It seems to be the universal Opinion . . . That the present Price of South-Sea Stock is much too high.
-Archibald Hutcheson, Some Calculations Relating to the Proposals made by the South-Sea Company, and the Bank of England, to the House of Commons, 1720 [47]
The value of the South Sea Company stock continued to rise from January to July 1720, as the company aggressively encouraged the purchase of more shares through installment plans and loans. As shares rose in value, less stock was needed to buy the government debt, and surplus shares could be sold at increasingly higher prices. Anticipating that its stock values would continue to rise, the company paid out far more than it took in.
An Abstract Shewing the Loss to the New Subscribers to the South-Sea Stock, 1720
An essay, attributed to political writer John Trenchard and widely distributed by J. Roberts, a prolific publisher in London, warned of the risks of investing in the South Sea Company. In An Abstract Shewing, the Loss to the New Subscribers of the South-Sea Stock and other publications, Member of Parliament Archibald Hutcheson also cautioned that the overinflated values of the South Sea Company stock could not be sustained. “I verily believe,” he wrote, “there is no real Foundation for the present, much less for the further expected, high Price of South-Sea stock; and that the frenzy which now reigns, can be of no long Continuance in so cool a Climate.” [48] His writings appeared in a series of pamphlets that he financed himself and sold for a nominal fee or distributed for free. In response, numerous pamphlets and newspapers like The Director and The Moderator defended the South Sea Company scheme.
The Bubble finally burst with stock values plummeting from £950 a share in July to £400 a share in September to £185 share in December 1720. [49] Many British as well as Europeans who invested in the South Sea Company lost their fortunes overnight, and those who had bought shares at high prices or on credit faced bankruptcy. The rate of suicides spiked. The Bubble rippled out to banks that could not collect on loans made for the overpriced stock. Together, the South Sea Bubble along with the Mississippi Bubble in France and other highly speculative enterprises that failed in England, France, and the Dutch Republic that year contributed to the first international stock market crash.
Stock value from November 1719-December 1720. Source: Frehen, Rik, William N. Goetzmann, and Rouwenhorst, K. Geert. “New Evidence on the First Financial Bubble.” Journal of Financial Economics vol. 108, Issue 3 (June 2013): 585-607. Available at SSRN: https://ssrn.com/abstract=1371007
Records issued from Parliament reveal how it addressed the public outcry—demanding accountability from the South Sea Company, the government, and the monarch who supported the company’s scheme. In January 1721, an act of Parliament forbade directors of the South Sea Company from leaving England or serving as directors in the Bank of England, East India Company, or South Sea Company. [50] Parliament also issued a decree to inventory and confiscate their estates as a way of shoring up the company’s credit and providing funds to the victims of the crash. [51]
Detailed view of An Account containing the Amount of the Sales of the Real and Personal Estates of the late South Sea Directors, February 1, 1724
The Speech of the Right Honourable John Aislabie, 1721
In The Speech of the Right Honourable John Aislabie, Chancellor of the Exchequer John Aisalbie argued against the decree. [52] Aislabie, who helped promote the South Sea Company and sold his shares at inflated values, was accused of wrongful conduct, expelled from the House of Lords, and imprisoned.
Reports of the Committee of Secrecy, 1721
Proceedings of the House of Lords, 1721
The House of Commons issued The Several Reports of the Committee of Secrecy, which had convened in closed-door sessions from February to June 1721. The Proceedings of the House of Lords also reported findings on the company’s misconduct. [53] John Blunt, a founder of the company who cashed out early, testified to the committee with the names of those implicated in the South Sea Bubble in exchange for leniency.
Sir Robert Walpole addressing the Cabinet ©Trustees of the British Museum 1920,0214.4
The toll of the South Sea Bubble prompted a reckoning of the root causes of the crash and calls for restructuring the national debt. Robert Walpole, who became First Lord of the Treasury, Chancellor of the Exchequer, and Leader of the House of Commons in 1721, was charged with addressing the fallout on the British economy through a series of emergency acts. Walpole took control by dividing the national debt that comprised the South Sea Company into the Bank of England, the Treasury, and the Sinking Fund. The Sinking Fund served as a repository for the country’s income that was saved and eventually contributed to the economic recovery of Great Britain. [54] Walpole emerged in a powerful position as essentially the first prime minister of England.
Act for Making Several Provisions, 1721
The Act for Making Several Provisions to Restore the Publick Credit Which Suffers by the Frauds and Mismanagements of the Late Directors of the South-Sea Company and Others passed by Parliament in August 1721 outlined the government’s efforts to reallocate and redistribute funds from those who had gained and lost from the scheme. [55] The Act, which signified a major invention by the government in debt forgiveness, aided many families impacted by the crisis who had to file for bankruptcy, helped Parliament regain a certain level of public trust, and stabilized the capital markets. [56]
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