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Newton: the Man 22-29
The South Sea Company was formed, amongst other purposes, to assist the Government financially, and took over about ten millions of National Debt, in return for certain trading concessions, which it is not necessary to recite. There was to be made an annual payment by the Government to the Company of £600,000, this being 6 per cent on the ten millions; and this payment was secured on certain Customs Duties. We may say that, in modern language, ten millions of the Government debt was " funded" at 6 per cent. These " securities" were commonly called ``Annuities,'' and they were unredeemable.
In 1713 the Company obtained from the Spanish Government, by the Asiento Treaty, the ``lucrative monopoly of the Slave Trade'' with Spanish America. The word ``monopoly'' is a slight exaggeration, since it was for the supply of a fixed number of negroes for a certain number of years: it was a large share, anyhow.
In 1717 the Company advanced another five millions to the Government, for which they were to receive 5 per cent. These were also called ``Annuities'' (5 per cent) and were also unredeemable. These ``Annuities'' were thus, though commonly called ``South Sea Annuities'' and so appearing, like ``South Sea Debentures,'' not so in reality. The South Sea Company kept the accounts, but the Government paid them for so doing. These ``Annuities'' were therefore ``Consols,'' and so first-class securities - ``gilt-edged,'' to use a stockbroking term. Newton appears to have invested some of his savings in these 5 per cent ``Annuities''; and had (as we have seen) not less than six hundred and fifty pounds per ann. of them on the 27th July, 1720.
During the three years preceding the early part of 1720 the value of the ``Capital Stock'' of the Company had varied very little from 300 per cent.
In 1718 the King became Governor of the Company, and therefore, presumably, a holder of a considerable amount of this stock.
In 1719 the National Debt had increased to £51,300,000, which was chiefly in terminable, or ``short'' annuities - what would be called ``Floating Debt,'' in opposition to the ``Funded Debt.'' The Company offered to take over this debt, on terms which are of no interest here.
Then, on the 13th April, 1720, the Company opened a subscription of two millions of their ``Capital Stock'' at 300 per cent. This was immediately subscribed for, ``The price that day being three hundred and twenty five per cent.'' (The South Sea Bubble, 1825.)
On the next day, April 14th, a ``Dividend of 10 per cent, in Capital Stock, was declared and resolved nem. con.'' (that is to say that every holder of 10 shares received one extra share as ``dividend'').
``The Additional Stock to be made to this Company by the present subscription and all further subscriptions as shall be made to the Capital Stock before midsummer next year either by subscription or otherwise shall be entitled to the like dividend.'' (Minutes of the South Sea Company.)
Thus (not to put the matter too delicately) the Company ``watered their Capital Stock'' to the extent of 10 per cent. Shall we say ``reduced it to 10 per cent below proof?''
The Company offered special terms to the holders of the ``long'' Annuities if they would ``subscribe'' to the conversion of their Annuities into ``Capital Stock.'' The terms for the ``irredeemables'' subscribed were arranged thus:
``The long Annuities they valued at 32 years' purchase, and at that rate gave seven hundred pounds stock, for each one hundred pounds annuity, at three hundred and seventy five per cent, its value being:
i.e., 700 by 3.75 . . . . . . £2625 0 0
These terms were very liberal, and exceedingly attractive to anyone who proposed to ``subscribe'' and then sell his stock. Such was not, however, either the intention or the desire of the Company. ``The first subscription of the Irredeemable debts amounted to £427,340 18 9'' (loc. cit.) Newton was not among these ``subscribers.''
On the 14th April (as I have stated) the Company voted a dividend of 10 per cent in Capital Stock; and at the same time offered an extra 10 per cent of Capital Stock to holders of the ``Irredeemables'' subscribing.
On the 27th July, 1720, Newton decides to ``subscribe,'' and instructs Dr. Fauquier to do so for him. Newton's note is very elliptical and has all the appearance of being a confirmation in writing of a previous conversation. It is well to note that the price of the Capital Stock on May 28th had risen to 550, and in July to vastly more¹.
