A Very English Deceit: The Secret History of the South Sea Bubble and the First Great Financial Scandal

CHAPTER II

A National Lottery, and a Rake’s Progress

Edwin Thrasher was stony-broke before he won, and one day he touched the ring that his father left him when he died, and said, ‘Dad, please send me some money.’ That afternoon he won £50,000 on an Instants scratch card. ‘Fun Facts About Winners’, the UK National Lottery website

With hindsight, it was five shillings’ worth of metal that changed the course of history.

In April 1694, in the London suburb of Bloomsbury, two men walked purposefully out of a tavern, glancing around in case there were any bystanders. Within a few paces, they had drawn their swords to settle their differences over a woman they both loved. It was over as quickly and silently as it began. The younger man made a single quick thrust; his rival fell to the ground, and was left dying, alone in Bloomsbury Square.

Within a day the survivor was arrested and thrown into Newgate jail. Within a fortnight he was in court to hear the charge against him: that ‘of his malice aforethought and assault premeditated he made an assault upon Edward Wilson with a certain sword made of iron and steel of the value of five shillings with which he inflicted one mortal wound of the breadth of two inches and depth of five inches, of which said wound the said Edward Wilson then and there instantly died’.

John Law, ‘Beau’ Law, scion of the Laws of Lauriston, gambler and ladies’ man, was sentenced to hang. There was little time to lose if his life was to be saved. According to the official version of events, Law was handed the means of escape by friends: they managed to supply him with a file with which he cut through the bars of his cell; also, drugs which he somehow managed to slip into his guards’ food or drink, to put them to sleep; and, for when he had achieved both these tasks, Law’s friends had a carriage waiting outside the prison, ready to whisk him away. Shortly after New Year’s Day, 1695, Law jumped thirty feet from his prison wall, and, although he apparently sprained his ankle on landing, he made it to the carriage and was promptly driven to the coast and smuggled aboard a boat to Holland. It appeared, in every detail, to be a daring escape, and one which became more and more colourful in the telling.

Soon afterwards, the newspapers were supplied with this description of the man on the run: ‘Captain John Lawe, a Scotchman, lately a prisoner in the King’s Bench for Murther, aged 26, a very tall black lean Man, well-shaped, about Six foot high, large Pockholes in his Face, big High-Nosed, speaks broad and low, made his Escape from the said Prison. Whoever secures him so he may be delivered at the said prison shall have £50 paid immediately by the Marshal of the King’s Bench.’ Descriptions can be misleading: Law had a clear complexion, and his nose was not large. Nor was his voice broad and low, and neither, for that matter, was he a captain. It appeared that influential friends had persuaded the newspapers to run a misleading description. Escape routes from justice, in the seventeenth century, could be arranged for the influential.

For the best part of two decades, John Law would wheel around Europe in exile. A quarter of a century would pass before he returned to London to receive a royal pardon. A quarter of a century in which he became the most important politician in Europe, a millionaire who invented a financial system that would capture the shattered economy of England’s greatest enemy and transform it into the most powerful in the Western world.

Many countries, but especially England and France, had empty coffers and restive taxpayers, mainly because they had failed to shake off their habit of waging expensive wars against each other. Since 1688, the English government had been almost permanently in combat against the French and Spanish. As the wars ground on, so the national debt had spiralled out of control, matched only by the harshness of the taxes on the country’s landowners and the crippling generosity of the government’s rate of interest to its moneylenders. All men were ‘led by their profit’, declared the banker Sir Josiah Child. The new breed of unprincipled, self-serving ‘moneyed-men’ was doing fast business in the coffee houses of’ Change Alley, growing fat on the interest on their loans.

