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Whatever the cause of the fight, the consequence was clear. Wilson lay dead, and Law had to flee for his life.
Law’s departure, though enforced, was not without its consolations. Exile proved profitable: within a few years he had made a fortune by gambling. He was not just making money – he was making his own money: so high were the stakes he placed that he even arranged for special gold counters to be minted. He was frequently to be seen arriving at the gaming tables carrying £6,000 worth of coins. Nonetheless he built up his wealth carefully, playing to a system and using his mathematical skills to calculate the odds. In Italy he won £20,000, and by the time he reached France in 1714, four years after Harley came to power in England, he had £90,000 to his name. He was seriously, independently, wealthy – the equivalent of a multimillionaire today.
But Law was not the dilettante his background suggested. While he was in Amsterdam, rather than simply trying to make money, though he did that too, he began to think seriously about it as a theory. The Dutch, too, had suffered from the financial problems with which Harley was wrestling in London. But they were far ahead of the English in their economic thinking. The Bank of Amsterdam, a government bank owned by the city, had been established specifically to help oil the wheels of commerce. Most countries faced the same problem, which was how best to guarantee the value of their currency. To try to secure a basis for international trade, a handbook was published listing the 500 gold and 340 silver coins which were circulating in the world. But traders complained that coins were frequently ‘clipped’ to reduce their metallic content, so their values fluctuated. England had been forced to call in all its silver coinage in 1696 and remint it, but paper money had been issued at an alarming rate to finance the war effort, out of all proportion to the coins in circulation.
The Bank of Amsterdam tackled the problem simply but effectively. It put the coins on the scales and allowed credit according to their real value, their weight, by replacing them with promissory notes. Such pieces of paper were, to all intents and purposes, early banknotes and they became a popular form of currency because their value was guaranteed: they could not be debased. Indeed, they sometimes changed hands at a premium because their value was always honoured. It made Law think: ‘This Bank is a secure place where merchants may give in money and have credit to trade with. Besides the convenience of easier and quicker payments, the banks save the expense of bags and carriage and losses by bad money.’
Law’s eyes were opened to the possibilities such a bank would bring. Why else, he considered, was Holland more prosperous than England or Scotland, even though it had fewer natural resources? Why else did its ships dominate both the North Sea and the South Seas? The reason, surely, was that the Bank of Amsterdam had loaned money to the Dutch East India Company, not in return for coins, duly weighed and bagged, but against its own assessment of the Company’s trading prospects and reputation. Indeed, the Bank actually owned half of the Company; it was effectively creating money by buying ships to carry out trade to bring back goods to make more money. It was a virtuous circle, and one which would not exist without the Bank.
Law began to work out his own theories concerning money, theories he would eventually get a chance to put into practice on a national scale. Holland was Europe’s largest printing centre and books were readily available, so during his exile he had read widely. For the moment, his thoughts were practical ones and confined to his writings. He set out to make his case for a paper currency, for a form of credit that could not be clipped, debased or altered in any form. His great revelation was that money was not intrinsically valuable. It was simply a means to an end, and one which ultimately reflected the strength, or weakness, of a country’s economy. ‘Money,’ he declared, ‘is not the value for which goods are exchanged, but the value by which they are exchanged.’ But Law did not want to remain an idle theoretician. He wanted to put his ideas into practice; and he wanted to return home.
Scotland was still, in 1705, constitutionally separate from England though it was moving towards union; the two countries shared the same crown, but had a separate government and parliament. So Law set his mind on persuading the Scottish Parliament, and by extension Queen Anne and her government, of his intellectual credentials to try to win his pardon. It was a back route out of exile and into London’s thinking.
Scotland’s great weakness was that it had separate commercial arrangements from England, and these arrangements had failed. Its economy had been shattered not by the wars which had eaten into the English coffers, but by overweening ambition and misplaced adventurism. In 1698, a Scottish fleet belonging to the Company of Scotland Trading to Africa and the Indies, known more popularly as the Darien Company, had sailed for Central America, backed by a fair wind, exclusive trading rights granted by the Scottish Parliament, and half the nation’s money. With great difficulty and considerable hardship, the adventurers established a settlement in Darien, in the eastern swamplands of the Isthmus of Panama. It was a disaster waiting to happen. Disease took hold; there wasn’t enough food; the settlers were divided among themselves. Then the Spanish attacked and captured the tiny foothold. Of the two thousand intrepid souls who set out on the Darien venture, only three hundred returned; and of the £400,000 investment, drawn from the Scottish economy, nothing was left. The dream of colonial trade had brought the country to its knees. There was to be no respite from the heavens. At home, the harvest failed again.
The Bank of Scotland, which had been founded a year after the Bank of England in 1695, with only a modest capital base of £100,000 sterling, was faced with a yawning trade deficit and dwindling reserves of gold and silver. It printed £1 notes, in order to meet payments with paper currency rather than metal, but it also revalued its crown coins, which were worth 5s 6d, to make them worth 6 shillings. In doing so, it succeeded only in producing a run on the bank, with so many customers trading in their banknotes for coins that they exhausted its reserves. By December 1704, payments had to be suspended, an ignominious blow to Scottish pride and financial independence.
In the eighteenth century there was little or no understanding of economic cycles, but Law, in exile, provided a full analysis of the problem and his own radical solution: he wanted to increase the money supply to produce full employment. His view was that the Bank should have carried out precisely the opposite process to the one it had implemented: it should, he thought, have devalued its coins by sixpence to make them worth 5 shillings. He predicted that customers would rush to exchange their crowns for paper notes before the rate changed. The vaults would have filled up with coins once more, and the danger would have been averted.
Law applied his mind to economic problems generally, and to Scotland’s in particular, in a forty-thousand-word document called Money and Trade Considered with a Proposal for Supplying the Nation with Money. It was an overview, written anonymously by a ‘Scots gentleman’ and printed and published in Edinburgh, of the role money played in trade, and the benefits that could accrue from a credit-based economy. But it was also, Law hoped, his ticket home.
Money and Trade is the work of a great thinker, but one who could express himself in everyday language. It is a treatise of startling clarity and economic insight, written by a man who was still just thirty-four. First, John Law established the historical background to the development of money: the use of barter, and the use of silver. Both depended for their basis on an analysis of supply and demand: ‘Water is of great use, yet of little value; because the quantity of water is much greater than the demand for it. Diamonds are of little use, yet of great value, because the demand for diamonds is much greater than the quantity of them. Goods change their value, from any change in their quantity, and in the demand for them. If oats be in greater quantity than last year, and the demand the same, or lesser, oats will be less valuable.’
