What was the South Seas bubble?

By Andrew Beattie AAA
A:

The British East India Company introduced England to the joys of corporate finance. The company enjoyed a government-backed monopoly on trade and paid hefty dividends to the shareholders. Unfortunately, the shares were largely held for the long-term by government officials and the upper class, so the public could only watch with envy as the rich got richer. With the appetite for shares growing, many companies looked for an opportunity to tap into the new capital.

The South Seas Company was the first to find a way in. It secured a similar charter from the king for a monopoly in the South Seas. The SSC's first issue of shares were snapped up so quickly and appreciated through trading so rapidly, that the company felt no qualms about making numerous re-issues. Before the first ship ever left port, the company had used its profits to open luxurious offices in the best parts of London.

It didn't take long for other businesses to catch on to the magic hold that stock had on the public. New ventures offering new shares materialized overnight and were snapped up even as the ink was drying. Conmen outdid each other in thinking up ludicrous enterprises such as reclaiming sunshine from vegetables or constructing vast floating suburbs. The prize for most creative, however, goes to a company selling shares in an undertaking of vast importance that was so secret that nothing more could be revealed. It sold and traded as vigorously as all the rest.

The bubble that started with the SSC, also ended with it. When the company failed to pay the incredible dividends investors had imagined, it started a chain reaction of sober realization and plummeting share prices. The complete lack of profits on mountains of worthless paper destroyed fortunes as well as England's faith in the stock market.

Read about other historic crashes from the Tulip Crisis to the Asian Crisis in our Market Crashes Tutorial.

This question was answered by Andrew Beattie.

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