1. Market Crashes: Introduction
  2. Market Crashes: What are Crashes and Bubbles?
  3. Market Crashes: The Tulip and Bulb Craze
  4. Market Crashes: The South Sea Bubble
  5. Market Crashes: The Florida Real Estate Craze
  6. Market Crashes: The Great Depression (1929)
  7. Market Crashes: The Crash of 1987
  8. Market Crashes: The Asian Crisis
  9. Market Crashes: The Dotcom Crash
  10. Market Crashes: Housing Bubble and Credit Crisis (2007-2009)
  11. Market Crashes: Conclusion

By Andrew Beattie

When: 1711

Where: United Kingdom

The amount the market declined from peak to bottom: Stocks in the South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing by the later half of 1720. A massive amount of money was lost.

Synopsis: In the 1700s, the British empire was the big dog on the block, and that particular block spanned the entire globe. For the British, the eighteenth century was a time of prosperity and opulence, meaning a large section of the population had money to invest and were looking for places to put their money. So, the South Sea Company had no problem attracting investors when, with an IOU to the government worth £10,000,000.00, the company purchased the "rights" to all trade in the South Seas.

The few companies offering stock at that time were all solid but difficult investments to buy. For example, the East India Company was paying out considerable tax-free dividends to their mere 499 investors. The SSC was perched on top of what was perceived to be the most lucrative monopoly on earth.

The first issue of stock didn't even satiate the voracious appetite of the hardcore speculators, let alone the average investors who were assured of this company's coming dominance. The popular conception was that Mexicans and South Americans were just waiting for someone to introduce them to the finery of wool and fleece in exchange for mounds of jewels and gold! So nobody questioned the repeated re-issues of stocks by the South Sea Company--people just bought the expensive stocks as fast as they were offered. It didn't matter either to investors that the company wasn't headed by experienced management. Those who lead the company, however, were born public relations directors, who set up offices furnished with affluence in the most extravagant quarters. People, once they saw the wealth the SSC was "generating," couldn't keep their money from gravitating towards the SSC.

Not long after the emergence of the SSC, another British company, the Mississippi Company, established itself in France. The company was the brainchild of an exiled Brit named John Law. His idea wasn't so much based in trade, but in switching the monetary system from gold and silver into a paper currency system. The Mississippi Company caught the attention of all the continental traders and gave them a space to put their hard-earned dollars. Soon the worth of the Mississippi Company's stock was worth 80 times more than all the gold and silver in France. Law also began collecting defunct companies to add to his massive conglomerate.

This success on the continent stirred British pride, and, believing that British companies could not fail, British investors were desperate to invest their money. They were blind to many indications that the SSC was run too poorly to break even (whole shipments of wool were misdirected and left decaying in foreign ports), and people wanted to buy even more stocks. The South Sea Company and others made a point of giving people what they wanted. The demand for investments caused IPOs to sprout out of everything, including companies that promised to reclaim sunshine from vegetables and to build floating mansions to extend Britain's landmass. They all sold like mad.



Eventually the management team of SSC took a step back and realized that the value of their personal shares in no way reflected the actual value of the company or its dismal earnings. So they sold their stocks in the summer of 1720 and hoped no one would leak the failure of the company to the other shareholders. Like all bad news, however, the knowledge of the actions of SSC management spread, and the panic selling of worthless certificates ensued. The huge hole in the south sea bubble also punctured the Mississippi Company's unrealistic value and both came crashing down.

A complete crash, which would be heralded by the folding of banks, was avoided due to the prominent economic position of the British Empire and the government's help in stabilizing the banking industry. The British government outlawed the issuing of stock certificates, a law that was not repealed until 1825.

Market Crashes: The Florida Real Estate Craze

Related Articles
  1. Insights

    The Birth Of Stock Exchanges

    Learn how British coffeehouses helped give rise to the juggernaut that is the NYSE.
  2. Personal Finance

    Short Selling: Making The Ban

    Short selling has been around as long as the stock market, and it hasn't always been looked on favorably.
  3. Investing

    Early Monopolies: Conquest And Corruption

    This structure can be very effective, but it is also known for its abuse of power.
  4. Investing

    What Must The UK Do To Keep North Sea Oil Afloat?

    The UK government may need to take drastic action to ensure the viability of UK North Sea offshore oil production amid high costs and shrinking margins.
  5. Investing

    China Has No Historical Rights To South China Sea, Court Says

    An International tribunal ruled that China has no historical rights to the South China Sea
  6. Investing

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
  7. Investing

    How The Stock Market Works

    When you buy a stock, you buy a piece of a company.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center