Surviving History


ADVENTURE, WAR, MURDER, SLAVERY, ESPIONAGE: from the internationally bestselling author of Nathaniel's Nutmeg and seven other history books. New post each Tuesday.

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Tuesday, February 7, 2012

THE WORST BANKER IN HISTORY: HOW JOHN BLUNT RUINED MILLIONS


He was an ugly man - fat, pompous and unscrupulous.
Blunt: fat and pompous
He was also a gambler whose only desire in life was to get as rich as possible.
Yet John Blunt had two qualities in his favour: he was self-confident and charismatic - a man who quickly gained the ear of the political elite.
He charmed politicians and then exploited them. In so doing, he would instigate one of the greatest financial catastrophes in history.
The countdown to disaster began in January, 1720, when Blunt developed a scheme to eradicate Britain’s crippling national debt.
The South Sea Bubble: an 18th century cartoon
This debt stood at £31million - a staggering sum - and the government was struggling to pay the £1.5million annual interest payments.
Blunt decided to use the South Sea Company, of which he was director, to promote his revolutionary scheme.
You get one, I get three
He was aided by the fact that two of the key figures in the government - Earl Sunderland and Earl Stanhope - knew nothing about finance.
They had deferred financial policy to John Aislabie, the inept Chancellor of the Exchequer. It was to Aislabie that Blunt now presented his grand idea.
It appeared blissfully simple. He offered to take over Britain’s entire national debt - and there was only one condition attached. For every £100 of debt he assumed, Blunt demanded the right to issue £100 of new stock for the South Sea Company.
A big gamble: Hogarth's vision of the bubble
This made no sense to Aislabie. He couldn’t understand how anyone was going to make any money out of such a transaction.
The answer was a neat little scam - one that depended on Blunt being able to artificially raise the market value of South Sea shares.
It worked like this: if an individual held £1,200 of bad Government securities - and wished to convert them into South Sea stock - the company would be allowed to issue 12 new shares at £100 each.
But if the market value of each share could be manipulated upwards to, say, £300, then the company would only have to give the individual four shares, since these would equal £1,200.
Aislabie: a brilliant idea
It would continue to hold the eight remaining shares, which it could then sell at £300 each, netting the tidy sum of £2,400. In one simple transaction, Blunt would make an enormous sum of money. And he promised to make money for the country as well.
Chancellor Aislabie was impressed by the scheme and presented it to Members of Parliament. They were no less impressed. Blunt already had a track record at manipulating the markets: no one doubted he’d be able to artificially increase the value of the South Sea Company shares.
After a long debate, it was decided to give him the green light. Britain’s economy was being placed in the hands of one man - and a highly dubious individual at that.
Everyone expected the national debt soon to be a thing of the past. But there was one serious drawback to Blunt’s scheme: it was little more than an empty gamble whose success was dependent on his ability to keen the price of stock artificially high.
Even the king bought shares
Blunt bribed ministers in order to set the ball rolling and people soon began to invest huge sums of money in the newly issued shares.
The king was no exception: he bought heavily and made £86,000 profit on his investment. He promptly knighted this banking genius.
‘The eyes of the world were turned from the chief ministers of state to this great oracle,’ wrote Aislabie.
The newly knighted Blunt had proved true to his word: now, he found fame and fortune in equal measure.
The speculating frenzy lasted for eight months and involved much of the nation: the value of shares exceeded all expectations, rising to £1,000 in the summer of 1720.
He ruined the nation - but not himself
And then - dramatically - the bubble burst. The share value crashed as people realized the hollowness of Blunt’s promises. Overnight, thousands of families lost their lifetime’s savings. Many were left bankrupt.
‘They have lived their dream,’ wrote Alexander Pope, ‘and on awakening found nothing in their hands.’
John Blunt ran away from the crisis he’d caused. He hid in Kent until he was discovered and ordered back to London. He was stripped of his remaining fortune and left the capital in disgrace.
Yet he had the last laugh. He was given a large allowance - and an even larger house - by his son, who’d made a fortune out of the artificially created boom. 
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'Idiosyncratic and utterly fascinating... an extraordinary tale of hardship, horror and amazing good fortune' James Delingpole, The Daily Mail 

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