The dot-com bubble is probably one of the most well known stock market bubbles to date. However, there were many more in the past that you may not have heard of. The South Sea bubble was one of the first stock bubbles in history, leading to one of the first stock crashes. Let’s take a look at how it happened.
Great Britain founded a company known as The South Sea Company in 1711. It’s advertised purpose was to set up trade with South America. The problem here was that Spain was controlling South America. Meanwhile, the Brits were at war with Spain in the War of the Spanish Succession. This made the trade unlikely to succeed.
This plan may sound absurd, but there was a deeper scheme going on. It was actually a plan to gather up government debt up creation and constantly buy more. It took on £9.4 million in debt to start, and the government would pay 6% interest for the company to issue as dividends.
By 1719 the debt held by South Sea had grown to £11.7 million. In total, Britain owed £50 million. They took this plan further, having the company buy up all £30 million of the unconsolidated debt.
Parliament arranged a deal for the debt with South Sea. They gave a large number of shares to many politicians, making sure everyone knew. This gave the politicians an incentive for a high share price, as well as drove more people to speculate.
A huge bubble occurred because of this. The share price had been about £100 for a long time. From late February to early August in 1720 the stock skyrocketed to £1000 and then crashed in a few weeks. The stock fell and the company fell apart.
Consequences of the South Sea Bubble
The crash had many repercussions. Many politicians were ousted, and one of the key players was imprisoned. The Bubble Act was passed to put in safeguards against this occurring again.
Even Isaac Newton had some involvement, not just once but twice. He made a lot of money early on in the South Sea bubble. Then he chose to buy in again after his friends made it rich from it. He lost most of his wealth when the price fell faster than an apple from a tree. The market is a stronger, and less predictable, force than gravity.