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A Very English Deceit: The Secret History of the South Sea Bubble and the First Great Financial Scandal
Malcolm Balen
The ebook of the critically acclaimed popular history book: the story of the South Sea Bubble which in Balen’s hands becomes a morality tale for our times. A classic collision of political ambition, mercenary greed and financial revolution.The early years of the 18th-century produced two great monuments: one, Christopher Wren’s new cathedral of St Paul’s, an enduring testament to principled craft and masterful construction; the other, an empty fraud of such magnitude that its collapse threatened to overturn monarchies and governments. Its failure delayed the introduction of modern market economies by two generations. Yet the full scale of this monumental deceit was quietly covered up and hidden, its enduring legacy a poorly understood colloquialism: the South Sea Bubble.It was all planned by one ambitious promoter, who had decided to launch ‘a company for carrying on an undertaking of great advantage, but nobody to know what it is’. This eighteenth-century mission statement has now acquired an almost uncanny resonance: these words could aptly have been applied to the bursting of the internet bubble and the collapse of Enron. With the financial scandals that have beset global companies recently, such as Rank Xerox and Worldcom, this tale is all the more relevant today.Balen reveals the full story of corruption and scandal that attended the birth of the first shareholder economy, and with it uncovers a parable for our times.Note that it has not been possible to include the same picture content that appeared in the original print version.
A Very English Deceit
The Secret History of the South Sea Bubbleand the First Great Financial Scandal
Malcolm Balen
Dedication (#ulink_e44deba1-1953-5675-9b04-7b1fc90d0f6a)
Karen, Mischa and Katya
Contents
Cover (#u2a7f43ac-3b9c-594b-90cc-a857b62b3cc8)
Title Page (#u8de25d34-cfac-58b2-ae5e-5ce09d9e1ed4)
Dedication (#udd9bf3c5-1b22-5116-9129-e909885d667f)
Prologue (#u45e22fcb-e773-5ebf-90c1-f2d471048039)
Postscript (#litres_trial_promo)
Bibliography (#litres_trial_promo)
Index (#litres_trial_promo)
Acknowledgements (#litres_trial_promo)
About the Author (#litres_trial_promo)
Author’s Note (#litres_trial_promo)
Copyright (#litres_trial_promo)
About the Publisher (#litres_trial_promo)
Prologue (#ulink_d57b61a9-41a1-5856-b4ee-aa2e17f476f5)
Even the Royal Family has joined the ranks of the dot-com investors hoping to make a fortune from Internet shares. Now it has emerged that the Queen has invested £100,000 in the Internet company getmapping.com. When it floats on the stock market next month, it’s expected to be valued at £40 million, so the Queen’s stake will be worth £1.2 million. But there’s growing concern about how successful investments in such stocks will be. An increasing number of City experts believe the Internet bubble will soon burst. Indeed many are comparing it with the first time a shares bubble fuelled by frenzied speculators burst.
Daily Mail, 20 March 2000
CHAPTER I
The Dome
It could be fair to describe what happened at the turn of the millennium as the Great Silicon Valley Swindle, a popular delusion that will take its place in economics textbooks alongside the Dutch Tulip Mania of the seventeenth century and the South Sea Bubble of the eighteenth. Investors appeared convinced that venture capitalists were capable of generating extraordinary returns on technology and consumer Internet companies. The effect was to drive up prices to ridiculous levels for companies that scarcely had business plans, let alone revenues or profits. The scale of subsequent value destruction is colossal. Most of the money that was invested in those twenty-four months is likely to be lost. When apportioning blame, it would be tempting to single out the venture capitalists. They, after all, are the ones who invested the money in business plans for ideas as ridiculous as online dog food.Financial Times, 20 August 2001
London, 1710.
The city is reaching for the heavens.
More than fifty steeples point towards the sky, raised arms above the dark, narrow streets whose dwellings are so low they appear to be at prayer. From the Thames-side terrace at Somerset House, there is a breath-taking sight – the architectural clutter of later centuries is not yet upon us. Lead and stone, cupolas and towers, crosses and columns stand exuberant against the sky. There is, perhaps, a gentle breeze, carrying with it the smell of sea-coal from the north of England which the bargemen are unloading on the river.
Downriver lie the two domes of Greenwich Hospital, identical twins along the water’s edge, each with a supporting army of columns. To the east, in Cheapside, more than two hundred and twenty feet up, a bronze weathervane in the form of a dragon swings gently in the wind. Below it stands the pencil-slim elegance of St Mary-le-Bow. As the church rises beyond its square tower it narrows sharply: a temple of simple columns yields to a balustrade, above which, tapering together like fingers, a dozen stone bows are gathered. The church soars skyward, ever slimmer, until the steeple touches the dragon’s feet. For the elegance of its buildings, and above all for this, the most beautiful of his creations, the city gives thanks to the genius of Christopher Wren, whose brilliance has led him down a path of magnificent architectural variety in the rebuilding programme he has inspired since the Great Fire. He is a mathematician first and foremost, but over the years he has trained himself as an architect, absorbing style and simplicity from France, Italy and Holland, but showing a uniform adherence to the influence of no one but himself.
