The South Sea Bubble was not an exceptional event but the first of many crises produced by the inescapable tendencies of capitalism, argues Dominic Alexander

England’s first stock market crisis erupted in 1720 when the price of shares in the South Sea Company suddenly started to slide at the end of the summer. The slide became a rout, and the resulting sell-off triggered the collapse of a host of other share schemes, many of which were either of doubtful value, or were outright frauds. The ‘bursting’ of the South Sea Bubble occurred only shortly after a similar crisis broke out in France with the collapse in the price of the shares of the Mississippi Company, which was tied to France’s first experiment with paper money. These events spilled over into a general shock to the finance systems of north-west Europe, where capitalism as a system had emerged or was emerging.

The South Sea Bubble has long been a byword for irrational behaviour driven by greed, or secondarily, a warning about the fickle unpredictability of the financial sector. It has not been lost upon many that the episode was exploited to the benefit of already rich and powerful insiders, and that this would not be the last time such a thing would happen. The bursting of the bubble did cause the disgrace of many politicians at the centre of the scandal, but apart from a few cases, most escaped significant censure or punishment.

The political beneficiary, and the one who carefully managed the outrage of public and parliamentary opinion, was the Whig politician, Robert Walpole, who went on to become, effectively, Britain’s first prime minister, and still its longest-serving one (1721-42). That Walpole was the leading politician to escape any damaging association with the bribery and insider-dealing of the South Sea Company is highly ironic, given his own subsequent reputation for systematic corruption. There seems to have been a good deal of revisionism, over the years, which applauds his political achievements, or attempts to downplay his corruption, but even so it is admitted that ‘Walpole’s willingness to compromise had a venal side,’ or that, for J. H. Plumb, he knew ‘the price of men.’[1]

Just as there have been voices seeking to rehabilitate or excuse Walpole’s conduct, so it seems that some have sought to sideline or minimise the corruption involved in the South Sea Bubble in one way or another. It is worth then summarising how the South Sea Companyoperated, and also the context of the new United Kingdom (the Act of Union joining the kingdoms of England and Scotland was in 1707) as a rising capitalist power, with a relatively fragile balance of power within its ruling class.

A new capitalist power

In 1720, the first Hanoverian king, George I, was freshly installed on the British throne, following an uncertain period during the reigns of William and Mary of Orange and Queen Anne, who died in 1714. Whether this new Protestant dynasty would survive was not at all clear at the time; the Jacobite rebellion of 1715 had been a very serious threat, and the restoration of the Stuart dynasty would not have appeared to be a lost cause at this point. A James III as monarch would have brought Britain into alliance with the French, and been a serious blow to capitalist interests across Britain. The English Revolution of the 1640s had overthrown the feudal absolutist state, but the stability and security of the political forces protecting the capitalist economy were far from completely secure all these decades later.

The Restoration of 1660 had brought the Stuarts back to the throne with an uneasy compromise between competing factions within the ruling class, but James II had pushed too hard to revive the pre-revolutionary monarchy. The result was the so-called Glorious Revolution of 1688, a new king, William of Orange, and an alliance with the first ever capitalist nation, the Netherlands. The faction of the ruling class known as the Whigs ensured this ‘revolution’ did not unleash any of the popular democratic radicalism seen in the 1640s, but did make the kingdoms of Britain safe for Protestant property owners.

However, also as a result, Britain had then been almost continuously at war with France and Spain in a series of conflicts that only finished with the end of the War of the Spanish Succession in 1714. In the course of all this, the state had built up an enormous debt due to war costs. For some, particularly Tory country gentlemen, the wars had been solely in the interests of the Whig aristocratic and mercantile elite who were able to profit from them. The costs, it was felt, had been shifted through taxation onto the lesser ranks of landowners, the gentry. How far this was true is less important than the point that the wars in Europe were, from the point of view of the Whig ruling class, at least as much about profits from trade worldwide, from Spanish colonies in the Caribbean and South America, the slave trade, and trade with the far east, than it was about French hegemony in Europe.