In 1693 Parliament, for the first time, had guaranteed the government’s debt, removing the responsibility and authority for it from the monarch. The cost of borrowing money soon came to dominate political life. Within a year, in April 1694, Parliament voted to establish the Bank of England as an expedient to get the government out of financial trouble. Under its charter, the Bank was required to lend more than £1 million to the government, although in return it was guaranteed a profitable 8 per cent interest a year on its money. The Bank was also given permission to issue its own paper currency, and soon Exchequer bills and promissory notes were introduced to manage the debt.

Trading companies, too, were tapped for loans by the government. The East India Company was forced to pay heavily for its charter: £2 million in 1698 to see off a rival syndicate, and another £1 million in 1708 when these two companies merged. The Bank of England and the East India Company were the country’s two great financial institutions, the pillars of the City, the props on which a financially enfeebled government relied. They sharpened the divide between the landowners who paid tax and the moneyed-men of the City. But as for signs of progress in the great wars for which all this money was being spent, there were none.

The country considered it was fighting for its independent future, both politically and as a trading nation. The changing alliances in Europe were as complicated as the fighting was interminable, but England had, for some twenty years, battled to bring Louis XIV of France to heel, to stop him from dominating Europe, and it hoped, too, to capture the valuable trade in gold and silver with Latin America. During the course of the conflict, international allegiances had shifted like the sand, washed away by many deaths and many broken promises.

For more than twenty years there had scarcely been a break in the campaigning season, and still the roll-call of valour and ignominy was evenly balanced: a desperate defeat at the Battle of Beachy Head in 1690; a famous victory over the French fleet at La Hogue in 1692, triumph at Barcelona and Vigo Bay, failure at Brest and Cadiz, then success at Blenheim, Ramillies, Oudenarde and Tournai. On and on went the wars, a ghastly and never-ending ritual punctuated only by the failure of desultory peace proposals. All this was scarcely a good return on England’s crippling taxes. More taxes are calculated to have been imposed between 1702 and 1714 than in the previous three reigns put together. The writer Jonathan Swift, who backed the Tory politicians who opposed the wars, noted in his Journal to Stella that ‘few of this generation can remember anything but war and taxes …’tis certain we are the most undone people in Europe’.

As the wars rumbled on, an army of two hundred thousand men had to be supported, and inevitably the greatest burden fell on the landowners. They were forced to hand over a fifth of their income in land tax to pay for the war effort, which they did reluctantly; and they faced heavy local taxes too. So desperate was the government for money that it would regularly raise loans on the future collection of taxes, rather than waiting for the money to come in. The battle with the enemy across the Channel was eventually reflected in a fight for the political control of England, for the grass roots of one political party – the Tories – lay in the old landed interest and the conservative rural squirearchy, which wanted peace; while the Whigs, whose leadership was aristocratic and who were in a majority in the House of Lords, had come to represent the new financial and mercantile interests which were making money from the war with France.

Taxes, however, were not the only source of revenue to a government in financial difficulty. The Whig government had tried to capitalise, on behalf of the Exchequer, on the rage for gambling. It launched a national lottery in 1694, selling tickets for £10 each, with a first prize of £1,000 a year for sixteen years.

The national lottery was not a lottery as we understand it today, because the competitors could not lose. Purchasers of tickets were automatically entitled to a government annuity, an annual payment at a fixed rate of interest for many years ahead, in return for the money they had subscribed through the lottery. But, in addition, if they were lucky, they could win a much bigger sum. Rather than a game of chance, the lottery was a device to attract people to lend money to the government for a guaranteed rate of return, but with the bait of prize money. It was an exercise in creating a cash flow for the government, rather than a profitable enterprise for the Treasury. Adventurers, as they were called, bought tickets which entitled ‘the Bearer to an annuity of one Pound or (by Chance) to a greater yearly sum for Sixteen Yeares’. It was worth taking the chance: no stake money could be lost, and there were 2,500 ‘fortunate’ tickets, with one prize of £1,000 a year, nine at £500 and twenty at £100. The bulk of the prizes, two thousand in all, were worth £10 yearly to the winners.

