South Sea Bubble


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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 HarleyHarley, Robert, 1st earl of Oxford,
1661–1724, English statesman and bibliophile. His career illustrates the power of personal connections and intrigue in the politics of his day.
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, who needed allies to carry through the peace negotiations to end the War of the Spanish SuccessionSpanish Succession, War of the,
1701–14, last of the general European wars caused by the efforts of King Louis XIV to extend French power. The conflict in America corresponding to the period of the War of the Spanish Succession was known as Queen Anne's War (see French and
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. 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 £128 1-2 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 WalpoleWalpole, Robert, 1st earl of Orford,
1676–1745, English statesman. Early Life and Career

He was the younger son of a prominent Whig family of Norfolk.
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 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 SchemeMississippi Scheme,
plan formulated by John Law for the colonization and commercial exploitation of the Mississippi valley and other French colonial areas. In 1717 the French merchant Antoine Crozat transferred his monopoly of commercial privileges in Louisiana to Law, who, with
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 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.

Bibliography

See studies by L. S. Benjamin (1921, repr. 1968), J. Carswell (1960), and V. S. Cowles (1960).

South Sea Bubble

fraud is exposed in British South Sea Company (1720). [Br. Hist.: EB, IX: 383]
See: Scandal
References in periodicals archive ?
Although many see the South Sea bubble as simply a case of stock market greed, it was in many ways a function of the unfamiliarity of risk--there was widespread ignorance on the part of management, investors, securities regulators and the public at large to the nature and scale of trading risks.
Second, Newton's remark about the South Sea Bubble illustrates the fallibility of even the most rational of thinkers to explain and predict market behavior.
This book was inspired by the conference 'City Merchants and the Arts' that took place in November 2002 and sought to examine the artistic patronage and aspirations of London's merchant class in the aftermath of the Great Fire, up to the financial disaster of the South Sea Bubble.
England's legislative response to the bursting of the South Sea bubble three centuries back, the Bubble Act of 1721, was a ban on the founding of joint-stock companies without a royal charter--a provision that slowed the development of British industry.
Despite claims that private interest can harmoniously promote public welfare, an economic catastrophe such as the South Sea Bubble reveals the danger a sociable endeavour--like exploration, a speculative journey--may pose to the preservation of the individual.
In Britain, the contemporaneous South Sea Bubble bred an even greater speculative mania (including the famous prospectus for a "Company for carrying on an Undertaking of great Advantage, but Nobody to know what it is"--which Macdonald thinks probably never actually existed), and an equally spectacular collapse.
Two of the biggest in history took place within months of each other almost three centuries ago--in Britain and France in 1720: the South Sea Bubble and the Mississippi Scheme.
The hope was, as Carswell, writing about the South Sea bubble, an international echo of the Mississippi bubble, observed, "[to] sell out betimes and so let the Devil take the hindmost?
As with the South Sea Bubble, thousands of people became poorer but wiser.
Contributing to this was a long period of economic growth, beginning with the financial revolution of the 1690s and the successful solution to the crisis caused by the South Sea Bubble.
The growth and eventual bursting of financial bubbles is an inherent feature of capitalist accumulation, as can be seen in the long history of such crises from the South Sea Bubble of the early eighteenth century to the financial blowouts of the present day.
The Internet boom, he believes, should be compared to such calamitous episodes as Holland's tulip mania in the seventeenth century, the South Sea bubble in eighteenth-century Britain, and the pre-1929 exuberance of Wall Street.

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