Cato V, Part VII: Bubbles, Bubbles Everywhere, and the Chancellor in the Clink

The saga of the South Sea Company is an exceptionally complex one, especially for those of us not intimately familiar with the subtleties of debt consolidation and interest rates. Government annuities were traded for stock, the value of stock was used to buy more stock, the purchase of stock by certain individuals was used to increase the overall price of existing stock, making it more desirable, leading to more purchases, and so on, and so forth, into a vortex of defaults and pyramid schemes from which few people emerged unscathed. Leaving these finer details to the side, however, the general thrust of the thing would seem to have been relatively straightforward. In 1711 the British Chancellor of the Exchequer, a man named Robert Harley (1661-1724), determined after a detailed examination of the national debt that the best way to refinance the nine million pound sum that was owed – a task which the Whig-controlled Bank of England was disinclined to perform for the Tory government of which Harley was a member – was to set up a joint-stock venture under the guise of a trading company whose prospective share value would entice people to give up their government annuities. Because the creation of such an entity would require the approval of a charter by a majority in Parliament, promises were accordingly made to the requisite MPs as to the benefits which would accrue as a result of their acquiescence. The South Sea Company, as it would be called, would enjoy the exclusive right to trade with South America and the Caribbean, a market whose overall value was second perhaps only to the East Indies within the realm of contemporary European mercantilism. As the company made money buying and selling such lucrative commodities as slaves and sugar, shareholders would enjoy both an increase in stock price and a healthy dividend whose overall value would potentially exceed the interest they otherwise stood to collect by holding on to the aforementioned government annuities. Granted, at the time of its creation the company was prevented from engaging in such a venture by the inevitable refusal of Spanish authorities to allow the citizen-merchants of its British rival from operating within its proprietary colonial market. But in point of fact this mattered very little. Whether or not the South Sea Company ever gained access to the trade routes over which it claimed dominion, its shareholders stood to claim a tremendous return on investment.

The value of company stock, it seemed, could be made to increase by any number of means that had nothing at all to do with its stated purpose. Such was the genius of Harley and his associates in Parliament; war between Spain and Britain, news of a victory over Spain, rumors of negotiations with Spain, or even news of Spanish war fatigue would all serve to increase share value based on the promise of British conquest of all or part of Spanish colonial America. Further share price increases could be expected whenever a particularly prominent individual – say, a member of the royal family – became a subscriber, or when stock was offered as a loan against the promise of future profits. This latter arrangement – by which the price of shares was deducted from a future potential increase in their value – was particular insidious in the way that it bound new subscribers to the success of the company as a whole. And presiding over all of this were Harley and his collaborators, collectively among the largest investors in South Sea Company stock and the architects of the entire scheme. Not only did they trade the annuities that they owned themselves for shares which they expected would gain tremendously in value, but they also used their knowledge of the timing of new share issues to purchase otherwise devalued annuities just before their value was about to increase. In consequence of these kinds of tactics, investments poured in over the course of the next nine years from members of the gentry, government ministers – one of whom, Treasurer of the Navy Richard Hampden (1674-1728), used twenty-five thousand pounds of government money to purchase shares on his behalf – and even the king’s mistress and their children. And while a tremendous portion of Britain’s previously unconsolidated debt was successfully traded to the South Sea Company in exchange for shares of equal stated value – thus significantly reducing the yearly interest to be paid out of the Treasury – the consequent frenzy of speculation resulted in the emergence of an exceptionally perilous environment wherein a sudden, unexplained dearth of shareholder confidence could serve to collapse a large portion of Britain’s economy.

