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THE SOUTH SEA COMPANY – III 1739-1856: THE FINANCIAL CORPORATION

The South Sea Company had no physical trade after 1739 but, despite this, it continued in existence for a further 117 years. The reason for the companys long existence was its activity as a financial corporation, principally managing the South Sea Annuities described in Part II (*).

company on the Exchequer annuity would remain at 4% until 1757 and then reduce to 3%. This rate remained thereafter, supporting the ordinary stock dividend of 31⁄2% per annum. The company’s other income included an annual fee for managing the South Sea Annuities (see Part II), about £14,500 but falling towards £7,000 as the government redeemed parcels of the annuities; licence fees from those wishing to trade within its monopoly area, typically £500 per annum, and stock transfer fees, perhaps £50 per annum. In 1750 Henry Pelham’s government carried out a major scheme whereby the part of the national debt bearing interest at 4%, was converted to pay 31⁄2% interest until 1757, and 3% thereafter. This encountered considerable opposition from stockholders in general, largely influenced by the initially hostile attitudes of the Bank of England and the South Sea Company. Only about two thirds of the outstanding stock was offered by the closing date. The remainder of the stockholders were offered a second chance (‘the Second Subscription’) but on slightly worse terms, that the 31⁄2% period would end in 1755, and this brought in another 21%. The rest – about £31⁄4 million – had to be paid off in cash. About £21⁄4 million of these were holders of the Old and New South Sea Annuities.

Inscribed stock certificate for the transfer for £1,000 of the ‘New Joint Stock of South Sea Annuities’, dated 19 April 1774 and priced at only 841⁄2%, the market perhaps being down just three weeks after Parliament closed the customs house at Boston in retribution for the ‘tea party’. At a later date the wording in the body of these certificates was changed to ‘Joint Stock of New South Sea Annuities’, bringing it into line with the form of words on the Old Annuities

To fund this purchase from holders unwilling to convert, the government raised £2.1 million by public issue of a new annuity, also managed by the South Sea Company. Because of its small size, this issue usually stood a point or two cheaper than other stocks. It is now so rare that it is difficult to ascertain its exact name – the company referred to it as 3% South Sea Annuity 1751 but most other contemporary sources leave out the words ‘South Sea’. £700,000 of this loan was raised by lottery in which all ticket holders were allocated stock, with prize winners receiving additional quantities.

The South Sea Annuities are exceptional in that they were continued after 1750 (at the new interest rates) whereas all other government stocks involved were swapped into new stocks. Stock transfer receipts for the Old and New South Sea Annuities are seen in collections, spanning the entire period from their first issue up to the liquidation of the company in 1856. Transfers for the 1751 annuity are very rare in fact, the author has never seen one.

Nominally as compensation for the company’s surrender of the asiento contract and its right to an annual ship to Spanish America (see Part I), the government agreed that interest payable to the company on the Exchequer annuity would remain at 4% until 1757 and then reduce to 3%. This rate remained thereafter, supporting the ordinary stock dividend of 31⁄2% per annum. The company’s other income included an annual fee for managing the South Sea Annuities (see Part II), about £14,500 but falling towards £7,000 as the government redeemed parcels of the annuities; licence fees from those wishing to trade within its monopoly area, typically £500 per annum, and stock transfer fees, perhaps £50 per annum.

Inscribed stock certificate for the transfer for £1,000 of ‘New Joint Stock of South Sea Annuities, Second Subsciption’, priced at 106 7⁄8 %, dated 3 June 1752. The heading is in black

In addition, annual income from the company’s investments amounted to, say, £20,000 but diminishing. These investments originated from various windfalls – compensation of £100,000 received in 1750 from Spain; cash confiscated from the 1720 directors; £10,000 received in 1743 from Robert Knight (the 1720 cashier); and about £40,000 of old trading debts and unclaimed stock. The investments were actively managed, sometimes in South Sea securities, sometimes in other government issues. Expenses might be £14,000 a year, chiefly for directors and staff salaries.

