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== Foundation == When in August 1710 [[Robert Harley, 1st Earl of Oxford and Earl Mortimer|Robert Harley]] was appointed [[Chancellor of the Exchequer]], the government had already become reliant on the [[Bank of England]], a privately owned company chartered 16 years previously, which had obtained a monopoly as the lender to the government. The government had become dissatisfied with the service it was receiving and Harley was actively seeking new ways to improve the national finances. A new parliament<!-- a session, not the institution, so lower case--> met in November 1710 resolved to attend to the national finances, which were suffering from the pressures of [[List of wars involving Great Britain|two simultaneous wars]]: the [[War of the Spanish Succession]] with France, which ended in 1713, and the [[Great Northern War]], which was not to end until 1721. Harley came prepared, with detailed accounts describing the situation of the national debt, which was customarily a piecemeal arrangement, with each government department borrowing independently as the need arose. He released the information steadily, continually adding new reports of debts incurred and scandalous expenditure, until in January 1711 the House of Commons agreed to appoint a committee to investigate the entire debt. The committee included Harley himself, the two [[Auditor of the Imprests|Auditors of the Imprests]] (whose task was to investigate government spending), [[Edward Harley (1664–1735)|Edward Harley]] (the Chancellor's brother), Paul Foley (the Chancellor's brother-in-law), the [[Secretary to the Treasury|Secretary of the Treasury]], [[William Lowndes (British politician)|William Lowndes]] (who had had significant responsibility for reminting the entire debased British coinage in 1696) and [[John Aislabie]] (who represented the [[October Club]], a group of about 200 MPs who had agreed to vote together).<ref>Carswell, pp. 40, 48–50</ref> Harley's first concern was to find £300,000 for the next quarter's payroll for the British army operating on the Continent under the [[Duke of Marlborough]]. This funding was provided by a private consortium of Edward Gibbon (grandfather of [[Edward Gibbon#Early life: 1737–1752|the historian]]), [[George Caswall]], and [[Hoare's Bank]]. The Bank of England had been operating a [[lottery]] on behalf of the government, but in 1710 this had produced less revenue than expected and another begun in 1711 was also performing poorly; Harley granted the authority to sell tickets to [[Sir John Blunt, 1st Baronet|John Blunt]], a director of the [[Hollow Sword Blade Company]], which despite its name was an unofficial bank. Sales commenced on 3 March 1711 and tickets had completely sold out by 7 March, making it the first truly successful English state lottery.<ref>Carswell, pp. 50–51</ref> The success was shortly followed by another larger lottery, "The Two Million Adventure" or "The Classis", with tickets costing £100, with a top prize of £20,000 and every ticket winning a prize of at least £10. Although prizes were advertised by their total value, they were in fact paid out by installments in the form of a fixed [[annuity]] over a period of years, so that the government effectively held the prize money as borrowings until the whole value had been paid out to the winners. Marketing was handled by members of the Sword Blade syndicate, Gibbon selling £200,000 of tickets and earning £4,500 commission, and Blunt selling £993,000. Charles Blunt (a relative) was made Paymaster of the lottery with expenses of £5,000. === Conception of the company === The national debt investigation concluded that a total of £9 million was owed by the government, with no specifically allocated income to pay it off. Robert Harley and John Blunt had jointly devised a scheme to consolidate this debt in much the same way that the Bank of England had consolidated previous debts, although the Bank still held the monopoly for operating as a bank. All holders of the debt (creditors) would be required to surrender it to a new company formed for the purpose, the South Sea Company, which in return would issue them shares in itself to the same nominal value. The government would make an annual payment to the Company of £568,279, equating to 6% interest plus expenses, which would then be redistributed to the shareholders as a dividend. The company was also granted a monopoly to trade with South America, a potentially lucrative enterprise, but one controlled by Spain – with which Britain was at war.<ref name="auto2">Carswell, pp. 52–54</ref> At that time, when the continent of America was being explored and colonized, Europeans applied the term "South Seas" only to South America and surrounding waters. The concession both held out the potential for future profits and encouraged a desire for an end to the war, necessary if any profits were to be made. The original suggestion for the South Sea scheme came from [[William Paterson (banker)|William Paterson]], one of the founders of the Bank of England and of the financially disastrous [[Darien Scheme]].