Unsurprisingly, this is almost exactly what happened. The outward success of the South Sea Company having inspired a host of imitators – both in style and (lack of) substance – the British economy had become fairly flooded by 1720 with shares issued under the names of companies whose stated business models were alternately novel, outlandish, nonsensical, or even illegal. Parliament accordingly opened a series of investigations into these entities, with particular attention being paid to those whose business practises were demonstrably at odds with the stated terms of their charter. One of these, the Hollow Sword Blade Company – which had been founded in 1691 for the purpose of manufacturing hollow-ground rapiers but became an unlicensed bank after it was purchased by syndicate of businessmen in 1702 – was only spared scrutiny by the fact that it had itself been instrumental in helping to form the South Sea Company back in 1711. MPs who held South Sea stock consequently voted by a significant margin to forgo a formal investigation; at least one of them later received further shares from one of the Hollow Sword’s directors. In spite of these backstage machinations, however, regulation did ultimately result. Notwithstanding a handful of previously unauthorized companies whose directors were given the chance to exchange a one-time indemnity for a royal charter – mainly those having to do with shipping insurance – the Bubble Act (1720) made it illegal for any joint-stock company to operate under British jurisdiction without first being granted the sanction of Parliament. The subsequent nullification of reams of circulating stock ultimately proved to be something of a mixed blessing for the South Sea Company. In the short time, refocusing the attention of the public – still in something of speculating lather – on the originator of the frenzy helped propel its share price to a new peak of over eight hundred pounds as of June, 1720. In the long term, however, having their shares trade at such a high value even briefly proved to be fundamentally unsustainable.

The year 1720 was a very memorable one for both the South Sea Company and for Great Britain as a whole. In January, South Sea stock traded at one hundred and twenty-eight pounds; by May it had increased to five hundred; following the passage of the Bubble Act and a bit of damage control on the part of company agents this grew to seven hundred; by midsummer it rose to an astonishing one thousand and fifty. Such a meteoric rise in value was most assuredly a source of jubilation for shareholders, but it was also arguably a signal of market volatility. The share price having increased tenfold in only six months, it was doubtless becoming increasingly clear to a least some portion of the South Sea investors that their as-yet unredeemed personal wealth possessed little in the way of a solid foundation. Seeking to get out “while the getting was good,” as it were, some people began to sell. This resulted in a series of increasingly disastrous knock-on effects. As the share price began to dip, more people started to sell while the price was still relatively inflated. Those who had purchased on credit saw their ability to repay what they owed essentially evaporate, declared bankruptcy, and liquidated more stock to cover their debts. And as the falling value of South Sea stock produced shareholder anxiety in markets in Amsterdam and Paris, the resulting scramble for liquidity on the Continent further depressed share value in Britain and produced a full-fledged rout. By September, 1720 South Sea Company stock was trading at one hundred and fifty pounds, having lost almost ninety percent of its value in two months. Banks failed, goldsmiths failed, thousands of people – including many members of the landed gentry – were reduced to financial ruin, Parliament conducted a series of fraud investigations, and the raft of ministers responsible for creating the South Seas Company to begin with – including the sitting Chancellor of the Exchequer, the Postmaster General, and the Southern Secretary – were impeached, removed from office, and, in at least one case, imprisoned. 

Returning to the subject at hand, one may now be given to wonder how it was that George Clinton could possibly have perceived the contemporary British House of Commons as evidence in itself of the positive effect of the size of a legislature on the frequency of political corruption therein when, in living memory, it had shown itself to be any but. To be sure, on the level of delegates per person, the lower house of Parliament was theoretically more representative of the population of Great Britain than the proposed Congress would have been of the population of the United States. And it could not be denied that this same legislature, in the aftermath of the Glorious Revolution (1688), had seen its way clear to proposing and adopting the Bill of Rights (1689), a bold declaration of individual civil liberties and one of the most significant documents in the entire Anglo-American legal tradition. In point of fact, however, this was about all a person could honestly say in favor of the contemporary House of Commons. Many of its constituencies were exceptionally undemocratic – too small, too large, or entirely devoid of human life – especially vulnerable to corruption, freely available for purchase, or bought and paid for by a particular interest or family. And while it was certainly possible for the haphazard patchwork of electoral regulations that reigned in the counties and boroughs represented in the lower house of Parliament to produce a body of legislatures whose collective integrity belied the often dubious means by which they obtained their seats, actual events demonstrated otherwise. Notwithstanding the fact that, as Clinton conceived it, it should have been prohibitively difficult for any exterior interest to secure the cooperation of a majority of five hundred and fifty Members of Parliament for the purpose of setting in motion some manner of corrupt scheme demonstrably at odds with the public welfare, the founders of the South Sea Company did exactly that.

