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Harley, Earl of Oxford, created the South Sea Company in 1711 by an Act of Parliament.  He decided to take responsibility for restoring the public finances by raising funds to pay back £10 million of debt, including military debentures.

The government paid six-percent interest to a company of merchants to take over the debt.  To raise the £600,000 per annum required to fund interest payments, the government placed permanent duties on a number of products, including wines, vinegar, India goods, wrought silks, tobacco and whale-fins.  Harley also granted the merchants sole rights to trade in the South Seas - what we would now recognise as the east coasts of Latin America.  Harley's flatterers called the scheme "the Earl of Oxford's masterpiece".

From its beginnings, great feats were expected of the South Sea Company.  Everybody had heard of the gold and silver mines of Peru and Mexico.  The mines were thought to be inexhaustible.  A well-spread rumour held that Spain would give Great Britain free-trade access to four of its ports in Chile and Peru in return for a share its South Seas business.  The rumour increased confidence in the South Sea Company and, in stock market trading, shares in the company rose in value.

At the opening of Parliament in 1717, the king's speech drew attention to the poor state of public finances and recommended that action be taken to reduce the national debt.  The two great financial institutions of the time, the South Sea Company and the Bank of England, made proposals to parliament on 20 May.  The South Sea Company proposed to raise its capital to £12 million and lend the government £2 million at five percent interest.  The Bank of England made a similar proposal on its own behalf to lend money to the government.  Parliament debated the issues and finally passed three new acts. These were:

The South Sea Act: This Act accepted the proposals of The South Sea Company.  The company was hold itself ready to advance £2 million to the government.

The Bank Act: The Bank of England agreed to deliver £2 million at five percent interest - the loan redeemable at one year's notice.  The Bank was further required to be ready to advance, if needed, a sum not exceeding £2.5 million on the same terms.

The General Fund Act: This Act listed the problems with public finances and how they would be solved by the two other Acts.

Through its dealings with the government, the name of the South Sea Company was continually in the public eye.  Despite the fact that the company earned little from South American trade, it flourished as a financial institution.  Shares in the company were in great demand and the directors began looking for ways to grow the company further. 

John Law's Mississippi Scheme, which had been amazingly popular in France inspired them with to try a similar scheme in England.  They were not deterred by the expected failure of the Mississippi scheme.  They were sufficiently arrogant to believe they could avoid the problems encountered in France and stretch loans infinitely far without default.  At the time when John Law's scheme reached its peak in France, and with people crowding in thousands to the Rue Quincampoix, and ruining themselves with their eagerness to participate in a flawed scheme, the South Sea directors presented their famous plan for paying off the national debt to Parliament.  Simultaneously, visions of boundless wealth were floated before the fascinated eyes of people in two of Europe's principal countries.  The English embarked on their career of extravagance somewhat later than the French; but as soon as the delirium seized them, they were determined not to be outdone.

On 22 January 1720, Parliament met to consider a proposal from the South Sea Company to wipe out the national debt.  The company proposed to take on the entire state debt of £30,981,712 until midsummer 1727 at an interest rate of five percent.  After this, Parliament could act to redeem the debt at any time or leave it with the South Sea Company 1727 at an interest rate of four percent.

The proposal was well received.  Supporters of the Bank of England proposed in Parliament that it should be the bank rather than the South Sea Company that should take on the state debt.  Parliament agreed to leave the matter for five days of consideration.

Afraid that the bank might offer better terms than they had, the South Sea Company improved the terms of their proposal to the government, allowing it to redeem the debt after four years rather than seven.  The bank, anxious not to be bettered, also sent a revised proposal to the government.

When Parliament debated the two offers, Robert Walpole acted as leader of the bank's supporters while the Chancellor of the Exchequer, Mr Aislabie, led support for the South Sea Company.  On 2 February, the South Sea Company's proposals were accepted as best for the country.  Leave was given to bring in a bill to that effect. 

Demand for the South Sea Company's shares on the stock exchange now reached fever point.  The previous day shares had been at 130.  They rose to 300 and then continued to rise as the bill passed its various stages through Parliament.

