Part 3 of our discussion of bubbles and crashes. "This has all happened before and it will happen again," is a re-occurring theme in the re-imagined version of the TV series Battlestar Galactica, now in it's fourth and final season. We continue our discussion of history repeating itself in regards to bubbles and crashes.
In 1711 in the United Kingdom stocks in The South Sea Company were traded for 1,000 British pounds (unadjusted for inflation) and then were reduced to nothing in the later half of 1720. A mass amount of money was lost.
The Eighteenth century was a time of great prosperity for the British. A large section of the population had money to invest and were looking for places to put their money. People had no problem investing in the South Sea Company when it purchased the rights to all trade in the South Sea.
The first issue of stock couldn't quench the thirst of the hardcore speculators, let alone the run of the mill investor who were assured of the company's coming dominance. People kept buying the expensive stock as soon as it was offered. It didn't matter to anyone the company was being lead by inexperienced management. The management was lead by however experienced public relation directors, who set up extravagant quarters. Once people saw the wealth the South Sea Company was generating they couldn't keep their hands off the stock.
The success that spread through the country and British pride led the people to beleive British companies could not fail. Blinded by their growing wealth, the people did not notice that the South Sea Company was run to poorly to break even. Shipments would be misdirected only to be left decaying in some foreign port. But people just kept buying stock. Soon demand came for more up in coming companies. IPO's were popping up everywhere. There were companies promising to reclaim sunshine from vegetables and to build floating mansions to expand England's land mass. People kept buying and buying.
Eventually the management of the South Sea Company realized their stock was nowhere the value of the company. So they sold their shares of the stock in the company hoping no one would notice. But like all bad news, everyone likes bad news, word spread, and panic selling ensued.
A complete crash which would lead to banks failing as well was avoided by the British Government. The governments prominent economic position helped stabilize the banking industry. The British Government outlawed the issuance of stock certificates. This law was not repealed until 1825. Over a hundred years later.
Joseph Spence wrote that Lord Randor reported to him "When Sir Isaac Newton was asked about the continuance of the rising South Sea Company stock...he responded "that he could not calculate the madness of people." Newton's neice Catherine Conduiit that he participated and lost twenty thousand pounds. All he didn't like to hear this much. This was a fortune at the time but it is unclear whether it was a monetary loss or an opportunity cost loss.
Next up: The Florida Real Estate Craze.
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