The Bubble Act – 1720 – A Royal Charter
The Bubble Act – 1720
Financial crises are not unique to any one economic or financial system, but they all arise from human greed.
The War of the Spanish Succession (1701–1714), a struggle primarily between England, the Dutch Republic, and France for succession to the Spanish monarchy and access to lucrative trading possibilities in the Spanish colonies, had proven costly, and Parliament needed to raise cash.
It did so in a variety of ways, including selling its debt to merchants. The South Sea Company was founded in 1711 by a group of investors as a joint-stock company with transferable shares, and Parliament granted it a charter. The firm was offered a trading monopoly on Spanish territories in the Caribbean and South America in exchange for taking on war debt.
Because Spain held authority over those territories when the war for Great Britain ended in 1713, the South Sea Company’s monopoly had little value. It’s still debatable if the company’s actual intention was to trade since it rapidly became adept at trading shares of its stock with holders of government debt instruments. Its new investors were overjoyed to get their hands on shares in what they thought was a successful business.
In 1719, Parliament authorized the company to take on even more national debt, which it did through additional swaps of its own shares, which were rapidly appreciating in value due to speculation about trading opportunities and successes in the South Seas, which was sparked by the company itself, of course. They’d sparked the South Sea Bubble, a surge in the trading of South Sea shares, and it was only getting bigger.
At the height of the bubble, Parliament passed the Bubble Act of 1720, which mandated that all joint-stock corporations have a royal charter. Historians disagree over whether the regulation was designed to shield unsuspecting investors from stock-trading con artists or whether the South Sea Company fine-tuned it to discourage participation in other “bubble firms,” allowing more money to be spent on South Sea shares. In any case, when the bubble burst, the value of South Sea shares plummeted, culminating in one of the biggest market collapses in history and a long-term loss of investor trust.
SEE ALSO:
Wall Street Regulation (1933);
The Securities Exchange Act (1934);
The Sarbanes-Oxley Act (2002);
Wall Street Reform (2010).
Sources: