The South Sea Bubble of 1720: what happened and what changed

1. 1711The South Sea Company is founded. Holders of government debt exchange it for company shares, and the company is granted a monopoly of British trade with Spanish South America.
2. 1713The Treaty of Utrecht gives Britain the asiento, the contract to carry enslaved Africans to Spanish America, which passes to the company. The trade proves far smaller than hoped.
3. January 1720The company proposes to take over a large part of the national debt. The Bank of England makes a rival offer and the two bid against each other. Shares stand at under £130.
4. April 1720Parliament passes the scheme. The company sells new shares in a series of subscriptions, payable by instalments, and lends money against its own shares so that buyers can buy more.
5. June 1720The Bubble Act requires a royal charter or an act of Parliament for a joint-stock company. During the summer South Sea shares reach about £1,000.
6. September 1720The price falls rapidly as instalments fall due and holders sell. The Sword Blade Company, the South Sea Company’s banker, fails.
7. December 1720The shares are back near where they began the year. Parliament is recalled and an inquiry begins.
8. 1721A Commons committee reports bribery of ministers and members of Parliament. Directors’ estates are confiscated, and the Chancellor of the Exchequer, John Aislabie, is expelled from the Commons and sent to the Tower. Robert Walpole oversees the reconstruction of the company’s finances.

• The Bubble Act of 1720 stayed on the statute book until 1825. It made it hard to form a joint-stock company in Britain without a charter or an act of Parliament. It was passed during the boom, with the company’s own support, and was aimed at rival ventures rather than at the company.
• Parliament confiscated much of the directors’ wealth to compensate investors, and the company’s debt holdings were restructured, with part passing to the Bank of England.
• Robert Walpole, who managed the settlement, became First Lord of the Treasury in April 1721 and held office for two decades. He is usually counted as the first British prime minister.
• The South Sea Company itself was not wound up. It continued for more than a century as a body that managed government debt.

• The company lent money against its own shares and sold them by instalment. Both let buyers hold more than they could pay for, which pushed the price up on the way and forced sales on the way down.
• The scheme worked better for the company the higher its share price went, so those running it had every reason to talk the price up. Who benefits from a rising price is worth knowing in any market.
• The price moved a very long way with no change in what the company earned. A price can say more about the buyers than about the thing bought.
• Rules written in the middle of a boom can serve the people already inside it. The Bubble Act is the classic case.

These are observations about how markets and rules work, drawn from one episode. They are not advice, and they do not say that anything like it will or will not happen again.

It is easy to judge an episode once its ending is known. This exercise takes four moments from the timeline above, one at a time. At each it shows only what had been made public by then, asks a hypothetical question with three plain choices, and then shows what came next and what each choice would have meant.

The text headed “what had been made public by then” is this site’s own summary of the record, written afterwards. It is not a contemporary document and nothing in it is a quotation. The position described is imagined. No choice is marked right, there is no score, and nothing is stored.

A hypothetical for study, not advice. It does not say what anyone should have done then, or what to do now.

Dates here are in the Old Style calendar that Britain used in 1720, so they differ by eleven days from the same events dated on the Continent. The share prices given are the commonly cited round figures from contemporary price lists; sources differ by a few pounds and on the exact day of the peak, partly because the company’s transfer books were closed for part of the summer. The story that Isaac Newton lost a fortune is well attested in outline, but the sum is uncertain and the remark usually attributed to him has no reliable contemporary source.

What did the South Sea Company actually do?

Its trade with South America was small. Its main business was financial: it held British government debt, which it had acquired by giving the holders its own shares, and received interest on it from the government. The 1720 scheme was a much larger version of the same exchange.

How high did South Sea shares go in 1720?

From under £130 a share in January 1720 to about £1,000 in the summer, and back to near the starting level by December. These are the commonly cited round figures; contemporary price lists differ slightly.

What was the Bubble Act?

An act of Parliament of June 1720 that required a royal charter or an act of Parliament before a joint-stock company could be formed. It was passed while prices were still rising and was aimed at the South Sea Company’s rivals for investors’ money. It was repealed in 1825.

• Leverage
• Margin
• Liquidity
• Volatility

The House of Commons committee reports of 1721, contemporary London price lists, and modern economic histories of the scheme.

A number is given on this page only where it is famous and certain. Nothing here is a quotation.