The South Sea Bubble occurred at a rather turbulent time. It occurred at the beginning of the 18th century when kings' eagerness to conquer the New World was in full swing. At the same time, in Europe, there were incessant wars between the different countries for the control of the Americas and world domination.
What is the south sea bubble?
The South Sea Bubble was a speculative bubble that occurred in Britain in the early 18th century, leading to the crash of 1720. The speculative bubble occurred around the shares of the South Sea Company, an international trading company.
The South Sea Company
The South Seas Company which was created in 1711, assumed, in exchange for the monopoly on the seat, all the British debt on the costs of the United Kingdom's participation in the conflict.
Exclusive trading rights (the commercial seat) had been granted to the company as part of the Treaty of Utrecht that ended the War of the Spanish Succession in 1713.
Since direct trade with the Spanish colonies was severely restricted, many British investors saw the Company's seat as a fabulous business opportunity.
The founders of the South Sea Company began a campaign doubly challenged by its ethics. Before the announcement of the company's plan to buy public debt, "interested" persons discredited Britain's ability to finance itself, reducing the value of that debt.
Then, to encourage debt holders to trade for shares, they spread the rumor aloud of the great value of the company's business operations, including its (worthless) South American monopoly.
The South Seas still had a significant slave trading operation, although it was not as lucrative as had been expected. In any case, shortly after the debt purchase plan was announced, the South Sea Company's shares were selling for 123 pounds per share (as opposed to the 100 pounds it was valued at in the previous announcement, and the 55 pounds it received from the deluded debt holders).
What was the cause of the South Sea Bubble?
The company seemed to be doing well until about 1718 when war with Spain led Spanish interests in South America to seize the company's properties. Although the company lost some assets, the real loss since the attacks came from bad publicity.
In 1719, the South Sea Company began a campaign to protect its insiders. It began a new marketing campaign: again touting the high value of its South Seas monopoly. Since senior members of the government held the options, they participated in spreading the rumor, and their cache lent credibility to the rumor.
The share price soared from around £100 per share to close to £1000, and insiders reaped extraordinary profits.
The South Sea crash
In 1720, the price per share reached 1050 pounds. When this price was reached, everything began to fall apart, the commercial business was not working and it was increasingly clear that it would never succeed, many important shareholders sold their shares, but the last straw came when the board of directors began to get rid of theirs.
It was during this year that the Bubble Act was passed.
The value plummeted and by the end of that year, the South Seas share price was down to £100. Attempts were made to halt the fall but all the loans that had been granted caused many banks to fail, investors could not repay the loans and the share guarantee was worthless.
Why did the South Sea Company fail
The Treaty of Utrecht did not bring, as expected, a trade explosion. Instead, Spain limited Britain by allowing only a limited amount of trading, even taking percentages of the profits. But that was not all. Spain also taxed, annually, the importation of slaves.
On the other hand, it also imposed very strict limits on Britain on how many ships they could send to make general trade: one ship per year.
Evidently, these unexpected and limiting conditions could not generate anywhere near the profit that the South Sea Company expected to keep everything afloat, so the hoax campaigns began, which included politicians, and even, in 1718, King George I who became governor of the company to give more credibility to the deceit.
Who lost money in the South Sea Bubble?
This crisis led to the ruin of thousands of people, from professional investors to small savers who had invested all their money in the cause of that company. Many of them lost their entire investment. Even Isaac Newton himself had invested in this company, losing all the money he had put there.
How the South Sea Bubble was resolved
Predictably, the public pointed the finger at monarchs and politicians as the culprits for the collapse.
The House of Commons, seeking to understand what had happened, conducted an investigation that turned into a financial and parliamentary scandal, as it uncovered the enormous scale of corruption and bribery that had taken place.
Indeed, among the powerful people in England who figured in the scheme were members of the House of Commons. The directors were arrested, losing their property. Some government officials were found guilty of corruption and arrested.
Parliament began to look for solutions and found them in Robert Walpole, who was against the agreement with South Sea Company from the beginning. He was appointed Chancellor, and the debt resulting from the South Sea financial fiasco was divided into three: the Sinking Fund, the Bank of England, and the Treasury, each bore a part of the debt, to spread its burden.
In January 1721, Parliament prohibited the directors of South Sea from leaving the country, as well as from being directors of the company and the Bank of England. Also, their estates were confiscated by Parliament, so that funds could be given to the victims of the crash, and to shore up the company's credit, which had not been dismantled and remained in operation until 1853.
Why was the Bubble Act passed?
Officially:“the Bubble Act is an English statute passed on 9, June 1720 to prevent corporate fraud. It forbade all joint-stock companies not authorized by the royal charter.”
“Its official name was An Act for better securing certain Powers and Privileges, intended to be granted by His Majesty by Two Charters, for Assurance of Ships and Merchandize at Sea, and for lending Money upon Bottomry; and for restraining several extravagant and unwarrantable Practices therein mentioned.”
Nonetheless, there are some explanations as to what this act was actually meant for. It was done shortly before the burst and one of the most likely main reasons is that the company was seeking to prevent other bubbles that might compete with it from forming.
Other reasons also include that it was seeking to prevent the speculation that the company had caused, and the formation of non-charter companies and thus lessen Parliament's responsibilities in regulating business.
How long did the South Sea Bubble last?
Even with its ups and downs, the South Sea craze lasted at least 5 years, until the lie fell of its own weight.
How much was the South Sea Company Worth?
At its peak, based on share price, the company was valued at 420 million pounds, which was twice the value of Britain’s land.
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