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It is the nature of stock market bubbles that eventually they burst and much like a soap bubble, investor confidence and value simply disappears. There is a lesson here for all who speculate in worthless dot com companies, internet startups and crypto currency. The past does not repeat but it rhymes. It has happened before and something like it will happen again and again.

The Great Stock Market Crash

Caricature of the Stock Market Bubble

Political Cartoons About the Stock Market Crash

The government itself began to think that some fearful end would come to the popular delusion; and a Royal Proclamation was issued against “mischievous and dangerous undertakings, especially the presuming to act as a corporate body, or raising stocks or shares without legal authority.” It was calculated that the value of the stock of all the companies, with corporate authority or no authority, amounted at the current prices to five hundred millions sterling; being five times as much as the circulating medium of Europe, and twice as much as the fee simple of all the land of the kingdom.

The attempt of the South Sea Company to lessen the number of their competitors was the prelude to their own fall. At their instance, writs of scire facias were issued, on the 18th of August, against four companies; and the subscribers to these, and to all other projects not legalized, were ordered to be prosecuted by the officers of the Crown. A panic ensued. In a day or two, the stocks of all the Companies not incorporated rapidly fell; and with the downward rush went down every description of stock. Before August, knowing and cautious holders of South Sea stock began to sell Out. Walpole, who had originally opposed the scheme, did not carry his opposition to the extreme of neglecting his opportunity of largely adding to his fortune, by investing at the proper time, and selling out at the proper time.

Horace Walpole

The Earl of Pembroke applied to Walpole for his advice as to the great question of selling when the shares were at their culminating point. The adroit financier coolly answered: “I will only tell you what I have done myself. I have just sold out at 1,000 per cent, and I am fully satisfied.” By the middle of September, holders of South Sea stock were crowding the Exchange, not as eager buyers, but as more eager sellers. The stock was at 850 on the 18th of August; in a month it had fallen to 410. Mr. Brodrick, on the 13th of September, writes, that the most considerable men of the Company, “with their fast friends, the Tories, Jacobites, and Papists,” had drawn out; “securing themselves by the losses of the deluded thoughtless numbers, whose understandings were overruled by avarice, and hopes of making mountains of mole-hills. Thousands of families will be reduced to beggary. . . . The consternation is inexpressible; the rage beyond expression; and the case is so desperate that I do not see any plan or scheme for averting the blow.”

On the 29th of September, South Sea stock had fallen to 175. This greatest of bubbles had burst. Many persons of rank and station were not so prudent as Walpole and the Earl of Pembroke had been. The Duke of Portland, Lord Lonsdale, and Lord Irwin were provided with colonial governments to enable them to live; “a species of consideration for ruined nobility which is rather in bad odor in our days. Merchants, lawyers, clergy, physicians, passed from their dream of fabulous wealth and from their wonted comforts into poverty; some “died of broken hearts; others withdrew to remote parts of the world, and never returned.”

It has been observed that “the calamitous effects of the madness were rather individual and immediate, than permanent or general. There was little, if any, absolute destruction of capital. The whole mischief consisted in a most quick and violent shifting of property from one hand to another.” But the derangement of the ordinary course of industry was to be added to this shifting of property. Serious as was this temporary evil; furious as it made the sufferers in their reproaches against every one but themselves; eager as it rendered the legislature for confiscation of the property of the South Sea Directors, the national credit was not permanently impaired by the infatuation which produced so much private misery.

In this respect, the issue of the South Sea scheme was essentially different from the Mississippi scheme of John Law in France, which also exploded in that fatal year for projectors; producing there what was equivalent to a national bankruptcy. When the South Sea crash came, there was alarm for its public consequences. But Walpole, who had again joined the govermment, though in a subordinate office, applied his great financial abilities to avert the difficulties which this convulsion might occasion to the State; and instead of joining the first cry for vengeance upon the South Sea Directors, he calmly said in Parliament, that if London were on fire, wise men would endeavor to extinguish the flames before they sought for the incendiaries. When the King opened the session on the 8th of December, the royal speech recommended measures “to restore the national credit.” Walpole was regarded by all parties as the man to effect this.

The Commons, through the entire session, were occupied with investigations and discussions connected with the financial convulsion. The private estates of the directors were to be regarded as a fund to provide some remedy for the public embarrassment. A bill was passed, to compel them to deliver, on oath, an estimate of the value of their property, and to prevent their going out of the kingdom. A secret Committee of Inquiry was appointed. After they had examined Mr. Robert Knight, the cashier of the Company, he fled to Brabant. A reward of “2,000 was offered for his apprehension; but it was believed that there were influences at work powerful enough to screen him. Knight was arrested at Antwerp; but the States of Brabant refused to give him up. “Screen” became a bye-word.

Caricatures, which it is said were become common at this period for political objects, had for their point the Duchess of Kendal and the flight of the cashier. “The Brabant Screen” exhibited the King’s mistress sending Knight upon his travels, giving him his dispatches from behind a screen. The prudent cashier took care to obliterate, as far as possible, the evidence that great ladies and ministers of state had been corrupted by the South Sea Directors. The Committee of the Commons reported that �in some of the books produced before them, false and fictitious entries were made; in others, entries with blanks; in others, entries with erasures and alterations; ‘ and in others, leaves were torn out.� They found, further, that some books had been destroyed, and others taken away or secreted.

Out of the mouths of the directors the committee extracted evidence to show that there had been extensive appropriation of stock to �certain ladies,� at the instance of Mr. Secretary Craggs; and the proof was clear that persons high in office had received and held stock during the time that the Company�s bill was depending in Parliament, �without any valuable consideration paid, or sufficient security given for the acceptance of, or payment for, such stock.� Nevertheless, Charles Stanhope, one of the accused, was cleared by a majority of three. The Earl of Sunderland was exonerated by a larger majority; but he could not stand up against the popular odium, and resigned his post of first Commissioner of the Treasury. Aislabie, the Chancellor of the Exchequer, was expelled the House, and was sent to the Tower. James Craggs died of small-pox during the heat of this inquiry. His father, the Postmaster-General, destroyed himself by poison.

The charges against the directors were founded upon their practice of “selling their own stock at high prices, at the same time that they gave orders for buying stock upon account of the Company;” and upon their various contrivances “to give his majesty’s subjects false notions of the value” of the South Sea stock. The punishment, under the bill that was passed, was severe. Their estates, amounting to two millions sterling, were confiscated for the relief of the sufferers by their schemes. A small allowance was made to each; but they were disabled from ever holding any place, or for sitting in Parliament Such visitations for their offenses were thought far too lenient by the greater number of their contemporaries. They may now be considered excessive.

Lessons to be Learned

It has been said that those who do not learn from history are doomed to repeat it. A corollary of this is that if you do not learn from the mistakes of others you are likely to fall for the same error.

The South Sea Bubble was an unprecedented event; there had never been anything like it. People at the time had no historical precedent to help them make sense of what was happening, and so they were caught up in the frenzy born of greed as they saw others making fortunes on paper. The excitement and enthusiasm over what was essentially a worthless company spread like a contagion and more and more people invested their money, willing to pay more for worthless shares than the last person, and each rise in price fueled even more speculation and buying frenzy — until there were no more fools to buy the stock from you and the last ones were left holding the bag.

Since then there have been many South Sea Bubbles, frenzies over useless dot com companies and bitcoin currency, whose value is objectively out of all proportion to what they should be worth.

One day every stock market bubble bursts, and most are left with nothing. But because memories are short and greed is powerful, we can be sure that different forms of the South Sea Bubble will continue to play out over and over again for as long as people want to get rich quick.