The essential financial infrastructure of a capitalist imperial power was being put together in these decades, with the Bank of England being founded in 1694, making government debt the business of parliament and not the king. The Bank of England was not only established to lend to the government on the basis of future taxation, but to provide the credit that a capitalist economy needs for investment, expansion and accumulation. State finances further depended upon the granting of monopolies to the great trading corporations, perhaps the most famous and successful of which was the East India Company. This paid £2 million, a gigantic sum at the time, in 1698 alone for its charter to trade.[2]

The South Sea Company

The South Sea Company was founded in 1711 essentially as a means of dealing with government debt, as well as enriching its directors in the process. Its success would depend upon a successful conclusion to the War of the Spanish Succession where Britain would gain extensive trading rights in Spanish colonial territories. The idea was that the Company would be able to make fabulous profits from trade with the Americas, and this ultimately would be what paid the government debt. It is worth emphasising right away that central to all of this was always going to be the slave trade. Incidentally also, it was a brief Tory government which ended the war in 1714, and in so doing betrayed Britain’s then ally, Austria. The Tory Party was the ‘peace’ party at this point, but no great virtue should be ascribed to this stance.

In the event, the series of treaties which ended the war, known as the Peace of Utrecht, was disappointing from the point of view of British trading rights in the Americas, and the South Sea Company’s few slaving expeditions failed to make a profit.[3] However, the main purpose of the company had been as a vehicle for servicing the government’s debts, to encourage lending on the basis of future profits. The Company carried on regardless. It was still assumed that the future would somehow pay off. The whole episode of the Bubble can be taken as a cautionary tale about the dangers of optimistic illusions stoked by a capitalist financial system. From being an originally Tory plan, the South Sea Company became entwined in the Whig oligarchy, as a means both for individuals to make their own fortunes, and for the government to offload its debt burden.

The way the scheme worked was inevitably somewhat complex, as it rather depended upon most investors not really understanding how it actually functioned, but being confident that they would profit from investing in it. The basic model was drawn from the system developed by a Scotsman, John Law, who was in exile in France. Law launched shares in the Mississippi Company to invest in the exploitation of the lands of France’s Louisiana territory. On the basis of confidence in the future profits of this company, shares rose to huge heights, and money was being made, in effect, by the shares themselves, purely due to the belief that the value of the shares would go on rising.

Without any real plans for the South Sea Company to engage in commodity trade of any kind, the value of the shares of that company depended entirely on a scheme to convince holders of government debt of various types to exchange it for shares in the company. The directors of the company made money so long as the trading in the shares of the company drove the prices ever upward. The success of the company depended entirely upon the continuing giddy ascent of the value of the shares. Despite some recent attempts to minimise the fraudulent nature of the South Sea Company’s behaviour, opponents said at the time that its directors were men ‘who design not the public interest but their own’.[4]

The whole venture was close to the definition of a Ponzi scheme. Like all Ponzi schemes, it was necessarily short-lived, and it only took some doubts to set in for the whole edifice to crumble apart. Public confidence was the key to an ever-rising share price, and when the Company voted an extraordinary lavish dividend with the intention of increasing confidence, on 30^th August 1720, the effect was the opposite. The empty nature of the Company suddenly seemed clear, and a serious sell-off began.[5]

John Law’s similar undertaking, underpinning the first French experiment in paper money, ended in a bout of hyperinflation provoked by Law’s desperate attempts to keep his system going. There was, in this case, at least the notion that the Louisiana territory would generate revenue in the future. The South Sea Company had no such economic reality behind it. Along with that crash, many other share schemes also collapsed in the general disillusionment with the ability of shares to make money by their own power. For the pre-capitalist French, under an absolutist monarchy, the disaster of the Mississippi Company meant that there would not be another experiment with paper money until 1793, after the Revolution.[6] In capitalist Britain, however, the setback for modern financial methods was much more temporary.

Some accounts seem to suggest that the problems with these twin financial disasters were more about the teething problems of new economic forms, with an investing public too inexperienced with stocks to be wary enough to behave responsibly.[7] Among the share schemes on offer, supposedly, was the often-quoted one for ‘a Company for carrying on an undertaking of Great Advantage but no one to know what it is.’ Sadly, this turns out to be a contemporary satire on the absurdity of the Bubble enthusiasms.[8] The affair cannot, therefore, be dismissed so easily as just an epiphenomenon of inexperience with the dangers of stock markets. It does, in fact, point towards the inescapably unstable nature of capitalist financial systems.

