What propelled Sir Robert Walpole to undisputed power was his handling of the financial crisis known as the South Sea Bubble.
The Glorious Revolution had not only brought in modern public finance, with the Bank of England and the national debt, it had also introduced other, less obviously desirable features of capitalist modernity – such as speculation and boom-and-bust. And the South Sea Bubble was the mother of all busts.
After Britain signed the Peace of Utrecht to end its involvement in the War of the Spanish Succession, it found itself in debt by £9.47 million. The government proposed a deal to the South Sea Company: in return for receiving 6% interest, the company would finance the debt, and it would also get exclusive rights to trade in the South Seas. The company quickly agreed, smelling riches in trading with the South American colonies and a possible monopoly on slave trading.
The shares offered by the South Sea Company were quickly snapped up. The company, wanting to repeat this success, issued more shares and then even more. The inexperienced financiers who ran the company saw no danger in this practice, spending their gains on lavish corporate offices. This gave investors the impression that the company was successful and wealthy, and as a result, they bought yet more shares.
The South Sea Company might have invented 'spin': it spread the word that it could not fail, and that the Spanish had given it unlimited access to their South American ports. In fact, they were only allowing three ships per year into them.
Other companies got into the act, selling shares in all sorts of ridiculous ventures, from building floating mansions to distilling sunshine from vegetables. An insatiable public bought everything on offer.
Then, in 1718, disaster struck the South Sea Company: Britain (and the Netherlands, France and the Holy Roman empire) went to war with Spain when it tried to regain what it had lost in the Peace of Utrecht, and all trade between them ended. Within the South Sea Company's boardroom walls, all pretence of making a profit from trade was abandoned – only selling shares mattered now. And the company's management team began selling their own incredibly over-priced (by at least £60 million) shares.
In March 1720, the shares stood at 170; they peaked at 1050 on 24 June. When word got out that those running the company had sold their own shares, panic selling ensued and the shares bottomed out at 290 – the 'bubble' had burst.
Everybody got their fingers burned – the scientist Isaac Newton, who lost £20,000, said: 'I can calculate the motions of heavenly bodies, but not the madness of people.' Still worse, everybody was found to have had their fingers in the pie, from the king to his mistress and his ministers
Everybody, that is, apart from Walpole.
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 South Sea Bubble
www.stock-market-crash.net/southsea.htm
Stock Market Crash! Net's take on the Bubble affair, which it likens to the Enron scandal of the early 21st century.
The South Sea Bubble
www.historyhouse.com/in_history/south_se
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A humorous yet historically accurate account of the Bubble, from History House, 'an irreverent history magazine'.
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A Very English Deceit: The secret history of the South Sea Bubble and the world's first great financial scandal by Malcolm Balen (Fourth Estate, 2003)
Malcolm 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.
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The First Crash: Lessons from the South Sea Bubble by Richard Dale (Princeton University Press, 2004)
Throws light on the current debate about investor rationality by re-examining the story of the South Sea Bubble from the standpoint of investors and commentators during and preceding the fateful Bubble year.
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