The British Joint-Stock Company That Took Over Most of the National Debt in 1720 and Whose Share Price Rose Tenfold in Six Months Before Collapsing in September

The South Sea Company had been chartered in 1711 with a nominal commercial monopoly on British trade with South America. The commercial monopoly was valueless — Spain controlled most of South America and was not granting British trading access. The company’s actual business was as a private creditor to the British government, exchanging government debt securities for company shares at favourable terms.

By 1720 the company’s chief promoter, the goldsmith-banker Sir John Blunt, had developed an ambitious scheme to expand the company’s debt-conversion role to cover almost all of the unfunded British national debt. The scheme was politically attractive: the government would convert its expensive perpetual debt obligations into manageable South Sea Company shares, and the company would profit from administering the conversion at terms it negotiated favourably for itself.

The South Sea Act received Royal Assent on 7 April 1720. The company was authorised to take over approximately £30 million of government debt (about £4 billion in modern terms) by exchanging it for company shares at prices to be set by the company itself.

The price rise

The South Sea share price had been £128 on 1 January 1720. The expectation of the imminent Act drove it up. By March it was £200. By April, when the Act passed, it was £338. By the end of May it was £550. By 24 June 1720 it had peaked at £1,050 — an approximately tenfold rise in six months.

The economic logic was specifically circular. The Act allowed the company to convert government debt at the market share price. The higher the share price, the less stock the company had to issue for a given quantity of government debt — and the more profit it made on the difference. Both the company’s directors and the Treasury officials who had negotiated the deal had a personal interest in keeping the share price as high as possible during the conversion. The company actively manipulated the price by selectively lending money to favoured speculators to buy more shares, by underwriting share offerings at successively higher prices, and by spreading optimistic rumours about its imaginary South American commercial prospects.

The mania was contagious. By June 1720 approximately 100 other speculative joint-stock companies had been promoted at Exchange Alley with similarly absurd valuations and similarly empty commercial substance. Some of the promotional prospectuses are famous in the historical literature: one company was advertised as “a company for carrying on an undertaking of great advantage, but nobody to know what it is.” The promoter raised £2,000 in the morning and disappeared by the afternoon.

The Bubble Act of 11 June 1720 — passed at the South Sea Company’s specific request — outlawed competing joint-stock company promotions without express parliamentary charter. The Act eliminated the competing speculative companies; their share prices collapsed in late June 1720; the proceeds flowed back into the South Sea Company shares. The Bubble Act briefly extended the South Sea price rise.

The collapse

The peak held for approximately six weeks. By mid-August 1720 enough London creditors had begun calling in their loans on speculators that share liquidations had become continuous. The price was £700 by end of August, £500 by mid-September, £190 by end of September.

The collapse was uniformly catastrophic for speculators who had bought near the peak. London bankruptcy proceedings ran for the next two years. Approximately 462 named bankruptcies were processed through the Court of Chancery in 1721-1722.

The political collapse was worse for the Whig government. The complicity of Treasury and South Sea Company senior officials was exposed by a parliamentary inquiry chaired by Robert Walpole in late 1720 and early 1721. The Chancellor of the Exchequer John Aislabie had personally accepted approximately £20,000 of South Sea stock at preferential prices in exchange for steering the Act through Parliament. The Postmaster-General James Craggs the Elder and his son the Secretary of State James Craggs the Younger had received similar bribes. The South Sea Company directors had distributed approximately £574,000 in fictitious share allocations to MPs, Treasury officials, and royal household members as inducements to support the scheme.

Aislabie was impeached, removed from office, and imprisoned in the Tower from March to August 1721. James Craggs the Younger committed suicide by laudanum on 16 February 1721 the day before his expected impeachment. James Craggs the Elder died of apoplexy on 16 March 1721 (the contemporary verdict was “of grief”). Three South Sea Company directors were imprisoned.

Walpole, who had been Paymaster of the Forces under the previous government and had warned against the scheme in early 1720, emerged from the inquiry as the dominant figure in Whig politics. He became First Lord of the Treasury on 3 April 1721. By the standard modern political-historical definition he was the first British Prime Minister and held the post for the next 21 years.

Newton’s loss

The famous private casualty was Sir Isaac Newton. Newton had been Master of the Royal Mint since 1699 and was a wealthy man by 1720 standards. He had bought South Sea shares in spring 1720, sold them at a profit in April or May, and then — watching the continued price rise through summer — bought back in at higher prices in June or July. The collapse cost him approximately £20,000 (about £3 million in 2025 money) — a portion of his liquid wealth.

Newton’s much-quoted comment to his niece Catherine Conduitt was that he “could calculate the motion of the heavenly bodies, but not the madness of people.” The quote is first attested in print in 1850, more than a century after Newton’s 1727 death, and may be apocryphal. Its substantive content — that the South Sea collapse had ruined careful investors who should have known better — is consistent with the documented contemporary correspondence.

The South Sea Company itself survived until 1853, mostly as a vehicle for administering whatever was left of the 1720 government debt after the bubble’s collapse. Its commercial South American operations remained negligible for the entire 142-year corporate lifetime.