No sooner has he completed St Bride’s in Fleet Street with an octagonal stairway, four steps high, than he tops Christ Church in Newgate with a square one; to St Magnus Martyr he gives an octagonal tower, and to St Vedast in Foster Lane a concave crown; most dramatically, he allows St Martin to rise above Ludgate with an octagonal tower topped by the longest, slimmest steeple of them all: a black lance to pierce the sky.
But its sharpness on the eye is blunted by the great grey shield of St Paul’s Cathedral which curves towards the clouds. As yet unfinished, its incompleteness serves only to emphasise human frailty and humility which its eventual perfection will deny, sealing off the worshippers, separating them from direct contact with God. The church roof is open to the elements and inside workmen are still perched on scaffolding in the chancel, making mouldings above the vaulting. In a large hut, sculptors are at work on statues which will stand in the space before the church – Queen Anne in white marble on a black pedestal, and round her the kingdoms of her domain. Sir Christopher himself can be seen, clambering into a basket to be hauled skywards to inspect the progress of this monument to his brilliance, an ascent he makes three or four times a week. It is his lifetime’s work. From start to finish, he has overseen his cathedral’s rise from the ashes of the city.
The dome to which he is travelling has an inner and an outer part, constructed like two layers of an onion skin so that if Wren was somehow able to peel away the outer covering, a cupola would still remain, resting on eight piers whose arches form the Whispering Gallery where the dropping of the lightest coin of the realm can be heard more than a hundred feet away. And it might be appropriate on this day, as Big Tom strikes the hour in the cathedral tower, if a coin was dropped in this temple, if the outer skin of the roof was peeled away, to reveal the true object of England’s worship. Not St Paul, carved above the central pediment and the great oak doors, nor God himself, but money.
For below Wren’s feet, among the busy maze of streets where some of the capital’s thousand hackney carriages and chairs jolt past, the early signs of financial madness can be detected. This is the kingdom of the ‘moneyed-men’, the stockjobbers who buy and sell their shares in the coffee houses, which are the heart of London’s new financial district, where not just coffee but tea, chocolate, sherbert, sherry and pale ale are consumed and where news spreads as quickly as the Great Fire itself.
Coffee houses are the most popular public places in London: there are more than two thousand of them, the preserve of men who wish to while away the hours free of the opposite sex. Inside, there are long tables and benches, a roaring fire in the hearth, lines of clay pipes and newspapers spread out to read. There is a warm, secure fug of smoke, and drink, and chatter. It is a male club, where the species can protect its own and ignore the world outside, especially the despairing women who once campaigned ‘against coffee and The Grand Inconveniences to their Sex from the Excessive Use of that enfeebling Liquor’.
The terrain of the moneyed-men, marked out by the coffee houses, is small but profitable, a series of narrow passageways called Exchange Alley, which lie within the maze of narrow streets captured at the intersection of Cornhill and Lombard Street. A minute and a half is all it takes to walk through this lively, noisy financial centre, hemmed in on each side by tradesmen and barbers, lawyers and insurance clerks. On the second floor of Wren’s favourite coffee house, Gangway’s, there is a sale room where the jobbers ply their trade from a rostrum between the hours of eleven and three. Nearby, just down the street, is an upstart bank, grown lean and sharp from the days when it was an import company bringing in the Huguenot steel, which was favoured by swordsmen over its English rival. The bank has expanded through land speculation in Ireland and stands on the brink of power, aiming now to cut down its two rivals, the young Bank of England and the East India Company. In this respect, its name does not disguise its intentions. It is the Sword Blade Bank.
The buying of stocks and shares in Exchange Alley is, as yet, in its infancy. The trade was carried out previously in the Royal Exchange, a stockjobber’s shout away on the other side of Cornhill, but this discomfited the traders in the country’s more conventional merchandise, such as their largest export, wool. So the broken moved to ’Change Alley, as it is known, taking with them their ceaseless noise. Here, the practitioners are already versed in the notion of buying and selling more than they can afford. It is the fashionable new form of gambling. There is a growing sense that shares will go ever upward, like one of Wren’s perfectly balanced spires.
The dealers are raucous and seedy, unscrupulous and rough. Their aim, in the saying of the day, is ‘to sell the bear’s skin before they have caught the bear’: they are selling stock before they have paid for it in the hope that they will be able to meet the cost from the profit – or ‘bubble’ – on the deal. One anonymous observer on a journey through England in the year 1710 watches the moneyed-men of’ Change Alley at work, and reports on the scene to a friend abroad in a series of letters; in one, he comments: ‘You will see fellows, in shabby clothes, selling ten or twelve thousand pounds in stock, though perhaps he mayn’t be worth at the same time ten shillings, and with as much zeal as if he were a director, which they call selling a Bear’s-Skin; and these men find Bubble enough to get bread by it, as the others do by gaming; and some few of them manage it so as to get pretty large estates.’