A simple calculation will show that Newton received for his six hundred and fifty pounds per ann. £4,550 ``Capital Stock'' plus ten per cent, giving a total of £5,000 Capital Stock. Now this is the exact amount which he left when he died, as we know from the ``True and Perfect Inventary,'' taken on oath by order of the Prerogative Court of Canterbury! Besides this he also received, in cash, £3,737 10s. 0d. (i.e. 575 × 6.5).
This was, in fact, exchanging from a lower priced security into a very highly priced one, on (as I have pointed out previously) very liberal terms. Where was the ``gamble'' in this? It is what any hard-headed banker might have done; it is what, we may suppose, Dr. Fauquier advised him to do. Let us consider the transaction even a little more closely .
Newton had £650 per ann. in 5 per cent ``Annuities,'' which would have cost him, at twenty years' purchase, £13,000. He was paid by the Company in cash (nearly) £4,000. These ``Annuities'' therefore stood him at £4,000. For that he obtained £5,000 of Capital Stock ; which Newton thus acquired at 180 per cent, while the market price of the stock had stoud at about £300 for nearly three years. On May 28th, 1720, it was priced at £550. On July 27th it was very considerably higher than that. The Company had just declared a dividend of 10 per cent. The King, as we saw, was one of the Governors, and, presumably, a holder of considerable stock.
Newton's transaction was, in fact, equivalent to (as we would now say) exchanging from ``Preference Stock,'' or ``Debentures,'' into ``Ordinary Stock'' in a company. There is not the least suggestion of ``greed'' here. Tt is the action of a man with sound business views. Newton was (as we see from his books) a great believer in commerce, and he considered the Company a sound one; also that their shares were worth more than 180 per cent, which he was paying for them.
The very worst that one can say about this transaction of Newton is that his judgment was at fault; but even of this I am by no means satisfied, since, but for the tremendous blow the Company received when the ``Bubble'' burst - largely in consequence of over-capitalisation, and, doubtless, to the large sums spent in bribery, etc. - it seems probable that the Capital Stock of the Company would have been worth more than the 180 which it had cost Newton. In any case, it was still worth 104 seven years later. It is so very easy for wiseacres to ``argue backwards'' - when one knows what has happened.
But, it may be said, there was undoubtedly a ``swindle'' on, and this fact must have been talked about in the coffee-houses. This seems probable; but we must remember that Newton was not a frequenter of coffee-houses, and so would not be likely to have heard of it. In any case, since the King was Governor of the Company whatever was said would not have been proclaimed very loudly. Had Newton really known what was going on he would not have subscribed, since his transaction was intended as an ``Investment,'' and he had no intention of selling his ``Capital Stock.''
Thus we see that, having ``subscribed,'' and having obtained £5,000 of the Capital Stock, which is said to have varied during June and July between 500 and 900 per cent, Newton was in a position to sell this stock (which is what any banker would have advised, and what, in all probability Dr. Fauquier recommended him to do); he would thus have realised a very large sum of money. If he had sold at, say, the very modest figure of 600¹, this would have been £30,000; when, deducting what it had cost him, he would have gained £21,000. This appears, in all probability, to be what Mrs. Conduitt really meant when she said (as is reported) that her uncle had ``lost £20,000'' in South Sea Stock. He could have gained £20,000; but as he did not sell he ``lost'' this £20,000! Put in another way, he lost (the opportunity of making) £20,000. I have heard ladies argue in this manner, even in our boasted century!
According to Pope (Spence's Anecdotes), ``The King was heard to say in the Drawing Room, upon the falling of the South Sea Stock, `We had very good luck; for we sold out last week'.''
Newton, however, did not sell his stock. The result was that he actually lost about £4,000 - and not £20,000 as is reported - being the difference between what it cost him (£9,000) and the value of the stock when he died, which was £5,200.