Law may have been the first economic writer to use the concept of demand – he was certainly one of the first. He wanted to show how economies had outgrown the concept of bartering and even the use of silver. He pointed his readers towards what he considered to be the essential quality that money should have: stability. In contrast, he showed how the value of silver could change if supply outstripped demand, or if its quality was diminished. Sometimes there was too much of it, so its value fell, and sometimes it was debased by European governments. Instead, land was, in Law’s view, a more stable instrument of economic prosperity. Land was, he opined, more valuable than silver because it produced everything, and silver was only a product.
Law then moved on to the lessons he had learned first-hand in Amsterdam. Banks, he declared, offered the best method of improving trade and increasing the supply of money, because of the way they could facilitate credit. To move away from corrupted, debased coinage, he proposed the replacement of metal coins by banknotes: ‘The paper money proposed being always equal in quantity to the demand, the people will be employed, the country improved, manufacture advanced, trade domestic and foreign will be carried on, and wealth and power attained.’
Initially, Law proposed a land bank, where paper money would be backed by the value of land. Notes were to be issued by the bank to the value of land that was sold. As he developed his argument, the colonial ambitions of the trading companies, whose financial aspirations became so entangled with the economies of European countries at that time, were implicitly blown away: their search for foreign booty was effectively deemed by Law to be absurd. France and Spain were ‘masters of the mines’, leaving other nations to buy their silver at high prices even though they had ‘a more valuable money’ of their own – paper, backed by land. Truly, declared Law, ‘the nature of money has not been rightly understood’.
Inauspiciously, it was on Friday 13 July 1705 that the Scottish Parliament, riven by factional fighting, agreed to hear Law’s proposals for a land bank and paper money. But its main business that day, to Law’s misfortune, was to debate the possibilities of the union with England, and here Parliament’s hand was being forced both by the economic straits it found itself in and by the terms of the bill which had been placed before it. The proposed Alien Act was designed to allow the Queen to appoint commissioners to work for the union. But if the Parliament voted to reject the move, the Scots would be deemed to be aliens, and their exports to England banned. With the economy destroyed by the Darien venture, the bill was deliberately framed to concentrate minds. Law’s proposals would inevitably be seen, at best, as a radical alternative to union, and at worst as an irrelevant sideshow. Moreover, it was unlikely that any discussion in the Scottish Parliament could ever be straightforward.
Passions ran high. Two members became so exercised by the issue of paper money that they challenged each other to a duel. Finally, Law’s proposals were rejected: the forcing of paper money upon the country was deemed to be ‘unfit for this nation’. Instead of striking out on a radical solution to its economic difficulties, which arguably might have delivered the financial stability the country needed and with it independence, the Scottish Parliament chose the path of least resistance, concentrating instead on joining the country to England in the Act of Union. Under its terms, one Parliament of Great Britain would replace the two of Scotland and England. Self-rule would be ceded by a piece of paper; it could, just perhaps, have been established by paper banknotes.
For Law, this was a bitter blow. His theories remained academic and his future once more lay in exile. Without a royal pardon, he could not even return to Scotland if it was to be formally united to the English nation. Once more he appealed to the Queen; once more, on her government’s advice, she turned him down. Within weeks of the Scottish Parliament rejecting his scheme, it voted to appoint commissioners to arrange the union with England. Law was at heart a patriot who wanted to use his intellect to benefit his homeland. Thwarted, he could only turn his thoughts abroad, destined to circulate his economic theories among more accommodating heads of state who admired his genius and were content to ignore the youthful duel which had forced him into exile.
Within a few years, Harley’s new government in England, faced with the burden of its ever-growing war debt, turned to a man with no intellectual convictions whatsoever, but a burning desire to make money for himself.
CHAPTER III
Blunt Advice
George Soros became frustrated because his huge wealth seemed to give him no political influence in the West. He realized he needed to become a public personality. In the late summer of 1992, a time of great pressure on European institutions, he didso with a vengeance.He shorted, betting that the pound would not be able to hold its value against other currencies traded within the Exchange RateMechanism.On Sept. 16, with Soros and others selling pounds, the British government responded by raising interest rates 2 percentage points to attract buyers. By evening sterling had been forced from the ERM. Soros scooped up $1 billion from that escapade and became known all over the world as the Man Who Broke theBank of England. ‘I had no platform,’ he says today. ‘So I deliberately [did] the sterling thing to create a platform. Obviously people care about the man who made a lot of money.’Time.com, 1 September 1997
John Blunt was not a handsome man. He was fat and pompous, and a very different character from John Law. Unlike with Law, there would be no madcap chase for the wilder things in life, nor any occasion when, through gambling, he would have to sell his family home or be bailed out by his mother. He had one aim in life, which was to better himself through business. His would be a focused search for wealth and power. Unlike Law, he had no intellectual backbone – he simply had a desire to get rich quick.
But John Blunt did have one redeeming quality. Whilst he was loud and overbearing, he possessed great self-confidence, even charisma; he was on the make but charming – a man bursting with ideas and energy, who dominated any group. His gift was for making money, and he would prove himself to be an inspired promoter of companies. Within a decade he would become rich from backing a project to bring water into London, despite the rivalry of the New River Company, and another for the manufacture of linen. Within a decade, too, he would move closer to the political world, winning election in the City as a councillor in the Cornhill ward, which included Exchange Alley. Blunt was religious, a Baptist by faith, and as the years went by the three worlds of business, politics and religion would merge seamlessly to his advantage.
Blunt was the son of a reasonably well-off shoemaker in Rochester; but he had come up, if not the hard way, then via a route that was tougher than Law’s relatively privileged upbringing in Scotland. He had started his working life as a humble member of the Worshipful Company of Scriveners, serving his apprenticeship in Holborn, London. Fittingly, for someone who wanted to aim high, his company’s coat of arms was an eagle, coloured gold, standing on a red book, its wings raised, poised to soar. Blunt’s choice of profession may have been a deliberate step in his planned path to power and influence. The scriveners were originally a kind of legal assistant, calligraphers with a monopoly on the paperwork for buying and selling houses. Gradually this gave them inside knowledge of the business affairs of merchants and landowners, and they became brokers who negotiated loans, an early type of merchant banker or land speculator. Such was the range of their financial activities that they seemed to occupy no firm place in society; one scrivener might tidy up the legal affairs of large estates, to the chagrin of the lawyers, while another might make his living by acting as a moneylender.
