Speculation in 'Fancied Activities' during the South Sea Bubble Period (1720) Sounds Incredibly Stupid Today, But The (dot.com) Results Are The Same

In 1720 “The South Sea Company” had the most expensive securities on the English stock exchange, but for 140 years of its existence the company never performed its original purposes: fishing and trade  it simply did not fish or trade.

Harley, Earl of Oxford, was a well-known government figure who formed the South Sea Company in 1711 by an Act of Parliament. He wanted to improve the British Government’s finances by paying back £10 million of debt, including military debentures.

The government offered six-percent interest to a company of merchants to take the debt from the government. To raise the £600,000 per annum it needed to pay the interest, the government placed new, permanent taxes on a number of products, including wines, vinegar, India goods, wrought silks, tobacco and whale-fins.

Harley granted the merchants sole rights to trade in the South Seas – what we would now recognise as the east coast of Latin America. People flattered Harley, calling the enterprise “the Earl of Oxford’s masterpiece”.

From the very beginning, the South Sea Company was expected to deliver huge profits. Everybody had heard of the gold and silver mines of Peru and Mexico. The mines were thought to be inexhaustible. Surely if the UK’s manufactured products were shipped there, the natives would pay for them with one hundred times their weight in gold and silver.

After a small time period there appeared rumours about the company`s incredible profits of the trade in Latin America, where English goods could be changed for gold and silver for “inexhaustive” fields of Peru and Mexico. Actually Spanish colony authorities admitted only one English ship per year and received one quarter of the whole profit and 5% of the turnover. The “South Sea” shares quietly existed on the stock exchange, the price moved only within two or three points per month.

With the rise of British Imperial power in the early eighteenth century, the huge wealth generated by its vast overseas businesses was creating a growing wealthy middle class. But it was well nigh impossible for anyone new to invest directly in the companies controlling the trade. For example, the East India Company, which enjoyed a monopoly on trade with India, had fewer than 500 shareholders to whom its handsome (and tax-free) dividends were distributed.

Enter the South Sea Company. Following the War of Spanish Succession, Britain was left with a national debt of around £10m (which was a considerable sum at the time). The South Sea Company was established in 1711 and raised capital from the investment-hungry wealthy to buy that government debt in return for 6% a year in interest. In addition, the company was granted a monopoly on trade with South America, upon which the government hoped to levy taxes that would, in turn, fund the 6% interest owed to the company. It was an incestuous web right from the start.

Naïve investors

The company’s first issue of stock was snapped up by eager investors, who believed South American gold would be handed over in shiploads in return for English wool and other such finery. Sadly for investors, the managers weren’t really much good at trade (though they were good at looking slick and talking smoothly), and with growing hostility between England and Spain, the company barely made any money from trade at all. Instead, further financial finagling followed, with new South Sea company shares being offered to the gullible public to finance new deals over national debt. Many insiders, in both the company and government, took advantage to gain huge wealth, with the share price rising nearly tenfold in little more than six months in 1720.

On June, 1720 the King announced some of those companies “danger sources for all surrounding people”, and forbade trading their shares with a penalty for violation of the statement. The list of 104 forbidden companies included the following fancied activities:

• improvement of soap making;

• silver extraction out of lead;

• buying and equipment of ships for pirates suppressing;

• mercury conversion into a ductile refined metal.

In spite of all efforts of the government, there emerged more and more bubbles every day, and the speculation fever still aggravated. The first and the largest bubble of the action – “The South Sea Company” had its share price of 550 pounds on May 28, 1720. In June the impressive price level exceeded 700 pounds. In this period the price movements were extremely jerky, with enormous periodic movements.

For only one day, June 3, the price fell down to 650 pounds before afternoon, to grow up to 750 pounds in the afternoon. Many large investors used high summer level in order to realize their profit which was then invested in something else, from land and goods to real estate and other shares. However, others continued buying the shares of “The South Sea Company”, physicist Isaac Newton was among the latter ones.

During the early rises of the price he sold all his shares of “The South Sea Company”, with taking the profit of 7000 pounds. In the middle of the summer he bought them again, and the bargain cost him 20,000 pounds.

(But he discovered gravity in the meantime, so all’s Right with the World… td)

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