The South Sea Company’s bonds were never meant to be a scam

In Money for Nothing, Thomas Levenson brings us into the story of the South Sea Bubble by writing about the development of the mathematics of odds and prediction. These advances were the beginnings of actuarial science: an understanding of risk that underpins insurance.

We start with Isaac Newton and his role in attempting to stabilise the currency with something we now think of as quite normal: currency revaluation (Levenson’s previous work on Newton means he’s well prepared here). Much of early modern Europe based their currencies on silver, and fluctuations in the value of the metal were a recurring issue. Ongoing wars meant England was massively in debt, and having its coins worth more (as silver bullion) than their face value in pounds was a problem. Silver coin was being taken out of the country to be sold in markets abroad.

Levenson moves on to how these things helped to influence the stock market, as trading in shares was gaining popularity. At the same time, the bond was emerging as a financial instrument.

Of course people had lent money in the past, hence the prohibition of usury in many religions. Trying to make money from money is an ancient enterprise. But the creation of bonds as a form of government finance is more recent. In the 18th century, they tended to take various forms, including those that came with prizes as well as an annual return: a forerunner of today’s Premium Bonds.

Into this market, which had seen the success of the East India and Muscovy Companies, came the South Sea Company in 1711. It proposed to trade various commodities (including slaves) in South America.