The Bank of England was one of the three corporations and owned £3.4 million of that total debt, while the British East India Company owned £3.2 million and the South Sea Company owned £11.7 million. Available at Tate Gallery.
The South Sea Company’s founders and the government were able to convince shareholders to assume a total of £10 million in short-term government debt in exchange for South Sea Company shares.
The South Sea Bubble was not an isolated bubble event in 1720.
More recently, the Bubble has been used as a case study to assess the efficiency of financial markets (Dale et al., 2005, 2007; Shea, 2007).But, how should it be remembered?
Harrison, P. (2001).
But Harris (1994, 1997) has shown that much of what the Bubble Act outlawed had already been illegal, and as a result, it was almost never invoked.Remembering 1720 as a sudden outbreak of madness would let the government off the hook: the bubble did not emerge spontaneously, but was deliberately created (Dickson, 1967). At one point in time, all the money is Britain was not enough to pay down the debts that accrued as a result of the South Sea Bubble.
Others have suggested that the Bubble Act, which accompanied the bubble, hamstrung British finance for the next century.
During this time, South Sea Company shareholders continued to collect a reliable stream of earnings.
The South Sea Company was formed to trade with Asian and Latin American countries. Many attempted to become wealthy through the stock. The Economic History Review, 16(2), 361. The South Sea Company’s proposal was chosen over that of its chief competitor, the Bank of England. However, the South Sea Bubble was popularly supposed to have been caused by fraud and folly. (2005).
How would the public be convinced to exchange lucrative government annuities for equity in a company whose main asset was a reduced rate of interest on those annuities? For further details: New York: B. Franklin. In 1720 the whole of England became involved with what has since become known as The South Sea Bubble. Robert Harley was responsible for creating a mechanism used to fund the British government’s debt that was being incurred during the ongoing War of Spanish Succession of 1701-1713.
The legislation had been introduced by the South Sea Company, presumably as a means of controlling competition in the burgeoning market. A proposal was even made in Parliament to place bankers in sacks filled with snakes and thrown into the Thames River!Carruthers, B. Rational Equity Valuation at the Time of the South Sea Bubble. Most failed. The trick was to lure annuity holders with the promise of capital gains on South Sea shares.
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. The South Sea Bubble of 1720 was a major financial crash in London. ), Dale, R.S., Johnson, J.E.V., and Tang, L. ‘Financial markets can go mad: Evidence of irrational behaviour during the South Sea Bubble’, Dale, R.S., Johnson, J.E.V., and Tang, L. ‘Pitfalls in the quest for South Sea rationality’, Harris, R. ‘The Bubble Act: Its passage and its effects on business organization’, Harris, R. ‘Political economy, interest groups, legal institution, and the repeal of the Bubble Act in 1825’, Kleer, R. ‘“The folly of particulars”: The political economy of the South Sea Bubble’, Kleer, R. A. The South Sea Bubble. The share price rose to £175 in February. This refinancing scheme allowed illiquid high-interest debt to be converted into highly-liquid low-interest debt – a win-win for all parties involved. Ironically, the passing of the “Bubble Act” caused South Sea Company shares to soar to £890 in June 1720. As South Sea Company shares bubbled up to incredible new heights, numerous other joint-stock companies IPOd to take advantage of the booming investor demand for speculative investments. The value of this promise, however, was closely tied to the outcome of the war.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 government intended to fund interest payments by placing tariffs on goods that were imported from South America (Carruthers, 2005). The Bubble Act was passed in June, requiring all joint-stock companies to receive a royal charter.
(Reading, 1933).
This purchasing arrangement enticed many government employees as well as the King’s mistress. Many of these new companies made outrageous and often fraudulent claims about their business ventures for the purpose of raising capital and boosting their stock prices. With investor confidence mounting, the share price climbed to approximately £330 by the end of March. 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.