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Pop-ping the South Sea Bubble

18th century economics may not seem the most accessible, which is why I want to tell the story of the South Sea Bubble- one of the first financial crashes- through the familiar territory of pop culture.


You’ll notice that I haven’t included an artefact in this Cabinet of Curiosity themed on ‘Money’. Whilst others may be able to display physical coins, financial markets are less tangible. This is especially true in the case of the South Sea Bubble, as historians struggle between themselves to identify its causes and effects: for many, this company never translated into tangible, accessible money. I hope that tethering South Sea to cultural references like the Wolf of Wall Street, GameStop and Bitcoin can help us all to grasp its slippery concepts.


Misunderstood commodity: The Wolf of Wall Street

The South Sea Company, established in January 1711, dealt slaves with Spanish America. Whilst many 18th century Brits were willing to invest in the trade, they misunderstood the relationship between the business of the South Sea Bubble and the subsequent generating of wealth for investors. This is a common faucet of legitimate, but overinflated, companies all the way through to ponzi schemes: whilst tangible cash is invested and the business seems to partake in material trade, it is unclear how this develops into tangible cash for investors.


I couldn’t write an article like this without reference to the Wolf of Wall Street. I think our best comparison here is Jordan’s trading of penny stocks, which are typically cheap and also represent ‘misunderstood commodities’ as these companies are not the well-known AMEX/ FTSE 100/ S&P Euro350 players. These are often offered by ‘growing companies with limited cash and resources’, which is representative of the South Sea Company in its conception.

Endorsement by notable figures: Fyre Festival

Returning to my Wolf of Wall Street analogy, Jordan was only able to sell penny stocks through aggressive, yet persuasive, sale pitches to gain investors’ trust. This faucet of ‘credibility’ is critical in any investment scheme, and can be bolstered through endorsement by a ‘reputable’ figure. In the case of South Sea this was from George I in 1718 and the businessman-come-celebrity John Blunt, who we can think of as an 18th century Alan Sugar.


But the influence of such endorsement also extends to those who may not be ‘financially credible.’ If you find some free time over the Easter break, you have to watch the Netflix docu-film Fyre: The Greatest Party That Never Happened. This festival was essentially a scam and its creator already had little credibility. However, the endorsement of the festival by supermodels and celebrities made the scheme seem not only trustworthy but glamorous.




The historiography on the South Sea Bubble has not overlooked the role of inflated expectations in inflating stock prices, with William R. Scott’ concluding that investors acted ‘‘optimistically” but still “rationally.’’

Communication and networks: GameStop

Key to investment is communication of stock value and prices and the South Sea Company actively sought to create its own networks to do so. Following the lapsing of the Press Licensing Act in 1695, the booming London press was perfect for informing the public and share holders. As Richard Dale has highlighted ‘announcements relating to new share issues and conversion operations appeared as press advertisements and were also posted on the doors of South Sea House (its headquarters) and at the Royal Exchange.’ But this also operated informally, through oral cultures in coffee houses and ballads such as ‘An excellent new song, called, Credit restored, in the year of our Lord God, 1711. To the tune of, Come prithee, Horace, hold up thy head.’ Even when writing after the collapse of the South Sea Bubble, Thomas Mortimer’s 1761 Every Man His Own Broker instructed that those who wished to deal in stocks ought to make use of the Coffee House Jonathan’s:



‘‘Every person who enters Jonathan’s to do any business there pays 6d at the bar, for which he is entitled to firing, ink and paper, and a small cup of chocolate; and if he understands the business, is as a Broker for that day (at least for his own affairs) as the best.’’


These seemingly ‘informal’ communication networks ought not to be underestimated, with Jonathan’s Coffee House eventually becoming the London Stock Exchange in 1773.


The lack of regulation of 18th century press and oral cultures can be compared to the frenzy of investment discussions on social media. Most notably, GameStop’s surge was prompted by so-called ‘activist investors’ on Reddit. The controversy of GameStop has prompted discussion about the regulation of online investment, notably with the investment app Robinhood limiting GameStop stocks in response. Comparable was the fate of John Freke’s Price List, which published daily stock prices to aid investors. Though established in 1714 it ceased in 1722 following the crash of the South Sea Bubble, highlighting that this financial crisis prompted fear of misinformation in communication networks.

Impacted by uncontrollable international events: (Covid-19)

The misinformation spread through communication networks was amplified by unpredictable, uncontrollable geopolitics. The South Sea Company, and its government backers, had hoped that the cessation of the Spanish War of Succession with the 1713 Treaty of Utrecht would create a boom in the slave trade and create vast returns. Unpredictably, the Spanish imposed taxation on British slave imports to the Americas which diminished profits and reduced the amount of trade. This unforeseen event, and impact of international economic politics, can be likened to the impact of Covid-19. Just as the South Sea Company could not predict Spanish protectionism, and the extent of its impacts, the unexpected Covid-19 pandemic not only initially disrupted international markets but has continued to do so. Though in March 2020 the OECD Interim Economic Outlook suggested that a worst-case scenario would see global growth halved to 1.5%, it admitted by June that year that this estimate ‘was optimistic’. It went on to recognise that ‘the most recent estimates in the June 10 OECD Economic Outlook suggest an unprecedented collapse in the first half of 2020 – an almost 13% decline in global GDP.’



