South Sea Bubble Of 1720

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As with most economies past and present there is ebb and flow, stability and instability. The South Sea Bubble marked the first time in England’s recorded economic history that we witnessed a major collapse and crash in 1720. To fully understand this economic failure, we should go back and examine the events that took place a decade prior to the collapse. In return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill. This allowed the South Sea Company (founded in 1711) a monopoly in trade with South America. The company’s exports were primarily based on slave trade with Spanish colonies on the assumption that the War of Spanish Succession would end with a treaty permitting the long-term commitment to this type of trade. Unfortunately, the relevant peace treaty, the Treaty of Utrecht, made with Spain in 1713 was less than favorable. It imposed an annual tax on imported slaves and allowed the company to send only one ship each year for general trade. Limited options in the slave trade, the interest to be paid by the government on the loan from the South Sea Company, and narrowing trade opportunities in the Spanish colonies of South America were all adverse outcomes of the treaty. The South Sea Company did not even engage in its first trade voyage to the South Seas until 1717. All of these events considered along with growing tensions between Spain and England were the recipe for the disaster. In 1719, the company proposed a scheme by which it would take on the entire remaining national debt of Britain, £30 million, offering its own stock at 5% in exchange for government bonds in a deal lasting until 1727(These schemes soon received the name of, “Bubbles”). The company hoped to make a considerable profit and did much to advertise the proposal which was accepted in a slightly altered form in April 1720.
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