The South Sea Bubble got its name from the South Sea Company. Its soaring stock price generated an enthusiastic buying spree in the early 1700s but the company is only part of the story. Hundred of smaller companies created around the same time kept the bubble inflated.
Between 1719 and 1720, numerous joint-stock companies were formed to take advantage of investor enthusiasm. A handful were legitimate concerns in insurance. Some were based on new innovations like “Puckle’s Machine Gun” and different fishery projects.
The majority were schemes to take advantage of investors’ ignorance. Some of the wilder concerns involved “extracting silver from lead,” “trading in human hair,” “a wheel for a perpetual motion,” and “a subscription advertised, and actually opened, for an undertaking, which shall in due time be revealed.”
Somehow, investors ate it up.
But the directors of the South Sea Company had a problem. They needed to prop up their stock and saw the smaller issues as competition. They wanted a monopoly on investor capital. They reasoned that if investors dumped their money into these new companies, no money would be left to pump up South Sea stock. Continue Reading…