South Sea Bubble

Context/Description: Following the War of the Spanish Succession (1701-1714), Britain faced crushing national debt of £50 million. The South Sea Company, founded in 1711 and granted a monopoly on trade with Spanish South America (including involvement in the slave trade), proposed a debt-for-equity swap: converting government bonds into company shares. Promoters hyped potential riches from largely imaginary trade prospects. Stock prices soared from £128 in January 1720 to roughly £1,000 by August, fueled by rumors, insider manipulation, and easy credit for share purchases.

Warning Signs:

• Company profits didn't match valuations—actual trade was minimal due to Spanish restrictions
• Massive insider selling by company directors at peak prices
• Parliament members received stock bribes to support the scheme
• Proliferation of dubious "bubble companies" with absurd business plans
• Credit was extended to buyers at unsustainable terms

The Problem: The company was fundamentally overvalued with little actual revenue. Spain limited British access to South American ports, making the trade monopoly nearly worthless. Much of the promotion involved fraud, including bribes to politicians and manipulated stock issuances to create artificial scarcity. The Bubble Act, passed in June 1720 to restrict rival companies, actually accelerated the crash by reducing market liquidity and confidence.

The Trigger: By August 1720, some insiders began selling. As the company couldn't deliver promised dividends, confidence evaporated. When the bubble companies began failing, panic selling ensued.

Results/Impacts: Shares plummeted 84% to around £150 by September 1720. Thousands were ruined across all social classes, including famous victims like Sir Isaac Newton (who lost £20,000, equivalent to millions today, and reportedly said "I can calculate the motion of heavenly bodies, but not the madness of people"). The crash caused bank runs, suicides, and political scandal. Several company directors fled the country; others had their estates confiscated.

The crisis spread to France (Mississippi Bubble) and broader Europe, causing a brief continental recession. Long-term, it led to stricter corporate regulations, greater parliamentary oversight of joint-stock companies, and decades of public distrust in stock markets. It established the term "bubble" for financial manias.

The Lesson: Government backing doesn't guarantee legitimacy. Insider manipulation and conflicts of interest can inflate bubbles beyond reason. Political corruption amplifies financial instability.