The first
stock market crashes
in London and Paris

  The first
stock market crashes
  in London and Paris

A threat to the financial market

Marlene Keßler and Rafael Streib

In 1720, Paris and London were the scenes of the first stock market crashes, which would go down in history as the Mississippi Bubble and the South Sea Bubble, respectively. The holders of government bonds were lured to exchange them for shares in large companies. From the government's point of view, this had several key advantages: the international trading companies were able to expand their activities, the economy was stimulated, and public debt was significantly reduced. Market manipulation and the introduction of new, risky possibilities for speculation such as options and futures, however, succeeded in creating a euphoria that drove share prices up to twenty times their nominal value.

"Futures" are contracts for share purchases. The price is fixed at the time of acquisition, but the actual purchase is carried out at a later date. Thus, the buyer speculates that the price of the stock will rise until then and that he  will then be able to resell at a higher price than the purchase price. In the case of "options," an investor puts a down payment on a share, giving him the right or option of deciding at a future date, whether he wishes to buy the share. If he decides not to, the deposit is lost.

Figure: Satirical depiction of Fortuna, which freely and generously distributes shares at the same time; Copper engraving (detail), Bernard Picart, 1720.

Stock market crash
in Paris and London

When prices finally collapsed, those who had invested beyond their means were in trouble. Loans were only given tenuously; prices rose and money became scarce. There were riots, theft was rampant, and even suicides are said to have occurred. In France, stock trading was temporarily abandoned and the debt conversion was reversed as far as it was possible. Speculation came to be declared as a criminal offense. In England, the directors of the South Seas Company were accused and subsequently convicted of being at fault. Stock trading, however, continued unabated. The events spread across Europe in a flood of pamphlets and satirical prints that portrayed speculation as carnival-like, a barely understandable phenomenon of human madness. Based on the records of two stock traders, Jean Vercour in Paris and John Evelyn in London, the turmoil of the stock market crash of 1720 can be looked at through their individual experiences.

Image: Southsea House in Bishopsgate Street in London – Thomas Bowles, 1754

What threatens us?

Jean Vercour, a merchant from the town of Liège in modern-day Belgium, travelled to Paris in late 1719 in order to try his luck in the new share market.

Jean Vercour was quite wary of the sharp price fluctuations and the new, risky ventures right from the start. Stock trading also put a strain on his social and business relationships. Before his arrival in Paris, Vercour had sought out co-investors who put him under tremendous pressure. Far away from the action, they showed little understanding for Vercour’s difficulties in turning a steady profit through speculation. Vercour’s most important co-investor was extremely upset with him for failing to capitalize on a certain share price.

John Evelyn, who negotiated shares in London, was more independent, but the advice of trusted friends also played a critical role for his decision-making. Following the advice of a good friend (who assured him that the share price would rise) led him to wait too long to sell.

In the end, both Vercour and Evelyn experienced losses due to their ventures. But the dimensions were quite different. Evelyn lost a part of the invested capital that he had sold land to gather but was still far from financial ruin. Vercour, on the other hand, found his very existence threatened if he wasn’t able to find a way to convert his paper-money into another currency or find a solid investment.

Background image: Share of the South Sea Company, dated April 30, 1730
BRIEF-AUSZUG Jean Vercour an
Ferdinand Dellesem, 18.12.1719
[P]ermettez moy de vous dire a present en amitie combien il est sensible piquant et desolent pour moy de me voir reprocher de vous avec tant de feu une affaire si bonne puisque le profit etoit de £ 14 000 a peu pres pour vous seulement […] vous m’engagez malgré moy dans une mechante affaire […] vous faiziez un sacrifice de mon honneur de mon bien et de ma santé qui est le plus gros d’ailleur de me trouver obligé de rester icy, en me mangeant le cœur au lieu de pain
Staatsarchiv Lüttich, Banque Sauvage-Vercour, Registre 3.

»Erlaubt mir, Euch freundschaftlich mitzuteilen, wie sehr es mich trifft und verletzt, dass ich mich solch energischen Vorwürfen eurerseits ausgesetzt sehe, und das angesichts eines so gutes Geschäft, bei dem der Profit für euch allein immerhin fast 14 000 Livre betrug […] Ihr bringt mich wider meinen Willen in ein schlechtes Geschäft […] Ihr habt meine Ehre, mein Vermögen und meine Gesundheit [euren Zielen] geopfert, und am schlimmsten ist, dass ich mich gezwungen sehe, weiter hier [in Paris] zu bleiben, wo ich mir statt Brot das Herz verspeise«

Who are we?

Jean Vercour justified his failure on an individual level, believing that he had lacked the necessary acumen to survive and thrive in the world of opaque stock trading. At the same time, he also justified his failure by insisting that he had reinvested only at the pressure of his co-investor – against his better knowledge. He was convinced that he would have succeeded otherwise. He did not reflect abstractly about who to blame for his losses; apparently, he was not aware that he – like many others – had been the victim of market manipulation. Instead, Vercour’s explanations remained at the level of personal relationships.

John Evelyn, on the other hand, felt betrayed by the company and thus felt he was part of a group of ‘victims’. Despite his losses, he did not doubt in himself. He believed that it was simply not God's will for him to earn his fortune in this way.

Rue Quincampoix was the center of stock trading in Paris, 1720 - copperplate engraving by Antoine Humblot
VIDEO Rafael Streib
on his research

What do we need?

The needs of Vercour, like Evelyn, were primarily economic in nature, but they were also directly linked to political expectations. Jean Vercour asked his creditors to show understanding for his situation, to give him time, and to trust that he would fulfill his payment obligations. He also hoped that the French king would guarantee, if not the shares, at the very least the paper money the monarch had issued. Like for other merchants, economic stability and clarity were important for him. But his hope that the king would not allow the value of banknotes to decline slowly dissipated, until his last hope was to beg for God’s mercy.

After the crash, John Evelyn also waited to see whether the prices would go up. He suspected that the state would take action, and that those responsible for the decline would be identified.

Background: Satirical depiction of the South Sea Bubble, 1721 – William Hogarth; right: Portrait of Philip of Orléans, the French Regent, 1717 – Jean-Baptiste Santerre
John Evelyn from April 03, 1721
I went to the South Sea Company's house to receive my dividends, accompanied by my eldest, who had come home for the Easter holidays, and I showed him the rooms full of bureaus and account books and the place that had been so disastrous for the nation.
Quote: BL ADD MS 78514, f. 25
Image: Microcosm of London Plate 101, South Sea House, Dividend Halle

What should we do?

Originally, Vercour had planned to get out of stock trading as soon as possible with a safe profit and to minimize his risks until then. But he failed to implement this strategy. He sold his shares only after widespread distrust of stock market trading had set in. The exchange rates had already collapsed and did not recover, and he ultimately incurred heavy financial losses. Vercour then looked for an investment opportunity elsewhere in France, but with a heavy heart, as this meant permanently leaving his home and his family. Finally, he was presented with an opportunity to start a brewery. Thus, after the ruinous crash, Jean Vercour turned away from early capitalist financial ventures completely and made a new start both socially and professionally.

Evelyn, on the other hand, endeavored to influence politics directly: he signed a petition to the parliament that sought to hold the directors of the South Seas Company responsible for the disaster. Fortunately, after the crash John Evelyn was able to use his wife's fortune and loans from a friend to avoid financial problems. His social reputation suffered no harm. He moved to London and eventually obtained the prestigious post of Commissioner of Customs, which he held for forty years.

On the left: excerpt from the letter book Jean Vercours
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