So the city-dwellers go about their money-making schemes, heads down and voices loud, and ignore Wren’s masterpiece as if it has no connection with their lives. And the truth is that it has little: the cathedral belongs to a world which they do not inhabit; it is a beautiful object of refinement and contemplation in the midst of the daily dirty struggle to survive: to earn enough to eat, drink and keep clean. As they walk, London’s citizens keep close to the walls of buildings, fearful of the water which cascades out of crude spouts from each roof; more fearful still of the sewage pumped into the gutters of the street when the houses’ wells are full.
The pavements are crammed with stalls, sheds and signposts; where they end and the road begins is hard to tell: there are no kerbstones to separate the path from the carriageway, although on the wider streets there is a line of posts and chains or wooden palings. The wide expanse of Tottenham Court Road, stretching north, has been paved for only a few years. London is not all that Wren would wish. ‘Natural beauty is from geometry,’ he has declared, ‘consisting in Uniformity and Proportion. Always the true Test is natural or geometrical Beauty.’ But the city is untidy, disorganised, unsymmetrical, full of chaotic winding streets that snake round and disappear. It is a jumble, a jungle, a teeming maze where the people live cheek by jowl – half a million of them, nearly a tenth of England’s population, crammed together in a city that has not yet spread. Piccadilly, to the west, marks its furthermost boundary.
But the capital is not just a commercial and trading centre. It is a gambler’s paradise. In the inns, bets are taken on brutal, bloody sports: bull-baiting, bear-baiting and cock-fighting, the vicious pastimes of a nation frequently at war. One German visitor to London in 1710 notes, with surprise, the aggressive nature of the English crowds:
In the afternoon we went to see the cockfighting. This is a sport peculiar to the English … a special building has been made for it near ‘Gras Inn’. The people, gentle and simple, act like madmen, and go on raising the odds to twenty guineas and more. It is amazing to see how the cocks hack with their spurs. Their combs bleed terribly and they often slit each other’s crop and abdomen with the spurs … they belong to great Lords who have brought them from Kent and other places and win a great deal of money by their wagers. Towards evening we drove to see the bull-baiting. First a young ox or bull was led in and fastened by a long rope to an iron ring in the middle of the yard; then about thirty dogs, two or three at a time, were let loose on him. Then they brought out a small bear and tied him up in the same fashion. As soon as the dogs had at him, he stood up on his hind legs and gave some terrific buffets. But the worst of all was a common little ass who was brought out saddled with an ape on his back. The ape began to scream most terribly for fear of falling off.
Later the same traveller watches two men fighting for money at the Bear Garden at Hockley in the Hole, on the outskirts of town by Clerkenwell Green, cheered on by spectators who crowd into the galleries of raised seats.
They went for each other with sword and dagger and the Moor got a nasty wound in his hand, which bled freely. When they had attacked each other with broadsword and shield, the good Moor received such a dreadful blow that he could not fight any longer. He was slashed from the left eye right down to his cheek to his chin and jaw with such force that one could hear the sword grating against his teeth. Straightaway not only the whole of his shirt front but the platform too was covered with blood. The onlookers began to cheer and threw down vast quantities of shillings and crowns.
London is a brutal, dirty, lively, joyous place. Plague and fire, and civil war, have done their worst and departed; fear of God is subsiding. Life is rushing back.
But there are warning signs that the established order can still be threatened, that England may not yet be built on firm foundations. Behind the remains of the Palace of Whitehall, torched by a recent fire, lie the marks made by the scaffold where Charles I was beheaded. And despite the splendour of Wren’s church-building, the view from Somerset House is deceptive: a thin layer of dirt has gathered upon his stonework. Already his masterpiece is tarnished, blackened by the smoke from the sea-coal, shipped from the northern mines. The coal, named from its journey rather than its origins, is taxed when it is unloaded at the Port of London in order to raise money to rebuild the city. But it is slowly eating into it instead, discolouring its buildings, clogging the nostrils of its people, coating their tongues and clouding their eyes.
Wren’s professed aim was to defy the corrosive elements and stretch across the centuries, ignoring fashion to appeal to an ideal, immutable form of design. He insisted: ‘Architecture aims at Eternity; and is therefore the only Thing uncapable of Modes and Fashions.’ His great vision was of a cathedral dome that would be grander than any other, capping not only St Paul’s, but his career. It would signify, architecturally, the might of the capital and the grandeur of England. It would lift spirits. And it would celebrate the stability of the country, its monarchy and people, after the trials of the Civil War and then the Glorious Revolution of the previous century.
