The Bubble

The South Sea Bubble -- the greatest stock market scandal of the eighteenth century -- originated in a scheme by the newly chartered South Sea Company to retire a large quantity of old government debt, bearing relatively high rates of interest.  The Company had been chartered under the last Tory administration to administer the Asiento, the right to export slaves to Spain's American colonies, granted to Britain by the peace treaty ending the War of the Spanish Succession.  The directors saw an opportunity to make additional profits as middlemen handling some of the debts the war had created, as the East India Company and Bank of England had long been doing.  They proposed a scheme by which holders of old debt would be invited to exchange it for South Sea Company stock.  In return the Crown would pay interest on this debt to the Company, which would either reinvest it in trade or return it directly to its stockholders in the form of dividends.  The company would also be authorized to issue new stock with a face value equal to that of the debt it sought to be redeemed. But the rate at which old securities would be redeemed for stock would be determined by the market price. 

The directors were counting on a recent boom in the London stock market, not only to convince debt holders to convert their securities to South Sea Stock but to do so at an inflated rate, reflecting the stock's market price rather than its face value.  In this way the Company would be able to redeem the old debt for less than the total amount of stock they were authorized to sell, allowing them to make a clear profit on the remainder.  The Directors then engaged in some "pump priming" by buying their own stock to create upward momentum.  The price of South Sea stock soon rose spectacularly, to nearly three times its face value.  Then more cautious investors began to sell and the bubble burst, causing investors who had bought in at the peak of the market to sustain huge losses. This sequence of events appeared to confirm all the worst stereotypes of stock brokers and the monied interest, as a collection of swindlers who enriched themselves by manipulating the market, at the expense of less sophisticated investors.  The victims of the collapse clamored for a parliamentary investigation and Tories and other opposition politicians joined in the cry, hoping to bring down the Whig administration that had presided over the fiasco.  The rising politician Sir Robert Walpole, who had been expelled from the Whig cabinet before the South Sea scheme unfolded, was assigned the task of managing the investigation in a way that would shield leading Whig politicians and members of the Court.  His success at this task, which earned him the obriquet of "screen master general", played a key role in launching his career as the leading Whig boss of the next generation and, effectively, the first Prime Minister.  In many circles it also confirmed the reputation of the Whig leadership and Walpole in particular as a corrupt political clique, whose use of patronage and government money had effectively subverted the independence of Parliament.   

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