Greed Created These Horrific Financial Crises

Investors in the speculative venture known as the South Sea Bubble found their fortunes wiped out when the bubble burst. Wikimedia

2. The South Sea Bubble of the early 18th century

In 1711 a joint stock trading company was founded in London as a joint public-private entity. Its purpose was to promote fishing in North American waters, trade in the so-called South Seas, and the reduction of England’s substantial national debt. The South Seas referred to in its name covered the Caribbean islands and the coast of South America, not the Pacific islands to which the term referred in a later day. At the time it was created to promote trade among the islands – which were then Spanish possessions – though England was at war with the Spanish Empire (the War of the Spanish Succession) and trade was not even a remote possibility. Spanish warships and English privateers roamed the seas of the region, and trading vessels of both entities were subject to both capture by the enemy and the depredations of pirates, it then being the so-called Golden Age of Piracy.

Nonetheless, stock in the venture sold well for the first eight years of its existence, driven by speculators enamored with the profits to be had by the reduction of the national debt. In 1720, the bubble created by speculation collapsed, with the stock quickly dropping to its original price (what would today be called an IPO) and fortunes in speculative profits were erased. The South Sea Company presented many of the features of later investing, including bribing legislature to pass favorable regulations, insider trading, loans against shares which exceeded their face value, and other less than savory investment practices. The collapse wiped out large and small investors, led to the disgrace of several ranking politicians and bankers, and severely weakened the British economy. Essentially what later became known as a Ponzi scheme, the collapse led to a financial crisis which in part led to an increase in the slave trade to recover losses to participants.