For gamblers, the national lottery draw was as popular in the seventeenth and eighteenth centuries as it is today. The draw took place in front of excited crowds in a public place, sometimes at the Banqueting House in London. Two huge wheels, more than six feet high, turned slowly in the centre of the floor. As they rotated, a large wooden box, containing thousands of tickets, started spinning, then faster and faster until it became a blur. At a given signal the wheels were halted, and, when the box stopped moving, the winning tickets were removed through its small wooden doors.

In 1710, a German visitor to London, one von Uffenbach, the traveller who had also witnessed the country’s blood-sports, watched a lottery draw and was struck by the scale and professionalism of the enterprise. Then, as now, it was vital to prevent fraud. Twenty members of the lottery team sat at long, narrow tables to cut up the tickets, which were engraved in copper and printed by the sheet, with intricate flourishes pricked out around the numbers. To guard against cheating, the sheets were firmly screwed down to the tables, and cut with penknives, using perforated rulers so that the tickets had a jagged edge. When a winner claimed a prize, his ticket, and that held by the promoters, were put together to see if the two matched. ‘The most curious things of all,’ noted von Uffenbach, ‘are the two great machines into which the tickets are thrown, jumbled together and drawn … The machine was a great round box of excellent workmanship, which was suspended in the middle on two iron nails, so that it could be turned round easily with little trouble by means of the iron handles at the side.’

The lottery held out the prospect of riches and social advancement impossible via humdrum work. Newspapers trumpeted stories about the lucky winners in their columns, stoking up people’s hopes that they too would get rich quickly – that, in a game which required no skill, it might be their destiny to become wealthy.

The lottery merged seamlessly with the culture of gambling on the stock market and soon the stockjobbers were dealing not just in shares, but in lottery tickets too. The lottery also infected the age, helping to spark hundreds of seedy schemes and scams. The advertising columns of the press were filled with get-rich-quick schemes run by people from all walks of life. Epsom had a lottery ‘performed by Mr Cope the undertaker’. Bellamy’s Chichester Lottery offered a £500 prize for a five-shilling ticket. There was a ‘New Monthly Chance’ in which it was ‘impossible for the adventurer to lose all his money’, the draw to take place at the Barbadoes Coffee House in Exchange Alley. ‘The Fair Adventure or Even and Odd’ claimed to have 5,000 prizes, out of only 10,000 tickets, ‘The New Golden Adventure’ a prize for every four tickets. A lawyer from Middle Temple organised a lottery to sell his law books; a chemist ran a lottery advertising his medicinal wares: ‘Warham’s Invention: where all are winners’. Women, too, seized their opportunity. In the Flying Post of 26 May 1698, this advertisement appeared: ‘A New Lottery, call’d, The Lady’s Invention; or Six Pence well ventured; Whereby the Adventurer, if fortunate, for 6d only, may get £1000 and £2000 for 1s 6d … This being an Invention of the Female Sex, several Ladies of Quality have ventured considerable Sums in it. Tickets to be had at most eminent Coffee-Houses’.

This last was almost certainly a fraud, one of many which forced the Whigs at the turn of the century to ban lotteries altogether. But the damage had already been done. The lowest return on an initial investment in the 1694 lottery was 60 per cent. It was simply storing up financial trouble for future generations, which would have to repay the debt. In effect, the wars were being paid for on the never-never, the result of a tacit conspiracy among the politicians to pay high rates of interest on huge debts which could never be quitted. But the rules were about to change.

In 1710, after much manoeuvring behind the scenes, the Tories wrested power from the Whigs. The new Chancellor of the Exchequer, Robert Harley, had become Queen Anne’s favourite, not least because he had befriended her chambermaid and through her had insinuated his way into his monarch’s affections. But he had also managed to overturn the government because, unlike the Whigs, he was pledged to peace. The task facing Harley was enormous and could be measured by the debts he had inherited. In total the government owed more than £8 million, of which the Navy alone owed half. Yet Harley could find only £5,000 in the Exchequer’s kitty.