And now let me make a small digression. The South Sea Company is commonly referred to as if it was nothing but a gigantic swindle. Such is not a correct view. The Company was statted by many of the rich merchants of London as a Trading Company, which, in consideration of certain privileges, proposed to fund the National Debt; and, eventually, from their profits to extinguish this debt¹.
Later, however, by what we may call ``sharp practice,'' and later still by deliberate swindling, the directors defrauded the public out of vast sums of money. How the swindling took place can be explained by a simple illustration, as follows :
Let us imagine a respectable and sound business the capital of which £9,000 is owned by A. The company trades, declares and pays dividends. A., however, wishes to make more money, and so resorts to ``sharp practice,'' to make the public believe that the company's shares are worth 300 per cent. The public fall into A.'s trap; and B. purchases, say, 3,000 shares at 300 per cent, for £9,000.
A. now owns, say, 6,000 shares (which we will assume are really worth £6,000), whilst B. owns 3,000 shares.
A., having received £9,000 from B., and having given him 3,000 shares, worth £3,000, has made a ``profit'' of £6,000; and we may say that he is worth £15,000 in all. B., on the contrary, having paid £9,000 for stock only worth £3,000, has lost £6,000.
Later A. and B. together indulge in some deliberate swindling, and induce the public to believe that the shares of the company are worth 600 per cent; or that their Capital Stock is worth £54,000.
At this valuation C. now purchases £3,000 worth of this stock (two-thirds from A. and one-third from B. - in proportion to their several holdings), thus paying £18,000.
A. now owns £4,000 of stock and has received £12,000 for £2,000 of it. He has consequently made a further profit of £10,000, which, with the previous profit of £6,000, makes his total profit £16,000. He may now be said to be worth £25,000 in all.
B., on his last deal, having sold £1,000 worth of stock for £6,000, has made a profit of £5,000. But since he lost £6,000 on the first deal, he is still £1,000 to the bad. Re owns, however, £2,000 of stock, so we may say that he is worth £8,000 in all-against the £9,000 he started with.
Lastly, C. having purchased £3,000 of stock for £18,000, has really lost £15,000; this loss, and B.'s loss of £1,000, making up A.'s gain of £16,000.
That this story of Newton's having gambled in his old age should have been credited, I can only suppose is due to the weight of Macaulay's authority, which caused the acceptance of his statement that
``With all his [Newton's] genius, he was as simple as a child; and the coldness of his temperament would have made him slow to believe that others had been led astray by their passions.''
Macaulay was notoriously positive about all his statements of what he called ``fact''; he is also notoriously inaccurate in many of his statements. That Newton was of a cold temperament appears certainly to be correct. This would, however, have prevented him from gambling - certainly in his old age. That he was ``slow to believe that others had been led astray by their passions'' we know is not true. His great-nephew, the Rev. Benjamin Smith (b. 1700), who was Rector of Linton-in-Craven from 1743-1776, was notoriously a disgraceful profligate: so much so that his preferment in the Church is said to have caused a very serious scandal. We know that Newton wrote to him in the plainest and severest terms. These letters were unfortunately destroyed after Smith's death by his successor to the rectory - another case of suppressio veri: the excuse being that he thought that these letters might reflect on Newton's own character, since the language and the direct reference to acts of profligacy were so exceedingly forcible.
Nor is this the only case on record ofloose living in Newton's own family. Maude was a near neighbour of the Rev. Barnabas Smith, from whom he got all his information, and he tells us (Wensleydale), of Newton's own father, that ``he was a wild, extravagant, and weak man.'' Also, in another place :
``His [Newton's] whole estate in that neighbourhood [Woolsthorpe] amounting at the time of his death to about £105 per ann. which fell to the share of his second cousin, John Newton, who being dissolute and illiterate, soon dissipated his estate in extravagance, dying about the thirtieth year of his age, in 1737, at Coltersworth, by a tobacco-pipe breaking in his throat, in the act of smoking, from a fall in the street, occasioned by ebriety.''
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