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TeachMeFinance.com - 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.
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