OECD graph June 2020 of impact of Covid-19 upon GDP, by nation.


In response to this, the OECD recommended to ‘boost confidence in trade and global markets by improving transparency.’ Further, the Secretary General of the UN urged that ‘in times of real emergencies such as now, we need to rethink cross-border trade by removing all unnecessary export restrictions and barriers and fostering a favourable business environment.’ Though George I hoped for a similar fate, the Spanish continued to impose trade restrictions which did nothing to increase the profitability of the South Sea trade.


So far, we’ve seen that the trade of the South Sea Company was, though misunderstood and its value overinflated, not maliciously or intentionally done so. However, against this backdrop of a Spanish trade embargo, a more insidious turn was taken in order to maintain investment in the company.

Coercion: OneCoin Pyramid Scheme

Though in 1718 stocks were now returning one hundred percent interest, this could not be underpinned by the actual profits that the company was generating. Hence, as Terry Stuart highlights, coercion to find new investors became necessary. ‘Those involved in the company began encouraging – and in some cases bribing – their friends to purchase stock to further inflate the price and keep demand high.’ This can have a more formalised aspect in modern examples, with such coercion being encouraged by the companies themselves. Jamie Barlett’s The Missing Cryptoqueen, which explores the fraudulent cryptocurrency OneCoin, uncovered that a key tactic was encouraging investors to forward details of the scam to their personal connections. This was primarily done through social media, with WhatsApp groups and online seminars enticing new investment. This returns us to the earlier discussion of communication networks. As the FTC Chairman Rorbert Pitofsky told a Senate subcommittee during a February on internet fraud, ‘what is new—and striking—is the size of the potential market and the relative ease, low cost and speed with which a scam can be perpetrated.’

Wealth that never materialised: Ponzi Schemes

I was also prompted not to include a physical object in our cabinet as many who invested in South Sea never actually benefited from material returns. ‘Among the many popular investment anecdotes, there is this one about how renowned scientist Isaac Newton lost a packet in the so-called "South Sea bubble" of 1720.’ Though, Wall Street Journal’s Jason Zweig has highlighted, he initially made £7,000- twice of what he had invested- he reinvested only to lose £20,000 (or more than $3 million, based on the money value in 2002-03), according to Zweig. Newton’s early success came as he sold his shares whilst the bubble was still growing. However, at this point the South Sea Company had effectively become a ‘Ponzi Scheme’. This term comes from Charles Ponzi, a ‘businessman’ in the 1920s who essentially paid earlier investors with the profits he made from later ones. This created a vicious cycle in which he could only pay his investors through attracting more. Newton would fall into the trap of becoming an investor who was contributing to the rise in profits, but did not quit in time to reap the benefits.



The short squeeze: Bitcoin

With an increasing number of investors, the South Sea experienced a ‘short squeeze’: when a stock price surges, encouraging continual investment. This was the creation of the ‘bubble’. The best example from our recent experience has to be the (admittedly ongoing) boom in Bitcoin stock value. Like South Sea, the surge stock price was caused by a genuine belief that this was a worthy investment combined with the company’s actually diminishing profits. This was due to the nature of the good as ‘Bitcoins are created by mining software and hardware at a specified rate. This rate splits in half every four years, slowing down the number of coins created,' which like the returns from the South Sea Company, was continually diminishing despite the ever increasing number of investors.


The similarities between the stock prices of Bitcoin and the South Sea Bubble is clear:



Red- South Sea

Blue- Bitcoin


The historiography has asserted that one reason the South Sea Bubble was able to inflate was the lack of financial theory. Bitcoin in 2014 was similarly elusive, with speculation that this would be a form of ‘financial revolution’ just like the 1690s had been.

Government involvement: Haiti, 2001

There was public outcry against the experience of the South Sea Bubble, prompting the government to introduce the Bubble Act in 1720. ‘This forbade the creation of joint-stock companies such as the South Sea Company without the specific permission of a royal charter.’ Further, there seems little need to include an object depicting the South Sea Bubble in our Cabinet as the debt of the company effectively disappeared. Then Chancellor of the Exchequer Robert Walpole, who would eventually become Prime Minister in 1721 for his handling of the bursting of the South Sea Bubble, ‘divided the national debt between the Bank of England, Treasury and Sinking Fund. The Sinking Fund was made up using a part of the country’s income, which was put aside every year.’ This was possible because the South Sea company was underwritten by the government, but also meant that the vast debt disappeared into national debt. Government endorsement of subsequently collapsing companies was experienced by Haitains in 2001, with their then President Jean-Bertrand Aristide encouraging public investments in ‘cooperatives’. These companies, generally established by unregulated banks and credit unions, offered huge inflation-rates and, like many of our examples, had implicit government support as well as endorsement from Haitian celebrities. However, as Haitians poured their life savings into these investments only to lose it, demonstrators took to the streets. Part of the frustration was that a regulator, similar to those introduced in Britain in 1720, already existed in Haiti: the National Council of Cooperatives. However, similar to the absorption of the South Sea Debt, in 2002 President Aristide promised ‘promised to refund the millions of dollars which evaporated from cooperative accounts.



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