Mr Walpole was almost the only statesman in the House who spoke out boldly against it.  He warned:

Stocktrading would divert the country's genius away from trade and industry.

The unwary would be ruined when their savings were lost pursuing imaginary wealth.

The basis of the project, to artificially increase the value of South Sea Company stock by promising dividends that could never be paid was evil.

If the plan succeeded, the directors would become masters of the government and, in fact, dictators.

If it failed, which he was convinced it would, the country would be ruined.  Walpole's pleadings fell on deaf ears.  He was looked upon as a false prophet.  Once, Parliament had listened carefully to his every word.  Now the benches emptied whenever they heard Walpole intended to speak on the South Sea question.

The Bill took two months to pass through the House of Commons.  During this time, directors of the South Sea Company, especially Sir John Blunt, took every opportunity to talk up the price of the stock.  Again, free trade agreements between England and Spain were said to be imminent.  Silver from the mines of Potosi-la-Paz was to be brought to England until it would be almost as plentiful as iron.  The Mexicans would give all of the gold in their mines for cotton and woollen goods from England.  The South Sea Company would be the richest the world had ever seen and every £100 invested in its shares would produce hundreds of pounds each year to investors.

The result of the talk was that shares rose to trade at almost £400 before settling to £330.  They were trading at this price when the Bill was passed by the House of Commons, 172 in favour to 55 against.  The Bill was then rushed through the House of Lords at unparalleled speed.  Several peers spoke heatedly against the scheme but their warnings fell on deaf ears.  Lords North and Grey said the bill was and might prove fatal in its consequences, being calculated to enrich the few and impoverish the many.  The Duke of Wharton followed, but as he only reiterated the arguments stated by Walpole in the Lower House, little attention was paid him.  Earl Cowper followed, comparing the bill to the famous horse of the siege of Troy: it would be received with great pomp and acclamations of joy, but bore within it treachery and destruction.

On the same day as the Bill was passed by the Lords, it received the Royal assent and became the law of the land.  A speculating frenzy had seized the Lords as well as the common people.  It seemed as if the whole nation had become obsessed with trading the stock of the South Seas Company.  Exchange Alley was blocked by crowds every day.  Cornhill became impassable because the number of carriages.  Everybody came to purchase stock.

Surprisingly, South Sea stock fell when the Bill became law.  On 7 April shares traded at £310 and the next day at £290.  The directors made every effort to keep the price up.

People with an interest in the company gathered groups around them to speak of the treasures of the South American seas.  Exchange Alley became crowded with attentive groups.  One highly effective rumour was that Earl Stanhope had received overtures from the Spanish Government.  The Spaniards were supposedly offering to exchange Gibraltar and Port Mahon for some places on the coast of Peru, for the security and enlargement of the trade in the South Seas.  The company was to be allowed to build and charter as many ships as they pleased to trade in South America and, in place of the usual twenty-five percent, they would pay no tax whatsoever to the King of Spain.  Visions of ingots danced before people's eyes and stock rose rapidly.

On 12 April, five days after the bill had become law, the directors offered one million shares to the public.  Each share, backed by £100 of capital, was offered at £300, payable in five instalments of £60.  The offering was heavily oversubscribed and two million shares were issued.  In the first days of trading, the stock rose to £340 and subscriptions began trading for double the price of the first instalment.  The directors, seeking to enrich themselves further, declared on 21 April that the midsummer dividend would be ten percent.  Furthermore, all subscriptions would be entitled to the same dividend.  The directors then announced a new offering for a second subscription of a million shares priced at £400 per share.  Such was the frantic eagerness of people of every class to speculate in the South Sea Company, that in the course of a few hours, the public subscribed to one and a half million shares.

During the whole of the month of May, South Sea Company stock continued to rise, and on the 28th it was quoted at £550.  In four days after this it took a huge leap, rising to £890.  By this time, about two-thirds of the government annuitants had exchanged their government-backed securities for those of the South Sea Company.  It was now the general opinion that the stock could rise no higher, and many people began selling to lock in their profits.  Many noblemen and people associated with the king were also anxious to sell out.

