South Sea Bubble Short History
The South Sea Bubble was a complex event, the product of intersecting financial, legal, political, and cultural factors. This short history is just an overview, intended to provide a context for research in the South Sea Bubble Collection. For additional resources, please see the related reading section on the previous page on this site.
The South Sea Company was formed in 1711, supported by Robert Harley as a Tory competitor for the Whig Bank of England. The company was promised a monopoly of all trade to the Spanish colonies in South America in exchange for taking over and consolidating the national debt raised by the War of Spanish Succession (1701-1714). The value of this promise, however, was closely tied to the outcome of the war.
|Figure from engraving in Het Groote Tafereel der Dwaasheid, 1720.
While the Treaty of Utrecht effectively ended the war in 1713, it curtailed the scope of trade opportunities for the South Sea Company by confirming Spain’s sovereignty over its new world colonies. The South Sea Company was left with limited options in the slave trade, the interest to be paid by the government on the loan from the South Sea Company, and narrowing trade opportunities in the Spanish colonies in South America. The South Sea Company did not even engage in its first trade voyage to the South Seas until 1717, and the potential for South Sea fortune slipped even further from grasp when the fragile relationship between Spain and Britain weakened in 1718.
Although unsuccessful in South Sea trade, the company did effectively persuade the British government to approve the conversion of successive portions of the national debt into South Sea Company shares. Building on the war debt conversion of 1711, Parliament authorized the South Sea Company in 1719 to assume an additional portion of the national debt.
In January of 1720, South Sea Company stock was trading at a modest £128. In an effort to stir up popular interest in the company’s stock, the directors circulated false claims of success and fanciful tales of South Sea riches. The share price rose to £175 in February. Interest in the company was furthered along in March when the government endorsed a proposal from the company to assume yet more of the national debt in exchange for shares of South Sea Company stock. The South Sea Company’s proposal was chosen over that of its chief competitor, the Bank of England. With investor confidence mounting, the share price climbed to approximately £330 by the end of March.
The South Sea Bubble was not an isolated bubble event in 1720. As the South Sea Bubble was developing, a general interest in joint-stock investment opportunities was also picking up pace. By the middle of 1720, sometimes known as the “Bubble Year,” the market was flooded with a remarkable range of new ventures, each creating smaller bubbles as the speculative frenzy mounted. South Sea Company stock benefited from the investor mania and by May it was at £550.
The Bubble Act was passed in June, requiring all joint-stock companies to receive a royal charter. The legislation had been introduced by the South Sea Company, presumably as a means of controlling competition in the burgeoning market. The South Sea Company received its charter, perceived as a vote of confidence in the company, and by the end of June its share price had spiked to a peak of £1050.
Investor confidence began to wane, however. The sell-off began by early July and the collapse occurred quickly. By the end of August stock was valued at less than £800. By September the share price had plummeted to £175, devastating institutions and individuals alike. In 1721 formal investigations exposed a web of deceit, corruption, and bribery that led to the prosecution of many of the major players in the crisis, including both company and government officials.