[opening jingle] Welcome to the fourth installment
of Extra History. This time it's gonna be
a daring tale of high seas adventure
and romance. Nah,
I'm just kidding. This is gonna be
all about finance
and economics. First off, I just want to say, I think
it's amazing that we get to do this episode. Each month,
the Patreon subscribers vote on what the next topic
is going to be. And last month,
we just sort of threw in the South Sea Company topic
on a lark. It's important, and it's relevant, but we figured there's no way
that it would win out against things like the life of Caesar,
or the Spanish Inquisition. But, delightfully,
we were wrong. And that's one of the things
that I love about doing this series. Everything, from
the Youtube comments, to the episode suggestions, and the votes from the Patreon supporters, reflect, not the nihilistic internet that people always talk about, but rather, a genuine curiosity,
and a love of history. I desperately want to cover
the campaigns of Caesar, and dig into the truth about
the Spanish Inquisition too, of course! But I think it's pretty awesome
that we have an audience that's also interested
in something as obscure and esoteric as the South Sea Bubble. So, what is the South Sea Bubble? It is perhaps
some of the wildest financial chicanery
of the 18th century. And why are we covering it? Well, because it has a lot of parallels
with some of the events of the last few years. It gloriously highlights the importance
and value of financial institutions, while also serving as a warning about
the incredible danger of invented wealth. But, before we can talk about
the South Sea Bubble, we have to talk about
the South Sea Company. And before we can talk about
the South Sea Company, we have to talk about
Great Britain in the early 1700s. First off, there was no Great Britain in the very early 1700s. because until
the Act of Union in 1707 England and Scotland
were two different countries. But since that's right in the middle
of the story that we're about to tell, I'm just going to refer to England
as Great Britain throughout if that's okay. And the first thing to know
about our Great Britain is the fact that in the late 17th
and early 18th century it pretty much
could not get enough of being at war. Not only did the English go through
a major civil war in the 17th century (which I am sure
we're gonna cover someday), but then they just
continued to fight pretty much everybody in Europe
for the next 100 years. So with that in mind I'm just going
to start us off in 1710 with a guy named
Robert Harley. August of 1710 looks like it's going
to be a great month for Mr. Harley. Through a bunch
of political wrangling he's just gotten himself
appointed Chancellor of the Exchequer a position that's basically the same
as the secretary of the Treasury in the U.S. He's been out of power for a while but by gum,
he's gotten himself back in it now. He's thinking everything
is gonna be great. Then he looks
at Britain's balance sheet. In one column is the five thousand pounds
still remaining in the government treasury, and in the other column
is a hastily scrawled note saying somewhere..., roughly..., probably...,
around 9 million pounds' in big red ink. to give you an idea of just
how big this debt is: the current, yes,
current Chancellor of the Exchequer announced that a payment
toward this consolidated debt will be made
on February 1st of 2015. That red ink is still
being paid down today, 300 years later. So with that in mind, you can pretty much imagine
the freak-out that Harley had when he realized just
how impossible his job was. His first task was just to keep the government afloat through the end of the year. Unfortunately there were
a few hurdles between him and doing that. first there was the problem
of government accounting. At the time, Britain had no unified budget so while everybody knew that they were in debt, until Harley did a thorough investigation no one quite knew exactly how in debt they were. This meant that no real preparation had been done, and since every government department had its own budget and carried its own debt, even after doing a deep dive on the books, even Harley could only give a ballpark estimate of how much debt they really had to tackle. Second problem: the House of Commons was a deeply partisan two-party body. For the last few years the Parliament had been controlled by the liberal Whigs, with the conservative Tory minority routinely blocking any legislation from the opposite side of the house. Well now the Tories had come into power, and you better believe the Whig minority was going to do the same thing to them. Of course, in response the Tories were busy calling for the impeachment of members of the previous Whig government, and all of this just made raising taxes a near impossibility. With taxation as a revenue stream cut off Harley turned to the next viable option to keep the government running: the Bank of England. The Bank of England, though, was created by the Whigs and was a Whig controlled institution. In fact this is the beginning of the age of central banking. The Bank of England was really the first institution of its kind. A bank specifically designed to lend money to the government and make sure the government remained solvent. But, since most of the board members of the Bank of England were Whigs, and Harley was a Tory, the bank was none too quick to help the government out. This