True, Harley and many of his collaborators were themselves MPs and government ministers and could thus only partially be classified as an outside interest. But John Blunt (1665-1733), the director of the Hollow Sword Blade Company, was not, and it was Blunt whose earlier financial machinations with devalued army pensions and forfeited Irish land formed the nucleus of what would become the South Sea Company concept. Blunt helped draw up the plans, became one of the Company’s directors, worked to drive up the share price, and helped to foil the aforementioned Parliamentary investigation by authorizing a judicious transfer of stock. Certainly he enjoyed a great deal of cooperation from within Parliament itself, to the extent that Harley should rightfully be thought of as the co-originator of the scheme. But this admission does nothing to alter the fact that Blunt, the representative of a private business interest, did a great deal to sell the idea of the South Sea Company to the critical mass of MPs necessary to secure the requisite government approvals. Regardless of how many of them there were, he and Harley seemed only to require the promise of profit to purchase their cooperation at the expense of their constituents. Indeed, based on the success they enjoyed in the immediate, the South Sea Company directors would likely not have been dismayed by the prospect of having to gain the cooperation of yet more MPs. Having purchased the support of a majority of five hundred and fifty representatives with relative ease as it was, they would surely have seized upon the prospect of six hundred, or seven hundred, or even one thousand MPs with similar alacrity. Far from being daunted or even dissuaded by such numbers, they likely would have seen every extra vote in need of purchase as another opportunity to cement the approval of their scheme, align the interests of Parliament with their own, and further drive up the South Sea Company share price.

As aforementioned, George Clinton’s use of the pseudonym Cato for his anti-constitutional missives would seem a strong indication that, despite all of the events described above having taken place years before he was born and an ocean away, he was very much aware of the circumstances and implications thereof. Cato’s Letters, one of the most influential publications within the British Whig tradition – of which the Commonwealth party formed a radical subset – had its origins in the need felt by a pair of polemicists to respond to the depth and breadth of corruption which they believed the rise and fall of the South Sea Company represented. George Clinton could have adopted any number of names to append to the bottom of his various essays in critique of the proposed constitution – the variety of monikers utilized by his fellow Anti-Federalists attesting to the same – but it was the penname selected by these aforementioned Whig polemicists on which he ultimately settled. Choosing to eschew the notion that Clinton chose to sign the name Cato either carelessly or at random – that is to say, giving Clinton some amount of credit for acting with intention – the principle question behind the inquiry at hand would seem to remain. If there was little if any evidence to be found in either contemporary American legislative circles or in the recent history and composition of the British House of Commons to support Clinton’s claim that larger legislatures were less vulnerable to corruption than smaller ones then what exactly was he driving at in the cited text of Cato V?

Of course it was possible that Clinton was speaking purely in theory, or that there was more to his understanding of the relationship between representation and corruption than his mention of the same in Cato V would have indicated. Perhaps he took it as a given, and believed his readers would do the same, that for any legislature to benefit from the phenomenon he described it would first have to establish itself on a sound, transparent, and consistent foundation. That is to say, it would have to be more like the Congress described by the proposed constitution – whose seat allocations and electoral regulations remained essentially the same across every legislative district in the country – and less like the contemporary British House of Commons – whose constituencies represented a haphazard patchwork of medieval-era traditions and practises that had gone almost entirely unreformed since their inception. Based on this assumption – which seems, on balance, a fairly safe one – it was more likely the principle represented by the House of Commons that Clinton was pointing to in Cato V than the practice thereof. Naturally there was bound to be corruption afoot when so many of the legislators in question were chosen by such manifestly corrupt and self-interested means. Eliminate opportunities for corruption in the selection process, however, and the validity of the principle in question will naturally make itself evident. Because of course men who are elected by self-interested means will act in a self-interested manner. And just so, men who are elected in such a way as to accurately represent the interests and desires of their constituents will naturally be harder to bribe. Certainly they will not be immune to a man from the temptation of personal enrichment or the coercive power of fear. But at least their collective baseline resistance to corruption will be higher.

