Ward's Book of Days.

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What happened on this day in history.


On this day in history in 1720, the South Sea Bubble finally burst.

The South Sea Bubble was an economic phenomenon which saw intense speculation in company shares and brought ruin to many private investors.

In 1711, the earl of Oxford and others formed a company, known as The South Sea Company, to trade with Spanish colonies in South America. Britain was at war with Spain at the time but, it was hoped that soon the war would be over, and profitable trading could begin. The war ended in 1713, but the peace treaty was not favourable to British trade, only allowing one voyage a year to the colonies. The company made its first expedition in 1717 and made moderate profits, but the directors of the company had guaranteed a dividend of at least 6% per annum, and therefore the company was losing money.

The directors tried to maintain confidence in the company by asking King George I to become its governor, and then formulated an ingenious scheme to boost public confidence in their enterprise. They proposed the takeover of the National Debt. Holders of government stock would be offered shares in the South Sea Company in exchange for their bonds, and the South Sea Company would become the sole government creditor and banker. This scheme was readily accepted by Parliament and public confidence in the company was restored.

Investors believed that this company must be making vast profits in order to promote this scheme. In fact, the company was only exchanging its own paper shares for paper government bonds. The value of the company’s shares rocketed, and by the end of 1719, had reached a value of £1,000 for each £100 share. Many other companies sprang up in the wake of this seemingly lucrative enterprise. There was a company to ‘fix quicksilver and make it as soft and malleable as lead’. There was a company ‘to insure marriages against divorce’ and one ‘for the planting of mulberry trees and breeding silk-worms in Chelsea Park’. One company was formed ‘for carrying on an undertaking of great advantage but no one to know what it is’. The formation of companies to undertake fatuous schemes was not new at that time. The South Sea Company’s bankers were The Hollow Sword Blade Company, a corporation formed to produce hollow sword blades, but which had found that difficult or impossible, and had branched out into banking, issuing bank notes with designs of sword blades.

In an attempt to reduce the competition for speculators’ money, the South Sea Company issued writs against many of these bogus companies. The courts ruled that many of these companies were indeed operating illegally, and added that the South Sea Company itself was not above suspicion. Shares in the company dropped at once. The directors attempted to allay disquiet by raising dividends but investors asked where the money was coming from, and stock prices fell further. The company tried to issue more stock to raise money to keep the business going but prices fell again. In September 1720, the directors called a shareholders’ meeting to try to restore confidence but prices fell further. On 24th September 1720, The Hollow Sword Blade Company, closed down, leaving the company with no funds and no business. On 28th September 1720, the directors announced that the company was to cease trading.

A subsequent investigation revealed that the whole scheme had been operating illegally. The directors had misappropriated funds for their own purposes and had made vast profits on speculation. They had bribed the king’s mistresses to persuade him to accept the governorship of the company. Furthermore they had deliberately misled the public and the government as to the true value of the company. Parliament subsequently passed The Bubble Act which forbad the setting up of a company without a Royal Charter.

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