left only foreign creditors as a possible source of revenue for the government but given how deeply in debt the government already was, and how many people it was still fighting, outside credit wasn't really available. So with no other options left to him Harley turned to less Orthodox sources; namely John Blunt of the hollow sword blade company. Despite 'Blunt' being an odd name for one of the fellows in charge of a company which held the monopoly on making fine swords our Mr. Blunt possessed a sharp financial mind and very few, if any, scruples. He saw the government's critical financial state, not as some great national crisis, but rather an opportunity to make money. Lots and lots of money. but he couldn't just sell the government rapiers. No. Blunt needed cold hard cash. So he dreamed up a scheme so convoluted, it's kind of hard to even describe but I'm gonna give him a best shot. The real estate market in Ireland was currently up for grabs, as the British government had just confiscated large amounts of Catholic land. Blunt wanted the hollow sword blade company to buy as much as it could as cheaply as possible. Unfortunately the hollow sword blade company didn't quite have the capital to do that. So they needed to raise some money in a hurry. Normally you would do this by just selling stock in the company. But Blunt had a more intricate plan. He offered to trade stock in the Hollow Sword company for army debentures at under market value to anybody willing to make the swap. Now army debentures were a form of government debt. Basically they were a promissory note that the army issued when it couldn't afford to, you know actually pay for things. The problem was you can't exactly repossess the Army's car, so those promissory notes aren't actually backed by anything, making them very hard for people to collect on which in turn made them nearly worthless. Okay, so at this point you're probably confused. How is the hollow sword blade company gonna make money by swapping shares in their company at under market value for army debt that most people are just looking to get rid of anyway? Well, Blunt realized that an offer this good was going to entice a lot of people into taking him up on it, thereby massively inflating the demand for and thus the price of army debentures. So he very quietly went out ahead of time and had the company quietly buy up as many army defenders as it possibly could, before announcing their offer to swap debentures for company shares. That way, when they announced their offer the value of all the debentures they picked up would go through the roof. On top of that, because the land he was aiming to buy was government-held, he could trade the government debt for the land directly at whatever value he'd driven the debt to. This tangley web of financial magic ended up getting him not only the 200 thousand pounds he needed to buy land in Ireland, but also another 20 thousand pounds which he politely loaned to the government at a very low rate. Now what Blount and the hollow sword blade company did here is certainly illegal today and probably was illegal back then, too - in fact there was even a court ruling against the company - but since they were now busy lending the government money no action was ever taken against them. After all when you're busy lending money to the government who exactly is going to punish you for bending the law? Which is of course what got Blount and Harley together in the first place. Blount was helping the government find funds and Harley badly needed funds to be found so it was high time they take tea. The Bank of England had been running a rather mediocre lottery for the government the last few years and Harley decided that Blunt was just the man he needed to kick it up a notch. So he got the rights to administer the government lottery, turned over to Blunt and his crew and man did Blount do a bang-up job: In four days he sold out all of the tickets pocketing a tidy profit for himself in the process. He then followed it up with an unbelievably exorbitant lottery with tickets that cost thousands of dollars apiece by today's standards. And he sold out all of those, too. The only problem was that part of the way he did this was by making sure that every ticket won something. At minimum you were guaranteed to get at least ten percent of the price of your ticket back in winnings. Which is great for the gambler but not so great for the government. The key though was that the government would pay out the winnings over the next decade rather than right away, bringing a much-needed influx of cash to the Exchequer So while, yes this added still more long-term debt the government owed, it gave Harley the three hundred thousand pounds he needed to see the government through the next few months. But it's going to take way more than just lotteries to solve the larger looming debt crisis. So join us next time for the scheme that Harley and Blount pulled together to tackle the long term British debt. A scheme that will be called the South Seas Trading Company.
You mean to tell us that the Dutch East India company was a piker? Or for that matter the 16th century Chinese porcelain company was also poor?
Amtrak has never turned a profit in it's entire history
this guy could have the greatest content in the world but the weird autotune he's always used just rubs the wrong way and i can't watch it for more than a minute.