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The South Sea Bubble was one of the earliest British stock market
bubbles. But it was more than just a bubble, like the dot com bubble of
recent years — it was an example of a scam of massive proportions,
with the snouts of businessmen, management, and government firmly in
the trough.

The South Sea Company

With the rise of British Imperial
power in the early eighteenth century, the huge wealth generated by its
vast overseas businesses was creating a growing wealthy middle class.
But it was well nigh impossible for anyone new to invest directly in
the companies controlling the trade. For example, the East India
Company, which enjoyed a monopoly on trade with India, had fewer than
500 shareholders to whom its handsome (and tax-free) dividends were
distributed.

Enter the South Sea Company. Following the War of
Spanish Succession, Britain was left with a national debt of around
£10m (which was a considerable sum at the time). The South Sea Company
was established in 1711 and raised capital from the investment-hungry
wealthy to buy that government debt in return for 6% a year in
interest. In addition, the company was granted a monopoly on trade with
South America, upon which the government hoped to levy taxes that
would, in turn, fund the 6% interest owed to the company. It was an
incestuous web right from the start.

Naïve investors

The
company’s first issue of stock was snapped up by eager investors, who
believed South American gold would be handed over in shiploads in
return for English wool and other such finery. Sadly for investors, the
managers weren’t really much good at trade (though they were good at
looking slick and talking smoothly), and with growing hostility between
England and Spain, the company barely made any money from trade at all.
Instead, further financial finagling followed, with new South Sea
company shares being offered to the gullible public to finance new
deals over national debt. Many insiders, in both the company and
government, took advantage to gain huge wealth, with the share price
rising nearly tenfold in little more than six months in 1720.

That
year, in full knowledge that the company’s actual business was worth a
meager fraction of the current market value of their shares, the
management sold out, and panic selling ensued when people heard the
news. In the carnage, such notables as Sir Isaac Newton (who was said
to have commented “I can calculate the motions of the heavenly bodies,
but not the madness of people.”), Alexander Pope, and even the king
himself, lost large amounts. It wasn’t just the uneducated masses who
were fleeced.

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