Based on this manner of reasoning, Clinton’s belief in the ability of larger groups of legislators to better resist corruption than smaller groups would appear to be little more than a straightforward numbers game. If the means by which lawmakers are elected can be established on a basis of consistency and transparency, to the point that every member of the relevant legislature can be said to accurately represent the interests and the will of a majority of their constituents, then the only factor which would seem likely to increase the ongoing level of political corruption therein would be the moral quality of the average legislator. This is, of course, a very difficult trait to measure. Some people, for whatever reason, will reliably give way to temptation given the right set of circumstances. And other people, for equally unknowable reasons, will not. If the frequency of individuals susceptible to temptation is higher on average across the human race than is the frequency of individuals immune to the same, then the idea that larger legislatures are safer from corruption than smaller ones would seem to be essentially baseless. However many legislators are allocated per person, and on however transparent a basis, more of them will be more likely to give way to self-interest should the opportunity arise. If, on the other hand, the reverse is true, and the frequency of individuals immune to temptation is higher on average than the frequency of individuals vulnerable to temptation, then Clinton’s principle would seem to be quite sound. In a reality in which more constitutionally honest people exist than not, increasing the number of representatives per person in any given legislature will inevitably bring more of them into government.

Granted, this all represents a fairly metaphysical approach to constitutionalism, and one whose validity can’t ever really be proven or refuted. That isn’t to say it’s a wholly meritless approach, of course. An essential part of any process which results in the creation or modification of the structures of government is an ongoing consideration of how and why humans act the way that they do. Political institutions, in this sense, are a species of machine which transform the actions, ambitions, and weaknesses of individuals into actionable public policy. Knowledge of human nature provides insight into how and by whom the machine is going to be used, ways in which it might become victim to sabotage, and the best means of keeping it running smoothly and in accordance with its design. Clinton’s evident conviction, therefore, that human beings are more honest as a species than they are not is both entirely relevant to the question of legislative composition and entirely valid as an answer in itself.

Or at the very least it is valid in theory. That the whole structure of Clinton’s argument takes place almost entirely in principle arguably points to both the essential strength and the primary weakness of the concept which he seemed so keen to put forward. Maybe human beings really are more honest and forthright than they are deceitful and duplicitous and the propensity of the latter traits to make themselves known in public office is merely a consequence of an imperfect representation of the general will. As strides continue to be made towards translating the actual interests of a given community into political representation and public policy, this may yet be conclusively proven as a verifiable truth. In this sense, Clinton may have at least been hinting at something of essential significance to the science and practice of government. But then again he may have been wrong, and not just because people tend to favor self-interest more than he believed was the case. As machines, political institutions are more than just the sum of the people that operate inside them. Their ability to function as their designers intended is also continuously shaped by the conditions in which they operate and the rules by which different components are replaced. Properly maintained, a political institution may theoretically function at an optimum level of effectiveness for an indefinite interval without the need for significant overhaul or repair. But condition in fact can rarely be accounted for in theory by even the most thoughtful and far-sighted designers. The machine, in consequence, may be used for too long without inspection, develop flaws, or be overtaken by changing conditions. It accordingly begins to malfunction, its malfunctions are ignored, and in time enough it starts to operate at a fraction of its intended output.

To a large extent, this is exactly what happened to the British House of Commons. Though on its face – and certainly by contemporary European standards – it was a remarkably representative body whose ability to hold the powers of the monarchy in check was entirely without peer, its ability to provide an accurate representation of the British people diminished in approximate proportion to the time that passed following the establishment of this or that procedure. County seats and borough seats – of whatever subtype – were doubtless founded with the intention of ensuring that the distinct communities of which Britain was comprised enjoyed the degree of influence warranted by their size and location. But time and inattention wreaked havoc with the whole scheme. Formerly prosperous market towns were displaced by new constructions, blighted by economic downturns, or fell prey to natural disasters while elsewhere small electorates grew to understand that their votes come election time were worth far more in trade than in practice. The quality of the people’s representation did not outwardly appear to suffer; the number of MPs per person remained relatively high. But the integrity of the machine began to suffer, from use and misuse in arguably equal measure. In this sense, Clinton seemed to be speaking reasonably rather than empirically in the cited passage of Cato V. That is to say, rather than speak based on what the evidence of his senses told him, he attempted to draw conclusions from what he believed to be logical. Yes, he would doubtless have admitted, the contemporary House of Commons was notoriously corrupt. And in that sense it was hardly a fit model for emulation in the United States of America. But at least it allocated seats in reasonable proportion to the population for which it claimed to speak. Purge it of its various electoral eccentricities and it will function in such a manner as the American people would do well to pay heed.

