The South Sea Bubble: 300 Years Later

2020 marks the 300-year anniversary of England’s most notorious speculative mania, and the first of many economic and financial crisis.

During the first half of 1720, the price of South Sea Company stock rose eight-fold reaching a peak in early July. Restrictions on the supply of shares, coupled with surging credit availability fueled the share buying bonanza. The fear of missing out on riches drove the share price even higher.

At its peak, the Company’s market worth was around twice the total value of all the land in England. Those charged with running the Company and connected to it in government knew they had a problem: they had to keep fueling the boom or fear that it would fall around their ears and potentially crash the economy.

But that confidence act could only last so long. Eventually it began to crumble, and with it the share price. As the bubble collapsed during late summer and into September 1720 financial distress rippled out through the financial centres of Europe — from England through Holland and onto northern Italy.

The South Sea bubble follows the same distinct patterns shown in the bubble profile illustrated below. As the subsequent 300 years demonstrated: markets may change, but people do not. They forget the lessons of the past and shout “This time is different”. It never is.

The South Sea Bubble of 1720 had the same essential ingredients that make investing so challenging today: geopolitical turmoil, rapid globalisation, novel financial products, innovative business models, new communication technologies, misinformation and an abundance of tricksters ready to prey on the unwary and gullible.

As so often happens with notorious stories of financial ruin there is much more to the story. This article outlines the history of the South Sea Bubble, much of which you might know already but there will also be some of the hidden stories that will be much less familiar. But first, in order to understand the crisis that was to unfold you first need to picture the preceding decade.

The Stealth Phase

The South Sea Company exploits the shift in global trade

The South Sea Company was a British joint-stock company founded in 1711. Daniel…