The South Sea Bubble

The South Sea Bubble: An 18th-Century Economic Speculation Bubble

• The South Sea Company was founded in 1711 as a public-private partnership to consolidate and reduce the cost of the national debt.

• The Company was granted a monopoly to supply African slaves to the islands in the "South Seas" and South America, but never realised any significant profit from it.

• The Company expanded its operations dealing in government debt, and its stock rose greatly in value, peaking in 1720 before suddenly collapsing.

• The Bubble Act 1720, which forbade the creation of joint-stock companies without royal charter, was promoted by the South Sea Company itself before its collapse.

• Many investors were ruined by the share-price collapse, and the national economy diminished substantially.

• The founders of the scheme engaged in insider trading, by using their advance knowledge of the timings of national debt consolidations to make large profits.

• Huge bribes were given to politicians to support the Acts of Parliament necessary for the scheme.

• Company money was used to deal in its own shares, and selected individuals purchasing shares were given cash loans backed by those same shares to spend on purchasing more shares.

• A parliamentary inquiry was held after the bursting of the bubble to discover its causes. A number of politicians were disgraced, and people found to have profited immorally from the company had personal assets confiscated proportionate to their gains.

• The Company was restructured and continued to operate for more than a century after the Bubble.

• The slave trade was a significant part of the Company's work, and its trading activities offered a financial motivation for investment in the company.

• The company was heavily dependent on the goodwill of the government and experienced changes in management when the government changed.The South Sea Company was owned by prominent individuals including the Prince of Wales, Whig politicians, and businessmen. The company's share value had fallen, and the new administration allowed the company to issue new shares to stockholders worth £10 million, half the share capital issued in the entire country. In 1718, the company's assets in South America were seized due to the war with Spain. In 1719, a new scheme was presented to the House of Commons to improve the national debt by converting annuities to South Sea stock. The government would pay 5% per annum on the stock created. In March of the same year, there was an attempt to restore the Old Pretender to the throne of Britain. In April 1720, the South Sea Company embarked on a show of gratitude to its friends and sold shares at the current market price to select individuals. The company set to talking up its stock with "the most extravagant rumours" of the value of its potential trade in the New World. A large number of other joint-stock companies had been created, making extravagant claims, nicknamed "Bubbles." A committee was set up to investigate bubble companies, and the Bubble Act was passed in June 1720. The prohibition on unauthorised joint stock ventures was not repealed until 1825. The passing of the Act gave a boost to the South Sea Company, and its shares leaped to £890 in early June.The South Sea Bubble: A Summary

• The South Sea Company was created in 1711 to reduce public debts and was granted exclusive rights of trade with the Spanish Indies.

• The company reluctantly took on the slave trade, which had shown little profitability when carried out by chartered companies.

• The Asiento contract set a sale quota of 4,800 units of slaves per year, but the company was relatively successful at slave trading and meeting its quota.

• The company established slave reception factories at several locations and had slave deposits at Jamaica and Barbados.

• The South Sea Company's trade in human slavery peaked during the 1725 trading year, five years after the bubble burst.

• The South Sea Company also established the annual ship, which was allowed to send one vessel of 500 tons per year, loaded with duty-free merchandise to be sold at the fairs of New Spain, Cartagena, and Portobello.

• The company's failure to produce accounts for all the annual ships but the first one, and lack of payment of the proceeds to the Spanish Crown from the profits for all the annual ships, resulted in no more permits being granted to the Company's ships after the Royal Caroline trip of 1732–1734.

• The South Sea Company also engaged in Arctic whaling, but the venture was not successful, and the company accumulated a net loss of £177,782 from their eight years of Arctic whaling.

• The company continued its trade (when not interrupted by war) until the end of the Seven Years' War (1756–1763). However, its main function was always managing government debt, rather than trading with the Spanish colonies.

• The price of the company's stock went up from about £100 to almost £1000 per share in a single year, causing a country-wide frenzy—herd behavior.

• The price finally reached £1,000 in early August 1720, and the level of selling was such that the price started to fall, dropping back to £100 per share before the year was out.

• The collapse of the bubble caused bankruptcies among those who had bought on credit, and increased selling, even short selling.

• Parliament was recalled in December, and an investigation began, which revealed widespread fraud amongst the company directors and corruption in the Cabinet.The South Sea Company was a British joint-stock company founded in 1711 to trade with Spanish America, which later became involved in financing government debt, and ended in a stock market crash in 1720 known as the South Sea Bubble. The company's coat of arms featured a ship of three masts in full sail, with the motto "A Gadibus usque ad Auroram" (From Cadiz to Dawn) and the Latin word "Praedico" (I predict) underneath. The coat of arms also included the emblems of Magellan and Cape Horn, two herrings in saltire, and the united arms of Great Britain in a canton. The company had a governor, a subgovernor, a deputy governor, and 30 directors (later reduced to 21). The South Sea Company was involved in financing government debt and trading with Spanish America. The South Sea Bubble was a stock market crash in 1720. The company's coat of arms featured a ship of three masts in full sail. The company's motto was "A Gadibus usque ad Auroram" (From Cadiz to Dawn). The company's coat of arms included the emblems of Magellan and Cape Horn. The company's coat of arms included two herrings in saltire. The company's coat of arms included the united arms of Great Britain in a canton. The South Sea Company had a governor, a subgovernor, a deputy governor, and 30 directors. The number of directors was later reduced to 21. The South Sea Company has been featured in fiction.