<ref name="auto2" /> Harley was rewarded for delivering the scheme by being created Earl of Oxford on 23 May 1711 and was promoted to [[Lord High Treasurer]]. With a more secure position, he began secret peace negotiations with France. === Initial speculation === The scheme to thus consolidate all government debt and to manage it better in the future held out the prospect of all existing creditors being repaid the full nominal value of their loans, which at the time before the scheme was publicised were valued at a discounted rate of £55 per £100 nominal value, as the lotteries were discredited and the government's ability to repay in full was widely doubted. Thus bonds representing the debt intended to be consolidated under the scheme were available for purchase on the open market at a price that allowed anyone with advance knowledge to buy and resell in the immediate future at a high profit, for as soon as the scheme became publicised the bonds would once again be worth at least their nominal value, as repayment was now more certain a prospect. This anticipation of gain made it possible for Harley to bring further financial supporters into the scheme, such as James Bateman and [[Theodore Janssen]].<ref>Carswell, pp. 54–55</ref> [[Daniel Defoe]] commented:<ref>Defoe, Daniel, ''An Essay on the South-Sea Trade'' ... , 2nd ed., (London, England: J. Baker, 1712), [https://books.google.com/books?id=NZ5VAAAAcAAJ&pg=PA40 pp. 40–41.]</ref><br /> {{quote|Unless the Spaniards are to be divested of common sense, infatuate, and given up, abandoning their own commerce, throwing away the only valuable stake they have left in the world, and in short, bent on their own ruin, we cannot suggest that they will ever, on any consideration, or for any equivalent, part with so valuable, indeed so inestimable a jewel, as the exclusive trade to their own plantations.|source=''An Essay on the South-Sea Trade''}} The originators of the scheme knew that there was no money to invest in a trading venture, and no realistic expectation that there would ever be a trade to exploit, but nevertheless the potential for great wealth was widely publicised at every opportunity, so as to encourage interest in the scheme. The objective for the founders was to create a company that they could use to become wealthy and that offered scope for further government deals.<ref>Carswell, p. 56</ref> === Flotation === [[File:Bubble.folly.jpg|thumb|right|A bubble-era stock promoter, caricatured as a "[[Pump and dump|night wind hawker]]" (''The Great Picture of Folly'', 1720)]] The [[royal charter]] for the company, based on that of the Bank of England, was drawn up by Blunt who was paid £3,846 for his services in setting up the company. Directors would be elected every three years and shareholders would meet twice a year. The company employed a cashier, secretary and accountant. The governor was intended as an honorary position, and was later customarily held by the monarch. The charter allowed the full court of directors to nominate a smaller committee to act on any matter on its behalf. Directors of the Bank of England and of the [[East India Company]] were barred from being directors of the South Sea Company. Any ship of more than 500 tons owned by the company was to have a Church of England clergyman on board. The surrender of government debt for company stock was to occur in five separate lots. The first two of these, totaling £2.75 million from about 200 large investors, had already been arranged before the company's charter was issued on 10 September 1711. The government itself surrendered £0.75 million of its own debt held by different departments (at that time individual office holders were at liberty to invest government funds under their control to their own advantage before it was required for government expenditure). Harley surrendered £8,000 of debt and was appointed Governor of the new company. Blunt, Caswall and Sawbridge together surrendered £65,000, Janssen £25,000 of his own plus £250,000 from a foreign consortium, Decker £49,000, Sir Ambrose Crawley £36,791. The company had a Sub-Governor, Bateman; a Deputy Governor, Ongley; and 30 ordinary directors. In total, nine of the directors were politicians, five were members of the Sword Blade consortium, and seven more were financial magnates who had been attracted to the scheme.<ref>Carswell, pp. 57, 58</ref> The company created a coat of arms with the motto ''A Gadibus usque ad Auroram'' ("from Cadiz to the dawn", from [[Juvenal]], [[Satires (Juvenal)|Satires]], 10) and rented a large house in the City of London as its headquarters. Seven sub-committees were created to handle its everyday business, the most important being the "committee for the affairs of the company". The Sword Blade company was retained as the company's banker and on the strength of its new government connections issued notes in its own right, notwithstanding the Bank of England's monopoly. The task of the Company Secretary was to oversee trading activities; the Accountant, Grigsby, was responsible for registering and issuing stock; and the Cashier, Robert Knight, acted as Blunt's personal assistant at a salary of £200 per annum.<ref>Carswell, pp. 60–63</ref> === The slave trade === [[File:Slavers-4496.jpg|thumb|African slaves taken aboard a slave ship]] The [[Treaty of Utrecht]] of 1713 granted Britain an ''[[Asiento de Negros]]'' lasting 30 years to supply the Spanish colonies with 4,800 slaves per year. Britain was permitted to open offices in [[Buenos Aires]], [[Caracas]], [[Cartagena, Colombia|Cartagena]], [[Havana]], [[Panama]], [[Portobelo, Colón|Portobello]] and [[Veracruz (city)|Vera Cruz]] to arrange the [[Atlantic slave trade]]. One ship of no more than 500 tons could be sent to one of these places each year (the ''Navío de Permiso'') with general trade goods. One quarter of the profits were to be reserved for the King of Spain. There was provision for two extra sailings at the start of the contract. The Asiento was granted in the name of [[Anne, Queen of Great Britain|Queen Anne]] and then contracted to the company.