Malcolm Balen - A Very English Deceit - The Secret History of the South Sea Bubble and the First Great Financial Scandal

Taxes, however, were not the only source of revenue to a government in financial difficulty. The Whig government had tried to capitalise, on behalf of the Exchequer, on the rage for gambling. It launched a national lottery in 1694, selling tickets for £10 each, with a first prize of £1,000 a year for sixteen years.

The national lottery was not a lottery as we understand it today, because the competitors could not lose. Purchasers of tickets were automatically entitled to a government annuity, an annual payment at a fixed rate of interest for many years ahead, in return for the money they had subscribed through the lottery. But, in addition, if they were lucky, they could win a much bigger sum. Rather than a game of chance, the lottery was a device to attract people to lend money to the government for a guaranteed rate of return, but with the bait of prize money. It was an exercise in creating a cash flow for the government, rather than a profitable enterprise for the Treasury. Adventurers, as they were called, bought tickets which entitled ‘the Bearer to an annuity of one Pound or (by Chance) to a greater yearly sum for Sixteen Yeares’. It was worth taking the chance: no stake money could be lost, and there were 2,500 ‘fortunate’ tickets, with one prize of £1,000 a year, nine at £500 and twenty at £100. The bulk of the prizes, two thousand in all, were worth £10 yearly to the winners.

For gamblers, the national lottery draw was as popular in the seventeenth and eighteenth centuries as it is today. The draw took place in front of excited crowds in a public place, sometimes at the Banqueting House in London. Two huge wheels, more than six feet high, turned slowly in the centre of the floor. As they rotated, a large wooden box, containing thousands of tickets, started spinning, then faster and faster until it became a blur. At a given signal the wheels were halted, and, when the box stopped moving, the winning tickets were removed through its small wooden doors.

In 1710, a German visitor to London, one von Uffenbach, the traveller who had also witnessed the country’s blood-sports, watched a lottery draw and was struck by the scale and professionalism of the enterprise. Then, as now, it was vital to prevent fraud. Twenty members of the lottery team sat at long, narrow tables to cut up the tickets, which were engraved in copper and printed by the sheet, with intricate flourishes pricked out around the numbers. To guard against cheating, the sheets were firmly screwed down to the tables, and cut with penknives, using perforated rulers so that the tickets had a jagged edge. When a winner claimed a prize, his ticket, and that held by the promoters, were put together to see if the two matched. ‘The most curious things of all,’ noted von Uffenbach, ‘are the two great machines into which the tickets are thrown, jumbled together and drawn … The machine was a great round box of excellent workmanship, which was suspended in the middle on two iron nails, so that it could be turned round easily with little trouble by means of the iron handles at the side.’

The lottery held out the prospect of riches and social advancement impossible via humdrum work. Newspapers trumpeted stories about the lucky winners in their columns, stoking up people’s hopes that they too would get rich quickly – that, in a game which required no skill, it might be their destiny to become wealthy.

The lottery merged seamlessly with the culture of gambling on the stock market and soon the stockjobbers were dealing not just in shares, but in lottery tickets too. The lottery also infected the age, helping to spark hundreds of seedy schemes and scams. The advertising columns of the press were filled with get-rich-quick schemes run by people from all walks of life. Epsom had a lottery ‘performed by Mr Cope the undertaker’. Bellamy’s Chichester Lottery offered a £500 prize for a five-shilling ticket. There was a ‘New Monthly Chance’ in which it was ‘impossible for the adventurer to lose all his money’, the draw to take place at the Barbadoes Coffee House in Exchange Alley. ‘The Fair Adventure or Even and Odd’ claimed to have 5,000 prizes, out of only 10,000 tickets, ‘The New Golden Adventure’ a prize for every four tickets. A lawyer from Middle Temple organised a lottery to sell his law books; a chemist ran a lottery advertising his medicinal wares: ‘Warham’s Invention: where all are winners’. Women, too, seized their opportunity. In the Flying Post of 26 May 1698, this advertisement appeared: ‘A New Lottery, call’d, The Lady’s Invention; or Six Pence well ventured; Whereby the Adventurer, if fortunate, for 6d only, may get £1000 and £2000 for 1s 6d … This being an Invention of the Female Sex, several Ladies of Quality have ventured considerable Sums in it. Tickets to be had at most eminent Coffee-Houses’.

This last was almost certainly a fraud, one of many which forced the Whigs at the turn of the century to ban lotteries altogether. But the damage had already been done. The lowest return on an initial investment in the 1694 lottery was 60 per cent. It was simply storing up financial trouble for future generations, which would have to repay the debt. In effect, the wars were being paid for on the never-never, the result of a tacit conspiracy among the politicians to pay high rates of interest on huge debts which could never be quitted. But the rules were about to change.

In 1710, after much manoeuvring behind the scenes, the Tories wrested power from the Whigs. The new Chancellor of the Exchequer, Robert Harley, had become Queen Anne’s favourite, not least because he had befriended her chambermaid and through her had insinuated his way into his monarch’s affections. But he had also managed to overturn the government because, unlike the Whigs, he was pledged to peace. The task facing Harley was enormous and could be measured by the debts he had inherited. In total the government owed more than £8 million, of which the Navy alone owed half. Yet Harley could find only £5,000 in the Exchequer’s kitty.

One problem was that the size of the nation’s debt had outpaced the development of any centralised machinery to process taxes. The Treasury, for example, relied on sticks made out of hazel to account for its loans. These ‘tallies’, as they were called, were split in the middle and notched according to the amount of money that had been loaned, with the depositor retaining one half and the Treasury the other. Such was the country landowners’ belief in the financial incompetence of the outgoing Whig government that they were convinced the Treasury must have mislaid their money. Robert Walpole wrote that ‘in every coffee-house and ale-House I may hear it with confidence asserted that thirty-five millions were lost to the public during the late administration’. Though the rumour was false, it seemed too plausible not to be true – why else were taxes so high and still more money needed to feed the great maw of the military machine?

When he took office, Harley knew he needed a plan to bail out the country and keep himself in power. But to find the money he so desperately needed there were few places to which he could turn. Poor Harley found it was virtually impossible to borrow money from the Bank of England or the East India Company, because of establishment opposition to the newcomer in power. The Whig-dominated City thought a Tory government was bad for business and put obstacles in his way. The election of directors, too, both to the Bank and to the East India Company, was in the grip of the Whigs. The Governor of the Bank of England, his deputy and all twenty-four directors were all Whigs, as were twenty out of the twenty-four directors of the East India Company. The Bank had even tried to persuade the Queen to block Harley’s appointment, by giving her an ultimatum: if she sacked the Whig government it would refuse to hand over a £100,000 loan it had promised. The Queen stood firm and went ahead anyway.