It was, in all, a fitting profession for a man on the make. During his long apprenticeship to Daniel Richards in Birchin Lane, on the perimeter of Exchange Alley, where he wrote letters for a groat (or sixpence), Blunt built up a view of English society, steeping himself in the knowledge of who was rich and who was poor, and those who seemed well-to-do but were just keeping up appearances. But few scriveners became as rich as the goldsmith-bankers like John Law’s father, who could lend large sums on credit, and make much more in return. The motto of the scriveners through the years was Scribite scientes – ‘Write, learned men.’ For Blunt, this was just a means to an end. He wanted to be the exception to the rule that few scriveners rose to great wealth or eminence in the City. In 1689, at the age of twenty-five, he left his apprenticeship to seek out new opportunities. Within four months of leaving his apprenticeship, he was married, a first step on the ladder towards social respectability – the string of affairs which John Law had enjoyed was not for Blunt. His choice of bride was Elizabeth Court, who came from a solid Warwickshire family. Blunt had married above himself, but not indecently so. A second marriage further up the social scale, to the daughter of a former Governor of Bengal, would come later.
Blunt was seeking his fortune in an England humming with new ideas. In the 1690s, the moneyed-men, grown rich on lending to the government, had begun to promote an extraordinary range of companies. The catalyst had been the success of a sea captain, one Captain Phipps, who had salvaged Spanish silver by the ton and precious jewels by the sackful from the bottom of the sea off the island of Hispaniola in the West Indies. He returned to England in triumph and to an instant knighthood: his backers had made an extraordinary 10,000 per cent profit on the adventure, a sum close to £200,000 – many millions of pounds today. Inspired by the captain’s success, copycat diving companies had arisen by the dozen, many of which came to London to show off their new deep-sea devices in a public demonstration on the Thames. The novelist and pamphleteer Daniel Defoe invested, and lost, £200 in one diving firm; he also owned a brick and tile factory on marshland near Tilbury, and, more quixotically, seventy civet cats – a leading scientist had once advocated breeding them for the secretion of their glands, which was a basic essence in the manufacture of perfume. The many other projects calling for investors to back them ranged from the Night Engine Company, which patented a burglar alarm, to the ‘Company for the Sucking-Worm Engines’ which had invented a machine to put out fire. Until 1697 when the impecunious government debased the coinage, puncturing investor confidence and putting many firms out of business, the stock market thrived. One coffee trader, John Houghton, published a twice-weekly paper listing share prices, taking care to explain to his readers the mysteries of the new profession: ‘The manner of the trade is this: the monied-man goes among the brokers and asks how stocks go? And upon information, bids the broker buy or sell so many shares of such and such stocks if he can, at such and such prices. Then he tries what he can do among those that have stocks, or the power to sell them, and if he can, makes a bargain.’
In such a speculative age, Blunt, with his glib personality and gift of the gab, was a man of his time, just as Law was far ahead of it. His initial route to power was through a company whose original business matched the bellicose nature of the times: the Sword Blade Company.
At the turn of the century, the Sword Blade Company had spotted a gap in the arms market. The English rapier, heavy and flat, was considered both by combatants and by those who wished, more peaceably, merely to make a fashion statement, to be less effective and less pleasing on the eye than the French equivalent, which had a grooved blade. From 1691 the Sword Blade Company, helped by some imported Huguenot craftsmen, was granted a charter to make French blades in England. But the company was soon to widen its horizons and change direction. It moved to Birchin Lane, and John Blunt became its company secretary. Working with him were three men who would play leading roles in the development of the South Sea Company: the goldsmith Elias Turner would become the Governor of the Company; Jacob Sawbridge, the Deputy Governor; and the third was George Caswall, whose family had held the Leominster seat in Parliament for more than a hundred years.
The Sword Blade Company was a child of its aggressive times, an exploiter of the government’s financial difficulties, and the progenitor of the most corrupt financial institution the country was ever to spawn. The company’s first step was to buy up large tracts of Ireland, at the bottom of the market, acquiring for about £200,000 land worth £20,000 a year in rents. To bankroll its purchase, it decided to issue stock in the company. It did so in a complicated but highly profitable manner, announcing that it would exchange its stock not for money but for government debts called ‘army debentures’. Debentures were slips of paper given to people who had lent money to the government, a type of IOU issued by the Paymaster of the Forces to raise money for the constant state of war. The debts were unsecured, however, and had fallen in value since they first came on the market.
The Sword Blade’s idea was to call in as many debentures as it could from the people who had lent the government money, by offering them what looked like a profitable exchange deal. The debentures stood at 85 on the stock market, and their holders were offered, in return, Sword Blade shares worth 100. How then could the company make a profit? The answer was that it had, effectively, rigged the market through what today would be called ‘insider trading’. It simply bought up as many debentures as cheaply as it could before announcing its plans, knowing that the scale of its share-swap scheme would cause their price to rise. By this method, the company made an estimated profit of around £25,000. The government, too, was satisfied. As well as buying land from it, the company lent it some £20,000 at a low level of interest as a ‘sweetener’ to facilitate the business between them. Through its financial adventures it became the Sword Blade Bank. It was a key moment in its history, the turning point in what became a growing, and corrupt, entanglement with affairs of state.
The Bank of England looked on unamused. Its banking monopoly had been enshrined in an Act of 1697, and now it seemed the Sword Blade Company was acting as a land bank, not just as a land corporation. Treasury lawyers pored over the case, and pronounced in favour of the Bank, but no action was ever taken. The deal had been too profitable for the government. But there was worse to come for the Bank of England. A mysterious syndicate, its backers unknown but almost certainly including partners from the Sword Blade Company, offered to lend the government £1.5 million. The Bank could clearly see the danger of such a manoeuvre by its unknown rival. Its charter had only three more years to run, and only by offering to match the size of the loan, and by cutting interest rates to 4.5 per cent, did it see off the threat to its position. Its reward was the extension of its charter to 1732.