On 3 June there were so many sellers and so few buyers in the Alley that the stock fell at once from £890 to £640.  The directors were alarmed and gave their agents orders to buy.  Their efforts succeeded.  Towards evening confidence was restored and the stock advanced to £750.

Using various methods, the directors kept the price rising until it reached £1,000 at the beginning of August.  The bubble was now full-blown and began to quiver and shake, preparatory to its bursting.  Many of the government annuitants expressed dissatisfaction with the directors, accusing them of favouritism in choosing who would receive shares in new subscription.  Uneasiness grew when news began spreading that the chairman Sir John Blunt and some others, had sold their shares.  During August the stock fell and by 2 September it had reached £700.  Alarm was beginning to spread.

On 23 September, with the stock still falling, MP Mr Broderick, wrote, "The Company have yet come to no determination, for they are in such a wood that they know not which way to turn.  By several gentlemen lately come to town, I perceive the very name of a South-Sea-man grows abominable in every country.  A great many goldsmiths are already run off, and more will daily.  I question whether one-third, nay, one-fourth, of them can stand it.  From the very beginning, I founded my judgement of the whole affair upon the unquestionable maxim, that ten millions (which is more than our running cash) could not circulate two hundred millions, beyond which our paper credit extended.  That, therefore, whenever that should become doubtful, be the cause what it would, our noble state machine must inevitably fall to the ground."

At a general court of the Bank of England held on 22 September, the governor informed officials that several meetings had been held to discuss the South Sea Company.  A resolution was proposed and carried unanimously, empowering the directors of the bank to agree with those of the South Sea Company to circulate their bonds in any way they thought proper.  Thus both parties had received authority to act as they thought appropriate to serve the public interest.  Books were opened at the bank for a subscription for £3 million on the usual terms.  The public leapt on the issue enthusiastically and due to a morning rush, it seemed that the subscription would be filled that day.  Before noon, however, the tide had turned.  In spite of all that could be done to prevent it, the South Sea Company's stock had started to fall rapidly again.  Their bonds were in such discredit, that a run started on the most eminent goldsmiths and bankers who had lent out great sums upon South Sea stock.  The goldsmiths and bankers had to close their shops and run away.  The Sword-blade Company, once the chief cashiers of the South Sea Company, stopped payments.  This started a great run on the Bank of England itself, which was now forced to pay out money faster than they had received it from subscriptions that morning.

The bank, finding they were not able to restore public confidence and stem the tide of ruin, without running the risk of being swept away with those they intended to save, refused to carry out the agreement with the South Sea Company.  They were under no obligation whatever to continue, for the contract was nothing more than the rough draft, in which blanks had been left for important particulars, and which contained no penalty for withdrawal. 

Nobody seemed to think that the nation itself was as guilty as the South Sea Company.  Nobody blamed the credulity and greed of the people or the degrading lust for gain, which had swallowed up every noble quality in the national character.  Nobody blamed the greed that had made people run with such frantic eagerness into the net held out by schemers.  These things were never mentioned.  The people were a simple, honest, hard-working people, ruined by a gang of robbers, who were to be hanged, drawn, and quartered without mercy.  This was virtually the unanimous feeling of the country.  The two Houses of Parliament were equally unreasonable.  Before the guilt of the South Sea directors was known, punishment was the only cry.  The king, in his speech from the throne, expressed his hope that they would remember that all their prudence, temper and resolution were necessary to find out and apply the proper remedy for their misfortunes.  Several parliamentarian speakers indulged in the most violent invectives against the directors of the South Sea project.

Petitions from all parts of the kingdom were presented, demanding justice for an injured nation, and the punishment of the fraudsters.  Moderate men, who would not go to extreme lengths, even in the punishment of the guilty, were accused of being accomplices.  They were repeatedly insulted publicly and in anonymous letters.

One by one every director of the company was tried and £2,014,000 was confiscated from their estates towards reparations.  Each man was allowed to keep a certain amount, in proportion to his conduct and circumstances, to begin life anew.

The company had lent about £11 million at a time when prices were unnaturally raised and got back £1.1 million. 

It was a long time before the public finances were restored completely.  The South Sea project is one of the greatest examples of the infatuation of the people with commercial gambling.

Source: http://www.thesouthseabubble.com/

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