The Bubble Act

I'll come to the Bubble Act in a bit, which is definitely a bit on the nerdy side of things and although not about canals, massively affected the development of canals in the 18th century.

Canal development in the 18th and 19th centuries was a major undertaking which stretched engineering capabilities to the limit of what was possible. But despite this the early pioneers, such as James Brindley and William Jessop, were bullish in their predictions of what they could do and in the case of The Grand Junction Canal they were spectacularly wrong. Until it was surpassed by the Manchester Ship Canal, The Grand Junction Canal was the most expensive canal project in Britain. It ultimately cost around £1.5 Million, almost 4 times Jessop's original budget of £400K. The gigantic overspend dwarfs pretty much all of today's major engineering projects, even HS2 which is currently only 2 times over budget.

What makes this more fascinating is that in the 18th century canal projects needed permission from Parliament, through an Act of Parliament, to allow money to be raised from investors. More than that any over spend needed further Acts of Parliament - the Grand Junction Canal needed 10 Acts of Parliament from 1793 to 1805 with 4 in 1795 alone! You can only imagine some of the meetings between Willian Praed, the Grand Junction Canal Company Chairman, a London banker, and Jessop with Jessop asking Praed yet again to go back to Parliament for yet another Act to raise yet more money. There must have been a massive collective belief that the canal would ultimately make money, which it did.

Asking Parliament for permission to raise money from investors seems an unbelievable amount of phaff and made me wonder why investors needed that level of protection? The answer is the world's first financial crash which happened in the early 18th Century and was caused by a single company called The South Sea Company. This huge kerfuffle with The South Sea Company was probably the main cause which delayed canal mania by at least 30 years. The South Sea Company crisis culminated with the Bubble Act, aimed at protecting investors by dictating that any future projects needing money from investors needed approval through an Act of Parliament.

At this point I was planning to add a couple of pictures of the main players of this story but like most 18th century paintings they're not very exciting and probably not very accurate. Early portrait paintings were often a vision of what the subject wanted their image to be, they were 18th century photoshopping with a brush and paint. I'd rather have had a candid painting of Jessop on site talking about some important engineering decision or trying to explain to William Praed why he needed more money, again. Sadly these pictures don't exist so here's a couple of lovely canal pictures instead. Both of the Aylesbury arm of the Grand Junction, which is a beautiful spot if you've not been. The Aylesbury arm along with unspecified overspend was authorised by a 1794 Act of Parliament .

Back to the the story of the South Sea Company and the Bubble Act. In many ways things weren't as different as you might think in the early 18th century. Life was of course a good deal harder for most people, but like today there were people with lots of money and plenty of unscrupulous scammers looking to separate those people from that money. One such scam, called the South Sea Company, was huge and precipitated a financial crash that was far reaching and affected the development of canals in this country for over 100 years

The South Sea Company was founded in 1711 and was a joint public and private partnership which promised much to investors. The company was given a monopoly in the trading of African slaves to the Dutch and Spanish empires across the world. In addition to the lucrative slave trade investors were promised an interest rate of 6% on the money they invested. To help things along the chairman of the South Sea Company was King George I, who of course would have needed to conduct the affairs of the company in German or French as he never really learnt English (that is if he really had anything to do with running the company). The South Sea Company was heavily promoted by a number of Tory MPs including the Chancellor of the Exchequer, John Aisalbie, and had an impressive headquarters in Threadneedle Street pretty much next to the Bank of England. How could anyone with some spare cash refuse such an investment opportunity?

Shares in the South Sea Company went wild, increasing from just over £100 at the beginning of 1720 to almost £1,000 by July in the same year. However it soon became apparent that the business case for the slave trade with the Dutch and Spanish was in fact non-existent and the South Sea Bubble, as it became known, burst. The share price plummeted and in less than 3 months was under £200 a share.

The crash was devastating for many investors including some famous names from history that are still well known today. Isac Newton was said to have lost about £40 Million in today's money along with Jonathan Swift, author of Gulliver's Travels, who also lost a considerable amount of money. Jonathan Swift wrote this profound prose about the South Sea Bubble:

Thus, the deluded Bankrupt raves; Puts all upon a desp'rate Bet, Then plunges in the Southern Waves, Dipt over Head and Ears – in Debt.

Very little good came out of the South Sea Company crash, other than through another famous character from history, a stationer called Thomas Guy. Thomas Guy invested heavily in the South Sea Company, making a fortune selling his shares at £600 a share. From the fortune he made he founded Guy's Hospital in London.

Some of those responsible for the South Sea Company scam were held to account. John Aisalbie the Chancellor of the Exchequer, who had promoted the scheme and made money selling shares at inflated prices, was expelled from the House of Lords and imprisoned in the Tower of London. There were of course repercussions from the South Sea Company scam, which the cynic in me says were born out of politicians trying to save their skin and protect those with money and power suffering such a fate again. The first of the repercussions related to the money that some people made through short selling as the South Sea share price fell. I find the whole idea of short selling fascinating, but feel free to skip this paragraph if you don't.

The idea of short selling is that I sell shares at today's price, say £100, that I don't own, in fact I've borrowed them (from a willing trader). I've agreed that I'll give the shares back in, say, a month's time when I'll buy shares on the market at the price they're worth at that time. So in a month's time if the share price has dropped to say £50 a share I will only pay £50 for the share's that I borrowed a month ago and sold a month ago for £100. Which means I make £50 a share. If the shares have gone up to say £150 then I will lose £50 a share. This is of course actually just gambling, unless I have some insider knowledge through which I know the price will fall. As the South Sea Company share price collapsed some people made lots of money by short selling nonetheless short selling was not banned (and still isn't today) however something called Naked Short Selling was. Naked Short Selling is a somewhat even more unbelievable practice where I promise to buy more shares, that I don't own, than actually exist! If you want to see how Short Selling happens today I'd recommend a film called The Big Short which describes how a small number of people made billions by short selling during the 2007/8 global financial crash. It is completely unbelievable and completely true. However if any of this paragraph makes you cross then I recommend you don't watch the Big Short, it will just make you crosser.

The second outcome of the South Sea Company crash was an attempt to protect investors through something called the Bubble Act. This new Act of Parliament meant that any scheme which required money to be raised from investors needed to be approved by Parliament. Of course the South Sea crash, and the Bubble Act, not surprisingly, made investors much more cautious. The result was that there were very few new canal projects in the middle part of the 18th century, despite the early success of projects like the Bridgewater canal and despite the massive need for a new transport infrastructure in Britain. Nonetheless pent up demand eventually became so much that in 1793 the dam finally burst with 21 Acts of Parliament for canal projects in a single year. Canal Mania had well and truly begun.

So did the Bubble Act make any difference? Not really. The Grand Junction share price went through a meteoric increase from £100 to £472 in less than a year in 1792/3 before falling back to £100 by 1795. No doubt along the way lots of shareholders made money and lots lost and there would have been short selling insider dealing galore! But there is one crucial difference between the South Sea Company and the Grand Junction Canal Company. The Grand Junction Canal wasn't a scam and whilst massively over budget was completed and did end up making money with revenues peaking in 1815 at £168,390.

There is plenty in this blog which offends my morale compass but I have to also admit that without the investors and to put it bluntly the raw commercial greed, we would not have the Grand Union Canal today.

With this in mind I thought I'd finish with another couple of pictures of the canal, the first early in the morning just north of the Globe Inn near Linslade, and the second of Soulbury Three Locks.

More soon.