The South Sea Bubble got its name from the South Sea Company that generated so much enthusiasm in the early 1700s. But the company is only part of the story. The bubble really inflated because of hundreds of smaller issues being created around the same time.
The reason is fairly simple. The high price of the South Sea Company stock made it difficult for the masses to participate. The smaller issues became the gateway for almost everyone to buy South Sea stock. Those smaller issues were just as wild and unsuccessful as most Dotcom stocks. But that didn’t stop people from buying.
The pop came about because of the directors of the South Sea Company. They needed to prop up the stock price and saw the smaller issues as competition. They wanted a monopoly on all investor capital.
So the directors pushed for the Bubble Act, which only allowed for joint-stock companies approved by royal charter. With the Act in place, only three companies had royal approval and the rest ceased trading almost immediately.
The entire episode was recorded in “Anderson’s History of Commerce,” originally published in the late 1700s. The entry for 1720 — the peak of the South Sea Bubble — paints an interesting picture of the experience (edited for easier reading): Continue Reading…