April 5 (Bloomberg) -- The bubble of 1720 precipitated England’s first stock-market crash. In August of that year, shares in the South Sea Company reached a peak of 1,000 pounds and dropped to 150 pounds by the end of September.
The crisis devastated thousands of investors, including Sir Isaac Newton, who reputedly said after losing 20,000 pounds, “I can calculate the movement of heavenly bodies but not the madness of men.” The crash also permanently changed the structure of the constitutional monarchy, allowing a prime minister to become head of the government as the monarch gradually assumed the more ceremonial role of head of state.
The monarch at the time, King George I, was a controversial successor to his second cousin, Queen Anne. He inherited the English and Scottish thrones through the Act of Settlement of 1701, which excluded 54 closer relatives of the queen from the succession because they were Roman Catholic. George I, the prince of the German state of Hanover, was a Protestant.
British Protestants, however, disapproved of his personal life. George I was unmarried, having divorced and imprisoned his wife for adultery in 1694. When he became king in 1714, he arrived in London with his illegitimate half-sister Sophia Charlotte von Platen, and his mistress Melusine von der Schulenberg. The two women were dubbed “the elephant” and “the maypole” by satirists because of their physiques. George Frideric Handel composed his famous “Water Music” to drown out the sound of Thames boatmen criticizing the king and his mistress as they traveled in the royal barge.
Sophia Charlotte and Melusine were concerned about their finances. Prices in London were about four times higher than in Hanover and the two ladies were expected to support themselves and their dependents in court style. The widowed Sophia Charlotte had five children and a modest pension. She sought to augment her income by other means, including buying lottery tickets and accepting payments for access to the king.
Melusine was similarly strapped for cash. She had to raise three “nieces” at her own expense. In fact, these young women were the daughters she had with George I, who never acknowledged paternity. She, too, offered to influence the king in exchange for money.
Eventually, petitioners for favors included representatives of the South Sea Company, which had been formed in 1711. The company wished to retain its 1713 monopoly over potential British trade with Spanish colonies in South America and inflate the price of its stock. Sophia Charlotte and Melusine each received 15,000 pounds of stock in the company with the promise that 120 pounds would be paid for every point the stock price rose above 154 pounds. Two of Melusine’s “nieces” each received 5,000 pounds of shares. The South Sea Company retained its monopoly and the value of the shares grew until 1720.
By the time of the crash, George I himself was rumored to have received payments from the company. He became governor of the company in 1718 and invested his own capital in the project as well as having inherited shares from Queen Anne. He suffered personal financial losses.
Melusine was accompanying the king on a visit to Hanover when the value of her shares declined in September 1720. “If we had been present in England,” she wrote to John Aislabie, the chancellor of the Exchequer, she and her nieces would have sold the shares “when they were at such an advantageous Price, and I wish you had been so kind as to do it for us, the more when you judged and saw they was [sic] not to rise but fall as they have done.” Aislabie judged that he couldn’t sell Melusine’s shares at a preferred rate without discrediting the crown and his own position.
In the inquiry that followed the South Sea Bubble, the payments received by Sophia Charlotte and Melusine became public. George I blocked the extradition of South Sea Company Treasurer Robert Knight, who fled England in January 1721 after alluding to immense bribes paid to the most prominent people at court. John Blunt, one of the company’s founders, was arrested and provided the list of payments. In March, Melusine and Sophia Charlotte were accused in a House of Lords debate of accepting bribes.
Because members of his court were implicated, George I couldn’t claim the authority to resolve the situation alone. Instead, Robert Walpole, the newly created first lord of the Treasury, took charge. The assets of South Sea Company directors were confiscated and distributed to bankrupt shareholders, and the stock was divided between the East India Company and the Bank of England. Walpole also fought to protect the king, shielding Melusine and Sophia Charlotte from prosecution.
Although Walpole never formally received the title of prime minister in his lifetime, his authority after the South Sea Bubble was unprecedented and set the tone for the future of the constitutional monarchy. The monarch would retain some control over foreign affairs but the prime minister would assume the role of head of government in the domestic realm as “the King’s Servant.” Walpole conducted state business in the House of Commons and united the Cabinet as an executive authority. The monarch’s direct influence over subsequent prime ministers varied over the course of the 18th and 19th centuries, but Walpole’s example set the tone for the office.
(Carolyn Harris is a lecturer in history at the University of Toronto’s School of Continuing Studies and is a royal-history blogger at www.royalhistorian.com. The opinions expressed are her own.)
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