The First Stock Bubble
This is the story of the world’s first stock market bubble and crash. A public frenzy began driving up shares of the South Sea Company and even people who had sold their stocks at a profit were swept up in the mass hysteria and bought more shares at even higher prices. It was common wisdom that the shares could only go up, and of course that sentiment is one of the surest signs of a bubble. The trick is to know when to get out and sell your stocks at a profit before it is too late. For most people, they bought in at the height of the stock bubble and were left with worthless scraps of paper when the bubble burst.
The Bank of England accordingly sent in a rival proposal; and the two Companies went on outbidding each other, till the South Sea Company’s large offer to provide seven millions and a half to buy up the annuities was accepted. The annuitants were not compelled to exchange their government security for the Company’s stock; and the chief doubt seemed to be whether the greater number would consent to this transfer. Although the terms offered by the Company to the annuitants were not encouraging, there was a rush to accept them. To hold stock in a Company whose exclusive trading privileges might realize that potentiality of wealth, which is never beyond the dreams of avarice, was a far grander thing than to receive seven, eight, or even nine per cent, upon annuities. Within six days of the announcement of the Company’s terms, two-thirds of the annuitants had exchanged their certain income for the boundless imaginary riches of South America.
Upon this foundation was built the most enormous fabric of national delusion that was ever raised among an industrious, thrifty, and prudent people. It had been long manifest that there was a great amount of superfluous capital, especially of the hoardings of the middle classes, which wanted opportunities for employment. To obtain interest for small sums was scarcely practicable for the mass of those who were enabled to keep their expenditure below their incomes.
Before the beginning of the century, companies, more or less safe, had been formed to meet this desire for investments. In spite of the long wars of the reigns of William and Anne, and the Jacobite plots and rebellions which threatened the Protestant succession, the country was going steadily forward in a course of prosperity. Wherever there is superfluous wealth, beyond the ordinary demands of industry for capital, there will be always projectors ready to suggest modes for its co-operative uses. There was then to be seen the magnificent list of noble names, such as continue to attract the unwary to have confidence in some board where very few know the secret transactions.
Franklin’s Mission to the French King
Even the Prince of Wales was then the Governor of a Welsh Copper Company. But it seems to us that the belief of all the schemes of that scheming time being fraudulent and delusive is a mistake. Many of these schemes might be premature; and having chiefly in view the profit to be made by the rise of shares, might be called “Bubbles.”
But it is scarcely reasonable to class the following projects among the ridiculous schemes of that gambling time: For improving alum works; for paving the streets of London; for supplying various towns with water; for improving the art of making soap; for improving the paper manufacture; for making iron with pit coal; for extracting silver from lead. It had been justly said by a writer who decried, in 1695, “many pernicious projects now on foot,” that “some were very useful and successful while they continued in a few hands, till they fell into stock-jobbing, now much introduced, when they dwindled to nothing: others of them were mere whims, of little or no service to the world.” Such, no doubt, was the general character of the manifold projects of 1720.
In the summer of that year, the South be a year, “the dog-star raged” over Exchange Alley with a fury that had never been equaled; because no capitalist, even to the possessor of a single shilling, was then too humble not to believe that the road to riches was open before him. Subscribers to projects recommended by “one or more persons of known credit,” were only required to advance ten shillings per cent. A shilling, and even sixpence per cent, was enough to secure the receipt for a share in the more doubtful undertakings. Shares of every sort were at a premium, unless in cases where the office that was opened at noon on one day was found closed on the next, and the shillings and sixpences had vanished with the subscription books.
But the great impulse to the frantic stock-jobbing of that Summer was the sudden and enormous rise in the value of South Sea stock. In July, Secretary Craggs wrote to Earl Stanhope, who was abroad with the King, “It is impossible to tell you what a rage prevails here for South Sea subscriptions at any price. The crowds of those that possess the redeemable annuities is so great that the Bank, who are obliged to take them in, has been forced to set tables with clerks in the streets.” The hundred pound shares of the South Sea Company went up to a thousand pounds in August.
The shares of the Bank of England and of the East India Company were transferred at an enormous advance. Smaller companies of every character : water-companies, fishery-companies, companies for various manufactures, companies for settlements and foreign trade infinite varieties, down to companies for fatting hogs and importing jackasses from Spain rushed into the market amid the universal cry for shares and more shares. The directors of the South Sea Company opened a second, a third, and a fourth subscription. They boldly proclaimed that after Christmas their annual dividend should not fall short of fifty per cent upon their �100 shf the legion of projects of that season was odious to these great lords of the money-market.
In reading the above account one is reminded of the insane speculation during the Dot Com Bubble, when companies that had no revenues and no prospect of ever turning a profit were suddenly valued more than established companies like GE or Coca Cola. Is the current craze over bitcoin a new South Sea bubble? Of course it is.
Next: The Bubble Bursts