Credit and fictitious capital

On the one hand, credit and lending is essential to the functioning of capitalism: capital needs to be invested before commodities can be produced and sold in order to realise a profit. For a commercial economy, even in this period that pre-dated the Industrial Revolution, there needed to be mechanisms where money available for investment could be connected with enterprises. At this stage where mercantile trade was dominant, for the two existing capitalist states, Britain and the Netherlands, many major opportunities required heavy investment in dangerous, far-flung, sea voyages. Moving commodities between the Americas, India or the Far East, and Europe also required easy means of accounting transfers that did not involve transporting large amounts of coin or bullion. The Dutch had been ahead of Britain in founding a national bank which printed its own banknotes.

All of this necessarily created what Marx termed ‘fictitious capital’; capital which is predicated on the expected profits from an enterprise. It is an inevitable part of the capitalist system, but it can easily get out of hand. In all of the machinery of finance, there is always something in the nature of a gamble involved, and this opens the door wide open to fraudulent schemes. These are then necessarily attendant upon the actual practice of finance.

Marx describes capitalism as a process which reverses that of an economy of simple reproduction, where a use value (or commodity, C) is exchanged for another use value through money (C – M – C). In capitalism, the system is no longer governed by use values, but the drive for profit, so the circuit now starts with capital (M) which is transformed through the commodity production process, and, by the mechanism of exchange, is realised as the original capital plus profit (M – C – M’). However, as Marx pointed out, the process creates the illusion that the middle function can be cut out, and become simply M – M’.[9] Financial scandal will always break out periodically under capitalism for this reason.

Does this make the South Sea Bubble just another cautionary tale about the greed of investors, or even ‘human nature’, as many commentators have taken it? Whatever anyone may think about the human propensity for such sins, the whole episode is one that could only have taken place within a capitalist context. The ‘nature’ we are looking at is not in fact a universal human folly, such as ‘the madness of crowds’ under which a famous nineteenth-century account classified the affair.[10] It is rather the peculiar madness of capitalist exchange which promotes the illusion that an M – M’ process is possible.

The bubble and nature of capitalist crisis

There is another misapprehension that should be avoided here as well, which is that these kinds of financial crisis are what de-stabilise capitalism. In some quarters, it is thought that if the tendency to fraud, or over-enthusiastic ‘animal spirits’, were properly controlled through careful regulation, then capitalism could be stabilised, and made rational. On the face of it, the South Sea Bubble looks like a pure financial crisis, which Marx acknowledged was indeed possible.

Generally speaking, however, a stock-market crash is a symptom of a profitability crisis in the ‘real’ economy of commodity production. Even in the present pandemic, the impact of the lockdown has been accentuating a major recession that many indications were showing was on its way in any case, as Michael Roberts has argued. There is nevertheless evidence that the 1720 crisis did result in economic difficulties, and a significant drop in land values in the years afterwards,[11] so was this, after all, an example of a pure financial crisis leading to a wider economic crisis?

We should not be too quick to accept that interpretation, however. Turning back to the context of the Bubble, the problem to be resolved is why there was so much enthusiasm to invest in these unproven shares in the first place. One writer, Malcolm Balen, contextualises it with the enthusiasm demonstrated by the English for lotteries and gambling, which, in the end, comes down to an historically more sophisticated version of the ‘madness of crowds’ argument.[12]

Perhaps a better explanation could be drawn from the Marxist law of profitability. The capitalist system is driven by profit-seeking, and capital will be withdrawn from activity that shows low profitability, or expectations of it, towards areas of high profitability. Once the industrial revolution was underway, this resulted in the familiar cycles of boom and bust, and periodic major crises and depressions. These cycles of a more developed capitalism had not crystallised as early as 1720, but the essential motor of the search for profitability would nevertheless be in operation already.

