Financial History Issue 124 (Winter 2018) | Page 21

South Sea Stock Prices in 1720
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Price
Newton buys for Hall
Newton buys
Newton sells
Thomas Guy sells
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We can monitor the torrents of infor-
mation that flow through traditional news
media, as well as some modern systems
such as Facebook and Twitter. But we
have limited ability to understand those
flows, and we have only a vague sense
of what goes over some other media,
such as encrypted chat sessions. We face
similar hurdles when studying the South
Sea Bubble. We do have large collections
of printed material from that period, as
well as a few personal letters and the like.
However, all available accounts argue that
a key role in the transmission and collec-
tive processing of information at that time
was played by coffee houses. That is where
people gathered to read the papers, gossip
and analyze what they had heard. We have
very little knowledge about how this oper-
ated. Thus, just like today, we have to make
do with fragmentary information on how
investment decisions were made.
Having to deal with shadowy fragments
of reality does not mean we cannot obtain
enlightening insights from comparisons
of the events of three centuries ago with
today. One feature that appears to char-
acterize bubbles is greatly increased gull-
ibility among investors, as well as policy
makers. As I write this article in early 2018,
we observe initial coin offerings (ICOs), in
which investors rush to throw their money
at promoters who rarely offer business
plans, much less plausible ones. The simi-
larity to the South Sea Bubble story of a
company “for carrying on an undertaking
of great advantage, but nobody to know
what it is” is striking. (It has to be said that
while the 1720 story appears embellished
from its apocryphal origins, it does not
exaggerate too greatly the promotional
atmosphere of that time.) What this sug-
gests is that we might perhaps be able to
develop a measure of public gullibility that
mi ght serve as a warning sign of bubbles,
just as high levels of debt do.
While there is already extensive litera-
ture on the South Sea Bubble, much more
can be learned about that episode. The
standard accounts tell us about the brib-
ery and fraud committed by the South Sea
Company, its manipulation of the market,
the price record and many other colorful
aspects of this multisided affair.
In particular, they include the British
government’s successful efforts to suppress
some of the extremely embarrassing facts
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after the crash through diplomatic pres-
sure on Austria. But there is far more that
can be learned, in particular about the
activities of individual investors, the infor-
mation that was available, how it was used
and, in most cases, how it was not used.
The newspapers and pamphlets from
that period have already been mined by
previous investigators, but not completely.
And there are sources that have barely
been scratched. Those include complete
records of trading in many of the main
securities on the London market. They also
include a substantial body of modern pub-
lications about the history of the British
press and the history of English literature.
Many of the famous literary figures
from that period, such as Daniel Defoe,
Jonathan Swift, Richard Steele and Alex-
ander Pope, were involved in the South Sea
Bubble, either as investors or as propagan-
dists. Since they were literary figures, they
wrote extensively, unlike people in finance,
who typically left few traces. Further, since
they are now famous, their writings have
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been studied intensively. What we can do
is to exploit those works from a financial
history point of view.
Here we briefly discuss some of the his-
torical nuggets that have been uncovered
recently, primarily about Daniel Defoe,
Isaac Newton and Thomas Guy. Defoe has
not attracted much attention in financial
history. But his economics, that in Rob-
inson Crusoe as well as his other profuse
writings, has already been studied. He was
an extraordinarily prolific and versatile
writer. His works are especially valuable
because he had a very modern mindset, in
terms of how he viewed and described the
world. This led historian G.M. Trevelyan to
entitle the chapter on the early 18th century
in one of his books as “Defoe’s England,” in
recognition of this writer’s value in creating
and describing that era. Unlike most of his
literary contemporaries, Defoe was keenly
interested in commerce and finance, based
on personal experience in those areas.
Defoe appears to have played a role,
possibly a very important one, in the
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