The causes of the South Sea Bubble

The Bubble began with the realisation that the English government’s spending had spiralled out of control; the South Sea Company was created as a solution in 1711. In 1720 the company agreed to lend £7million to finance the war in France – but in return for a disastrous deal.

The company negotiated a monopoly on trade with South America in return for the loan: although this could have been extremely lucrative, England was at war with Spain at the time and South America was under Spanish control. Take that into consideration and the deal is based on merely the possibility that trade with South America would become feasible in the future.

x Despite this, the company set about singing its own praises and initiating some particularly extravagant rumours about (potential) trade with the New World. Over time this led to speculating frenzy – everyone was jumping on the bandwagon to invest in the South Sea Company. But not only that, it triggered a hunger to invest in anything.

The share price for the South Sea Company rose from £128 in January 1720, to £175 in February, £330 in March and, following the scheme's acceptance, £550 at the end of May.

At the same time, as more and more people looked to find their investment windfall, companies were being created simply to attract investors – and some of them were ludicrous. One company floated claimed to manufacture a gun to fire square cannon balls and another bizarrely stated the company was “for carrying-on an undertaking of great advantage but no-one to know what it is”.

For the South Sea Company itself, several clever moves by its directors led to politicians and dignitaries (including the King’s mistresses) investing in stocks – clothing the company in an aura of legitimacy.

The House of Commons soon raised concerns about the legitimacy of many joint-stock companies – especially those with such bizarre claims. But the South Sea Company, thanks to some clever political manoeuvres, largely avoided the investigation – and remained in tack despite the creation of the Bubble Act, which stated joint-stock companies could only be created by Royal Charter or Act of Parliament, and even then only with five separate investors.

The South Sea Company’s shares reached the heady-heights of £1000 in August 1720, but the prices soon crashed – partly due to global economic events and the realisation that the trade deal was not all it was made out to be.

Thousands who had jumped on the ‘South Sea bandwagon’ were left ruined, including members of the aristocracy. Even Sir Isaac Newton reportedly lost money: he was famously quoted as saying, “I can calculate the motions of the heavenly bodies, but not the madness of the people.”