The South Sea Company would make investors rich

The South Sea Company would make investors rich
	FALSE
	"The South Sea Company's monopoly on British trade with Spanish America would generate enormous profits, justifying a tenfold rise in its share price in 1720."
Domain	Business, Finance & Scams
Tactic	Fraud or Scam; Propaganda Technique;
Era	Historical
First seen	1711
Origin	Promotion of the South Sea Company by its directors and allied politicians, culminating in the 1720 debt conversion scheme
Last reviewed	2026-10-26
	Further reading: books on Business, Finance & Scams

The claim that the South Sea Company would make investors rich fueled the South Sea Bubble of 1720, one of the most famous financial crises in history. The company was founded in 1711 to take on part of the British government's debt in exchange for a monopoly on trade with Spain's colonies in South America. Its directors promoted visions of vast profits from that trade. In reality the trade was small, restricted and rarely profitable; the company's main business was government finance and, notoriously, the transatlantic slave trade. In 1720, as it took over more of the national debt, its share price soared roughly eightfold and then collapsed within months, ruining many investors and exposing widespread bribery of government ministers.

The claim

The company was presented to investors as a gateway to the riches of Spanish America, then imagined as a source of gold, silver and lucrative markets. Its directors encouraged the belief that the end of the War of the Spanish Succession would open these markets to British traders. In 1720 the company proposed to take over most of Britain's remaining national debt by persuading holders of government bonds to exchange them for company shares. The higher the share price rose, the fewer shares the company needed to issue for each pound of debt, and the more profit it could make. It therefore had strong incentives to drive the price up.

Origin

The company was created in 1711 by the government of Robert Harley as a way of managing debts from the war. The 1713 Treaty of Utrecht gave Britain the Asiento, a contract to supply enslaved Africans to Spanish America, along with permission to send one trading ship a year. The company held these rights. The slave trade conducted under the Asiento was brutal; tens of thousands of enslaved people were transported by the company. Even so, the trade did not produce the profits the company advertised, and it was repeatedly disrupted by renewed conflict with Spain.

What the evidence shows

In 1720 Parliament approved the company's debt conversion scheme. To support the share price, the company lent investors money to buy shares, issued new shares in installments, and reportedly gave shares or options to politicians, courtiers and officials to secure their support. The price rose from about £128 in January 1720 to roughly £1,000 by the summer.

Many other companies were floated in the same period, some with vague or fanciful purposes. In June 1720 Parliament passed the Bubble Act, which restricted the formation of joint-stock companies without a royal charter. The South Sea Company supported the act, partly to stop rival schemes from drawing away investors' money.

By late summer prices began to fall, and in September they collapsed, dropping to around £150 by the end of the year. Many investors who had bought on credit or at high prices suffered heavy losses. Banks and goldsmiths that had lent against shares failed. The crash caused public anger across Britain.

A parliamentary investigation found that company directors had bribed ministers and members of Parliament with shares and had falsified records. The Chancellor of the Exchequer, John Aislabie, was expelled from Parliament and imprisoned in the Tower of London. Directors' estates were confiscated to compensate investors. Robert Walpole, who managed the aftermath, rose to become Britain's first prime minister.

Some popular stories about the bubble are themselves unreliable. Mackay's 1841 account of a company "for carrying on an undertaking of great advantage, but nobody to know what it is" is widely repeated but poorly documented. The claim that Isaac Newton lost a fortune is supported by some evidence, but the famous remark attributed to him about calculating the motions of the heavens but not the madness of people is probably apocryphal.

Why it persists

The South Sea Bubble remains a reference point for financial crises because it combined features that recur:

An exciting story of future profits that bore little relation to the company's actual business.
Self-reinforcing price rises encouraged by the company's own financial engineering and lending.
Political capture. Officials who should have scrutinized the scheme were bribed to support it.
Many imitators riding the same wave of enthusiasm.

It also shows how a business can be presented as glamorous while its real activities, in this case the slave trade, are hidden or ignored.

Lessons for readers

Compare the story a company tells about future profits with what it actually earns.
Be wary when a company's profits depend on its share price continuing to rise.
Ask whether officials or advisers promoting an investment have been given a stake in it.
Lending people money to buy a company's own shares can inflate a bubble.
Look closely at what a business actually does. Glamorous promises can conceal harmful or unprofitable activities.

Sources

John Carswell, The South Sea Bubble (Cresset Press, 1960; revised ed. Alan Sutton, 1993).
Richard Dale, The First Crash: Lessons from the South Sea Bubble (Princeton University Press, 2004).
Helen J. Paul, The South Sea Bubble: An Economic History of Its Origins and Consequences (Routledge, 2011).
Andrew Odlyzko, "Newton's financial misadventures in the South Sea Bubble," Notes and Records of the Royal Society 73 (2019).