In absence of the large-scale industrial production that would come later in the century, capital around 1700 would have been more drawn to invest either in land or in overseas trading ventures. Strikingly, some of the other share schemes at the time involved plans to drain fenland, or buy up land in Ireland, not in themselves outlandish notions. However, whether the plans involved the development of land in England, Ireland or the Americas, all of these would take time to turn a profit, and were uncertain. Capitalism, however, has an in-built drive to reproduce and accumulate as rapidly as possible, and it is this propensity which will always make it vulnerable to the kind of financial debacle that happened in 1720.

The South Sea Bubble was not therefore an exceptional event, but the first of many that are bound to happen any time there seem to be blocks to profitability in the realm of commodity production and trade. Capital will flow into the most attractive alternative channel available, which will often be the realm of fictitious profit. Financialisation and stock-market crashes are not the cause of crisis under capitalism, but merely the expressions of its underlying, and inescapable tendencies.

Production relations in 1700

A final dimension of the historical context needs to be added to put the South Sea Bubble within its proper place in the understanding of capitalist development. At almost the same time as Walpole was managing the fall-out from the crash, protecting some political colleagues and sacrificing others, parliament passed the ‘Black Act’ in 1723. The act was so-named after the practice of those who went out poaching to blacken their faces to avoid identification. The legislation was not simply a reaction to the sometimes violent conflicts in areas like the Windsor Forest most prominently, but introduced the death penalty for a whole series of crimes against property. This was only the beginning, in the course of the eighteenth century, of a huge expansion in the often quite petty crimes that could be punished by hanging.

As E. P. Thompson’s classic work, Whigs and Hunters (1975) describes, this was nothing less than a class war over the use of rural resources, and an unsparing attack on the traditional rights of the poor, and even middling ranks, over resources in the woods, streams and fields of England.[13] The enclosures, those countless acts of class robbery that privatised common lands, was already well underway, but they were only a part of the relentless drive to transform a subsistence economy into a market-orientated one. It was underpinned by new legal ideas: ‘lawyers had become converted to the notions of absolute property ownership.’[14] The result was the gradual impoverishment of rural labour, and the driving of people into low-wage industrial employment. The foundations of the industrial revolution lie here.

What it reveals is the limitations to capitalist relations of production, even in rural areas close to London. Conflicts over rights to rural resources, which Thompson shows were building up to a high pitch in the years before 1723, would have put limits on the ability of capitalist orientated landowners to maximise the profits from their estates. The early eighteenth century is not known for major popular movements, but class struggles can be pervasive and yet relatively invisible in the historical record. The disputes which led up to the Black Act are one sign that resistance to capitalist relations of production may well have been widespread.

If that is so, then the desire of many of the wealthy, and even not so wealthy, to invest in the dubious claims of huckstering ‘stock-jobbers’ may be explained, not by some eternal flaw in human character, whether of greed or gullibility, but in a perception that returns on capital were not certain enough, or lucrative enough, in the competitive society of the early 1700s. That is to say, again, that the South Sea Bubble was not a crisis of the ‘financial sector’, but, like so many capitalist crises since, fundamentally a crisis of profitability.

Most of the most powerful interests caught up in the South Sea scandal, including the uncharismatic King George I and his unpopular mistresses, were saved from the worst of the fallout by the clever manipulations of Walpole, who gauged what he could get away with in terms of public outrage very carefully. The South Sea Company, in shades of the future, was itself bailed out.[15] Those who suffered the brunt of the losses were not only acquisitive members of the gentry, but shopkeepers and artisans, who, in the ensuing wider crisis became unable to sell their goods or collect their bills from wealthy patrons. Far from suffering from the crisis, the Whig faction went on to flourish under Walpole’s later reign of corruption. The period in fact represented a stabilisation of the new Hanoverian dynasty, to which the Tory Party increasingly thoroughly reconciled itself.

Whatever the divisions between Whig and Tory over the crisis, both factions were agreed on punitive policies towards the labouring population of the country, exemplified by the repeated renewals and extensions of the Black Act in the years to come. Profits must be made somehow, and we can always be sure that in a capitalist economy, losses will be recouped out of the lives of working people, unless we organise to fight back.