South Sea Bubble

Dobromir Risov
4 days ago
5 min read

by Dobromir Risov, January 2026

South Sea shares bought in June 1720 for 4,000 Pounds (Wikipedia - German edition)

Introduction

I came up with the idea to write about bubbles in more detail during my research on the Tulip mania. I had heard about the Tulip Mania before as well about more recent ones, but not about the South Sea bubble for example.

Main

And there are many more if you go in even more detail than I just did, when I follow an article of the MAN Group on this topic. I counted in their article 21, one of them Bitcoin Crypto (pt.2) - an investment?. Different names are used - bubbles, crisis, mania or frenzy. Oxford Languages describes a bubble as follows:

a good or fortunate situation that is isolated

from reality or unlikely to last.

South Sea Company: foundation and business

The South Sea company was incorporated in 1711 in London. The company was dissolved in the 1850s existing for some 140 years. The business mission was to trade in commodities and slaves in the South Seas. South Sea refers to the region of South America. The founders of the company expected the Spanish succession war to end soon and speculated on a favorable outcome. The favorable outcome being to be allowed to do a lot of trade in above region. And here is the problem: the country which issued the right to trade slaves and commodities Great Britain, did not have control over those regions. The idea being to force slaves from Africa and ship them to South America.

the Dividend Hall - no profits, hence no dividends to be paid to the owners

It was Spain and Portugal which controlled South America. As a result the monopolistic right held by the South Sea company was not viable from a business perspective. According to Wikipedia (English version) the company had traded in total around 34.000 slaves. No mention of commodities. Also, as Great Britain had no control over South America, the slaves the company had brought there were received at best with difficulty by the authorities. It is mentioned ships were rerouted to the West Indies. There Great Britain had control. Not surprisingly the South Sea company was loss making. First trips are mentioned to have started in 1713.

The shares of the South Sea company and national debt

The shares of the South Sea company were issued at a nominal value of 100 British Pounds in 1711. The shares traded up and down between nominal value and 120 for 9 years with occasional dips below nominal value as I read. In early 1720 things start changing as a result of an event one year before. The Parliament passes the National Debt Act 1719 or a deal is struck with the South Sea company. The goal is to improve the country´s debt situation. The South Sea Company takes over the debt of Great Britain and is allowed to issue more shares to the public. According to Wikipedia (English) events in France influenced the idea. And about one year later, supported by a lot of stock promoting the South Sea shares start rising rapidly. The proceeds of the capital increase were used to pay back the debt the company took over from Great Britain.

What goes up without substance must come down later.

The share of the South Sea Company quickly went up and up as shown in the chart. Prices reached 950 Pounds in July 1720. So, within 6 months, the price went up by more than 690%. Did profits keep up with the share price? The company was doing as poorly as it was doing when the share price was at 120 Pounds. Since its foundation until early 1720 the price had gone up by 20 Pounds. During the next 6 months the price went up by more than 800 Pounds. Yet the business dynamics had not changed. In August 1720 the South Sea company was expected to pay a dividend it has been withholding for about a year. When the company could not pay a dividend again the share price quickly started falling. In August from 800 to 200 Pounds by December and then another fall to 100 Pounds.

The impact on the overall economy

The website measuring worth.com estimates the Gross Domestic product (GDP) at 87 million Pounds in 1719 for Great Britain. The economy back then was very small compared with the economy today. Today´s GDP is measured in trillions. The economy today is very differentiated and very developed. Further, today´s debt of the United Kingdom is at 96% of GDP. The indebtedness is higher today than it was back then. It was at 57% as you see in the table. This is a very moderate level. According to Wikipedia (German) Great Britain went into a recession following the collapse of the South Sea share price. Trade and production output decreased. If I remember correctly a recession is when the economy decreases for two quarters in a row. The table shows the South Sea company was amongst the largest holders of national debt. It held 24% of the total debt. The East India company held solely 3%.

South Sea company deals in national debt instead of trading commodities and slaves.

Summary

The South Sea Company was founded in 1711 upon speculating on a favorable outcome of the Spanish succession war. The company´s operations were small and there were no profits. The frenzy the South Sea Company is associated with broke out in 1720, 9 years after foundation. The share price skyrocketed within 6 months. Had investors paid attention at the meagre business history of the company, they had probably not bought the stock. A company to increase its capital to become one of the largest holders of national debt - that would not be possible today. Many investors lost their investments in the ensuing collapse in late 1720, across all classes of the population. Check out my course on personal investing Courses (List) to learn investing from professionals and avoid bubbles.

Frequently Asked Questions (FAQs)

1. Did the South Sea Company have a realistic chance to do well? No. The cause being : Great Britain had issued trade rights to the company for areas which Great Britain did not control. It was Spain and Portugal which controlled South America.

2. What can be said about the stock price movements of the South Sea company? The stock didn´t move much for almost a decade. That was in line with the poor business performance of the South Sea company. As a result of a frenzy around the purchase of national debt the stock price shot up six fold within six months before collapsing.

3. Did the South Sea case have a wider impact? Yes. Many people from different social classes lost their investments. The economy took a hit and went into a recession.

4.What´s the lesson of the South Sea case for investors? The lesson is simple and is probably the same with every bubble: had investors taken a sober look at the business they invested in instead of believing the promises, they probably had stayed away from South Sea shares.