This early skirmish between the two rivals presaged what would be in 1720 their all-out hostility, and the government seemed to be the beneficiary, paying less for its money than before. But the charter’s extension still proved to be a problem for the Chancellor, Robert Harley. The government had, by confirming the Bank’s monopoly, tied itself to a single banking institution to raise money for its conflicts and, over the next three years, the Bank increasingly struggled to deliver. What else could Harley do?
In 1710, battling with the nation’s finances, he was impressed by the acumen of John Blunt, and the profit he was making. Harley began to discuss the issue of the national debt with Blunt in the hope of finding a radical solution. The first proposal that his new ally put forward, however, was distinctly traditional. Just five years after John Law had produced what would turn out to be one of the greatest analyses of the eighteenth century as a possible cure for Scotland’s economic ills, Blunt persuaded Harley to resurrect the old Whig solution of the lottery; and to let him run a far bigger game than the one which had captured von Uffenbach’s attention in the Banqueting House back in 1710, one which offered even bigger cash prizes and was more a game of chance. It would capitalise on the general fever for gambling and have the delightful side-effect, if it succeeded, of wresting some financial control from the Whig-dominated Bank of England. On 3 March 1711, the new lottery was launched.
Ostensibly, it was the traditional way of raising loans, to be paid back through yearly payments, or annuities, at a guaranteed rate of interest. One hundred and fifty thousand numbered tickets, costing £10 each, were to be sold, inscribed with the legend: ‘This ticket entitles the bearer to ten Pounds to be paid in due course with Interest to commence from the Nine and twenty Day of September One thousand seven hundred and eleven or a better chance’ – that is, a prize. Interest was to be paid at 6 per cent. But Blunt had made big changes to the scale of the prize money. There were 25,000 prizes to be won, with the smallest at £20 and the largest at a staggering £12,000. The first and last tickets drawn out of the box would win an extra £500. In total, more than £678,000 – nearly as much as it cost to build St Paul’s Cathedral – was to be given away in prize money. Not surprisingly, the lottery was a tremendous success. One knight of the realm complained to a friend who asked him to buy tickets: ‘You may assure yourself that I used my endeavours to have put your money in the Lottery, but it was impossible to do it though I was very early that morning in the City, and a vast number of persons was disappointed as well as myself … As for buying up tickets, I cannot tell how to advise you, such advantage is made of them by the stock-jobbers.’
John Blunt was on his way to the top, but at a price. The lottery was the first to raise huge sums for the state, triggering a succession of similar enterprises over the next decade, while weighing down the government with the annuities it was obliged to pay to the subscribers. By raising the stakes with such large prize money, the lottery also prepared the ground for the grand speculation of 1720. Eventually, there was to be an explosion of investment which made Wren’s continual pleas for cash to fund his dome seem like requests for loose change, rather than the serious financial commitment that Parliament invariably resisted.
After the triumph of his first lottery, Blunt immediately marketed his second, known as ‘the Adventure of Two Millions’ or ‘the Classis’. Never before had the state attempted to hold a lottery on this scale; the tickets cost £100, which was half the annual income of a middle-class family and ten times the income of a manservant. The top prize was £20,000, the equivalent of the multimillion-pound jackpot today. The tickets were within the reach of only the very rich, except when the stockjobbers sold shares in them. But Blunt’s revolutionary idea was to divide the draw into five ranks, or classes, each with a different level of prizes. In the First Classis (or section), 1,330 tickets would win prizes ranging from £110 to £1,000. Then the prize money was stepped up: in the Second Classis, 2,670 tickets would win between £115 and £3,000; in the Third Classis there were 4,000 prizes, from £120 to £4,000; in the Fourth Classis, 5,340 tickets would win £125 to £5,000; and in the final draw, the Fifth Classis, there were 6,660 winning tickets with prizes ranging from £130 to the top prize, again, of £20,000. In effect, there were five different lotteries, draw succeeding draw so as to build the excitement to fever pitch. If their number did not come up, investors would not know whether to be pleased or disappointed until the last ticket of the fifth and final draw was produced from the box to win the biggest prize of all.
The Sword Blade Company was in charge of marketing the game, and all the tickets were sold within nine days. In this short space of time, Blunt’s two lotteries raised £3.5 million. Some investors were either very lucky, or bought heavily: the Duchess of Newcastle won eleven times, the Dukes of Rutland and Buckingham eight times. In the Second Classis an apothecary from Reading, Robert Dean, won the top prize of £3,000; in the Third, a gentleman from Westminster, Thomas Layton, the £4,000 jackpot. In the Fourth, Thomas Scawen, an alderman from London, won the £3,000 prize; another London merchant, John Upton, £4,000; and a gentleman from Northamptonshire, John Hunt, the top prize of £5,000. In the Fifth Classis, ‘The Hon. Thomas Cornwallis of St Martins in ye Fields, esquire’ won £3,000; a London scrivener, James Colebrook, £4,000, and Samuel Strode, a London surgeon, £5,000. The final ticket to be drawn belonged to Thomas Weddell, a merchant of Gray’s Inn, who scooped the £20,000 jackpot.
Encouraged by their success, Blunt and Harley now set to work on their most ambitious scheme of all: to try to find a way to reduce the national debt. The government owed money everywhere, in a confusing tangle of loans. There were the goldsmiths and moneyed-men who had lent it money; there were the holders of lottery tickets, and the holders of the Treasury’s notched hazel tallies; then there was money raised by the Army, the Navy, the customs, the Commissioners of Victualling – the government’s obligations seemed endless.
Harley’s idea was to found a trading company. It was a move that appeared conventional enough. Trade and war were the unholy twins of commerce. It suited both the financial nostrums and the bellicosity of England to develop a new company which would trade abroad and, if necessary, kill natives in order to repatriate the proceeds. Daniel Defoe, who was a lifelong admirer of Sir Walter Raleigh, had long been captivated by the spirit of Elizabethan adventurism and impressed by the vast profits that Spain was still coining from its colonies. Galleons from Mexico and South America were held to carry dazzling cargoes of gold, silver and jewels, but Defoe had consistently argued that there was an even greater profit to be made if the trade was better managed. There is no evidence that Blunt and Harley were swayed by Defoe’s arguments, but he reflected the spirit of the times. There was, the pair agreed, a huge commercial prize to be won in South America, offering a ready market for English cloth, with an endless supply of gold and silver in payment.
But Harley was also taking a politically radical step: he intended the proposed trading company to become a new financial institution to rival the Bank of England and the East India Company. On 2 May 1711, when he announced the new company’s formation, he declared that not only would it trade in the South Seas but it also aimed to take over the ‘floating’ portion of the national debt, put at £9 million: this was the debt that could be paid off if the government had enough money, rather than the fixed sums it had agreed to pay to annuitants for many years ahead at generous rates of interest. The company would ask the government’s creditors to exchange the money they were owed, directly, for shares in the new trading venture. To help service the interest on the debt, the company itself would be paid more than half a million pounds a year by the government.
Harley’s spirits were high, and found a ready outlet in symbolism. The company was awarded a coat of arms, designed by the College of Heralds and emblazoned with the motto A Gadibus usque Auroram – ‘From Cadiz [still held to be the empire’s last outpost] to the Dawn’. And, in keeping with its heraldry, it was given a suitably grandiose, if overly optimistic, monopoly on trade. It was granted the right to the ‘sole trade and traffick, from 1 August 1711, into unto and from the Kingdoms, lands etc. of America, on the east side from the river Aranoca, to the southernmost part of the Terra del Fuego, on the west side thereof, from the said southernmost part through the South Seas to the northernmost part of America, and unto, into and from all countries in the same limits, reputed to belong to the Crown of Spain, or which shall hereafter be discovered’.
Ominously, however, there would have to be a peace deal with Spain and France if the lands which were ‘reputed to belong to the Crown of Spain’ were to yield their supposed riches to the company’s trading vessels. There were therefore two big catches: peace had to be struck on advantageous terms; and the conceded territories had to yield the fabulous wealth which it was so fondly imagined they possessed. The government’s propaganda machine, ably spearheaded by Daniel Defoe and Jonathan Swift, went into action. They printed lists of exports which might prove suitable on the markets of South America, from silk handkerchiefs to Cheshire cheese, and they spun stories of South American wealth, the ready market for exports and the generous profits to be made from the slave trade. Portugal had been actively engaged in the traffic in African slaves for more than two centuries; Spain had built a lucrative sugar empire by importing slave labour to the New World. Harley was right to think the profits could be immense: between 1698 and 1708 a stake in the Portuguese slave trade to Jamaica had earned the English government £200,000 a year in bullion. Within half a century, Britain would be shipping a third of a million slaves to the New World and the national economy would depend on the trade.
Aided by his propagandists, Harley’s plan succeeded in capturing the imagination of investors. Some of them were political opponents who saw a chance to make money. Some were Dutch or Italian financiers, some were merchants, some were goldsmiths. Blunt and his team of directors also bought thousands of pounds’ worth of shares, believing they would make their fortune from the enterprise. Intellectuals such as Swift and Isaac Newton held stock, as did a large number of women. So too, curiously, did government departments.
But if Harley was genuinely attracted by the bold adventurism of the project, by the prospect of faraway riches which would replenish the war-weary coffers of the Exchequer, there were to be other consequences far closer to home. Blunt had won for himself a political and financial lever, a place in society and a position in the City. The Bank of England, officially, might have managed to protect its position, but a rival had been born and – whether it considered it or not – the Bank could not predict what sort of creature it might become. A company which had begun life by making sword blades had turned to land speculation. From land, it was now venturing out to sea. Where next?
On 10 September 1711 the South Sea Company was formally created, with Harley as its Governor. Nine of the thirty appointments were political, and five came from the Sword Blade Bank itself.
Not one of them had any experience of trading with South America.
For now, the political and financial path which had led to the formation of the company appeared to be one and the same. Harley genuinely wanted peace with Spain and France, and believed he could extract, as its price, the right to trade in the southern seas. But first he had to negotiate a deal. Peace, if it was to be struck, had to be struck quickly, so as to enable the South Sea Company to trade successfully and pay off the portion of the national debt it had shouldered. Harley had already begun the process, but he had failed to inform Parliament, and he did not yet have its consent.
Harley had the support of his party and of the country: both thought the war had to end. But the Whig-dominated House of Lords was in a rage, and mobilised for attack. Their aim was to bring down the Tory ministry in a political contest that ranged the old aristocratic Whig order against the upstart who was running the country. In some desperation, Harley tried to delay the return of Parliament, which was in recess. But confrontation at some point was inevitable, a sure sign of which was the propaganda war unleashed by Harley and his pet pamphleteer, Daniel Defoe.
For polemical persuasiveness Defoe had few equals. In his pamphlets on The Balance of Europe, an Essay upon the National Credit of England, and in Reasons why this Nation ought to put a Speedy END to this Expensive WAR, where Defoe argued his most trenchant case of all, the ink flowed as thick and fast as the imagery:
How have we above twenty years groaned under a long and a bloody war? How often has our most remote view of peace gladdened our souls and cheered up our spirits. Our stocks have always risen and fallen, as the prospects we had of that amiable object were near or remote.
Now we see our treasure lost, our funds exhausted, all our public revenues sold, mortgaged, and anticipated, vast and endless interests entailed upon our posterity, the whole kingdom sold to usury, and an immense treasure turned into an immense debt to pay; we went out full, but we are returned empty.
But even with Defoe on his side, Harley faced a struggle to get his policy accepted. When he could avoid a vote on his peace moves no longer, he found himself defeated by a majority of one. His policy lay in tatters. But Harley was adamant that he would not be forced from office, and circumvented the Lords’ hostility by creating a dozen peers to back his peace policy, and with it secure the future of the fledgling South Sea Company. Emboldened, he moved against his Whig enemies by charging the Duke of Marlborough and Robert Walpole with corruption over the Army’s accounts, sending Walpole to the Tower.
For Harley it was now imperative to circumvent Parliament and strike a peace deal, whatever the cost. Despite the peace negotiations led by the poet and diplomat Matthew Prior the spring campaign against the French was about to start, with the Duke of Ormonde leading British, German and Dutch forces in Flanders. So the British politicians decided to sabotage their own battle plan. The allied forces were ordered by the leading Tory minister Henry St John, Viscount Bolingbroke, to avoid fighting. Worse still, and with official sanction, via a go-between he revealed the battle plan to the French foreign minister. Then he sent the infamous ‘Restraining Orders’ to the Duke of Ormonde: ‘It is the Queen’s positive command to your Grace that you must avoid engaging in any siege, or hazarding a battle, till you have further orders from Her Majesty.’ Ormonde was in an impossible position: he was the leader of an army which had been forced to keep the peace by not fighting at all. He was not even allowed to tell his allies, but was ordered to make excuses for the attack’s delay, until finally – to the amazement of the allies – the French and British announced their truce.
But the French now advanced on the allied army, capturing town after town, inflicting defeat after defeat on a force which, until the British treachery, had confidently expected to win the war. It was one of the most discreditable episodes in British history. It was peace, but not with honour. In the light of future events it was appropriate that it was on the back of this disgrace that the South Sea Company was launched. Bonfires were lit around the country to celebrate its foundation.
But political and financial interests now started, unnoticed, to spin apart. They were two halves of a lottery ticket which at first sight appeared to join but whose flourishes failed to match. In September 1711, Harley addressed the South Sea directors but, significantly, failed to admit he had abandoned his peace demands for trading settlements in South America. In January 1712, the South Sea directors, secure in their ignorance, informed Harley, now Earl of Oxford, that they wanted to raise an expeditionary force of four thousand soldiers, forty transport ships, twenty men-of-war, plus store ships and hospital ships. Harley, keeping his secret to himself, began to stay away from the directors’ meetings. By September, twelve hundred tons of merchandise lay rotting in London warehouses, awaiting dispatch to the South Seas.
In March 1713, eighteen months after he had conceived the South Sea Company, a peace deal was finally signed at Utrecht. Harley had triumphed over the old generation, steeped in war. But in return for the decades of fighting, Britain had won a comparatively trifling prize: a thirty-year slaving contract, and a licence to send a single merchant ship a year on a direct mission to one of the seven ports where the Company was allowed to set up trading stations, but not to establish settlements: Buenos Aires, Caracas, Cartagena, Havana, Panama, Portobello and Vera Cruz. Britain had won no territorial guarantees near the South Seas as a result of the peace treaty. The war was over, though, and Harley stood at last unchallenged on the political stage.
But the child of Harley’s peace project, the South Sea Company, was in fact becalmed. The next year, seven ships, including the Hope and the Liberty, carried more than 2,500 slaves – voyages financed by the Company raising £200,000 in bonds. But it never made a profit in its cargo of human flesh, not least because the Spanish charged such heavy taxes. Then Queen Anne declared that she had the right to keep a quarter of any profits. But the Company must take its share of the blame for its failure to make money: in 1714 it took woollens to Cartagena, where there was no market for them, rather than to Vera Cruz, where there was, so they were left behind to be eaten by the moths and rats. By default, if not intention, the Company had become nothing more than a financial corporation, a ship to float the national debt. As a trading enterprise, it effectively lay at anchor.
By 1713, Harley, too, was going nowhere. The political combination of middle-ground Tories he had put together had proved to be a temporary structure without firm foundations. Harley was hemmed in, too, on the other side, by the Tory hardliners in the October Club, whose members drank together in Westminster and proudly took their name from the month in which the strongest beer was brewed. Their constant harassment of the government to try to shake it out of its moderation on occasions ground the Commons’ business to a halt. With the war over, and with credit seemingly restored, Harley could not give his party what it most wanted: clear and decisive Tory leadership. He had not even managed to rid himself of the national debt: by the end of his rule, the government owed another £9 million from the lotteries which Harley had continued to run. Ironically, this sum exactly matched the amount of government debt the South Sea Company had taken over.
The pressure told. Like many a politician, he had found solace in drink. On 25 July 1714 Anne was finally forced to sack Harley from his post. She told the Lords he ‘neglected all business; that he was seldom to be understood; that when he did explain himself she could not depend upon the truth of what he said; that he never came to her at the time she appointed; that he often came drunk; that lastly, to crown all, he behaved himself toward her with ill manner, indecency and disrespect’. She would not reign long without him: she was dead within the week.
The Hanoverian era was upon the country and with it a change in political power. George I had a distaste for the Tories matched only by the contempt he held for a foreign kingdom which could never match his beloved homeland. Harley was to be impeached for ‘high treason and other crimes and misdemeanours’. In contrast, his Whig rival, Robert Walpole, who had been sent to the Tower for corruption, had been handed a route back to office. Before he left his prison, he penned a note to his sister Dorothy:
Dear Dolly,
I am sure it will be a satisfaction to you to know that this barbarous injustice being only the effect of party malice, does not concern me at all and I heartily despise what I shall one day revenge, my innocence was so evident that I am confident that those who voted me guilty did not believe me so.
His enemies should have taken note. Robert Walpole would prove to have a long memory.
CHAPTER IV
Walpole and the Maypole
The most fundamental overhaul ever carried out on the rules governing the way members of the royal family run their business lives was announced by Buckingham Palace last night. In an attempt to ensure that family members do not exploit their position for financial gain, the palace said new safeguards would ensure a ‘complete separation’ between official engagements andcommercial projects.‘It is entirely in tune with today’s world that members of the royal family should be allowed to pursue careers, including in business, if that is what they wish to do,’ a Palace statement saidlast night.Observer, 8 July, 2001
King George I exhibited his eagerness to take over his new throne by dawdling all the way from Hanover to London. Weeks went by before his pernickety nature was satisfied with the detailed preparations for his forthcoming ordeal. When he finally set out, he made sure he stopped all the way along his route to receive the congratulations which befitted his new status and which put off the point at which he could no longer avoid stepping on to the timber-clad deck of the royal yacht for the sea journey to the grey, cold, inhospitable island which it was now his fate to rule. So disagreeable was this prospect that he clung to Holland as if it was home, meandering through its cities and basking in the receptions he was accorded, so that he did not embark for England until 27 September 1714, nearly two full months after Anne’s death.
The British weather retaliated, responding to George’s preconceived view of his kingdom as a damp and chilly outpost by exceeding his expectations. Dense fog shrouded London on his arrival, drifting ethereally over the waters of the Thames as his yacht neared port, wrapping itself around Wren’s masterpieces and obscuring the soaring cathedral. George could no more make out the spiritual grandeur of the city’s horizon than his bulging blue eyes could penetrate the narrow, twisting streets to glimpse the temporal realities of his subjects’ lives. So slow was his progress that he was forced to come ashore at night. Then he was rowed to Greenwich in his barge to avoid damage to the royal yacht. As he stepped ashore, to be greeted by ranks of fawning politicians, George could just make out the symmetrical splendour of Wren’s seamen’s hospital. But his kingdom was still a mystery. Even when the clinging fog finally relented, and throughout the rest of his reign, it remained so.
