South Sea Bubble
South Sea Bubble, popular name in England for the speculation in the South Sea Company, which failed disastrously in 1720. The company was formed in 1711 by Robert Harley, who needed allies to carry through the peace negotiations to end the War of the Spanish Succession. Holders of £9 million worth of government bonds were allowed to exchange their bonds for stock (with 6% interest) in the new company, which was given a monopoly of British trade with the islands of the South Seas and South America.
The monopoly was based on the expectation of securing extensive trading concessions from Spain in the peace treaty. These concessions barely materialized, however, so that the company had a very shaky commercial basis. Nonetheless, it was active financially, and in 1720 it proposed that it should assume responsibility for the entire national debt, again offering its own stock in exchange for government bonds, a transaction on which it expected to make a considerable profit. The government accepted this proposal, and the result was an incredible wave of speculation, which drove the price of the company's stock from £1281/2 in Jan., 1720, to £1,000 in August. Many dishonest and imprudent speculative ventures sprang up in imitation.
In Sept., 1720, the bubble burst. Banks failed when they could not collect loans on inflated stock, prices of stock fell, thousands were ruined (including many members of the government), and fraud in the South Sea Company was exposed. Robert Walpole became first lord of the treasury and chancellor of the exchequer and started a series of measures to restore the credit of the company and to reorganize it. The bursting of the bubble, which coincided with the similar collapse of the Mississippi Scheme in France, ended the prevalent belief that prosperity could be achieved through unlimited expansion of credit. Legislation was enacted that forbade unincorporated joint stock enterprise.
See studies by L. S. Benjamin (1921, repr. 1968), J. Carswell (1960), and V. S. Cowles (1960).