South Sea Bubble

Updated: Aug 20, 2021

Towards the end of the seventeenth century companies were formed in vast numbers and for quite bizarre purposes, such as importing jackasses from Spain or in one case for ‘purposes to be revealed at a later date’. It was a get-rich quick period. There was little legal control over companies and no limited liability. The climax came when the famous South Sea Company, originally formed to explore the South Seas, essayed to buy the national debt and issued shares for this purpose. To do this cheaply it attempted to increase the value of its own shares by creating a fictitious market. For a long period, it did nothing but lend money for the purchase of its own shares (which were issued at frequent intervals). Very soon the whole country became involved, and large fortunes were both made and lost. Thomas Guy built Guy’s Hospital with the profit he made. Little was done to stop the process, as both Parliament and the king were involved financially. The company failed in 1720 when public confidence suddenly disappeared, because money lent out and private profits made, rather than coming back in for the acquisition of shares, were used for the purchase of land. This company, formed in 1711, the biggest the country has ever seen, suddenly disappeared from the scene (as did the secretary), leaving behind financial chaos at deal of misery. It was over a hundred years later that Parliament allowed the formation of companies again and then on very strict conditions,

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.