<ref>Carswell, pp. 64–66</ref> By July the company had arranged contracts with the [[Royal African Company]] to supply the necessary African slaves to Jamaica. Ten pounds was paid for a slave aged over 16, £8 for one under 16 but over 10. Two-thirds were to be male, and 90% adult. The company trans-shipped 1,230 slaves from Jamaica to America in the first year, plus any that might have been added (against standing instructions) by the ship's captains on their own behalf. On arrival of the first cargoes, the local authorities refused to accept the Asiento, which had still not been officially confirmed there by the Spanish authorities. The slaves were eventually sold at a loss in the West Indies.<ref>Carswell, pp. 65–66</ref> In 1714 the government announced that a quarter of profits would be reserved for [[Anne, Queen of Great Britain|Queen Anne]] and a further 7.5% for a financial adviser, Manasseh Gilligan. Some company board members refused to accept the contract on these terms, and the government was obliged to reverse its decision.<ref>Carswell, p. 67</ref> Despite these setbacks, the company continued, having raised £200,000 to finance the operations. In 1714 2,680 slaves were carried, and for 1716–17, 13,000 more, but the trade continued to be unprofitable. An import duty of 33 [[pieces of eight]] was charged on each slave (although for this purpose some slaves might be counted only as a fraction of a slave, depending on quality). One of the extra trade ships was sent to Cartagena in 1714 carrying woollen goods, despite warnings that there was no market for them there, and they remained unsold for two years.<ref>Carswell, pp. 66–67</ref> It has been estimated that the company transported a little over 34,000 slaves with mortality losses comparable to its competitors, showing that slave trading was a significant part of the company's work, and that it was carried out to the standards of the day.<ref name=":0" /> Its trading activities therefore offered a financial motivation for investment in the company.<ref name=":0" /> === Changes of management === The company was heavily dependent on the goodwill of government; when the government changed, so too did the company board. In 1714 one of the directors who had been sponsored by Harley, Arthur Moore, had attempted to send 60 tons of private goods on board the company ship. He was dismissed as a director, but the result was the beginning of Harley's fall from favour with the company. On 27 July 1714, Harley was replaced as Lord High Treasurer as a result of a disagreement that had broken out within the Tory faction in parliament. Queen Anne died on 1 August 1714; and at the election of directors in 1715 the Prince of Wales (the future King [[George II of Great Britain|George II]]) was elected as Governor of the company. The new King [[George I of Great Britain|George I]] and the Prince of Wales both had large holdings in the company, as did some prominent Whig politicians, including [[James Craggs the Elder]], the Earl of Halifax and Sir Joseph Jekyll. James Craggs, as Postmaster General, was responsible for intercepting mail on behalf of the government to obtain political and financial information. All Tory politicians were removed from the board and replaced with businessmen. The Whigs Horatio Townshend, brother in law of [[Robert Walpole]], and the [[John Campbell, 2nd Duke of Argyll|Duke of Argyll]] were elected directors. The change of government led to a revival of the company's share value, which had fallen below its issue price. The previous government had failed to make the interest payments to the company for the preceding two years, owing more than £1 million. The new administration insisted that the debt be written off, but allowed the company to issue new shares to stockholders to the value of the missed payments. At around £10 million, this now represented half the share capital issued in the entire country. In 1714 the company had 2,000 to 3,000 shareholders, more than either of its rivals.<ref>Carswell, pp. 67–70</ref> By the time of the next directors' elections in 1718 politics had changed again, with a schism within the Whigs between Walpole's faction supporting the Prince of Wales and [[James Stanhope, 1st Earl Stanhope|James Stanhope]]'s supporting the King. Argyll and Townshend were dismissed as directors, as were surviving Tories Sir Richard Hoare and George Pitt, and King George I became governor. Four MPs remained directors, as did six people holding government financial offices. The Sword Blade Company remained bankers to the South Sea, and indeed had flourished despite the company's dubious legal position. Blunt and Sawbridge remained South Sea directors, and they had been joined by Gibbon and Child. Caswall had retired as a South Sea director to concentrate on the Sword Blade business. In November 1718 Sub-Governor Bateman and Deputy Governor Shepheard both died. Leaving aside the honorary position of Governor, this left the company suddenly without its two most senior and experienced directors. They were replaced by [[Sir John Fellowes]] as Sub-Governor and Charles Joye as Deputy.<ref>Carswell, pp. 73–75</ref> === War === In 1718 war broke out with Spain once again, in the [[War of the Quadruple Alliance]]. The company's assets in South America were seized, at a cost claimed by the company to be £300,000. Any prospect of profit from trade, for which the company had purchased ships and had been planning its next ventures, disappeared.<ref>Carswell, pp. 75–76</ref>
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