For all his splendid dreams, however, it was as hard for Wren to raise money for his great project as it was to quarry the blocks of stone for the cathedral’s construction. The Act of 1670 which allotted St Paul’s four and a half pennies in tax for every chaldron, or twenty-five hundred-weight of coal, brought it only some £4,000 a year, and in 1677 the cathedral’s commissioners were forced to mount an appeal to the nation. Even the monarch was enlisted to the cause. Sermons were preached around the country, collections taken, and gradually the ordinary people sent in their pennies and their pounds to the rebuilding fund. Still, the greatest building the country had seen was in danger of being left uncompleted – until the workmen themselves came up with the solution: they suggested that their wages should be considered as a loan to the building project, and they would work instead for the interest on the money they were due. By the end of 1697, more than £24,000 was owed to them, including £1,500 to the master carver Grinling Gibbons. The cathedral slowly rose.
Thirty years after he first started, Wren’s task is nearly done. Above the Derbyshire lead and Kentish timber of his dome, a ball and lantern top out his mighty work, three hundred and fifty-five feet above the streets. His is the largest, most beautiful cathedral in England, a fitting homage to the patron saint of the City of London whose wealth has helped make the country one of the grandest on the globe. Out of a total of three-quarters of a million pounds, it has cost Sir Christopher Wren £2,000 of his own money, a small fortune for the times.
Soon, however, such a sum will appear to be a trifle. The financial world is about to be turned upside-down in the streets below.
Ten years after Wren completed his cathedral, to mark his vision of eternity, a city which had survived plague and fire to prosper as a mercantile centre – a city which, to the untrained eye, had risen gloriously from its ashes – was beginning to live only for the moment, chasing financial liberation by buying shares in extraordinary new projects that had no foundation. The Age of Reason, which held that science could explain all, was giving way, indeed was being unceremoniously elbowed aside, by the Age of Insanity. The country was rushing headlong into enterprises founded on little more than an understanding of human greed and corruptibility. By speculating on the stock market, a humble bookseller trading near the cathedral churchyard would win a third of the total cost of building St Paul’s.
An age inspired by the genuine achievement of men like Christopher Wren and Isaac Newton had the misfortune to collide at full speed with the age of the moneyed-men. Hundreds of projects were launched in these vertiginous times. Here was invention, inspiration and downright fraud, all merging in a pot-pourri of frenzied activity. Schemes arose thick and fast with just enough scientific credibility to fool the layman. ‘Projectors’ – as such speculators were known – were held to want money
For a wheel for perpetual motion
For extracting silver from lead
For carrying on a trade in the river Oronooko
For trading in hair
For paving the streets of London
For furnishing funerals to any part of Great Britain
For insuring and increasing children’s fortunes
The country appeared to have discovered a new industry with new rules of credit which held out the prospect of immense riches, removing traditional class barriers to wealth. It was an exciting, vibrant era in which huge fortunes could be created overnight by a simple share launch.
One of the most famous projects was launched by James Puckle, who designed a flintlock machine-gun for making a ‘total revolution in the art of war’. The Puckle gun was mounted on a tripod and fired nine shots a minute, one after the other and three times faster than a soldier’s musket. Puckle had two versions of his design. One weapon, intended for use against Christian enemies, fired conventional round bullets. The second, designed to be used against the Muslim Turks, fired square bullets, which were believed to cause more painful wounds.
But some of the schemes were not half as sensible as this. There was even said to be a ‘Company for carrying on an undertaking of Great Advantage but no-one to know what it is’. Crowds of investors were reported to have surrounded the company’s office in Cornhill, snapping up shares at £2 each. Some of the schemes were swindles, others were hoaxes – not with a view to making money but simply to illustrate the country’s madness. Spread by greed and by the newspapers’ zeal in reporting daily on the changing prices of shares, the new way to make money without having to do an honest day’s toil appeared to be obsessing the whole country.
Speculators scrambled to invest in the thousands of new projects, launched in the wake of the grandest scheme of them all, a scheme which would grow to such a size it seemed as if there was not enough money in the kingdom to support it. Some would make or lose up to a quarter of a million pounds in the madness of 1720, when shares in some ventures rose as high as the cathedral itself. Few investors kept their feet firmly on the ground; many felt under pressure to join in as they watched their neighbours climbing a new social ladder through the sudden acquisition of riches. Politicians, the clergy, landowners and the poor all joined in the scramble. Social mobility appeared to race out of control, with barriers between the classes seemingly removed by the chance of easy money. Women, defying convention, invested too – to claim, albeit briefly, an equal place in society. A there porter in Exchange Alley was said to have made £2,000 – ten times the annual income of an entire well-to-do family and a hundred times his own likely yearly earnings. Investors flocked to Britain from Holland and France. The canton of Bern in Switzerland made a corporate decision to invest. The streets of Exchange Alley heaved with desperate souls seeking to place their money in the mushrooming schemes. Fortunes, it appeared, could be made overnight.
