The South Sea Bubble - The First Financial Crash

From AI Overview: 

The South Sea Bubble was a speculative financial bubble and crash in 1720, centered on the South Sea Company, which involved the monopolization of British trade with South America. The bubble was caused by the company taking over government debt, the rapid rise in its stock price through various speculative schemes, increased investor confidence, and a wave of similar "bubble" companies in the UK and France. The bubble collapsed in September 1720, leading to widespread bankruptcies, financial ruin for investors, a parliamentary inquiry into corruption, and the passage of the Bubble Act to prevent future events.

What Caused the Bubble?

South Sea Company: The company was founded in 1711 to take over British national debt and was given exclusive trading rights in the South Seas (South America).

Speculative Schemes: The company's stock price soared as it issued more shares to absorb government debt and to finance other speculative ventures.

Investor Confidence: New investors entered the market, driven by confidence and the belief in quick fortunes, which further inflated stock prices.

"Bubble" Act: The government passed a law in 1720 that removed competition for the South Sea Company, allowing its stock to rise even higher.

International Context: The bubble was amplified by a boom-and-bust cycle in the French stock market, also known as the Mississippi Bubble, which pushed investors to move their money to London.

How Did the Bubble Collapse?

Loss of Confidence: By the summer of 1720, the high prices were unsustainable, and investors began to sell.

Market Crash: The stock price of the South Sea Company plummeted from over £1,000 to £100 by the end of the year, with a sharp drop in September.

Economic Ruin: Many investors went bankrupt, while others faced financial ruin and even suicides spiked.

Consequences and Legacy

Financial Crisis: The collapse was the first international stock market crash, impacting Britain, France, and the Dutch Republic.

Parliamentary Inquiry: A parliamentary investigation revealed corruption and bribery, leading to the confiscation of personal assets.

The Bubble Act: Parliament passed the Bubble Act to prevent similar speculative events from happening in the future.

Lasting Lesson: The South Sea Bubble remains a cautionary tale about the dangers of speculative bubbles, invented wealth, and the power of groupthink in financial markets.