On dry land, the torchlit reception which greeted George appeared both to lend some atmosphere to the occasion and to give appropriate recognition to his new-found status. The Whigs, loyal throughout their parliamentary difficulties to the House of Hanover, were there in force to reap their reward. George singled out their standard-bearer, the Duke of Marlborough, for attention, while Harley was relegated to the background, his hopes that the King intended to rule without favourites or party already dead. With George the power of the Whigs would come irresistibly flooding back.
For the leading players in the South Sea drama which was about to unfold, the ground had also shifted. John Blunt had to court the new regime, as he had courted Harley, but Robert Walpole, at the age of thirty-eight was back in power. He held office first as Paymaster of the Forces, and then, within a year, as Chancellor of the Exchequer, posts which allowed him to see at first hand the debts of the nation, and which also gave him a licence to line his own pockets.
Political stability was absent at the start of George’s reign. He was a contingent king, an interloper who had taken the throne after a political battle of wills, not through divine right or the hereditary principle. His presence assured the Protestant succession, but not the warm embrace of his new countrymen. Both sides in this convenient compact eyed each other warily, not knowing quite what to expect; neither felt an emotional pull towards the other. George was an administrative convenience, a fruit grafted on to Anne’s barren reign, a foreigner who would have to win the respect of his citizens, but who possessed neither the charm nor the intellect to do so. Cruelly, the traveller and letter-writer Lady Mary Wortley Montagu noted: ‘The King’s character may be comprised in a very few words. In private life he would have been called an honest block-head.’
This was an exaggeration. George was a complicated man, not clever but not entirely stupid either; idle, but energetic enough to want to rule in his own way without interference, and short-tempered enough to cast out those who did not fall into line. At fifty-four, he was not in the full flush of youth; nor was he handsome, but he more than made up for this with an extraordinary appetite for women which was to make him an object of ridicule in his kingdom – less for his sexual charge per se, more for the way he chose to express it: the objects of his desire were, by common consent, downright ugly. Added to which, there was something positively medieval about his family background. His wife Sophia had once taken a lover, perhaps in retaliation for her husband’s considerable dedication to his extramarital activities. George’s revenge was terrible to behold. The lover, the Swedish Count von Königsmark, disappeared after he was lured to a false rendezvous with his lady. George probably ordered the murder, though he was away in Berlin when it happened. Sophia was divorced and incarcerated in the Castle of Ahlden, near Hanover, forbidden to see her children again. For her, there was no fairy-tale rescue by a handsome prince. For thirty-two years she languished there until her death, while George frolicked with his mistresses.
The two mistresses he brought with him to England were both, in their own ways, improbable recipients of their monarch’s favours. Baroness Eremengarda Melusina von der Schulenburg was tall and bony. She was called ‘the Maypole’ by the King’s subjects; Madame Carlotte Sophia Kielmansegge, fifty and fat, was known as ‘the Elephant’. As a child, the writer Horace Walpole was scared witless by her: ‘I remember being terrified at her enormous figure … [she] was as corpulent and ample as the Duchess was long and emaciated. Two fierce black eyes, large and rolling beneath two lofty arched eyebrows, two acres of cheeks spread with crimson, an ocean of neck that overflowed and was not distinguished from the lower parts of her body, and no part restrained by stays – no wonder that a child dreaded such an ogress!’
Money, or the lack of it, was still the driving force in politics, and with the presence of the royal mistresses it became even more so. Their grasping nature, the rapidly acquired debts of the new monarch and the shattering of the government Exchequer through war combined to form a corruption which wrapped itself around the very institutions of state. In this the strangeness of King George I also played a part. He was a foreigner, who spoke little or no English; an outsider, who had brought with him not just his own women to share the royal bed, but his own placemen who staffed his court and who needed to be bribed. An American businessman, William Byrd, attended court in the hope of being appointed Governor of Virginia and was advised to bribe one of the leading German courtiers, while the future Duke of Chandos oiled his way through the early years of George’s reign in order that his brother could become cashier of the Salt Office, dishing out 250 lottery tickets here, 400 guineas there. In 1715 he gave £3,000, an enormous sum, to Madame Kielmansegge, followed by a ring for her daughter. The Maypole, in particular, saw that she could make serious money out of her status. She sold the patent for copper coinage in Ireland for £14,000 and she also sold peerages. George’s arrival on the throne had accentuated the establishment’s tendency towards corruption.
The King’s mistresses also played their part in overturning the established political order, to promote the men who were to prove susceptible to the overtures of the South Sea Company. The catalyst for political change was the legal obstacle the two consorts faced in their desire to make their mark on British society, a desire which began to undermine, insidiously, Walpole’s return to office. The mistresses wanted to acquire the status which would be the true sign that they had been accepted by their adoptive country, that their foreign accents and their physical unattractiveness would no longer be the butt of jokes. They considered that the best social defence they could gain against such cruelty was to become aristocrats. But the Act of Settlement of 1701 prevented them from receiving titles or any position of profit under the Crown.
This did not, however, prevent them from working out a cunning way round the difficulty. Madame Schulenburg decided to become naturalised, and campaigned to be granted an Irish title. So it was that the Maypole was transformed into the Duchess of Munster. This merely spurred her rival for the King’s affections into a fury of action. The Elephant too became naturalised, and after much trumpeting of her cause was rewarded with the tide Countess of Darlington, though not until 1722. Here was the formal recognition that the Maypole and the Elephant stood at the pinnacle of society. But it didn’t entirely work. The mistresses were too comic, the King too foreign, for the country to stand in awe. Indeed, the King’s preference for these women was just too alien for popular taste, as the balladeers made clear in scatological vein:
At St James’s of late
On a great bed of State
A dismal Disaster did happen;
For Munster’s good Grace
In her Brunswick’s Embrace,
was taken indeed, but not napping.
But, alas! In this Hurry,
While with too much Fury,
The rampant old lecher embrac’d her
Her Ladyship’s Weight
(which we all know is great)
Brought down on ’em both, the Bed’s Tester.