The story of the events of 1720 holds more than just the elements of greed and pathos. It was, to those on the edges of the affair, so ridiculous that it inspired a generation of satirists to make fun of the human condition. And it was cruel, causing suffering among many families across the land. Ultimately, it showed England at its most corrupt, exposing the poisonous underbelly of the monarchy, of the ruling classes and of the elected politicians.
The three actors in the drama would be John Blunt, the aspiring son of a Kent shoemaker; John Law, a Scottish gambler; and Robert Walpole, a scheming Whig politician from Norfolk with an ambition as large as his girth. Blunt and Law would, in very different ways, lead the search for the alchemy that would overturn the vast debts of two nations and fill ordinary people’s pockets to overflowing. From 1710 to 1720 their careers would collide, and the impact would change the political and economic direction of two great countries, England and France. One was a shallow schemer, who conned a nation; the other a brilliant economist, far ahead of his times, whose intellectual theories blinded him to reality; but both would be condemned as charlatans when their inventions failed. On the backs of their triumphs and disasters, Walpole would, through cunning and ability, rise to unparalleled political power.
When reality returned, as inevitably it would, the old industries of shipping, farming and land-ownership, too dull for the exciting times of the stock-market ride, would once more be seen to be the places to put hard cash. The same would be true of the trade of which Wren was the architectural master: bricks and mortar would come back into favour. Those who had transferred their allegiance to the share market would be left to bemoan their fate and mourn their thumping losses. The Duke of Portland quietly applied for, and was granted, the governorship of Jamaica. A more ignominious position for a member of the eighteenth-century aristocracy can scarcely be imagined. But he needed to draw a salary.
CHAPTER II
A National Lottery, and a Rake’s Progress
Edwin Thrasher was stony-broke before he won, and one day he touched the ring that his father left him when he died, and said, ‘Dad, please send me some money.’ That afternoon he won £50,000 on an Instants scratch card.‘Fun Facts About Winners’, the UK National Lottery website
With hindsight, it was five shillings’ worth of metal that changed the course of history.
In April 1694, in the London suburb of Bloomsbury, two men walked purposefully out of a tavern, glancing around in case there were any bystanders. Within a few paces, they had drawn their swords to settle their differences over a woman they both loved. It was over as quickly and silently as it began. The younger man made a single quick thrust; his rival fell to the ground, and was left dying, alone in Bloomsbury Square.
Within a day the survivor was arrested and thrown into Newgate jail. Within a fortnight he was in court to hear the charge against him: that ‘of his malice aforethought and assault premeditated he made an assault upon Edward Wilson with a certain sword made of iron and steel of the value of five shillings with which he inflicted one mortal wound of the breadth of two inches and depth of five inches, of which said wound the said Edward Wilson then and there instantly died’.
John Law, ‘Beau’ Law, scion of the Laws of Lauriston, gambler and ladies’ man, was sentenced to hang. There was little time to lose if his life was to be saved. According to the official version of events, Law was handed the means of escape by friends: they managed to supply him with a file with which he cut through the bars of his cell; also, drugs which he somehow managed to slip into his guards’ food or drink, to put them to sleep; and, for when he had achieved both these tasks, Law’s friends had a carriage waiting outside the prison, ready to whisk him away. Shortly after New Year’s Day, 1695, Law jumped thirty feet from his prison wall, and, although he apparently sprained his ankle on landing, he made it to the carriage and was promptly driven to the coast and smuggled aboard a boat to Holland. It appeared, in every detail, to be a daring escape, and one which became more and more colourful in the telling.
Soon afterwards, the newspapers were supplied with this description of the man on the run: ‘Captain John Lawe, a Scotchman, lately a prisoner in the King’s Bench for Murther, aged 26, a very tall black lean Man, well-shaped, about Six foot high, large Pockholes in his Face, big High-Nosed, speaks broad and low, made his Escape from the said Prison. Whoever secures him so he may be delivered at the said prison shall have £50 paid immediately by the Marshal of the King’s Bench.’ Descriptions can be misleading: Law had a clear complexion, and his nose was not large. Nor was his voice broad and low, and neither, for that matter, was he a captain. It appeared that influential friends had persuaded the newspapers to run a misleading description. Escape routes from justice, in the seventeenth century, could be arranged for the influential.
For the best part of two decades, John Law would wheel around Europe in exile. A quarter of a century would pass before he returned to London to receive a royal pardon. A quarter of a century in which he became the most important politician in Europe, a millionaire who invented a financial system that would capture the shattered economy of England’s greatest enemy and transform it into the most powerful in the Western world.
