The Fruits of Civilization (23-7-2) The South Sea Bubble

 The South Sea Bubble

The South Sea Company was a joint-stock company chartered in 1711. Its monopoly grant was trade in South America, at a time that Spain controlled that trade.

The South Sea Company was a public-private partnership to fund England’s portion of the War of Spanish Succession (1701–1714). There was never any realistic prospect that any trade would take place. No profit was ever realized.

Yet shares of the stock soared as the Company expanded its government debt operations. The South Sea Bubble burst in 1720, when Parliament passed the Bubble Act, which forbade all joint-stock companies not authorized by royal charter. Share prices plummeted to a less than the original flotation price, even though the South Sea Company had a charter.

(The motivation behind the Bubble Act is obscured: whether it was to protect unwary investors, or whether the South Sea Company itself finessed the legislation to ward off other bubble companies. Either way, the Act cast the South Sea Company in a light which doomed it.)

Many moneyed men were ruined by the collapse. The national economy was diminished.

The South Sea Bubble was fostered by insider trading. Founders finagled handsome profits by purchasing debt in advance of its consolidation. Politicians profited from huge bribes to support the scheme.

Company money was employed to deal in its own shares. Privileged persons purchasing stock were given loans backed by those same shares to spend on buying more shares.

The expectation of vast wealth from South American trade was foisted upon an unsuspecting public, despite its improbability. The only consequential trading that did take place was in slaves, and the company managed that at a loss.

A parliamentary inquiry afterwards garnered the disgrace of some politicians, and men found to have illicitly profited had assets confiscated commensurate with their gains. These rich men remained comfortably so.

Parliament was loath to grant authorization for joint-stock companies after the Bubble Act. England entered the industrial era bereft of the business organization that would predominate modern capitalism. Most enterprises were partnerships or simple proprietorships.