South Sea Bubble / South Sea Company

The South Sea Company was an English stock trading company that assumed the entire national debt of England after the War of the Spanish Succession in exchange for the exclusive right to trade in the Spanish colonies of South America. Europeans used the term "South Seas" to mean any water surrounding the continent of South America.

Unable to be funded as a bank, because the Bank of England had a monopoly on the banking system, the South Sea Company was established as a trading company in 1711.

Debt from the war was significant, and it did not end until 1713, which put extra pressure on Lord Treasurer Robert Harley, the founder of the company. There was a substantial investment in this particular company, and the interest that was to be paid yearly to its stockholders was acquired by placing a tariff on the various goods brought to England from South America.

Several schemes evolved in order to push the price of the stock upward. Rumors of great success were being released by the Bank of England, the South Sea Company and the stockholders themselves. Many claims were made in reference to foreign schemes, and these schemes were subsequently named Bubbles.

In 1719, the Royal Exchange and London Assurance Corporation Act was written, passed in 1720, creating a prohibition on unauthorized joint stock ventures. It later became known as the Bubbles Act. It would not be repealed until 1825, and this gave an inevitable and important upper edge to the South Sea Company. The stocks peaked and a great deal of buying and selling began occurring.

The price of the stock increased ten-fold over the course of a year. The stock price peaked in August of 1720 at 1,000 pounds before it began to free-fall to 150 pounds in September of that same year. What England saw was mass madness at work. Everyone, from peasants to lords wanted into the market during the euphoric Tulipomania-like bubble. Specifically, South Sea Company stock was the preferred stock to own. And then, with the crash in September, no stock in any company could be marketed due to the rampant fraudulent activity of South Sea Company directors and the widespread corruption that existed within the Cabinet itself.

An attempt at a resolution came after the appointment of the new First Lord of the Treasury, Robert Walpole. All South Sea Company directors' estates were seized and used to partially settle with the victims of this fraudulent South Sea bubble scheme. Slave trade was part of the South Sea Company's business. Slaves were delivered to the Americas over the course of many years. The slave trade was seen as successful. Much of the South Sea Company's income came from this particular trade during the next 100 years.

Despite the bad publicity, the South Sea Company was in existence until the mid-1800s. It got into other businesses such as whaling, but its primary effort was always to manage the debt of the British government. The South Sea Company and its rise and fall offer us another example of market failure that, on closer inspection, was created via government fiat and collapsed as a result of the bad laws that first ignited the bubble and then punctured it.