John Blunt’s Nefarious Scheming
Before a law exists, one cannot break it. One is, however, more than capable of doing something immoral regardless of the existence of a legal code. Our distant hunter gatherer ancestors had no constitution to ensure their rights, yet they still functioned in social groups. If someone stole from their neighbour, they might expect to face violent retribution, which may in turn result in further violent vengeance. When it comes to some basic immorality: theft, and violence, humans will for the most part naturally agree that these things are wrong and should be prevented or punished. When it comes to the physical world humans can understand the idea of ownership, but when it comes to conceptual property, things get a bit complicated. I spoke at length in part one about the burgeoning new ideas of how finance could work at this time, and like all new ideas people strove to find a way to make it work to their advantage. What happens when these new ideas are usurped for massive personal gain at the cost of others, but the law has no way to deal with it? Well, in this particular case, John Blunt was given a job.
The Hollowsword Blade Company had ceased actually making swords when their founder died in 1702, and the remaining board members elected a new director, the ironically named John Blunt, to take over the reins and keep the company operating as an unofficial bank. Even this early in history companies would need to jump through considerable amounts of red tape in order to be considered an official bank, so working behind the scenes and chiselling at the cracks in the law was perfectly fine with them. What really catapulted them into the spotlight (and more importantly for our story, the attention of Chancellor Harley) was a financial scheme so devious the legal system had no real way of punishing Blunt for carrying it out so successfully.
During the reign of King William II (whose wife, Mary II, was brother to James Stuart, the now exiled Catholic heir to the throne thanks to the Glorious Revolution) substantial lands had been confiscated from landowners in Ireland. The history of English brutality in Ireland could fill multiple volumes of academic textbooks so I won’t go into it here, but suffice it to say that after much debate, Parliament ruled that the land would be available for purchase, rather than given away as gifts to the King’s favourites, and this is where Blunt smelled his chance.
The plan seemed relatively simple at first. The company would buy £200,000 worth of these confiscated lands in Ireland, the income from which was estimated to be roughly £20,000 per year, and this rental income would be used to pay a dividend to all the shareholders. You can think of this as an early form of Mortgage Backed Security (the irresponsible lending of which, incidentally, caused the 2008 global financial crisis). Nothing too out of the ordinary so far, but stay with me because this next bit is where the devious nature of greed steps in. The Hollowsword Blade Company proposed to pay for this by issuing shares worth £100 each, and offered to swap these for army debentures worth £100. These debentures were essentially an I.O.U. from the government, but in reality they weren’t worth the full price actually paid by the bearer. They paid no dividends, and there was essentially no way for the bearer to somehow reclaim money from the army, and so were often traded at well below the market value of £100. Just so we’re clear on what’s happening here: a private company is issuing shares that can be purchased with government debt, to pay for land owned by the government. The company wasn’t actually paying any money, it was simply using the magic of financial jiggery pokery to make government debt simply disappear, and in exchange they were purchasing huge sums of property. But even here, Blunt had his thumb squarely on the scale.
Before the announcement of the scheme was made public, Blunt managed to convince the rest of the Board of Directors to quietly purchase as many army debentures as possible, gradually increasing the price of buying the debt. Once the scheme was made public, everyone on Change Alley was desperate to buy these debentures in order to get in on the ground floor of this whacky new scheme, and the price skyrocketed. Of course, the Hollowsword Blade Company directors already owned many of these debentures, and were all too happy to sell them to the general public at a massively inflated price in exchange for shares in the company which were now worth considerably less on paper than the debentures were. This secured the directors a huge sum of profit, more than making back the money they had lost buying up debt in the first place. So now the full picture looks something like this: a private company buys up huge amounts of relatively worthless government debt, offers to swap the debt for shares in the company, they then work up the general public into a hysteria to buy this debt (secretly held by the very same directors issuing the shares) at inflated prices, all with the goal of securing land from the government.
