South Sea Bubble (1720): Britain's First Great Financial Crash

The South Sea Bubble was the speculative boom and crash in the shares of Britain’s South Sea Company in 1720. Between January and June the price rose roughly eightfold, drawing in investors from dukes to shopkeepers, before it collapsed in the late summer and autumn. The crash ruined many, exposed the bribery of ministers and courtiers, and became the classic English example of a financial bubble.

Background: war debt and a trading company

Britain had fought almost continuously against France since 1689, and the War of the Spanish Succession left it with a heavy national debt. Much of it was expensive, in forms that could not easily be traded or repaid. Governments looked for ways to convert it into cheaper, more manageable debt.

The South Sea Company was founded in 1711 by the Tory minister Robert Harley, Earl of Oxford, as part of such a scheme. Holders of about £9–10 million of government debt exchanged it for company shares, and the state paid the company interest. In return the company received a monopoly of British trade with Spanish South America, the “South Seas”.

That trade proved small. Under the Peace of Utrecht in 1713 Britain gained the asiento, the contract to supply enslaved Africans to Spanish America, plus one ship of other goods a year. The company carried out this slave trade, but wars with Spain kept interrupting it, and its real business remained finance rather than commerce.

The 1720 scheme

In early 1720 the company’s leading director, John Blunt, proposed a far bigger conversion: the South Sea Company would take over most of the national debt not held by the Bank of England and the East India Company, roughly £31 million. Holders of government annuities would swap them voluntarily for South Sea shares.

The Bank of England bid against it, but the company won by promising the government a payment of up to £7.5 million. The South Sea Act received royal assent in April 1720. The company’s profit depended on one thing: the higher its share price, the fewer new shares it had to give each debt holder, leaving more to sell for cash. It therefore had every reason to push the price up.

King George I was the company’s governor, and many politicians held shares, some of them given on favourable terms. This gave the scheme an air of official approval.

The mania

Shares that stood at about £128 in January passed £300 in March and £500 in May. The company sold new shares in “money subscriptions” paid in instalments, so buyers needed only a fraction of the price at first. It also lent money to investors on the security of their shares, which they used to buy more.

Trading took place in the crowded coffee houses of Exchange Alley in the City of London, such as Garraway’s and Jonathan’s, a culture that had grown since the first London coffeehouses of the 1650s. Dozens of new joint-stock “bubble” companies floated alongside, promising everything from fishing to insurance. In France, John Law’s Mississippi Company was going through a similar boom at the same time, and money flowed between the two markets.

In June Parliament passed what became known as the Bubble Act, forbidding joint-stock companies without a charter. It was largely meant to stop rival schemes from drawing money away from South Sea stock. Around 24 June the price reached roughly £1,050, its peak.

The crash

The rise could not last. Many buyers had paid only an instalment and owed large sums; insiders, including some directors, quietly sold. In August the company took legal action against unauthorised bubble companies, and the collapse of their shares forced investors to sell South Sea stock to cover losses.

By early September the price was falling fast. The collapse of Law’s system in France added to the panic, and several goldsmith-bankers who had lent on South Sea stock failed. By the end of September shares traded below £200, and they ended the year at around £120–£150. Thousands of people, from aristocrats to small savers, found themselves holding shares worth a fraction of what they had paid, or owing debts for shares they could not sell.

Inquiry and political fallout

When Parliament met in December 1720 there was fury. The House of Commons set up a secret committee in January 1721, which found that the company had used fictitious share sales and gifts of stock to buy support from ministers and courtiers.

The company’s cashier, Robert Knight, fled to the Continent with the record of these dealings, known as the green book. John Aislabie, the Chancellor of the Exchequer, was expelled from the Commons and imprisoned in the Tower of London. The Secretary of State James Craggs the Younger died of smallpox before he could be examined, and his father, the Postmaster General, died soon after. The First Lord of the Treasury, the Earl of Sunderland, was cleared but resigned.

Parliament seized most of the directors’ estates, raising around £2 million, and used it with other measures to give some relief to investors. Robert Walpole, who had criticised the scheme, managed the settlement and became First Lord of the Treasury in April 1721. Because he also shielded the King and leading figures from exposure, critics called him the “Screen-Master General”. He went on to lead the government for over twenty years and is often regarded as Britain’s first prime minister.

Key people

• John Blunt (1665–1733): director and architect of the 1720 scheme; most of his fortune was confiscated.
• John Aislabie (1670–1742): Chancellor of the Exchequer who steered the scheme through Parliament; expelled and imprisoned.
• Robert Knight (1675–1744): the company’s cashier, who fled abroad with incriminating records.
• Robert Walpole (1676–1745): the politician who cleaned up the aftermath and rose to power on it.
• Thomas Guy (c. 1644–1724): a bookseller who sold his shares early, made a fortune and used it to found Guy’s Hospital in London.

Myths and facts

“Investors put money into a company whose purpose was secret.” A famous story describes a prospectus for “an undertaking of great advantage, but nobody to know what it is”. It appears in later accounts, but historians have not found reliable contemporary evidence for it.

“Isaac Newton said he could not calculate the madness of people.” Newton did invest and probably lost money, but the quotation comes from later anecdotes, not his own writings.

“The crash wrecked the British economy.” It caused bankruptcies and hardship, but historians generally find that the wider economy and the public credit recovered within a few years. The national debt conversion itself largely went ahead.

Timeline

• 1711: Robert Harley founds the South Sea Company to take over part of the national debt.
• 1713: The Peace of Utrecht grants Britain the asiento, which the company operates.
• 1720, January–February: The company offers to take over most of the national debt and outbids the Bank of England.
• 1720, April: The South Sea Act receives royal assent.
• 1720, June: The Bubble Act is passed; shares peak at around £1,000 late in the month.
• 1720, August–September: The price collapses; by the end of September it is below £200.
• 1721, January: The Commons appoints a secret committee of inquiry; Robert Knight flees abroad.
• 1721, April: Robert Walpole becomes First Lord of the Treasury.
• 1825: The Bubble Act is repealed.

Why it matters

The South Sea Bubble was one of the first market crashes in a modern financial system, and it shaped how Britain thought about speculation for a century. It produced the Bubble Act, launched Walpole’s long ministry and left the word “bubble” as the standard term for a market mania.