Money for Nothing: The South Sea Bubble and the Invention of Modern Capitalism, by Thomas Levenson
After the 1707 Act of Union, the new Kingdom of Great Britain was experiencing a number of firsts; Isaac Newton had already brought ground-breaking understanding with his theory of gravity; Daniel Defoe was to write the first English novel, Robinson Crusoe in 1719; and Robert Walpole would become the first Prime Minister in 1721. The scientific advances that Newton had uncovered were part of a wider revolution that was intrinsically linked to finance (Newton was also Master of the Mint) and it was into this new era that another, more malevolent force arrived: the stock market crash in the form of the South Sea Bubble. Thomas Levenson has written an immensely readable history of the calamitous event and Newton, Defoe and Walpole are key characters throughout.
The South Sea Company had been founded in 1711 as a supposedly ingenious way of consolidating government debt, in addition to capitalising on trade in South America. That trade would be reliant on the goodwill of Spain, which had a violent relationship with Britain, and slavery in which the company had no experience. Whilst the Royal African Company had shown it was possible to make fortunes through the horrors of the slave trade, the South Sea Company proved itself incapable. Regardless, a mania descended on investors, and the price of stock increased tenfold during six months in 1721.
It is remarkable how Newton, the genius of his time, could be swept along by the craze that involved increasingly complex methods of trading. Innovations, common enough today, such as bonds, derivatives, futures and options, all helped contribute to the stock price rise. As Newton famously said, ‘I can calculate the motions of the planets, but I cannot calculate the madness of men.’ And it was this madness, combined with the new financial instruments that caused him to lose £20,000 (the equivalent of around £4 million today).
Throughout Money for Nothing, the 2008 crash was in my mind, but the 1720 bubble, whilst ruinous for individuals, did not have the same global impact. Indeed, Levenson makes clear the foundations of Britain’s subsequent empire were built on Walpole’s management of government debt through what remained of the South Sea Company.
But ruinous it was and whilst Newton and the other ‘victims’ did not have financial history to help steer their decisions, the same cannot be said for the participants of the booms we’ve seen most recently. Levenson’s brilliant book concludes with the Lehman collapse, and the reader is left with a sense of unease of not if, but when we will face the next stock market crash.
Oliver Webb-Carter is the Editor of Aspects of History. Issue 8 is out now.
