Our people, taught by the bitter experience of the 90s, who "gave" us "Khoper-Invest", "Russian House of Selenga", "Vlastina" and, of course, Sergei Panteleevich Mavrodi with his MMM, today, albeit sometimes at an intuitive level, understand a sign of the words "financial pyramid". A structure that issues unsecured securities may seem to many to be an invention of the 20th century, "tied" to market quotations and global trade, but the history of "financial pyramids" goes back to ancient times, when mankind had not yet conquered the sky and invented diesel - at the beginning of the 18th century, which would later be known as the Age of Enlightenment.
The War of the Spanish Succession (1701-1714), in which Great Britain and France clashed, completely devastated their foreign exchange reserves by the time the peace was concluded, putting both states on the brink of bankruptcy. Great Britain, whose annual budget at that time was equal to 4 million pounds sterling, had an external debt of 50 million, that is, it spent its budget for 12.5 years in advance! Back in 1710, after a series of intrigues in parliament, the Tory party came to power led by Henry St. John, Viscount Bolingbroke and Lord Robert Harley. The Tories tried to speed up the conclusion of peace and lead the country out of a devastating war, for which they achieved the removal from power of the leader of the Whig party, John Churchill, Duke of Marlborough, who was an ardent supporter of the war and commander of British troops in Europe.
After removing the Whigs from power, the Tories proposed to parliament a project to repay the external debt. Lord Harley proposed to include in the draft peace agreement a clause on "aciento de negros" - the exclusive right to import black slaves into Spanish America. Trade with the Spanish colonies was to be established by a joint stock company, which in exchange for this exclusive privilege would undertake the obligation to pay off government debts in the amount of 10 million pounds. The government, in turn, had to pay the company 6% per annum, that is, just over 500 thousand pounds per year.
(Night Singer - Merchant) sells shares of the Bzhnyh Seas Company, Amsterdam, 1720
In 1713, Great Britain concluded a separate peace and withdrew from the war, having received, under the terms of a peace agreement, the right to aciento for a period of 30 years. However, it soon became clear that the quota for the importation of black slaves could not pay off British debts to the extent that Lord Harley had imagined it. In addition, he could not establish a bank for restructuring government debt, because only the Bank of England had the exclusive right to issue under the law.
The South Seas Company (as the new joint stock company was named) nevertheless continued to operate and issued a package of securities secured by its agreement with the government. Soon after the start of the company, in June 1714, Lord Harley was forced to resign - the Whigs accused him and Viscount Bolingbroke of concluding a separate peace beneficial to France. The new Lord Treasurer of the country was the representative of the Whigs, Robert Walpole.
Receipt of payment for the shares of the South Seas company
Despite the fact that the company lost patrons in the government, it regularly selected its quota for the haciento, while at the same time opening up a new way of generating income through gambling. In 1719, the company's board of directors suggested that the government take on more than half of the state's debts at 5 percent per annum until 1727, and at 4 percent per annum in the following years. The South Seas Company quickly became the main creditor of the government, "crushing" in opposition even the Bank of England, which could not interrupt the final proposal of the company's management.
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It was necessary to buy patronage among the authorities - 1 million 300 thousand pounds went to bribes high-ranking government officials who supported the company's proposal. All this resulted in a fierce debate in parliament, during which the Chancellor of the Exchequer John Islaby (who supported the company) and Robert Walpole (who supported the Bank of England) clashed. In particular, Walpole said that the company's offer is the essence of stock market speculation, and the share price will rise based on the excitement around them, while in essence it will be an unsecured paper. However, supporters of the South Seas Company and the parliamentarians bribed by it literally shouted down Lord Walpole.
Playing cards featuring the South Seas Scam
While statesmen were debating the law, the company's chairman, Sir John Blunt, launched a powerful advertising campaign to attract new shareholders. There were various myths (artificially “launched” among the people) that the company allegedly received a concession to develop silver mines in Spanish America, that soon its turnover would increase many times, etc. Amid general jubilation, the government accepted the offer of the South Seas Company, and the shares of the new tranche flew like hot cakes.
If a share with a par value of 100 pounds in January 1720 cost 128, then in February it was already sold for 175, and in May - for 550. The growth in value was provided by a continuous inflow of funds, which made the company a classic pyramid.
In May, Lord Harley's son wrote: “The madness of the stock market is unthinkable. This savagery goes beyond my understanding, it subjugates all hearts, languages, minds, as if it were a madhouse, in which all sides were at once - Whigs, Tories, Jacobites, papists and others."
However, as is usually the case with pyramids, the rise gives way to the fall. In the same year, the Royal Exchange Act was passed, according to which any enterprise had to receive a state charter to do business. At its core, it was a certification that made it possible to liquidate dubious "offices", however, as it later became clear, it was this act that cut the clay feet of the financial colossus. Several Members of Parliament asked reasonable questions about securing the company's shares, as the aciento did not come close to hitting the turnover of the South Sea Company.
While the proceedings were going on, rumors spread throughout London that the company's shares were not financially backed. The board of directors of the company tried to artificially increase the value of the issued securities, but the wave could no longer be stopped, and in September 1720 the price fell to 150 pounds per share. Investors rushed to the offices of the company to exchange securities for money, and by October it crashed.
