What was the South Sea Bubble of 1720?

The South Sea Bubble was the financial collapse of the South Sea Company in 1720. Investors paid inflated prices for the company's stock, and when confidence failed the price crashed and many people were ruined. Historians at Oxford describe it as the first modern financial speculation crisis. The company's trading business was weak, and its real function was financial: converting government debt into company shares. [1] [2]

The company was founded in 1711 by Robert Harley, who worked with the banker John Blunt. It was a joint-stock company whose profits could help pay down the public debt, and holders of government debt received shares in it. In return it received a trade monopoly with South America. Britain was then burdened with debt from the War of the Spanish Succession. Harley was a Tory, and one account says he also saw the company as a rival to the Whig-aligned Bank of England. [2] [3]

At the Treaty of Utrecht in 1713, Britain gained the asiento, the right to supply 4,800 enslaved Africans a year to Spanish America for thirty years, and the company took over this contract. The sources give different prices for it: the Royal Museums Greenwich says £9,500,000, while the EBSCO summary says £7.5 million. Profits from the slave trade were expected to be enormous but were not. The first annual trading voyage was delayed until 1717, and trade stopped when war with Spain resumed in 1718. [1] [3]

In 1719 the directors proposed to take on the whole national debt, mostly bonds and annuities, by exchanging it for company shares. Parliament accepted in April 1720. Historian Emma Rothschild describes the company's central operation as a series of debt-for-equity swaps, with the expectation in summer 1720 that the company would own about 80 percent of outstanding public debt. [3] [4]

According to the EBSCO account, Blunt and the directors pushed prices up by allowing purchases by instalment, issuing loans on favorable terms, and offering new subscriptions. The stock rose from £128.5 at the start of the year to £1,000 in July. Oxford historians add that when income fell short, the company issued more stock, artificially inflating values. [3] [2]

Hundreds of imitation joint-stock companies appeared. The Bubble Act of June 1720 required parliamentary permission to form a company. One source says the South Sea Company itself lobbied for the act to remove competitors drawing off speculative capital. [3] [5]

Insiders, including Blunt, began selling in August, and by the end of September the stock had fallen to £135. Banks failed, thousands of investors went bankrupt, and unemployment rose. Losers reportedly included courtiers, nobles and ministers; Isaac Newton supposedly lost around £20,000. [3] [2]

Parliament investigated and found widespread fraud among directors and some officials. Directors' profits of about £2 million were confiscated and redistributed to shareholders in 1721. The Library of Congress notes that directors were arrested and the Chancellor of the Exchequer was ousted. Robert Walpole arranged a rescue in which the Bank of England and the East India Company took on nearly £4 million of South Sea government debt, which the Oxford historians say helped avoid a public audit of the company's records. [3] [6] [2]