Let’s be clear about what is happening here; this is blatant insider trading. Today, this is punishable with severe restrictions and penalties. But this was the early 1700s, very few, if any, laws on this kind of trading even existed. Was this immoral? Unquestionably. Was it illegal? Well, no one was quite sure. And here’s the funny thing about legislation, if the legislators are the ones benefiting from actions taken by an immoral few, those legislators aren’t exactly keen to crack down on them. Sure, the public had been essentially ripped off into buying worthless debt to trade for shares in a private company, but once the company had made the purchase of land from the government, that debt was no longer the responsibility of the government to manage. Suddenly, the finances of the realm looked a little brighter, as they were no longer paying interest on debts that were haunting the treasury. To sweeten the deal, Blunt even offered to loan the government £20,000 at 5% interest. Parliament was, therefore, reluctant to look this gift horse in the mouth, and this particular act of financial skulduggery was left unpunished, and Blunt was soon given a new job and a long list of allies in powerful places to call upon later.
We jump back to a desperate Harley 1711, who decided to give Blunt a chance to raise the money he desperately needed; so Harley tasked him with taking over the state lottery. Blunt brought his typical creative flair to this endeavour. He announced a series of eye wateringly lucrative payouts. Tickets were sold at exorbitant prices, with the promise of a payout on every ticket. People scrambled to get these tickets, which would pay out incrementally over the course of several years, and Harley could finally breathe a sigh of relief as he managed to scrape together the money needed to keep the Government going for the rest of the year. But neither he, nor his new ally Blunt were done with their scheming.
The Actual Trading of the South Sea Trading Company
It’s finally time to actually talk about the South Sea trading Company. You may have noticed that I haven’t actually talked about the South Sea Company much so far. There’s a good reason for this; there isn’t much to talk about for the early days of the company. It had been founded in 1710, along with a purchase of £10million in government debt, and the idea was that the company would issue shares at £100 in exchange for £100 of government debt, with dividends paid out from the profits of the trading company.
But here’s the thing: the “south sea”, refers to the Southern Atlantic Ocean, largely dominated by the continent of South America, which was itself dominated by Spain. England was currently at war with Spain (remember all that army debt Blunt was messing around with earlier, I wonder how that got there?). After some extremely questionable negotiating, England managed to come to a settlement with King Philip V of Spain, and won the right to send a single ship, once a year, to a Spanish port in South America. Along with this, the company was also given the even more questionably lucrative right to trade slaves between Africa and South America (known at the time as an Assiento). If this wasn’t obviously problematic enough, what few ships that actually did manage to reach these Spanish ports were met with devastating failure. The H.M.S. Bedford was accused of exceeding the maximum tonnage at Cartagena. Despite this later being proved to have been untrue, the cargo was seized and all profit forfeited. The H.M.S. Elizabeth was heavily subjected to duties at Veracruz, causing the company to lose something like £200,000 on its first few ships. If this wasn’t bad enough, the company also had trouble actually trading in slaves. For quite some time, private teams of pirates had been ferrying slaves taken from Africa over to America, and were in no mood to hand over their profits to some company in England just because they had a bit of paper saying they held the right to do so. Suppliers of human chattel were also not the sort of people to take a bit of foreign paperwork too seriously. Consequently, the company was haemorrhaging money year after year, and the government was wracking up more and more debt.
The press was running wild with speculative articles about the doom and gloom hanging over the nation in the form of the insurmountable national debt. By 1719, King George I was giving speeches to the realm urging his ministers to take all necessary steps to tackle this debt. By this point, it was believed that these debts were around £41.6million, orders of magnitude greater than what it had been at the start of the century barely 19 years earlier. Britain was at crisis point. If things got any worse the government would be completely unable to secure further financing, and would effectively be made bankrupt. What parliament needed was the right sort of morally bankrupt man with his thumb on the scales to tip their finances back in their favour, and this is the story of how John Blunt defrauded an entire country to make a quick profit.
The Money Trail 