Editing South Sea Company (section)

=== Trading more debt for equity ===
[[File:William Hogarth - The South Sea Scheme.png|thumb|right|upright=1.6|[[William Hogarth]], ''[[Emblematical Print on the South Sea Scheme]]'' (1721). In the bottom left corner are Protestant, Catholic, and Jewish figures gambling, while in the middle there is a huge machine, like a merry-go-round, which people are boarding. At the top is a goat, written below which is "Who'l Ride". The people are scattered around the picture with a sense of disorder, while the progress of the well-dressed people towards the ride in the middle represents the foolishness of the crowd in buying stock in the South Sea Company, which spent more time issuing stock than anything else. Honor at left is dismembered; Honesty in center is [[broken on the wheel]] and at lower right trade lies dead.]]

The 1719 scheme was a distinct success from the government's perspective, and they sought to repeat it. Negotiations took place between Aislabie and Craggs for the government and Blunt, Cashier Knight and his assistant and Caswell. Janssen, the Sub Governor and Deputy Governor were also consulted but negotiations remained secret from most of the company. News from France was of fortunes being made investing in Law's bank, whose shares had risen sharply. Money was moving around Europe, and other flotations threatened to soak up available capital (two insurance schemes in December 1719 each sought to raise £3 million).<ref>Carswell, pp. 100–102</ref>

Plans were made for a new scheme to take over most of the unconsolidated national debt of Britain (£30,981,712) in exchange for company shares. Annuities were valued as a lump sum necessary to produce the annual income over the original term at an assumed interest of 5%, which favoured those with shorter terms still to run. The government agreed to pay the same amount to the company for all the fixed-term repayable debt as it had been paying before, but after seven years the 5% interest rate would fall to 4% on both the new annuity debt and also that assumed previously. After the first year, the company was to give the government £3 million in four quarterly installments. New stock would be created at a face value equal to the debt, but the share price was still rising and sales of the remaining stock, i.e. the excess of the total market value of the stock over the amount of the debt, would be used to raise the government fee plus a profit for the company. The more the price rose in advance of conversion, the more the company would make. Before the scheme, payments were costing the government £1.5 million per year.<ref name="auto">Carswell, pp. 102–107</ref>

In summary, the total government debt in 1719 was £50 million:
* £18.3m was held by three large corporations:
** £3.4m by the [[Bank of England]]
** £3.2m by the [[British East India Company]]
** £11.7m by the South Sea Company
* Privately held redeemable debt amounted to £16.5m
* £15m consisted of irredeemable annuities, long-fixed-term annuities of 72–87 years, and short annuities of 22 years remaining to expiry.

The purpose of this conversion was similar to the old one: debt holders and annuitants might receive less return in total, but an illiquid investment was transformed into shares that could be readily traded. Shares backed by national debt were considered a safe investment and a convenient way to hold and move money, far easier and safer than metal coins. The only alternative safe asset, land, was much harder to sell and transfer of its ownership was legally much more complex.

The government received a cash payment and lower overall interest on the debt. Importantly, it also gained control over when the debt had to be repaid, which was not before seven years but then at its discretion. This avoided the risk that debt might become repayable at some future point just when the government needed to borrow more, and could be forced into paying higher interest rates. The payment to the government was to be used to buy in any debt not subscribed to the scheme, which although it helped the government, also helped the company by removing possibly competing securities from the market, including large holdings by the Bank of England.<ref name="auto" />

Company stock was now trading at £123, so the issue amounted to an injection of £5 million of new money into a booming economy just as interest rates were falling. [[Gross Domestic Product]] (GDP) for Britain at this point was estimated as £64.4 million.<ref>{{cite web |title=UK Budget Pie Chart for 2010 – Charts |url=http://www.ukpublicspending.co.uk/budget_pie_ukgs.php?span=ukgs302&year=1717&view=1&expand=&units=b&fy=2010&state=UK#ukgs302 |url-status=dead |archive-url=https://web.archive.org/web/20110728044409/http://www.ukpublicspending.co.uk/budget_pie_ukgs.php?span=ukgs302&year=1717&view=1&expand=&units=b&fy=2010&state=UK |archive-date=28 July 2011}}</ref>

==== Public announcement ====
[[File:South Sea Annuities share certificate, issued November 13, 1784. On display at the British Museum in London.jpg|thumb|South Sea Annuities share certificate, issued 13 November 1784. On display at the British Museum in London]]
On 21 January the plan was presented to the board of the South Sea Company, and on 22 January [[Chancellor of the Exchequer]] [[John Aislabie]] presented it to Parliament. The House was stunned into silence, but on recovering proposed that the Bank of England should be invited to make a better offer. In response, the South Sea increased its cash payment to £3.5 million, while the Bank proposed to undertake the conversion with a payment of £5.5 million and a fixed conversion price of £170 per £100 face-value Bank stock. On 1 February, the company negotiators led by Blunt raised their offer to £4 million plus a proportion of £3.5 million depending on how much of the debt was converted. They also agreed that the interest rate would decrease after four years instead of seven, and agreed to sell on behalf of the government £1 million of Exchequer bills (formerly handled by the Bank). The House accepted the South Sea offer. Bank stock fell sharply.<ref>Carswell, pp. 112–113</ref>

Perhaps the first sign of difficulty came when the South Sea Company announced that its Christmas 1719 dividend would be deferred for 12 months. The company now embarked on a show of gratitude to its friends. Select individuals were sold a parcel of company stock at the current price. The transactions were recorded by Knight in the names of intermediaries, but no payments were received and no stock issued – indeed the company had none to issue until the conversion of debt began. The individual received an option to sell his stock back to the company at any future date at whatever market price might then apply. Shares went to the Craggs: [[James Craggs the Elder|the Elder]] and [[James Craggs the Younger|the Younger]]; [[John Leveson-Gower, 1st Earl Gower|Lord Gower]]; [[George Granville, 1st Baron Lansdowne|Lord Lansdowne]]; and four other MPs. [[Charles Spencer, 3rd Earl of Sunderland|Lord Sunderland]] would gain £500 for every pound that stock rose; George I's mistress, their children and Countess Platen £120 per pound rise, Aislabie £200 per pound, [[James Stanhope, 1st Earl Stanhope|Lord Stanhope]] £600 per pound. Others invested money, including the [[Richard Hampden (1674–1728)|Treasurer to the Navy, Hampden]], who invested £25,000 of government money on his own behalf.<ref>Carswell, pp. 114–118</ref>

The proposal was accepted in a slightly altered form in April 1720. Crucial in this conversion was the proportion of holders of irredeemable annuities who could be tempted to convert their securities at a high price for the new shares. (Holders of redeemable debt had effectively no other choice but to subscribe.) The South Sea Company could set the conversion price but could not diverge much from the market price of its shares. The company ultimately acquired 85% of the redeemables and 80% of the irredeemables.