It worked for a while and stock prices skyrocketed in 1720, until the bubble burst. Investors were ruined and an inquiry had to be held. While the South Sea Bubble went down in history as the cause of a total financial crash, that wasn\u2019t actually the case: it certainly had its losers, but it had its winners, too.<\/p>\n
What was the state of Britain\u2019s finances before the Bubble?<\/h2>\n
The Bank of England<\/a> formed 26 years earlier had grown into a powerful institution as the sole lender to the government. It was, however, controlled by one of the two main political parties, the Whigs, so when Robert Harley became the new Tory chancellor of the Exchequer in 1710, he looked for other means of making money. With Britain engaged in expensive wars and the government debt at around \u00a39m, funds were preciously needed.<\/p>\n Harley gave the job of organising the Bank of England\u2019s lotteries to John Blunt, the less-than scrupulous director of an unofficial bank (and sword manufacturer) called the Hollow Sword Blades Company. While the ironically named Blunt had great success selling lottery tickets, the two men devised a grander scheme to make serious money. That\u2019s where the South Sea Company came in.<\/p>\n It formed in 1711 with the purpose of consolidating the government<\/a>\u2019s debt. In return for taking on and paying off this debt, the company would be granted a monopoly on trade between Britain and Spain (particularly the sale of slaves) in the \u2018South Seas\u2019 around South America<\/a>. This idea had a major problem, though: Britain was at war with Spain and in no position to dictate the trade there, unless favourable terms were reached in peace talks.<\/p>\n The Peace of Utrecht \u2013 a series of treaties signed between 1713 and 1715 \u2013 did indeed grant the South Sea Company a monopoly, or Asiento de Negros, for 4,800 enslaved people a year, but the Spanish put a tax on the \u2018cargo\u2019 and permitted only one ship at each port annually for other goods. The company ultimately transported tens of thousands of slaves, helped by the Royal African Company and Royal Navy<\/a> protection. Yet the restrictions meant profits would never be enough to resolve the debt.<\/p>\n Instead, what proved more lucrative was getting investors enthused. From its headquarters on Threadneedle Street in London, the company launched a propaganda campaign to sell shares: promising riches and marketing the business as a patriotic venture. Success for the South Sea Company would be a success for Britain. By 1718, nobles, politicians and celebrities, like author Jonathan Swift and scientist Isaac Newton<\/a>, had invested, and George I had been appointed as governor.<\/p>\n It was a cunning, if convoluted, scheme: the company encouraged all the individual people who held an \u2018instrument of debt\u2019 (essentially, an IOU from the government) to swap them for shares. In other words, swapping the hope of getting paid back by the government for the promise of getting payouts from the company\u2019s profits. Every year, investors would also receive a dividend. But that didn\u2019t mean the company was out of pocket since the government paid interest on the total debt taken on, set at a high six per cent.<\/p>\n Simply, the point was to keep the share value going up \u2013 and the more shares sold, the higher it got. To that end, the company introduced several other reckless, legally questionable methods, including lending people its own money so they would buy shares. In terms of the stock market, this created the illusion that share demand was high, which inflated the value. And if people made personal fortunes by exploiting the market or politicians had to be bribed to ensure their support, so be it.<\/p>\n Converting debt into shares was working so well that the South Sea Company hatched an audacious plan to take on most of the unconsolidated national debt, which stood at over \u00a330m. If successful, it would become the biggest financial institution in Britain. Never mind that its actual profits from the slave trade were nowhere near strong enough to justify this. This set off a massive boom in the stock price, from \u00a3128 per share to over \u00a31,000 in August.<\/p>\n Other businesses tried to get in on the act, which resulted in a flurry of speculative and unwise investments. The Bubble Act of June 1720 put a stop to this, and essentially removed all competition to the South Sea juggernaut, but this didn\u2019t last long. By September, the market collapsed and company shares plummeted to \u00a3124 by the end of the year.<\/p>\n Thousands of investors were ruined and the resulting parliamentary investigation revealed widespread corruption. The Bank of England stepped in as company directors were disgraced and had assets seized; government members were impeached; and the chancellor of the Exchequer, John Aislabie, was imprisoned in the Tower of London<\/a>. As for Blunt, who had been made a baronet earlier that year, he had cashed out before the collapse.<\/p>\n It was one of the first economic bubbles known to the general public \u2013 and came at the same time as another one in France \u2013 so was pounced on by satirists, writers and artists, including the famous William Hogarth<\/a>. It also inspired a crusade by politician Robert Walpole<\/a> to restore faith in the financial system. Despite being a South Sea investor himself, he made stern examples of a handful of those implicated, while ensuring others (his friends and the king, say) were left alone. In fact, Walpole did such a thorough job that he grew into power and popularity to become the first de facto prime minister of Britain.<\/p>\n![\"""\"](\""https:\/\/images.immediate.co.uk\/production\/volatile\/sites\/7\/2022\/12\/GettyImages173399321-02ec79f-e1670942884615.jpg?quality=90&resize=620%2C413"\" "\\"\"\"\\"\/")
<\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/picture><\/div>So, what was the South Sea Company?<\/h2>\n
How successful did the company get?<\/h2>\n
How did the sale of shares work?<\/h2>\n
![\"""\"](\""https:\/\/images.immediate.co.uk\/production\/volatile\/sites\/7\/2022\/12\/GettyImages590672695-af9001d-e1670942826125.jpg?quality=90&resize=620%2C412"\" "\\"\"\"\\"\/")
<\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/source><\/picture><\/div>How high did the share value reach?<\/h2>\n
Is that when South Sea Bubble burst?<\/h2>\n
What was the fallout?<\/h2>\n