the 1710s, more and more national debt was dumped in the South Sea company and with it, more and more corruption. Government officials were given stock and various options based on speculation as to increasing share price. Remarkably, even George I’s mistress was given an option on a £120 pay-out per pound rise in the share price. Insider trade was rife with those in the company using information fed from the bribed government officials to learn the dates of national debt consolidations and speculate using the knowledge. 

All this was done in the background of some ridiculous statements about the likely financial success of the company. In a burst of enthusiasm that makes things going “viral” today look rather tame, Jonathan’s Coffee House became the centre of speculation in the company across the City. The company’s share price went from just over £100 at the end of 1719 to almost £1,000 by the middle of 1720. Everyone wanted shares and people were desperate to acquire them, as an advert from the Daily Courant on 21 November 1720 attested:

“LOST out of a pocket at Jonathan’s Coffee House in Exchange Alley on Saturday 19th instant, a plain vellum pocket book wherein was a first subscription to the South Sea Company of £1,000 South Sea Bonds. Whoever brings the said book, with the papers therein contained to Mr Jonathan Wilde in the Old Bailey shall have five guineas reward and no questions asked.”

Almost as quickly as the share price rose, it came tumbling down with a sudden realisation the company wasn’t worth anything near the price people were paying for stocks. Those buying on credit were ruined and bankruptcies were rife. Banks and goldsmiths also began to go under as the debts remained un-paid and the financial devastation began rippling across the country. Even Isaac Newton lost substantial sums in the collapse (somewhere in the region of £20,000, or £20 million in modern day money). In his own words:

“[he could] calculate the motions of the heavenly bodies, but not the madness of people”

A statement probably caused by the fact he sold his shares early in the crisis, making a substantial profit before being persuaded to reinvest at the peak!

The political casualties were extreme (the Chancellor of the Exchequer, the Postmaster General, the Southern Secretary and various others) were identified and impeached. It fell on Robert Walpole (the new First Lord of the Treasury) to restore confidence in the financial system – which he did by stripping the wealth of the 33 directors of the company and distributing back to those that had lost. An extreme measure that it’s probably difficult to imagine happening today!

Despite all this, the company survived, and it was still administering 80% of the total government debt in early 1722. It would continue to exist until the 1850s. An example of a clever financial structure overused and abused leading to a national collapse. It’s good to know that some things never change.