The South Sea Bubble

Overview:

The South Sea Company was founded in 1711 as an exploration and slave-trading venture. Its infamous legacy centers on its role in the first major stock market collapse in history. The link between finance and exploration was substantial in 18th century Europe. When the South Sea Company was granted the right to convert British government debt to South Sea Company equity, share values skyrocketed. Accounting, however, does not explain every facet of this company's pertinent story. Shares in exploration firms had been available for nearly 200 years. What about the South Sea Company and the political, economic and social context in which it operated made it the impetus for (or victim of) such a calamity? Does the collapse of the "South Sea Bubble" shed light on investor irrationality or the importance of corporate governance, responsible regulation, investor savings, liquidity, and leverage?

The story of the South Sea Company and its seemingly absurd stock price levels always enters into conversations about modern valuation bubbles. Social advocates and media outlets tend to emphasize the madness of crowds, as in the above video from the television show "Bremmer, Bird and Fortune.”  Because of its modern application, discerning what was at the root of the world's first stock market crash merits considerable attention.

Format:
Raw, online
Teaching Note:
No
Suggested Citation:

Frank Newman and William Goetzmann, “South Sea Bubble,” Yale SOM Case 09-032, September 17, 2009.

Keywords:
  • panics
Perspectives:
  • Business History
  • Financial Regulation