South Seas monopoly abandoned

Ordinary stock (shares) transferred at a price of 911⁄2% on an inscribed stock certificate dated 21 July 1848, close to the end of the company’s life. The heading is in black

In 1815 there was a further change. Without a trade nor any stomach for acquiring one, the company surrendered its monopoly rights (and licence fees) and the trade was declared open to all but subject to export duty. In a curious arrangement, the government undertook to invest, in government stock, the revenue from the export duty until it reached £610,464, the amount required to yield interest equal to a dividend of 1⁄2% on the company’s ordinary stock. At this point the government stock would be handed over to the company “as a full satisfaction for the Surrender of their exclusive Privileges of Trade, within the existing limits of their charter”. The objective was to maintain the dividend on the ordinary stock at 31⁄2%. In the years immediately following, the export duty yielded about £8,000 p a. Only about 60% of the required fund had been purchased after 28 years and probably the scheme was never completed. In the interim the government subsidised the company, up to a limit of 1⁄2%, for whatever amount was required to maintain the dividend at 31⁄2%: about £2,000 p a rising to £9,000 p a by the 1840s. Thus the government guaranteed the company against a fall in its income from the government!

Winding up

The company, with its three governors, 21 directors (reduced from 31 in 1753) and a prime London office, had nothing to do but manage the transfers of ordinary stock and annuities, and the payment of the dividends on its capital and the interest on the part of the national debt it was managing, about 4% of the total after the Napoleonic wars. It is surprising that steps to terminate the company were not taken until 1853, when William Gladstone took this action during his first spell as Chancellor of the Exchequer. At that time £2.7 million Old South Sea Annuities, £2 million New and £400,000 of the 1751 issue remained in circulation.

Gladstone needed only to redeem the Exchequer annuity, revoke the company’s charter by Act of Parliament and arrange for the Bank of England to handle the annuities. Instead he tried to push through a reduction in interest rates, offering the holders a bewildering variety of alternative stocks. These were rejected by the company, both in respect of the Exchequer annuity and for a large holding of South Sea annuities which it owned. Altogether, holders of about 75% of these three annuities elected for cash, the remainder mostly converting to a government stock called New 21⁄2%Annuities. The government redeemed the Exchequer annuity on 5th January 1854 and paid off or converted the annuities on 5th April 1854.

William Ewart Gladstone (1809-98), who as Chancellor of the Exchequernitiated the company’s liquidation. He was later Prime Minister four may tend considerably to do away with litigation”.
times for thirteen years in all

Meanwhile the shareholders were agitating for winding up, but the directors had other ideas. They proposed to convert the company to “undertake the business of execution of trusts” – to act as trustee for anybody willing to appoint them There would be a guarantee fund of £350,000 in addition to the capital. The government was willing (the guarantee would be invested in state funds). The shareholders were less enthusiastic and insisted on provisions by which members not agreeing could be paid out. Twice, the necessary Parliamentary bill was defeated, The Times reporting, without a trace of irony, that it “encountered prolonged opposition from the legal profession under the fear that the creation of a trust company To counter accusations that the directors were delaying matters, in December 1853 the company offered advances to shareholders waiting to be paid out, at 4% interest (reduced to 3% in the next month), which drew the not unreasonable comment that they were being charged to borrow their own money. Thereupon the company arranged to buy the ordinary stock if requested, at £115, raised to £118 in January 1855, these amounts being about £2 above the stock market prices and a little below the forecast asset value. In February 1855, South Sea House in Threadneedle Streetwas sold to an architect, T Nelson, for £56,750, the book value having been £12,000. It was to serve as the Baltic Exchange for some years and was later demolished. In July the company made a first capital distribution to shareholders of £115 per £100 nominal together with its last dividend, which despite the lack of management fee income was 11⁄2% for the six months. The Act terminating the charter received the Royal Assent in the same month, July 1855.

The Dividend Hall in South Sea House in about 1820, by Rowlandson and Pugin

The final shareholders meeting was on 15 February 1856, at which a further £5 per share was distributed, to congratulations all round except perhaps from those who had accepted the company’s first offer of £115. £44,000 was retained against potential remaining liabilities (which to the extent not required may have resulted in another small distribution later) but on that day, 145 years after it was chartered, the Governour and Company of Merchants of Great-Britain Trading to the South-Seas and other Parts of America, and for Encouraging the Fishery, ceased to exist.

Geoffrey L Grant

Scripophily-Journal-2000-12-December-2000

International Bond Share Society

International Bond Share Society

International Bond & Share Society
The International Bond & Share Society (or IBSS for short) is the world’s biggest association of people interested in scripophily. The Society was founded in 1978 as a non-profit organization with the aim to promote, encourage and develop all aspects of scripophily. That comprises any activity dedicated to collecting, study and research of historic securities such as bonds, shares, stock certificates and other documents of financial nature. Now we have members in more than 40 countries on all continents. The largest groups are located in the United States, Great Britain and Germany.
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