## Chapter 122: The Game of Capital (Part 1)
Lionel leaned back on the sofa, a smile playing on his lips. “I wonder if you have any basic understanding of the stock and bond markets?”
Arthur pondered for a moment. He had arrived in London from the Yorkshire countryside, his first stop being the heart of 19th-century global finance – the London Stock Exchange.
Unfortunately, or perhaps fortunately, he witnessed the second major crash of the London Stock Exchange. The previous one dated back to the South Sea Bubble in the 18th century.
In 1720, the South Sea Company, which held a monopoly on British trade with Spanish colonies in South America, fueled the fervor of the London Stock Exchange through dazzling investment and trade plans, along with various half-truths and supposed insider information.
When the South Sea Company directors realized that making money from the stock market was far easier than their tedious slave trading business, they felt like they had stumbled upon a new world.
From April 1720, the South Sea Company began releasing numerous plans and boasting about their grand vision in newspapers.
According to records, during that period, the South Sea Company board announced 11 fishing plans, 10 insurance plans, and the future establishment of two international remittance companies, 12 American colonial or trading companies, 20 real estate and construction companies, eight companies dedicated to supplying London with coal, livestock, feed, and road and bridge construction, 12 textile companies specializing in silk, cotton, and hemp, 15 mining companies, and over 60 other obscure enterprises. They even audaciously declared that the South Sea Company would pay a 60% dividend at Christmas.
However, these seemingly unrealistic visions, to the average person, managed to fool the sharpest minds in Great Britain.
Investors saw that the South Sea Company’s initial purpose was to establish a giant monopoly to develop trade in the South Atlantic. To this end, the South Sea Company also took over about £10 million in floating government bonds from the British government.
This was a giant company backed by the British government. How could their promises deceive investors?
Driven by the allure of immense profits, investors completely lost their rationality and judgment. They frantically purchased the company’s stock, ultimately pushing the South Sea Company’s share price from £120 to £1020 in just three months.
However, the South Sea Company’s financial fairy tale soon met its end.
At the end of July, companies began filing lawsuits against the South Sea Company, accusing them of serious debt defaults.
Other companies with debt ties to the South Sea Company gradually discovered something was wrong. After exchanging information, they realized that the bastards were playing a game of empty promises.
To limit their losses, they ultimately decided to petition Parliament jointly, demanding that the British Treasury and Supreme Court intervene to investigate the South Sea Company’s accounts.
As soon as news of the South Sea Company’s alleged accounting fraud spread, the company’s share price plummeted from the opening bell of the London Stock Exchange on August 25, 1720. In just a month, their stock price fell from its peak of £1020 to £190.
Countless investors went bankrupt. Almost overnight, the rooftops of London were filled with South Sea Company shareholders.
The South Sea Company’s fraud case also directly caused political instability in London.
King George I issued several Privy Council orders demanding a thorough investigation into the South Sea Company case.
Parliament immediately arrested all members of the South Sea Company board, confiscated all their property, and imprisoned George Caswell, a South Sea Company director who bore direct responsibility, in the Tower of London. They then hastily passed the “Bubble Act” and formed a 13-member special committee to investigate the South Sea Company’s collapse.
Regardless, the South Sea Company’s bankruptcy still resulted in a massive loss of millions of pounds, plunging the London Stock Exchange into a long period of stagnation for decades.
One of its few positive impacts might have been the birth of Britain’s first truly substantive prime minister. Robert Walpole, the then Chancellor of the Exchequer, secured the top position in the cabinet by skillfully handling the South Sea Company case, establishing the British tradition of the Chancellor of the Exchequer leading the cabinet.
The crisis Arthur encountered was the banking crisis of 1825-1826.
The reason behind this crisis was quite simple, essentially no different from the South Sea Company case.
Simply put, before the enactment of the “Banking Act” in 1826, all banks established in England could freely issue bank notes.
Bank notes were essentially pounds sterling. Any depositor could exchange them for their equivalent value in gold at the bank.
However, in the 19th century, gold production was far less than the growth of British wealth. This directly led to numerous instances of banks, both large and small, recklessly printing banknotes in their scramble for market share, even without sufficient gold reserves.