One problem was that the size of the nation’s debt had outpaced the development of any centralised machinery to process taxes. The Treasury, for example, relied on sticks made out of hazel to account for its loans. These ‘tallies’, as they were called, were split in the middle and notched according to the amount of money that had been loaned, with the depositor retaining one half and the Treasury the other. Such was the country landowners’ belief in the financial incompetence of the outgoing Whig government that they were convinced the Treasury must have mislaid their money. Robert Walpole wrote that ‘in every coffee-house and ale-House I may hear it with confidence asserted that thirty-five millions were lost to the public during the late administration’. Though the rumour was false, it seemed too plausible not to be true – why else were taxes so high and still more money needed to feed the great maw of the military machine?

When he took office, Harley knew he needed a plan to bail out the country and keep himself in power. But to find the money he so desperately needed there were few places to which he could turn. Poor Harley found it was virtually impossible to borrow money from the Bank of England or the East India Company, because of establishment opposition to the newcomer in power. The Whig-dominated City thought a Tory government was bad for business and put obstacles in his way. The election of directors, too, both to the Bank and to the East India Company, was in the grip of the Whigs. The Governor of the Bank of England, his deputy and all twenty-four directors were all Whigs, as were twenty out of the twenty-four directors of the East India Company. The Bank had even tried to persuade the Queen to block Harley’s appointment, by giving her an ultimatum: if she sacked the Whig government it would refuse to hand over a £100,000 loan it had promised. The Queen stood firm and went ahead anyway.

So while the Tories had ousted the Whigs, they were effectively in office but not in power: they simply couldn’t raise the large sums of money they needed to replenish the Exchequer’s coffers. Grudgingly, the Bank granted Harley a £50,000 loan, only half the amount he requested. In these circumstances it was not surprising that Harley’s brother Edward maintained there was a conspiracy among ‘the Bank, stock jobbers and moneyed men of the City who are all engaged to sink the credit of the government’.

In fact, Harley could not even rely on support from within his own party. The more radical Tories, inflamed by the punishment of a radical cleric whose trial had been the catalyst for the Whigs’ downfall, wanted to impeach the previous government. Harley, who was a mainstream Tory rather than a High Tory, refused. Jonathan Swift noted: ‘The ministry is upon a very narrow bottom, and stands like an Isthmus between the Whigs on one side, and violent Tories on the other. They are able seamen, but the tempest is too great, the ship too rotten, and the crew all against them.’ Add together Harley’s struggle against the country’s overwhelming debts and the obstructiveness of the City, and there was every incentive for him to look outside traditional political or financial circles for new ideas. Unable to join the two main City institutions, he resolved to beat them. In these straitened times, it is unsurprising that he welcomed advice from outside the establishment.

Two men were to offer very different solutions: John Blunt and John Law.

John Law was well brought up and should have known better than to get himself into the trouble that had seen him exiled. His father, William, was a goldsmith who had made so much money from banking that he had bought two large estates, Lauriston and Randlestone, on the outskirts of Edinburgh. With Lauriston came a family castle, which William Law bequeathed to John along with most of his estate when he died in 1683. When John left school he took a keen interest in the business his father had left behind. At the same time, perhaps in the absence of paternal control, he began to develop a taste for women and gambling – becoming, as one contemporary put it, ‘nicely expert in all manner of debaucheries’. Luckily for him, women found him fairly irresistible: tall and dark, he was so good-looking they called him ‘Beau Law’ or ‘Jessamy John’, to indicate he was a fop or a dandy.

