The First Crash by Dale Richard

The First Crash by Dale Richard

Author:Dale, Richard
Language: eng
Format: epub
Publisher: Princeton University Press
Published: 2014-05-30T16:00:00+00:00


Plate 6 Royal Exchange Scene 1788. Copyright Guildhall Library.

If the market was to be fed with new South Sea stock at ever higher prices, it would be necessary to use the press and the coffee house rumour mill to maximum advantage. The planting of bogus valuations in friendly journals has already been mentioned and no doubt suitable stories were put about in Exchange Alley; for example, that, following peace with Spain, the South Sea Company would receive £1.5 million compensation for assets seized in the Spanish territories,13 or that the South Sea trade would be renewed by England ceding Gibraltar to Spain.14

Beyond this public relations exercise, a number of financial techniques familiarised by Law were introduced to attract investors. First, where new stock was issued for cash, generous subscription terms were allowed, ranging from a 20 percent down payment and eight two-monthly payments of 10 percent (first money subscription) to a 10 percent down payment and nine six-monthly payments of 10 percent (third money subscription). Since the subscription receipts, unlike shares, could be transferred through a simple legal assignment, there was a ready market for speculators in this partly paid (and therefore highly leveraged) scrip.15

Second, the South Sea Company encouraged investors to borrow against the security of its shares. As part of its package deal with the government, the Company was allowed to borrow £1 million in Exchequer bills (these were equivalent to cash) which it subsequently lent out to purchasers of South Sea shares at 4 percent. But the Company lent far larger sums at 5 percent (later reduced to 4 percent) from its own cash resources against the security of both shares and subscription receipts, total lending under this heading eventually exceeding £11 million. Blunt later claimed that the Company had acted prudently by limiting advances to only half the prevailing market value of the security. He also argued that if the Company had not returned money to the market in this way, there would have been a severe credit squeeze:

There would be great sums from subscriptions and other money remaining in hand, which if kept dead, till the same could be applied to pay off the annuities and debts, might prove very prejudicial to, and stagnate the Public Credit, and be likewise prejudicial to the further execution of the Act. Therefore, it was thought proper, that money should be used, in lending on the stock of the Company ….16

Unlike Law, John Blunt could not pump up the money supply because he did not control the national bank but at least he could recycle funds that would otherwise lie dormant within the Company.

The South Sea cabal went one stage further and used its powers over the Company’s cash to buy stock in Exchange Alley. This was consistent with the total discretion given to the Treasury Committee “to lend or imploy the Company’s money that is or shall be in cash … in such manner as they shall judge for the Company’s interest”.17

Blunt, following Law’s example, made maximum use of dividend announcements to raise investors’ expectations and the price of stock.



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