What's a south sea bubble

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Q.� What sort of company was this

A.� It was formed by Robert Harley in 1711 and given, by the Government, the exclusive right to trade with the island of the South Seas and South America.

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Q.� Why was the Government so generous with its favours

A.� A group of merchants had had bought �9 million of the Government's debt. In return, the hard-pressed Government promised them 6% interest - that's �540,000 a year. But instead of the cash, they could take their repayment as shares in the South Sea Company.

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Q.� A good deal, on the face of it

A.� It was based on ignorance and greed. The South Sea Company had huge expectations of profit once South Amerce and the South Seas re-opened for trade after the War of Spanish Succession.

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Q.� So the market rose artificially

A.� Yes - stock in the company rose from �128 10s in January, 1720, to �1,000 in August. Investors thought that it was a sure-fire investment. After all, the Government had endorsed it, so it couldn't fail, could it

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Q.� And ...

A.� It did fail. The company had just been given a monopoly on the trading rights to four ports that Spain was apparently willing to open up in Chile and Peru. The South Sea Company imagined piles of gold in South America. But King Philip V of Spain was having none of this ... he was permitting only two or three ships a year to visit for trade. The bubble burst in September, 1720. Banks failed when they could not collect loans on inflated stock. Thousands were ruined, including many members of the government.

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Q.� Why did they all fall for it

A.� Greed had taken a grip - causing almost a mania in some investors. Many actually believed that prosperity could be achieved though unlimited expansion of credit - a theory instantly disproved when the bubble burst. This was a time of great speculation and the South Sea's early success spawned many other ventures in imitation.

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Q.� Such as

A.� Some were semi-legitimate, such as gold-hunting and silk trading in the New World. Others were ludicrous schemes: to trade in hair; insure horses; improve soap; to invent a wheel of perpetual motion; to find a way to 'transmute quicksilver [mercury] into a malleable fine metal'; and best of all, a scheme 'for carrying on an undertaking of great advantage'.

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Q.� What was that

A.� It was never revealed.

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Q.� So what happened after the bubble burst

A.� One victim of the scam, an MP, suggested that the company's directors be sewn into sacks and thrown into the Thames. That didn't happen. Some were prosecuted; some fled the country. Legislation was brought in stop it happening again.

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Steve Cunningham