Law decided, while still a teenager, to try his luck in London, no doubt influenced by the stories he had heard of its racy social life. He moved into rooms in St Giles-in-the-Fields, a mixed area which included Bloomsbury and Covent Garden. In many ways, St Giles matched Law’s changeable personality: it could not quite decide whether it was respectable, including as it did many members of the fashionable set, or rough, with its narrow, dirty alleys which were home to Irish immigrants and French refugees. Here, Law lost no time in conducting himself in a way that reflected both sides of his character: he took a mistress, a certain Mrs Lawrence, but also made sure he made the acquaintance of Thomas Neale, the Master of the Mint and one of the leading ‘projectors’ of the day – the name given to men who promoted the cause of the new ideas and businesses that abounded in the capital. Neale was also Groom Porter to the King, which meant he was responsible for providing cards and dice at court. It was not hard to see why Law was keen to meet him.

Law spent most of his nights in the clubs and gaming houses of London. But he was no idle gambler. He began to investigate the odds of throwing a sequence of numbers with the dice, and studied the patterns of games like ‘hazard’ – a form of craps – which were very popular. His early calculations were not successful. He was forced to sell his castle, and his mother bailed him out by buying the estates from him. At the same time, Law kept up his interest in banking and in particular addressed the issue of whether a national bank should be established to take over from the goldsmiths, like his father, who generally held money for the merchants of the day.

The two sides of Law’s engaging personality were to collide – and in spectacular fashion. All his plans, and hopes for the future, were ended by the duel that he came to fight in Bloomsbury in April 1694.

His rival in love, Edward Wilson, was a man whose taste for high living exceeded even that of Law, and in the wake of his death his lifestyle became the subject of much comment in the newspapers, the London Journal declaring that ‘Mr Wilson was the wonder of the time he lived in; from low circumstances he was on a sudden exalted to a very high pitch for in a gay dress, a splendid equipage and vast expense, he exceeded all the Court. How he was supported, few (very few indeed) truly know; and those who have undertaken to account for it, have only done it from the darkness and uncertainty of conjecture. But in the midst of gaiety, he fell by the hand of the then private Mr Law, and not fairly neither.’

One theory for Wilson’s giddy lifestyle, which was based on no discernible income, is that he was the lover of Elizabeth Villiers, the mistress of the King, and that she was subsidising his standard of living. It may also explain why the King apparently took an interest in Law’s trial. However, the reports of the proceedings make no mention of Miss Villiers: ‘The matter of fact was thus. There was some difference happened to arise between Mr Lawe and the deceased concerning a woman, one Mrs Lawrence, who was acquainted with Mr Lawe; upon which on 9th of April instant, they met at Bloomsbury Square, and there fought a duel in which Mr Wilson was killed.’

Whatever the cause of the fight, the consequence was clear. Wilson lay dead, and Law had to flee for his life.

Law’s departure, though enforced, was not without its consolations. Exile proved profitable: within a few years he had made a fortune by gambling. He was not just making money – he was making his own money: so high were the stakes he placed that he even arranged for special gold counters to be minted. He was frequently to be seen arriving at the gaming tables carrying £6,000 worth of coins. Nonetheless he built up his wealth carefully, playing to a system and using his mathematical skills to calculate the odds. In Italy he won £20,000, and by the time he reached France in 1714, four years after Harley came to power in England, he had £90,000 to his name. He was seriously, independently, wealthy – the equivalent of a multimillionaire today.

But Law was not the dilettante his background suggested. While he was in Amsterdam, rather than simply trying to make money, though he did that too, he began to think seriously about it as a theory. The Dutch, too, had suffered from the financial problems with which Harley was wrestling in London. But they were far ahead of the English in their economic thinking. The Bank of Amsterdam, a government bank owned by the city, had been established specifically to help oil the wheels of commerce. Most countries faced the same problem, which was how best to guarantee the value of their currency. To try to secure a basis for international trade, a handbook was published listing the 500 gold and 340 silver coins which were circulating in the world. But traders complained that coins were frequently ‘clipped’ to reduce their metallic content, so their values fluctuated. England had been forced to call in all its silver coinage in 1696 and remint it, but paper money had been issued at an alarming rate to finance the war effort, out of all proportion to the coins in circulation.