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The South Sea Bubble

The South Sea Bubble

John Carswell
1960
T2 314 pages · about 5h 14m to read Open Librarygoodreads

The standard account of 1720.

Summary

John Carswell wrote the standard modern history of the South Sea Bubble of 1720, using parliamentary records, company documents and correspondence.

The scheme's mechanics are the substance. The South Sea Company was created in 1711 to take over a portion of the British government's unfunded debt in exchange for annual interest and a monopoly on trade with Spanish America, which never produced meaningful commerce. In 1720 the company proposed to take over the great majority of the remaining national debt: holders of government annuities would exchange them for company shares at a conversion rate determined by the share price, so that the higher the share price, the fewer shares the company needed to issue and the more remained available for it to sell. This gave the directors a direct interest in driving the price up, and Carswell documents how they did it, including lending money to buyers of the stock and distributing shares to politicians on terms that guaranteed profit.

The collapse, the parliamentary inquiry, the confiscation of directors' estates and the political consequences including Robert Walpole's rise are covered in detail. Carswell also covers the parallel Mississippi scheme in France and the relationship between them. The book is scholarly and its explanation of the conversion mechanism is the clearest available; most popular accounts of the bubble do not explain why the share price mattered to the company's own economics.

Key takeaways 7

  1. The conversion terms meant that a higher share price let the company retire the same debt with fewer shares, which gave directors a direct interest in inflating it.
  2. The company's Spanish American trading monopoly, which was its nominal business, never produced meaningful commerce.
  3. Directors lent money to buyers of the company's own stock, which manufactured demand with the company's own resources.
  4. Shares were distributed to politicians on terms that guaranteed profit, which purchased the legislation the scheme required.
  5. The scheme was a debt conversion whose entire economics depended on the market price of the converting security.
  6. Parliament confiscated the directors' estates afterward, which is a resolution mechanism no subsequent bubble has produced.
  7. Carswell's explanation of the conversion mechanism is clearer than the popular accounts, which usually omit why the share price mattered to the company.

Who should read it

Investors and financial historians who want the mechanism of the first great speculative collapse rather than the anecdotes about it.

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Where it sits in the reference 1

Tulips, the South Sea and Mississippi bubbles
Financial panics

Topics

Financial HistoryGeneral HistoryFinancial History