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The South Sea Company

A Disaster Waiting to Happen

May 26, 2009 Barry Vale

The South Sea Company was originally set up on the premise that trade with Spain would increase as a result of the War of the Spanish Succession.

The South Sea Company planned to make money by persuading speculators to exchange government stocks for South Sea Company stock. The South Sea bubble that occurred because the company gained the sole right to buy government bonds yet had nothing to sell apart from its own stock. The company failed to keep expectations realistic and proved incapable of restoring confidence when the bubble burst. The company actually had no other source of income; it never had a plan A let alone a plan B.

A Bubble Ready To Burst

Those investors in the South Sea Company that had sold their shares during the boom in prices made handsome profits; those that held shares when the bubble burst were ruined. The bubble burst once investors worked out what the company had known all along, it had no source of income to pay the portions of the British national debt in the absence of trade with Spain. The South Sea Company had to exaggerate the prospects of its stock in order to provide large returns for the powerful people it had bribed with stock and increased public demand to frenzy.

Government acceptance of the company’s schemes were more importantly clinched by bribes, company directors kept share prices high to maintain public confidence high. The bubble was sustained by people’s greed outweighing their common sense. The bubble was built upon unreal expectations and unrealistic economic foundations so it was a bubble waiting to be burst, the company got in a vicious cycle it had to sell shares to raise money, yet shares were never going to save the company.

The biggest problem for the South Sea Company was that they had very few actual assets, they had trade agreements with Spain and trading charters from the British government. The often-poor relationship between Britain and Spain meant that those agreements and charters were not viable.

Sources:

Ashley M, (2002) A brief history of British Kings & Queens, Robinson, London

Balen, M (2003), A Very English Deceit: The South Seas Bubble and the World’s First Great

Financial Scandal, London: Fourth Estate.

Duncan R & Goddard J (2005) Contemporary America, Palgrave, Basingstoke and New York

Gardiner & Wenborn (1995) The History Today Companion to British History Collins and Brown Ltd, London

Morgan K O, (1993) The Oxford Popular History of Britain, Oxford University Press, Oxford

Schama S (2001) A History of Britain - The British Wars 1603-1776 BBC Worldwide, London

Ward G, (2003) The Rough Guide History of the USA, Rough Guides Ltd, London and New York

The copyright of the article The South Sea Company in UK/Irish History is owned by Barry Vale. Permission to republish The South Sea Company in print or online must be granted by the author in writing.