South Sea Bubble Bursts

The South Sea Bubble is the name given to speculative activity surrounding the South Sea Company. The company, established in 1711, traded in the South Atlantic and was a prominent player in the Transatlantic slave trade. Traded on the stock exchange, the share price rose rapidly as profit seemed assured. In 1720 the market collapsed. It was the first major collapse of a share based trading company. It’s collapse affected many investors and was a major test of the banking system.

South Sea Bubble Bursts. Collapse of the South Sea Company

Monopoly for the South Sea Company

The South Sea Company was large. In 1720 it loaned the government £7 million and under wrote the national debt of £30 million. In return, Parliament granted the South Sea Company a monopoly on trade from Africa to South America. This monopoly was viewed as being highly lucrative. The price of shares in the company rose rapidly. They were ten times the pre-monopoly prices very quickly. Speculation was rife, profit seemed easy.
Many entrepreneurs and some chancers launched companies intending to service the South Sea Companies trade in the atlantic. There was some logic to this, the example of the East India Company showed that much of the mechanics of trading intercontinentally were through third parties. None of it was based on true analysis of the value of the companies monopoly though, or of likely contracts.

Speculation and the Bursting of the South Sea Bubble

Speculation in the company had become widespread. It was the first time that share ownership had become a national interest. Savings were invested. Some borrowed to invest in the company. Then, as the shares were massively overvalued, the market collapsed. As the true value of the company was realised the value of shares plummeted. WIth this savings of thousands of people were lost.

The crash of share value is known as the South Sea Bubble Crisis or collapse. It was of national significance. The company was the underwriter for the national debt, it was effectively bankrolling the war against the French. Suddenly the national economy was threatened because of the collapse of the share value. The directors of the South Sea Company were arrested and their assets seized.

Financial Despair

Thousands of people suffered financial hardship as a result of the collapse. One example is the number of members of Parliament who had invested heavily in the company. These men had all of the information on the companies trading and the terms of deals with Government at their disposal. They had confidence in the company. 462 members of the house of commons and 112 of the house of Lords were shareholders.

The collapse left people destitute. Many suicides were attributed to the financial collapse of the company. The Riot Act had to be read to prevent disturbances outside Parliament. The inquiry into the collapse led to the Chancellor of the Exchequer and several other members of Parliament being expelled: almost unique in Parliamentary history.

The public pointed at politicians and the monarchy for the collapse. Parliament looked for solutions. The solution came from Robert Walpole. He had spoken out against the deal for the South Sea Company from the outset. He was appointed Chancellor. Debt resulting from the Bubble bursting was split between three organisations to spread the burden. The Bank of England, Treasury and Sinking Fund each bore some of the weight of debt.

The South Sea Company after the crash

The South Sea Company continued trading after the stock market collapse. One of the key areas in which they worked was the trade in Slaves. Complex agreements between European powers meant that trade into South America could only be done with a permit from Spain. Spain was not allowed to trade in slaves to its own colonies. The Spanish issued an Asiento permit to enable the trade to their colonies by foreign powers. Britain won the Asiento contract at the 1713 Treaty of Utrecht. The slave trading was done by the Royal African Company on behalf of the South Sea Company.

Slave Trading by the South Sea Company continued after the bubble burst. Its peak was in 1725. The Company had other commercial interests. One was an ‘Annual Ship’ of other goods to South America. These were very profitable but irregular. The Company also participated in Whaling. Despite the company name, this was in Arctic Waters.

The South Sea Company continued trading until 1838. It was part of the Banking system alongside the Bank of England and serviced the National Debt. This debt was consolidated several times. The government had its debt to the South Sea Company written off as the First World War broke out.

Source Material and Essays

The “South Sea Bubble”, 1720 by Helen J. Paul. European History Online.

Oxford Scholarship. The South Sea Bubble, Peter Temin and Hans-Joachim Voth. DOI:10.1093/acprof:oso/9780199944279.003.0006

Harvard Business School offer an overview of the circumstances in which the share price crashed.

Victorian Web has a brief introduction to the South Sea Company.

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