Bubbles on the South Sea - Essay Example

According to a website "The bubble is usually followed by a sudden drop in prices known as crash". This is a significant drop in the total value of a market, almost undoubtedly to the popping of a bubble, creating a situation wherein the majority of investors are trying to flee the market at the same time and consequently incurring massive losses. And terribly affects everyone. The inevitable crash came and the strain proved to much to many joint stock companies. The immediate cause was the activities of the South Sea Company.

It had been formed to engage in trading in the South Seas, but it also has engaged in the funding of the national debt in return for monopolistic privileges. The bad repute of this joint stock companies had led to the passage of the Bubble Act for the regulation of companies in the main attempt to prevent panic. Bubble Act declared that only companies formed by charter or by a private act of parliament were legal. The South Sea Company was reasonably successful. It was chartered by the government for trade in South America and South Sea.

The relationship between the government and the company created confidence and high expectations. In the history, they were given the monopoly of trading in the Pacific Ocean and along the coast of South America, made an offer to the government to pay off the whole National Debt and to buy up the irredeemable annuities, according to Melville amounting of "800,000 a year, provided the different public securities were consolidated into one fund in their hands and the government gave the company certain exclusive commercial privileges".

In spite of the limited privileges conceded to it in the Asiento by Spain, been highly successful in the slave trade. This means according to (Colliers Encyclopedia) "that they have the right for 30 years to supply Spanish-America colonies with 4,800 slaves annually and to send to Porto Bello and Vera Cruz a trading ship of 500 tons a year". A negotiation being settled with the South Sea Company. This right was handed over the company which underwrote the English national debt, on a promise of 5% from the government.

The most question was whether the fund-holders would convert their stock for shares in the company, for they could not compelled to do so. According to (Caleb W.)" The brilliant prospects held out by the directors of the gold and silver lands awaiting exploitation in South America, crowded into the rush for shares." Its shares immediately rose to 10x their value from 110 rose to 1000, speculation ran wild and all sorts of joint stock companies, fraudulent or merely optimistic were formed. Its price soared within a few weeks, people realized that it was greatly overpriced and prices fell.

Thousands were financially ruined. The South Sea Prosecution of some of those concern served to open the eyes of the public to the recklessness of its own scheme, and its shares dropped with the result that few sold out enormous profits, the majority of those who hold on were ruined and result of financial disaster. The Bubble had burst, ruining thousands of families. The disaster happened in South Sea Bubble almost wealthy persons in the kingdom had become members of the government to involved in manipulating of the company.

Robert Walpole un his time did much to restore national credit. According to (Caleb, W) " he makes arrangement and assign 9 million which