Panic, Prosperity, and Progress: Five Centuries of History and the Markets

CHAPTER 3

The South Sea Bubble

At roughly the same time John Law and the Duke of Orléans were turning France upside–down with the Mississippi Company, a largely identical situation was foisted on Great Britain with different actors. The parallels between what happened in France and Britain are remarkable, as we shall see.

■ Sovereign Debt and an Idea

The War of Spanish Succession was waged between 1701 and 1714, and in its prosecution of that war, Britain got itself deeply in debt. An internal audit of the various bonds yielded a sum of 9 million pounds owed without any specified means of paying it off. Indeed, prospects for the debt’s being honored were so poor that the government bonds were priced in the public market at a near 50 percent discount to their face value.

In 1711, a scheme was conjured up to form a private organization to take over and manage the debt. The capitalization would be relatively simple: the company would be established with a government-sanctioned trading monopoly; specifically, it would be permitted to trade with the Spanish colonies in South America, a zone generally referred to as the South Seas. Thus, this new enterprise would be called The South Sea Company.

Holders of debt could exchange their certificates for shares in the newly formed company, and Britain would make interest payments on those bonds. Thus, the South Sea Company had two sources of income: (1) a reliable stream of cash from Great Britain for interest payments, and (2) lucrative ...