Joseph Spence wrote that Lord Radnor reported to him "When Sir Isaac Newton was asked about the continuance of the rising of South Sea stock.....He answered 'that he could not calculate the madness of people'. (Spence, Anecdotes, 1820, p368)
Dubbed the “Enron of England”, the South Sea Bubble was one of history’s worst financial bubbles.
The mania started in 1711, after a war which left Britain in debt by 10 million pounds. Britain proposed a deal to a financial institution, the South Sea Company, where Britain’s debt would be financed in return for 6% interest. Britain added another benefit to sweeten the deal: exclusive trading rights in the South Seas. The South Sea Company quickly agreed, because of the proximity to wealthy South American colonies.
The company had been granted a monopoly to trade with South America under a treaty with Spain while the company assumed the national debt of England. The South Sea Company issued stock to finance operations and gain investors. Investors quickly saw what they perceived as value in the monopoly of the South Seas. Shares were quickly snatched up from the start. The South Sea Company, seeing the success of the first issue of shares, quickly issued even more.
Dubbed the “Enron of England”, the South Sea Bubble was one of history’s worst financial bubbles.
The mania started in 1711, after a war which left Britain in debt by 10 million pounds. Britain proposed a deal to a financial institution, the South Sea Company, where Britain’s debt would be financed in return for 6% interest. Britain added another benefit to sweeten the deal: exclusive trading rights in the South Seas. The South Sea Company quickly agreed, because of the proximity to wealthy South American colonies.
The company had been granted a monopoly to trade with South America under a treaty with Spain while the company assumed the national debt of England. The South Sea Company issued stock to finance operations and gain investors. Investors quickly saw what they perceived as value in the monopoly of the South Seas. Shares were quickly snatched up from the start. The South Sea Company, seeing the success of the first issue of shares, quickly issued even more.
The price finally reached £1,000 in early August and the level of selling was such that the price started to fall, dropping back to one hundred pounds per share before the year was out, triggering bankruptcies amongst those who had bought on credit.
Richard Dale It's academic 28 November 2008 from Business Spectator
My central thesis was that, taken together with other more recent boom/bust episodes, the events of 1720 lend force to the argument that national authorities must intervene to head off unsustainable financial market booms. I was also critical of revisionist histories of financial upheavals such as the South Sea Bubble that have tended to stress the rationality of investors and downplay the idea that financial markets are inherently unstable and prone to bouts of euphoria and panic.
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