Many countries, but especially England and France, had empty coffers and restive taxpayers, mainly because they had failed to shake off their habit of waging expensive wars against each other. Since 1688, the English government had been almost permanently in combat against the French and Spanish. As the wars ground on, so the national debt had spiralled out of control, matched only by the harshness of the taxes on the country’s landowners and the crippling generosity of the government’s rate of interest to its moneylenders. All men were ‘led by their profit’, declared the banker Sir Josiah Child. The new breed of unprincipled, self-serving ‘moneyed-men’ was doing fast business in the coffee houses of’ Change Alley, growing fat on the interest on their loans.
In 1693 Parliament, for the first time, had guaranteed the government’s debt, removing the responsibility and authority for it from the monarch. The cost of borrowing money soon came to dominate political life. Within a year, in April 1694, Parliament voted to establish the Bank of England as an expedient to get the government out of financial trouble. Under its charter, the Bank was required to lend more than £1 million to the government, although in return it was guaranteed a profitable 8 per cent interest a year on its money. The Bank was also given permission to issue its own paper currency, and soon Exchequer bills and promissory notes were introduced to manage the debt.
Trading companies, too, were tapped for loans by the government. The East India Company was forced to pay heavily for its charter: £2 million in 1698 to see off a rival syndicate, and another £1 million in 1708 when these two companies merged. The Bank of England and the East India Company were the country’s two great financial institutions, the pillars of the City, the props on which a financially enfeebled government relied. They sharpened the divide between the landowners who paid tax and the moneyed-men of the City. But as for signs of progress in the great wars for which all this money was being spent, there were none.
The country considered it was fighting for its independent future, both politically and as a trading nation. The changing alliances in Europe were as complicated as the fighting was interminable, but England had, for some twenty years, battled to bring Louis XIV of France to heel, to stop him from dominating Europe, and it hoped, too, to capture the valuable trade in gold and silver with Latin America. During the course of the conflict, international allegiances had shifted like the sand, washed away by many deaths and many broken promises.
For more than twenty years there had scarcely been a break in the campaigning season, and still the roll-call of valour and ignominy was evenly balanced: a desperate defeat at the Battle of Beachy Head in 1690; a famous victory over the French fleet at La Hogue in 1692, triumph at Barcelona and Vigo Bay, failure at Brest and Cadiz, then success at Blenheim, Ramillies, Oudenarde and Tournai. On and on went the wars, a ghastly and never-ending ritual punctuated only by the failure of desultory peace proposals. All this was scarcely a good return on England’s crippling taxes. More taxes are calculated to have been imposed between 1702 and 1714 than in the previous three reigns put together. The writer Jonathan Swift, who backed the Tory politicians who opposed the wars, noted in his Journal to Stella that ‘few of this generation can remember anything but war and taxes …’tis certain we are the most undone people in Europe’.
As the wars rumbled on, an army of two hundred thousand men had to be supported, and inevitably the greatest burden fell on the landowners. They were forced to hand over a fifth of their income in land tax to pay for the war effort, which they did reluctantly; and they faced heavy local taxes too. So desperate was the government for money that it would regularly raise loans on the future collection of taxes, rather than waiting for the money to come in. The battle with the enemy across the Channel was eventually reflected in a fight for the political control of England, for the grass roots of one political party – the Tories – lay in the old landed interest and the conservative rural squirearchy, which wanted peace; while the Whigs, whose leadership was aristocratic and who were in a majority in the House of Lords, had come to represent the new financial and mercantile interests which were making money from the war with France.
Taxes, however, were not the only source of revenue to a government in financial difficulty. The Whig government had tried to capitalise, on behalf of the Exchequer, on the rage for gambling. It launched a national lottery in 1694, selling tickets for £10 each, with a first prize of £1,000 a year for sixteen years.
The national lottery was not a lottery as we understand it today, because the competitors could not lose. Purchasers of tickets were automatically entitled to a government annuity, an annual payment at a fixed rate of interest for many years ahead, in return for the money they had subscribed through the lottery. But, in addition, if they were lucky, they could win a much bigger sum. Rather than a game of chance, the lottery was a device to attract people to lend money to the government for a guaranteed rate of return, but with the bait of prize money. It was an exercise in creating a cash flow for the government, rather than a profitable enterprise for the Treasury. Adventurers, as they were called, bought tickets which entitled ‘the Bearer to an annuity of one Pound or (by Chance) to a greater yearly sum for Sixteen Yeares’. It was worth taking the chance: no stake money could be lost, and there were 2,500 ‘fortunate’ tickets, with one prize of £1,000 a year, nine at £500 and twenty at £100. The bulk of the prizes, two thousand in all, were worth £10 yearly to the winners.
For gamblers, the national lottery draw was as popular in the seventeenth and eighteenth centuries as it is today. The draw took place in front of excited crowds in a public place, sometimes at the Banqueting House in London. Two huge wheels, more than six feet high, turned slowly in the centre of the floor. As they rotated, a large wooden box, containing thousands of tickets, started spinning, then faster and faster until it became a blur. At a given signal the wheels were halted, and, when the box stopped moving, the winning tickets were removed through its small wooden doors.
