South Sea Bubble

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South Sea Bubble popular name in England for the speculation in the South Sea Company, which failed disastrously in 1720. The company was formed in 1711 by Robert Harley , who needed allies to carry through the peace negotiations to end the War of the Spanish Succession . Holders of £9 million worth of government bonds were allowed to exchange their bonds for stock (with 6% interest) in the new company, which was given a monopoly of British trade with the islands of the South Seas and South America.

The monopoly was based on the expectation of securing extensive trading concessions from Spain in the peace treaty. These concessions barely materialized, however, so that the company had a very shaky commercial basis. Nonetheless, it was active financially, and in 1720 it proposed that it should assume responsibility for the entire national debt, again offering its own stock in exchange for government bonds, a transaction on which it expected to make a considerable profit. The government accepted this proposal, and the result was an incredible wave of speculation, which drove the price of the company's stock from £128 1/2 in Jan., 1720, to £1,000 in August. Many dishonest and imprudent speculative ventures sprang up in imitation.

In Sept., 1720, the bubble burst. Banks failed when they could not collect loans on inflated stock, prices of stock fell, thousands were ruined (including many members of the government), and fraud in the South Sea Company was exposed. Robert Walpole became first lord of the treasury and chancellor of the exchequer and started a series of measures to restore the credit of the company and to reorganize it. The bursting of the bubble, which coincided with the similar collapse of the Mississippi Scheme in France, ended the prevalent belief that prosperity could be achieved through unlimited expansion of credit. Legislation was enacted that forbade unincorporated joint stock enterprise.

Bibliography: See studies by L. S. Benjamin (1921, repr. 1968), J. Carswell (1960), and V. S. Cowles (1960).

South Sea Bubble, a series of financial hoaxes, or speculations, in stocks of the South Sea Company which in 1720 produced ruin for many investors. The company, founded by Robert Harley in 1711, was formed on the supposed possibility of a vast increase in the slave trade, particularly in the Pacific, once peace returned after the War of the Spanish Succession (1702–13). However, the Treaty of Utrecht, signed in 1713, provided only very limited possibilities for trade, an annual tax being imposed on imported slaves and the company being restricted to no more than one ship per year. Nevertheless, with the king becoming governor of the company in 1718, popular confidence was enhanced and a wild boom was engendered in which the value of the stock, issued at £100, rose to over £1,000 in the summer of 1719, and the directors even offered to take over part of the National Debt. However, by the end of the year the stock had dropped to £124, and six months later was virtually valueless. While a few holders of the stock had made vast fortunes, the great majority lost very heavily. Some holders fled the country because of their debts, many others committed suicide. A committee of inquiry found that three ministers of the crown had accepted bribes and speculated heavily in South Sea stock. The Chancellor of the Exchequer was sent to prison, the other two had their estates confiscated. The South Sea Company itself remained in existence until 1853, being mainly concerned, after selling its supposed trading right to Spain in 1750, with the Greenland whaling industry.

South Sea bubble. The 1720 financial crisis resulting from the collapse of the South Sea Company. Founded by Harley in 1711 as a Tory alternative to the Whig financial establishment, the company in 1719 proposed (and in 1720 the ministry accepted) to take over three-fifths of the national debt (about £30 million). In return for trading privileges and accepting 5 per cent interest until 1727 and thereafter 4 per cent, the company was to pay £7 million immediately. A fever of speculation followed and its shares rose from 130 per cent to over 1,000 per cent in six months. Other companies climbed on the bandwagon, and in an effort to drive its rivals to the wall, the company spread alarm. Panic selling ensued and the market collapsed, ruining thousands of investors. Walpole produced a plan (which helped to secure his supremacy in the ministry) to stem the disaster by transferring a proportion of the stock to the Bank of England and the East India Company. Subsequent parliamentary investigations, prompted by a public outcry, revealed corruption on a wide scale, which implicated some ministers and George I himself.

Clyve Jones

South Sea Bubble An English financial disaster in which the South Sea Company took over most of the National Debt in 1720 and needed a rise in the value of the shares of the Company. This was achieved not by past trading profits, but by rumours of future ones. Some politicians and even members of the court were bribed with cheap or free South Sea Company shares to promote the company's interests. The shares increased ten-fold in value, and expectations of high dividends rose accordingly. When confidence collapsed, the South Sea Company's shares fell to less than 10% of their peak value, and thousands of investors were ruined. Sir Robert WALPOLE began his long period of office by saving the company and restoring financial stability, and managed to limit the political damage to two of George I's ministers who had been implicated in the scandal.

South Sea Bubble (1720) Speculation in the shares of the English South Sea Company ending in financial collapse. The South Sea Company was founded (1711) for trade in the Pacific. Shares sold so well, and interest was so high, that in 1720 the company volunteered to finance the national debt. The result was intensive speculation with a 900% rise in the price of shares, until the bubble burst in September 1720, bankrupting investors and closing banks. Credit for saving the company and the government was given to Robert Walpole.

South Sea bubble The 1720 financial crisis resulting from the collapse of the South Sea Company. Founded by Harley in 1711 as a Tory alternative to the Whig financial establishment, the company in 1719 proposed to take over three‐fifths of the national debt (about £30 million). A fever of speculation followed and its shares rose from 130 per cent to over 1,000 per cent in six months. Panic selling ensued and the market collapsed, ruining thousands of investors.