The consequences of printing empty banknotes were obvious. When customers went to the bank with bundles of banknotes to exchange for gold, the bank tellers could only stare at them in disbelief.
As news of this spread, it naturally triggered a mass panic among the British people. They all rushed to the banks, demanding immediate redemption for their banknotes. The doors of major banks were practically trampled down.
Faced with this situation, 70 banks with insufficient gold reserves had to announce a suspension of payments.
The government had no choice but to urgently order the deployment of military and police to maintain order in various regions, preventing riots.
To plug the hole, the Bank of England, the largest bank in Great Britain, had to use its own gold reserves to help. However, their assistance almost dragged them down with it.
At the crucial moment, the partners of the Bank of England were on the verge of begging Nathan Rothschild and Alexander Baring, the two London bankers who held vast amounts of gold.
In this time of crisis, Rothschild Bank and Baring Bank, under the persuasion of Tory heavyweights such as Lord Liverpool, the Duke of Wellington, and Sir Robert Peel, finally agreed to urgently allocate most of their gold reserves to the Bank of England.
To demonstrate their loyalty to the Tories, the Rothschild family, the moneybags of the Duke of Wellington, even mobilized almost all the gold reserves from their four branches in Paris, Naples, Frankfurt, and Vienna. They also used their connections to obtain some gold reserves from Russia at a high price, barely managing to scrape together £11 million worth of gold to plug the hole for the Bank of England.
Although the crisis was somehow weathered, 70 banks still declared bankruptcy and exited the London Stock Exchange afterwards.
And so, the London Stock Exchange, barely recovered from the shadow of the South Sea Company case, plunged into another trough.
Arthur was just a poor boy from the countryside at the time, but even so, he couldn’t help but feel a surge of exhilaration watching the capital giants on the London Stock Exchange looking dejected.
Tens or hundreds of thousands of pounds lost in a minute, exhilarating even if it was a loss.
It was even more exhilarating if it wasn’t his money that was lost.
Arthur picked up his teacup, pondering for a moment before speaking, his words as concise as possible. “I do have some concerns about stock trading.”
His words were short, but enough for Lionel to understand his subtle resistance.
Lionel smiled. “No problem. If you don’t intend to invest in stocks, I have many other options for you. Let me list the advantages and disadvantages of different asset allocations for you: real estate, bonds, and stocks. You can decide which one suits you best.
Also, stocks are not as scary as the British public thinks. According to our analysis and judgment, the London Stock Exchange is at its lowest point in recent years and could bounce back at any time. It’s unlikely to get any lower in the future.”
Arthur couldn’t help but frown slightly at this.
He couldn’t shake the feeling that he had heard this before.
The Red Devil, standing beside him, couldn’t help but urge him. “Arthur, don’t hesitate! Mammon is beckoning you. Buy the dip, buy the dip hard!”
Arthur finally grasped the key words.
He couldn’t help but ponder a simple question: Which generation of leeks is greener, the 19th century or the 21st century?
However, Lionel’s enthusiasm sparked a flicker of interest in him.
“So, what direction do you think is good to invest in right now?” he asked.
Seeing that Arthur was finally loosening up, Lionel’s smile widened. He began to respond.
“Don’t worry, you’re not the first customer to use Rothschild Private Financial Services. While we typically don’t disclose customer private information, this isn’t exactly a secret, so I can openly tell you: the Duke of Wellington is also one of our key clients, and your superior, Home Secretary Sir Robert Peel, also has some funds under our management.”
Lionel finished his words, and before Arthur could be moved, Dumas couldn’t hold back.
“Then, how much personal capital does Rothschild Bank’s private financial service require?” he asked.
Lionel smiled. “I think it mainly depends on whether we have a good trading relationship with our clients. Personal capital is always our secondary consideration. But if you’re Mr. Hastings’ friend, I think £1000 would be enough.”
Dumas pondered for a moment, the French fat man gritted his teeth and said, “You wait, I’ll try my best.”
Hearing this, Lionel turned to Arthur with a smile. “So, Mr. Hastings, can I start the introduction?”
Arthur nodded. “Of course, please.”
Tonight, I’ll write this chapter until the wee hours of the morning. I’ve been stimulated, so all my readers, wait for me.
(End of Chapter)