But therein, as ever, lays the rub. It is very easy to say that protecting a legislature from falling prey to corruption is simply a matter of getting more people into government – believing, of course, that people are generally honest. But it is quite another to put in place such measures as would achieve this outcome while avoiding any number of unintended complications. The version of Congress described in the text of the proposed constitution arguably represented exactly the kind of rational and transparent model of legislative assembly that a critic of the contemporary British House of Commons would doubtless have held up as an ideal alternative. And though Clinton as Cato registered a number of complaints against the same over the course of his various anti-constitutional missives, the fact that he urged the expansion of the number of Representatives therein would seem to indicate that he did not entirely disagree. Had he believed that the whole conception of Congress embedded in the text of the proposed constitution was invalid he could just as well have said so. That he did not, and instead offered a detailed list of what he believed to be its faults and failures, would seem to indicate that he was at least open to the idea of Congress as constructed by the Framers. Presumably, if the issues to which he attempted to draw attention were addressed to his satisfaction he would have shifted from opposing ratification to supporting it. That is to say, if Representatives in Congress were chosen on an annual rather than biennial basis, and if each of them was allocated to a district containing fifteen thousand or twenty thousand rather than thirty thousand people, Clinton might well have seen his way clear to deeming the project as a whole to be broadly acceptable.

Contrasting directly the respective electoral frameworks of the proposed Congress and the contemporary House of Common would seem to reveal quite clearly why someone like George Clinton might have favored the former at least in part, provided that its architects adopted a number of key modifications. As aforementioned, the House of Commons (circa 1790) contained some five hundred and fifty-eight MPs elected every five to seven years – there being no fixed term of office – to represent a population of about ten million. While this averaged out to one MP for every eighteen thousand people, the different electoral regulations in place in different parts of the country ensured that many communities were either grossly overrepresented or alarmingly underrepresented. As aforementioned, there were county constituencies containing several thousand people, freeholder boroughs containing several hundred, scot and lot boroughs containing fewer than ten, and burgage boroughs containing none at all. Regardless of these irregularities, however – and which included county seats containing several hundred thousand people – most constituencies sent at least two MPs to Westminster. By comparison, the version of Congress described by the Framers in the text of the proposed constitution was exceptionally consistent in terms of structure and operation. Each Representative would stand for election every two years within a district containing no less than thirty-thousand people. A census was to be held every ten years to aid in maintaining this ratio of legislators to constituents and seats would be reapportioned as needed on a broad basis of equality. These rules would apply with equal force in New York or Georgia, Pennsylvania or South Carolina, as well as consistently within the boundaries of each of the states themselves.

Again, though Clinton most definitely took issue with certain specific aspects of this plan, he could not but have held it as a far better basis upon which to establish a national legislative regime than that which underpinned the contemporary British House of Commons. It was only the ratio of legislators to constituents exhibited by the latter which he seemed to believe should have been replicated in the former. As mentioned above, every MP seated in Westminster as of the late 1780s and early 1790s represented about eighteen thousand people on average. But by the terms of Article I, Section 2 of the proposed constitution, “The Number of Representatives [in Congress] shall not exceed one for every thirty Thousand [.]” Granting that the consistency embodied by this selfsame text almost certainly guaranteed that more Americans would enjoy a fairly accurate representation in Congress than would most British people in the House of Commons, the figure of thirty thousand people (or greater) for every district represented in the lower house of Congress still appeared to be too broad for George Clinton. To his thinking, it seemed, that base number needed to be lower: twenty thousand, perhaps, or fifteen thousand, or ten thousand, or even five thousand. Only once they could claim to enjoy such a fine-grained representation in their national legislature could the American people rest easy in the knowledge that their interests were not being unnecessarily elided or abstracted by the national government that they had consented to erect. And only in the event that as many people were sent to the proposed House of Representatives as was reasonably possible could that body truly claim to be anywhere near to being safe from “the influence of corruption, and the temptation of treachery.”