Socius NewsIn January 1720, a share of the South Sea Company traded at £128 in London. By June it was worth around £1,050. By December it was back to £124. In between, Britain lived through the first market crash anyone could take part in with a few pounds and an appetite, and it produced a set of lessons that three hundred years of markets have not managed to retire.
This is the first article in a series on the crashes, bubbles and regime changes that shaped the markets you trade today. Each one ends the same way: with what a trading journal would have shown.
South Sea Company share price, 1720
Pounds sterling per share
Source: Encyclopaedia Britannica; Federal Reserve Bank of New York, Liberty Street Economics
What was the South Sea Company?
The South Sea Company was founded in 1711. Its business model was financial before it was commercial. Britain had spent a decade fighting the War of the Spanish Succession and owed money to soldiers, sailors and suppliers. The company offered to swap that government debt for its own shares. In exchange it received an annual payment from the Treasury and a monopoly on English trade with Spanish South America, which in practice meant the asiento, the contract to supply enslaved Africans to Spain's colonies.
The trade never made much money. The monopoly was the story; the debt conversion was the business.
How does a debt swap turn into a bubble?
In 1719 and 1720 the company went bigger. It proposed to take over most of Britain's national debt, again by exchanging it for shares, and Parliament accepted the scheme in early 1720. The mechanism contained the bubble in miniature. The company was allowed to issue a fixed amount of new stock to absorb the debt. The higher its share price, the fewer shares it needed to hand to the debt holders, and the more it kept to sell to the public for cash. The company therefore had every reason to push its own price up, and it did: through a sequence of money subscriptions, through loans it made to investors against the shares they were buying, and through rumours of trade profits that did not exist.
A share you can buy with borrowed money, from the issuer, who lends against the share itself, is a machine for one-way prices, right up until the day it is not.
Paris was running the same experiment at the same time with John Law's Mississippi Company, and Amsterdam followed. Yale's International Center for Finance calls 1720 the first global financial bubble for that reason: three markets, one year, the same arc.
What did the price actually do?
From £128 in January the price rose through the spring and reached roughly £1,000 in June. It held near that level for most of the summer. In June, Parliament passed the Bubble Act, which required new joint-stock companies to hold a royal charter. The South Sea Company had lobbied for it, to choke the dozens of rival schemes then soaking up London's money. When the Act was enforced against those rivals in August, their shares collapsed, investors who had borrowed to buy them had to sell whatever they could, and the selling reached South Sea stock.
By September the price was around £175. By December, £124. Twelve months, a return to the starting line, and a country full of people who had bought on the way up with money they did not have.
1711
The South Sea Company is founded
Government debt swapped for shares; monopoly on trade with Spanish South America.
Early 1720
Parliament accepts the debt conversion scheme
The company will absorb most of the national debt in exchange for new stock.
April 1720
Newton sells
A profit of about £20,000, then weeks of watching the price keep rising.
June 1720
About £1,050 a share. The Bubble Act passes
Rival joint-stock schemes must hold a royal charter. The company lobbied for it.
August 1720
The Act is enforced against rivals
Their shares collapse; leveraged buyers sell whatever they can.
September 1720
Around £175
The selling reaches South Sea stock.
December 1720
£124
Back to where the year started.
1721
Inquiry, confiscations, Walpole
Ministers exposed, directors' estates seized, the company survives until 1853.
Who paid for it?
Parliament opened an inquiry in 1721. It found that at least three ministers had accepted bribes and speculated in the stock. Directors were disgraced, and Parliament seized the greater part of their estates to compensate the losers. Robert Walpole, who had opposed the scheme, managed the clean-up, protected enough of the political class to keep the government standing, and became in effect Britain's first prime minister. The company itself outlived the scandal and survived until 1853.
Then there is Isaac Newton. The popular version is that he lost £20,000 and said he could calculate the motions of the heavenly bodies but not the madness of people. Andrew Odlyzko went through the surviving records in 2018 for the Royal Society. The story turns out to be broadly true and, in one respect, worse.
Newton sold his South Sea shares in April 1720 for a profit of about £20,000. That was the right trade. Then he watched the price keep rising through May and June, sold his government bonds, and put nearly all his money back in near the top. His net worth went from just over £30,000 before the bubble to about £20,000 by mid-1721. He did not lose because he failed to see the bubble. He lost because he saw it, got out, and could not stand being out.
£20,000
Newton's profit when he sold in April 1720
£30,000+
His net worth before the bubble
≈ £20,000
His net worth by mid-1721, after buying back near the top
What your journal would have shown
Strip the wigs off and Newton's 1720 is a sequence any trading journal recognises.
A planned exit. April: sell at a large profit. The first trade was a good trade by any measure, and the journal would have marked it as such.
A re-entry without a plan. June: buy back at a price several times the exit, with the position sized at close to all available capital, with no defined risk, after weeks of watching other people's gains. That is the trade that did the damage, and it was not a new idea. It was the old idea, re-entered because the price went up without him.
Size that scaled with conviction, not with risk. The rule that had protected him in April, take profit and hold cash, was replaced in June by the feeling that the trade was obvious. The bigger the certainty, the bigger the position. A journal shows this as one bar on a size chart standing far above the rest.
Leverage disguised as liquidity. Thousands of buyers financed South Sea shares with loans from the South Sea Company. Their journals, had they kept one, would have shown the same thing: a position whose size depended on the price staying up. When the price fell, the loan did not.
Three of these four are still the most common patterns in retail trading accounts today. The re-entry after a planned exit, the size that follows conviction, and the leverage nobody counts as leverage. None of them requires a monopoly or a minister. They only require a price that went up without you.
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