Definition of South Sea bubble.


search - explain South Sea bubble.

historic definition...

South Sea bubble. -- The South Sea Company was projected (organized) in 1710 by the Prime Minister of England, Harley, afterward Earl of Oxford, to effect a reduction of the interest on the funded debt. By 1720 the necessities of the nation had increased to such an extent that the plan of the Smith Sea Company was accepted by the government. This plan provided for the uniting or consolidation of the debts of the state upon which the state was to pay 5 per cent until 1727 and 4 per cent thereafter. The South Sea Company was to receive a valuable monopoly for its services, to wit: the exclusive privilege of trading to the Pacific ocean and along the east coast of America from the Orinoco to Cape Horn. The company's method of consolidating the English government debts was by offering its own stock in exchange for the securities representing the debts. The South Sea Company's offer was considered so advantageous that the holders of government securities, or annuities , as they were commonly called, rushed to embrace it. These holders thought that by exchanging their securities for South Sea shares they would receive an annuity of 10 per cent instead of 5 per cent. The par value of the shares of the South Sea Company was 100 pounds. By the middle of 1720 they had risen to 1,000 pounds. The apparent success of the South Sea Company inspired schemes without end. The objects of some of them were most absurd, such as "for the discovery of perpetual motion," "for the fattening of hogs," "for the importation of jackasses," etc. There were instances of shares reaching a premium of 2,000 per cent. One projector announced a "Company for carrying on an undertaking of great advantage, but nobody to know what it is; every subscriber who deposits 2 pounds per share to be entitled to 100 pounds per annum." This individual in five hours received subscriptions to the amount of 2,000 pounds and the next day was nowhere to be found. The companies that were formed after the organization of the South Sea Company were the first to collapse, but the South Sea Company burst not long afterward. The loss by its failure was tremendous. Thereafter the South Sea Company was known as the South Sea bubble.

About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

Copyright © 2007 by Mark McCracken, All Rights Reserved. is an informational website, and should not be used as a substitute for professional financial or legal advice. and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.