In the face of such ridicule, the attainment of titular aristocracy was never going to be enough to sate the mistresses’ ambition. The Maypole continued her campaign for social acceptance, deciding that an Irish title was not enough and that she wanted an English one instead. Her preferred route was to exploit the jockeying for position among the ambitious politicians in and around the government.
She had several men to choose from, all of them eager for power. Charles, the third Earl of Sunderland, was a court man to the tips of his well manicured fingers. It was in his blood: he was the son of a minister to three kings and connected through marriage to perhaps the greatest family of them all, the Marlboroughs. He was cunning and clever, self-possessed and rich; he spoke French fluently, and floated easily through the European courts; indeed, he lived and breathed court life, at ease with himself and with greatness. But Sunderland, though he could offer George a window on the world which the introverted king could not see for himself, was not the only Whig with ambitions. James Stanhope, who later became the first Earl Stanhope, was already a master of foreign diplomacy, the war hero who had fought valiantly in the War of the Spanish Succession as commander of the British forces and who had been imprisoned for a year. Politically, he was the friend of everyone, but he was committed to no one.
Sunderland and Stanhope were ranged against Charles, the second Viscount Townshend, who had been appointed by George as his first minister. He had none of Sunderland’s sophistication: indeed, upon his retirement a decade hence he would become known as ‘Turnip Townshend’ because of his passion for experimental farming. But what he lacked in finesse he made up for with hard work, notably as a commissioner negotiating the union with Scotland and as an ambassador to the Netherlands.
Townshend’s key political ally was his brother-in-law, Robert Walpole. Walpole, like John Blunt, was physically unattractive. He was short and stout, and had a large head. At first glance, his features appeared to be coarse – a double chin, bushy black eyebrows and a thick lower lip. His eyes were large and wide-spaced, giving him an air of openness, even vulnerability. He played on his looks by affecting the demeanour of a blunt-speaking, unsophisticated Norfolk squire, even munching his little red homegrown apples during debates in the House of Commons. He had let it be known that he always opened his gamekeeper’s letters before any official communication. But appearances were deceptive. Walpole was equally at home in London as he was in the country, relishing the life of a city socialite, and he would rise smoothly through the political ranks. He was a political amphibian, a countryman with Whig ambitions, a Westminster politician with roots, a man who quickly saw the merit of using his rustic image as a camouflage for ambition. His political brain was as sharp as Huguenot steel. He would not have been so trusted had he been lean.
From a modest upbringing, Walpole came to amass riches on a scale never fully explained, living in splendour and taste on his country estate at Houghton, where he built a small palace, and at Orford House, his Chelsea residence, which overlooked the Thames. More than £100,000, the equivalent of many millions today, passed through his bank account when he became Paymaster-General, the most lucrative post in government. Ten acres were added to the grounds of his Chelsea house, where he kept brightly coloured parakeets and goldfinches, and gifts of jewellery were showered on his friends and relatives.
In 1715, George’s yearning for his beloved Hanover played a crucial role in helping to shift the balance of power in Sunderland’s direction, and away from Townshend and Walpole. With the King now abroad, ambition had to travel too. Sunderland was quick off the mark, his speed belying his affected casualness. He set off for Aix-les-Bains with alacrity, covering his tracks by claiming the need of a health cure. Conveniently, it was only a short distance from there to Hanover and the King. So while Sunderland was able to plot with his ruler, helped by the whispering campaign led by the King’s mistresses, the brothers-in-law were stuck at home, without any hope of influencing the King: Townshend and Walpole were now effectively in exile, with the country run from Europe.
On the King’s return, a journey much delayed by bad weather, the duo were sacked in favour of Sunderland and Stanhope, who were to be the government’s two key figures throughout the year 1720. Walpole had been outmanoeuvred this time not by the Tories, but by his own party.
He was in the wilderness again.
John Blunt, surveying the new political landscape, had wasted no time in pressing his cause with George I. He was keen to make the South Sea Company part of the new establishment, and with it secure his own place in society. In order to do this, he wanted to bring some famous names into the Company’s orbit. In place of Harley, he persuaded the Prince of Wales himself to become its Governor in 1715. It was a recognition both of the changed political times and of Blunt’s desire for the royal imprimatur. For the Prince, it was a useful way of making money, given the high running costs of being royal.
George I, too, was amenable to Blunt’s overtures and acquired a large shareholding in the South Sea Company for himself. It did not take long for the Company to change its composition: in the first year of the reign, leading Tory politicians were voted out as directors by the shareholders, to be replaced by Whig businessmen. Even the Duke of Argyll, a Whig and a loyal Hanoverian, became a director of the South Sea Company – an extraordinary step for a man of such social standing and a sign of Blunt’s ability to capture the upper echelons of society with his schemes. But there was another sign, too, of the Company’s future direction: half a dozen of its directors, including Blunt, had begun their careers with the original Sword Blade Bank, and had an eye on manipulation of the markets rather than any genuine interest in trade. The deaths, three months apart in 1718, of two great men among the directors, the sub-Governor Bateman and the Deputy Governor Shepheard, tipped the balance of the Court of Directors firmly towards the Sword Blade men, and away from the experienced financiers.
In 1715, to cement its place in the Hanoverian order, the Company had declined the interest payments which were due from the government for servicing the national debt. This had saved the Treasury more than £1 million, and in return the Company was allowed to increase its capital size by the same amount, so that it now had several thousand shareholders, more than either the Bank of England or the East India Company. In the same year, for the first time, its share price reached par, the value at which the stock had been launched under Harley. Four years later, in 1719, the Company was also allowed, through an Act of Parliament, to convert a further part of the government’s debt into shares. Unlike Harley, who had merely converted the floating debt (the debt that could be paid off if the Treasury could afford it), the government proposed to sell off that part of the debt to which it was committed for years ahead: this was called the funded, or ‘irredeemable’, debt. By transferring its subscribers to a stock-market holding in the Company, this new small-scale conversion scheme aimed to remove the burden on the Treasury created by the lottery of 1710. Two-thirds of the annuitants eventually took up the offer, and under the terms of the deal the Company agreed to lend the government more than half a million pounds. As a reward, the Company was allowed to sell extra stock for itself, on a rising market, to increase its reserves of cash.