In 1710, a German visitor to London, one von Uffenbach, the traveller who had also witnessed the country’s blood-sports, watched a lottery draw and was struck by the scale and professionalism of the enterprise. Then, as now, it was vital to prevent fraud. Twenty members of the lottery team sat at long, narrow tables to cut up the tickets, which were engraved in copper and printed by the sheet, with intricate flourishes pricked out around the numbers. To guard against cheating, the sheets were firmly screwed down to the tables, and cut with penknives, using perforated rulers so that the tickets had a jagged edge. When a winner claimed a prize, his ticket, and that held by the promoters, were put together to see if the two matched. ‘The most curious things of all,’ noted von Uffenbach, ‘are the two great machines into which the tickets are thrown, jumbled together and drawn … The machine was a great round box of excellent workmanship, which was suspended in the middle on two iron nails, so that it could be turned round easily with little trouble by means of the iron handles at the side.’
The lottery held out the prospect of riches and social advancement impossible via humdrum work. Newspapers trumpeted stories about the lucky winners in their columns, stoking up people’s hopes that they too would get rich quickly – that, in a game which required no skill, it might be their destiny to become wealthy.
The lottery merged seamlessly with the culture of gambling on the stock market and soon the stockjobbers were dealing not just in shares, but in lottery tickets too. The lottery also infected the age, helping to spark hundreds of seedy schemes and scams. The advertising columns of the press were filled with get-rich-quick schemes run by people from all walks of life. Epsom had a lottery ‘performed by Mr Cope the undertaker’. Bellamy’s Chichester Lottery offered a £500 prize for a five-shilling ticket. There was a ‘New Monthly Chance’ in which it was ‘impossible for the adventurer to lose all his money’, the draw to take place at the Barbadoes Coffee House in Exchange Alley. ‘The Fair Adventure or Even and Odd’ claimed to have 5,000 prizes, out of only 10,000 tickets, ‘The New Golden Adventure’ a prize for every four tickets. A lawyer from Middle Temple organised a lottery to sell his law books; a chemist ran a lottery advertising his medicinal wares: ‘Warham’s Invention: where all are winners’. Women, too, seized their opportunity. In the Flying Post of 26 May 1698, this advertisement appeared: ‘A New Lottery, call’d, The Lady’s Invention; or Six Pence well ventured; Whereby the Adventurer, if fortunate, for 6d only, may get £1000 and £2000 for 1s 6d … This being an Invention of the Female Sex, several Ladies of Quality have ventured considerable Sums in it. Tickets to be had at most eminent Coffee-Houses’.
This last was almost certainly a fraud, one of many which forced the Whigs at the turn of the century to ban lotteries altogether. But the damage had already been done. The lowest return on an initial investment in the 1694 lottery was 60 per cent. It was simply storing up financial trouble for future generations, which would have to repay the debt. In effect, the wars were being paid for on the never-never, the result of a tacit conspiracy among the politicians to pay high rates of interest on huge debts which could never be quitted. But the rules were about to change.
In 1710, after much manoeuvring behind the scenes, the Tories wrested power from the Whigs. The new Chancellor of the Exchequer, Robert Harley, had become Queen Anne’s favourite, not least because he had befriended her chambermaid and through her had insinuated his way into his monarch’s affections. But he had also managed to overturn the government because, unlike the Whigs, he was pledged to peace. The task facing Harley was enormous and could be measured by the debts he had inherited. In total the government owed more than £8 million, of which the Navy alone owed half. Yet Harley could find only £5,000 in the Exchequer’s kitty.
One problem was that the size of the nation’s debt had outpaced the development of any centralised machinery to process taxes. The Treasury, for example, relied on sticks made out of hazel to account for its loans. These ‘tallies’, as they were called, were split in the middle and notched according to the amount of money that had been loaned, with the depositor retaining one half and the Treasury the other. Such was the country landowners’ belief in the financial incompetence of the outgoing Whig government that they were convinced the Treasury must have mislaid their money. Robert Walpole wrote that ‘in every coffee-house and ale-House I may hear it with confidence asserted that thirty-five millions were lost to the public during the late administration’. Though the rumour was false, it seemed too plausible not to be true – why else were taxes so high and still more money needed to feed the great maw of the military machine?
When he took office, Harley knew he needed a plan to bail out the country and keep himself in power. But to find the money he so desperately needed there were few places to which he could turn. Poor Harley found it was virtually impossible to borrow money from the Bank of England or the East India Company, because of establishment opposition to the newcomer in power. The Whig-dominated City thought a Tory government was bad for business and put obstacles in his way. The election of directors, too, both to the Bank and to the East India Company, was in the grip of the Whigs. The Governor of the Bank of England, his deputy and all twenty-four directors were all Whigs, as were twenty out of the twenty-four directors of the East India Company. The Bank had even tried to persuade the Queen to block Harley’s appointment, by giving her an ultimatum: if she sacked the Whig government it would refuse to hand over a £100,000 loan it had promised. The Queen stood firm and went ahead anyway.
