Penn Wealth Publishing

2019.01.13 Penn Wealth Report Vol 7 Issue 01

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Penn Wealth Report strategic vision Copyright 2019. All Rights Reserved. 13 Jan 2019 penn wealth Report volume 7 issue 01 7 1754 engraving of the Old South Sea House in London, headquarters of the South Sea Company. (Public Domain) In exchange for the scheme, the South Sea Company would be given a monop- oly on trade with South America once the war was over, with the (strong) assump- tion that Britain would be the victor. e end of a war, the start of a bubble. e Treaty of Utrecht did, indeed, sig- nal an end to the war, and Britain did walk away with most of the spoils. But the founders of the South Sea Company were engaging in something of a Bernie Madoff-like Ponzi scheme. ey knew that Spain would never willingly give up their lucrative South American trade routes, and they knew that their prom- ises of wealth being made in this endeavor were greatly exaggerated. eir cargo trips, with the cargo generally consisting of slaves, were perpetually unprofitable. At the start of 1720, South Sea shares were trading around £128. To keep the money flowing in, the directors began cir- culating false stories of vast wealth being created from the trade side of the business. e stock price rose to £175 the follow- ing month, and to £330 by the end of March. By the end of spring, shares were at £550—over a 400% gain from the start of the year. In a warped deal, greatly misconstrued by would-be investors, the South Sea Company persuaded Parliament to pass the Bubble Act, which required all joint- stock companies to receive a royal charter. From the South Sea angle, this would curtail competition; from the angle of the investing public, this only lent credibility to the company. By summer, South Sea stock had spiked to £1,050 per share. e collapse and the fallout. Like any financial bubble, the collapse came even more fervently than the rise. Questions surrounding the company's actual profit (or lack thereof ) went unan- swered, and fear began to supplant greed. Investors began unloading shares at a breakneck speed, and by September they were once again trading around £175. When we think of 18th century England, we envision a small percentage of well-offs, and a vast percentage of the abject poor. But members of all economic quintiles got caught up in the South Sea Bubble. Porters, maids, and clergymen lost their life savings, and members of the House of Commons lost their situation. Politically, the bubble led to the 20-year reign of Robert Walpole, con- sidered to be the first Prime Minister of Great Britain. Walpole had opposed the South Sea scheme from the start. By claw- ing back the national debt and dividing it into three government-controlled buckets, he eventually restored order. Despite the "safeguards" we have in place today, the similarity between the South Sea Bubble and modern bubbles should serve as a warning sign for inves- tors who let emotions dictate their actions. 1720; The "night singer of shares" sells South Sea shares on the street (Public Domain)

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