South Sea bubble
The South Sea Bubble (1711 - September 1720) is the name given to the economic bubble which occurred due to overheated speculation in, and subsequent disastrous collapse of, the South Sea Company.
The company, formed in 1711 by Robert Harley, was granted exclusive trading rights in Spanish South America. The trading rights were pre-supposed on the successful conclusion of the War of the Spanish Succession, which did not end until 1713, and the actual granted treaty rights were not as comprehensive as Harley had originally hoped. In return for these rights, the company took on around £10 million of government bonds, exchanging them with the bondholders for stock in the company at 6% interest.
The company did not undertake a trading voyage to South America until 1717 and made little actual profit. Furthermore, when ties between Spain and Britain deteriorated in 1718 the short-term prospects of the company were very poor. Nonetheless, the company continued to argue that its longer-term future would be extremely profitable. In 1717 the company took on a further £2 million of public debt.
In 1719 the company proposed a scheme by which it would take on the entire remaining national debt of Britain (£30,981,712), offering its own stock at 5% in exchange for government bonds in a deal lasting until 1727. The Bank of England proposed a similar deal. The company hoped to make a considerable profit and did much to advertise the proposal which was accepted in a slightly altered form in April, 1720. The Chancellor of the Exchequer, John Aislabie, was a strong supporter of the scheme.
The company then set to talking up its stock with "the most extravagant rumours" of the value of its potental trade, and there was an enormous wave of "speculating frenzy". The share price had risen from the time the scheme was proposed: from £128 in January 1720, to £175 in February, £330 in March and, following the scheme's acceptance, to £550 at the end of May. A number of other joint-stock companies then joined the market, making usually fraudulent claims about other foreign ventures or bizarre schemes, and were nicknamed 'bubbles'.
In June the Bubble Act (repealed in 1825) required all joint-stock companies to have a Royal Charter. The grant of a charter to the South Sea Company was an added boost, its shares leaping to £890 in early June. This peak encouraged people to start to sell; to counterbalance this the company's directors ordered their agents to buy, which succeeded in propping the price up at around £750. The price finally reached £1,000 in early August and the level of selling was such that the price started to fall, triggering bankruptcies amongst those who had bought on credit and increased selling (ie short-sellers). The price fell slowly throughout August down to around £700. The attempts by the company directors to talk up the price failed and it continued to fall into September; the stockholders had lost confidence and a run started.
By the end of September the stock had fallen to £150. The company failures now extended to banks and goldsmiths as they could not collect loans made on the stock, and thousands of individuals were ruined (including many members of the aristocracy). With investors outraged, Parliament was recalled in December and an investigation began. Reporting in 1721, it revealed widespread fraud amongst the company directors. Robert Walpole, who had argued against the scheme from the beginning, was forced to introduce a series of measures to restore public confidence.
The collapse coincided with the fall of the Mississippi Scheme of John Law in France.
The South Sea Company continued until the 1850s.