So while the Tories had ousted the Whigs, they were effectively in office but not in power: they simply couldn’t raise the large sums of money they needed to replenish the Exchequer’s coffers. Grudgingly, the Bank granted Harley a £50,000 loan, only half the amount he requested. In these circumstances it was not surprising that Harley’s brother Edward maintained there was a conspiracy among ‘the Bank, stock jobbers and moneyed men of the City who are all engaged to sink the credit of the government’.
In fact, Harley could not even rely on support from within his own party. The more radical Tories, inflamed by the punishment of a radical cleric whose trial had been the catalyst for the Whigs’ downfall, wanted to impeach the previous government. Harley, who was a mainstream Tory rather than a High Tory, refused. Jonathan Swift noted: ‘The ministry is upon a very narrow bottom, and stands like an Isthmus between the Whigs on one side, and violent Tories on the other. They are able seamen, but the tempest is too great, the ship too rotten, and the crew all against them.’ Add together Harley’s struggle against the country’s overwhelming debts and the obstructiveness of the City, and there was every incentive for him to look outside traditional political or financial circles for new ideas. Unable to join the two main City institutions, he resolved to beat them. In these straitened times, it is unsurprising that he welcomed advice from outside the establishment.
Two men were to offer very different solutions: John Blunt and John Law.
John Law was well brought up and should have known better than to get himself into the trouble that had seen him exiled. His father, William, was a goldsmith who had made so much money from banking that he had bought two large estates, Lauriston and Randlestone, on the outskirts of Edinburgh. With Lauriston came a family castle, which William Law bequeathed to John along with most of his estate when he died in 1683. When John left school he took a keen interest in the business his father had left behind. At the same time, perhaps in the absence of paternal control, he began to develop a taste for women and gambling – becoming, as one contemporary put it, ‘nicely expert in all manner of debaucheries’. Luckily for him, women found him fairly irresistible: tall and dark, he was so good-looking they called him ‘Beau Law’ or ‘Jessamy John’, to indicate he was a fop or a dandy.
Law decided, while still a teenager, to try his luck in London, no doubt influenced by the stories he had heard of its racy social life. He moved into rooms in St Giles-in-the-Fields, a mixed area which included Bloomsbury and Covent Garden. In many ways, St Giles matched Law’s changeable personality: it could not quite decide whether it was respectable, including as it did many members of the fashionable set, or rough, with its narrow, dirty alleys which were home to Irish immigrants and French refugees. Here, Law lost no time in conducting himself in a way that reflected both sides of his character: he took a mistress, a certain Mrs Lawrence, but also made sure he made the acquaintance of Thomas Neale, the Master of the Mint and one of the leading ‘projectors’ of the day – the name given to men who promoted the cause of the new ideas and businesses that abounded in the capital. Neale was also Groom Porter to the King, which meant he was responsible for providing cards and dice at court. It was not hard to see why Law was keen to meet him.
Law spent most of his nights in the clubs and gaming houses of London. But he was no idle gambler. He began to investigate the odds of throwing a sequence of numbers with the dice, and studied the patterns of games like ‘hazard’ – a form of craps – which were very popular. His early calculations were not successful. He was forced to sell his castle, and his mother bailed him out by buying the estates from him. At the same time, Law kept up his interest in banking and in particular addressed the issue of whether a national bank should be established to take over from the goldsmiths, like his father, who generally held money for the merchants of the day.
The two sides of Law’s engaging personality were to collide – and in spectacular fashion. All his plans, and hopes for the future, were ended by the duel that he came to fight in Bloomsbury in April 1694.
His rival in love, Edward Wilson, was a man whose taste for high living exceeded even that of Law, and in the wake of his death his lifestyle became the subject of much comment in the newspapers, the London Journal declaring that ‘Mr Wilson was the wonder of the time he lived in; from low circumstances he was on a sudden exalted to a very high pitch for in a gay dress, a splendid equipage and vast expense, he exceeded all the Court. How he was supported, few (very few indeed) truly know; and those who have undertaken to account for it, have only done it from the darkness and uncertainty of conjecture. But in the midst of gaiety, he fell by the hand of the then private Mr Law, and not fairly neither.’
One theory for Wilson’s giddy lifestyle, which was based on no discernible income, is that he was the lover of Elizabeth Villiers, the mistress of the King, and that she was subsidising his standard of living. It may also explain why the King apparently took an interest in Law’s trial. However, the reports of the proceedings make no mention of Miss Villiers: ‘The matter of fact was thus. There was some difference happened to arise between Mr Lawe and the deceased concerning a woman, one Mrs Lawrence, who was acquainted with Mr Lawe; upon which on 9th of April instant, they met at Bloomsbury Square, and there fought a duel in which Mr Wilson was killed.’
