South Sea Bubble: The South Sea Company 1711 – 1720

I have been doing a lot of research lately on economic bubbles and most recently I came across what is known as the south sea bubble. 

All through history, one subject appears again and again. How to make a lot of money quickly and this always almost ends in disaster, albeit deliberately planned or through sheer stupidity. Either way this cycle just seems to continue like clock work and the south sea bubble is no exception.

In 1720 the whole of England became involved with what has since become known as The South Sea Bubble.

In 1720, in return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill, which allowed the South Sea Company a monopoly in trade with South America.

The company underwrote the English National Debt, which stood at £30 million, on a promise of 5% interest from the Government.

 

During The Mania Phase
South Sea Bubble

Though the company’s trading rights with Spanish colonies were quite modest, its executives whet investors’ appetites with incredible tales and rumours of South American gold and silver just waiting to be imported back to Europe. The company successfully sparked a speculative frenzy for its shares in 1720, with stock prices soaring from £128 in January, £175 in February, £330 in March and £550 in May. The company was able to support unusually high valuations thanks to a £70 million fund of credit that was granted by the King and Parliament for the purpose of commercial expansion (Dickson, 1963).

Shares were offered to a myriad of politicians at market prices. However, these politicians did not purchase the shares in a conventional sense, but held on to their shares with the option sell them back to the South Sea Company at a later date, allowing them to keep all profits made. This purchasing arrangement enticed many government employees as well as the King’s mistress. High ranking shareholders helped to pump the value of South Sea Company shares in addition to lending an air of legitimacy to the scheme

As South Sea Company shares bubbled up to incredible new heights, numerous other joint-stock companies IPOd to take advantage of the booming investor demand for speculative investments. Many of these new companies made outrageous and often fraudulent claims about their business ventures for the purpose of raising capital and boosting their stock prices.

Eventually this bubble burst.

The Sad Outcome of This Bubble Bursting

When the stocks crashed and people all over the country lost all of their money. Porters and ladies maids who had bought their own carriages became destitute almost overnight. The Clergy, Bishops and the Gentry lost their life savings; the whole country suffered a catastrophic loss of money and property.

Suicides became a daily occurrence. The gullible mob whose innate greed had lain behind this mass hysteria for wealth, demanded vengeance. The Postmaster General took poison and his son, who was the Secretary of State, avoided disaster by fortuitously contracting smallpox and died!

The South Sea Company Directors were arrested and their estates forfeited. (Different story today, not one banker has been arrested for their crimes they committed which lead to the 2008 financial crisis.)

Unfortunately like all financial crisis’s, bubbles and disasters…… There are winners and losers and for as long people allow these bankers and financiers to get away with it, it will always continue.

Anyway, enough of the morbid view on life, enjoy the clip below to lighten the mood a Little on this subject 🙂

South Sea Bubble – Comedy Sketch

So there you have it, I hope you got value, If so, I would greatly appreciate if you commented below with your thoughts and shared on social media. Also remember to subscribe to keep updated on my latest content.

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