| Code | DS/UK/633 |
| Corporate Name | South Sea Company |
| Activity | The South Sea Company was founded in 1711 as a joint stock company to deal with government debt. Joint stock companies held a royal charter that allowed them to issue shares. Shareholders enjoyed limited liability and shares were easily transferable. (Other financial instruments of the time did not necessarily have these two features.) The Bank of England (founded in 1694) was another joint stock company. The British state had incurred heavy wartime debts. Older debt contracts were inefficient for both creditors and debtors. The state had to deal with a large range of different creditors. Some of the contracts did not allow the state to buy back the debt without the creditors permission (e.g. irredeemable annuities). Creditors found that there were difficulties with assignability (i.e. it was difficult to transfer ownership of, say, annuities) creating liquidity problems. In addition, payments from the state often fell into arrears. In a debt for equity swap, creditors were offered shares in a company (equity) in exchange for the debt. The company would receive a management fee from the government and a royal charter to engage in a particular activity. The Bank and the South Sea were both founded in this way.
The South Sea Companys royal charter theoretically assigned it a monopoly right to trade in enslaved Africans to the Spanish held colonies in the Americas. This right was officially confirmed by Spanish Crown by the Asiento contract as part of the Treaty of Utrecht (after the War of the Spanish Succession). Although many popular histories claim that the companys trade was negligible, records of slaving voyages (slavevoyages.org) show that several thousand individuals were shipped. The company was helped by the Royal African Company and the Royal Navy. The South Sea also competed with the Bank of England to engage in another debt for equity swap. The South Sea outbid the Bank, but had to pay a hefty fee to the state in the process. The company also sold its shares directly onto the market. An early shareholder was Thomas Guy who was simply interested in providing his charitable projects with a steady income. When the company shares shot up in price, he sold out. Some of his gains were invested in his eponymous hospital.
The 1720 boom in share prices on the London stock market is known as the South Sea Bubble. Its origins are complicated. The debt for equity swap went well and Europe was entering a time of relative peace. The French economy had undergone a radical overhaul and the Paris stock exchange experienced a financial bubble (the Mississippi Bubble). When the bubble burst, investors moved money to London and this pushed up share prices. Naïve investors also entered the market, encouraged by sales tactics such as payment by instalment. When the South Sea Bubble burst, the company was found to have bribed important political figures including the Chancellor of the Exchequer, John Aislabie. Aislabie was briefly held in the Tower of London. Robert Walpole began his rise to power due to his handling of the crisis. The Bank was required to contribute to the financial rescue package. It received company shares and loaned substantial sums to the company. It required the companys own banker, the Sword Blade Bank, to fail (as the Sword Blade was a rival bank). Popular myth claims that many were ruined in the bubble, but there is little evidence of any long term economic damage similar to the 1929 Crash or the 2007-8 crisis.
The above Information Shee was provided by Helen Paul, University of Southampton, hjp@soton.ac.uk. For further reading see: John Carswell 'The South Sea Bubble' (various editions) and Helen Paul 'The South Sea Bubble'.
|
Show related catalogue records