Exchange alley during the boom on the South Seas stock, sketch by artist Granger, 1720
In December of the same year, parliament initiated an investigation into the activities of the South Seas Company, seizing the property of its directors. They were forbidden to leave England, but Knight's accountant managed to escape to France, taking all the financial statements. A real war broke out in parliament, summoned to the hearing by the director of the Craggs company, in the heat of the moment, even offered to fight him in a duel to anyone who dared to doubt his honesty. John Blunt, who was escorted to the hearing, refused to testify against himself and his colleagues.
As a result, it was still possible to find inconsistencies and traces of forgery in the company's papers, which made it possible to accuse its directors of fraud. Chancellor of the Treasury John Islaby, who was sent to the Tower on corruption charges, was also prosecuted. The director of the Craggs company died in prison without receiving a court verdict. With regard to the rest of the directors of the South Seas Company, it was not possible to clearly formulate the accusation, so they got off with only confiscation of property.
Directors of the South Seas Company trying to hide from angry depositors
Thousands of people lost significant amounts, hundreds were ruined. Among the shareholders of the company who lost their contributions was the physicist Isaac Newton. However, there was one side that was able to benefit from all this, that side was the British government, whose debts were exchanged for depreciated shares, and by 1721 the external debt of Great Britain was only 500 thousand pounds.
Market Alley Scene by Edward Matthew Ward
And what about France, England's opponent in the struggle for the Spanish inheritance? Surprisingly, things were similar there. By the end of the war, France's foreign debt was over 3 billion livres. The government could not find creditors - the banks of Europe were reluctant to agree to lend money to Versailles, and even then - only at huge interest rates and for a short period.
Comptroller General (Minister) of Finance Noaille decided to "shake" the Jewish community, which controlled most of the banks in France - a real "witch hunt" began, when Jews were interrogated with addiction on charges of witchcraft, but they died from torture, but they did not give money to the crown … In an attempt to find additional sources of income, the French government canceled many privileges and liberties of the nobility, significantly reduced the size of the army, but these measures did not give the effect that was necessary.
the object of desire and speculation: one tenth of the Compagnie des Indes (in other words, the Mississippi company).
Philip of Orleans, regent under the minor heir and future King Louis XV, in 1715 tried to devalue the livre by re-coinage - gold and silver coins were withdrawn from circulation and replaced with coins of the same denomination, but with a smaller (20%) share of the precious metal. A fierce struggle against tax evaders unfolded, one was even demonstratively executed. However, in all this chaos, the lion's share of the proceeds to the treasury was plundered by the regent's close associates, so the situation continued to remain critical.
Salvation came from where no one expected - in 1716 the Scottish adventurer John Lowe arrived in Paris, who presented to Philip of Orleans his project to restructure the royal debt. The Scotsman proposed gradually withdrawing gold money from circulation and replacing it with government bonds. For this business, a bank was established, which began issuing banknotes. Thanks to massive advertising and the spread of the necessary rumors, these papers soon gained popularity among the population, and soon Lowe was able to buy out the foreign debt of the crown. If at first the tickets were secured with gold and silver, then later, on the wave of success, Low's bank began to print banknotes without collateral. Thus, this system also became a classical pyramid.
John Lowe
In 1717, the Mississippi Trade Company was established, whose director was the same John Lowe, and the provision was guaranteed by his own World Bank. The company issued a starting package of 200 thousand shares worth 500 livres apiece, which immediately became the subject of fierce demand. Shares could be purchased not only for money, but also in exchange for government obligations. Thus, Lowe became the main creditor to the French crown. The value of the shares grew, and soon the 500 livres worth more than 10 thousand. The money received from the issue of shares, Lowe's company invested in government bonds.
In early 1720, royal shareholders began to gradually withdraw money from the bank in exchange for shares. This provoked a real boom among the courtiers, who decided that something bad was going on in the company and also rushed to withdraw their deposits. The government tried to stop the collapse by issuing a decree in February of that year prohibiting the possession of coins in excess of 500 livres. However, the situation was gaining momentum like a snowball. Soon the bubble burst.
Dutch caricature of John Lowe and his company, 1720
French society literally split into two camps - some demanded that Lowe be hanged on a nearby tree as a swindler, others believed that he could still fix the situation, and they personally would not be of any use to his corpse and confiscation of his property. The Regent allowed the Scotsman to secretly leave France, but seized all his property and funds that went to the crown. Nobody was going to compensate the losses to ordinary depositors. Like the English "South Seas Company", Law's office was able to do the main thing - to cover almost the entire external debt of France, and, as often happens, the powerful again solved their problems at the expense of the wallets of ordinary citizens.
In the hands of brokers, the coin turns first into shares of the Mississippi company, and then into bad air. 1720 year.
In this regard, the relationship between the two pyramids looks very interesting, because both in London and in Paris they knew very well that there was a serious financial structure on the other side of the English Channel that would guarantee its investors big profits. English investors have followed Low's bank since 1717, and in May 1719, the British ambassador in Paris received confidential letters from his relatives who asked to buy shares of the Mississippi company for them. Thousands of British people personally came to France to buy shares in Lowe's company, which is why Ambassador Steyer directly appealed to the government with a request to urgently do something in order to limit the outflow of British money abroad.
Mississippi Company Ticket
While the British were looking at French bonds, the French and other Europeans invested in the South Seas Company. French banker Martin, a confidant of a group of French investors, acquired shares in the company under the name of Charles McKay. The Dutch banker Cornellius, describing what was happening on the Amsterdam stock exchange at the end of April 1720, remarked that "all the madmen must have been let out into the street." One can only guess how much the European securities markets "shook" when in 1720 both of these financial giants went bankrupt.
Bernard Picard. Monument for the edification of descendants (1721).