What is the significance of the South Sea Bubble for today's financial markets

    The failure results suggest that South Sea investors might have been the victims of their own irrational behaviour, or might have suffered from "irrational exuberance", Shiller emphasized in 2000. Garber (1990) state the episode in 1720 is easily understandable as a case of speculators working on the basis of the best economic analysis. Dickson (1967), Scott (1911) and Neal (1988) are misty to explain the reason for the speed and magnitude of the South Sea Company shares decline, even though they attribute it to the appearance of a capital liquidity crisis.

    
    I believe that the core point that both investors and fiscal authorities have to consider the fact that economic bubble, as in 1720, investor behavior can become manic and irrational. Although the South Sea episode was short lived, the boom and bust cycle taking place within every single year. Nevertheless, more extended bubbles, for instance, those experienced by Railway Mania in 1844, by Wall St. Crash in 1929 and by Housing bubble in 2000-now. These bubbles can have more enduring consequences, affecting a serious misallocation of properties and severe economic instabilities. Therefore, central bank and financial institutions need to be aware of the potential damage caused by irrational investor behavior and do need to intervene preventing financial market excesses. It is hoped that a better appreciation of the elements focusing on the South Sea Bubble will inform the current argument on this important event. 

Such a fragile Bubble when the price collapse

    According to evidences from historical bubbles, the south sea company's financing activities haven't complete yet until the south sea bubble popped. It was unobvious with south sea company shares failure from their accounts. But the bubble unexpected collapse at the first blow.

    
    I do believe that irrational investment, overconfidence, herding and mass delusion are the main effects in terms of this bubble. Urging the plenty of assets inflow to the south sea company that is the significant cause towards British government. Investors and shareholders who have optimistic expectations to the south sea company shares prompt the stock prices rose dramatically. The direct factor to destroy the south sea bubble is the psychological failings of investors. Irrational expectations and inexperienced investors contributed the south sea company bubble formation, and burst. what's more, the main reason to prick the south sea bubble is when British investors informed John Law's Mississippi bubble has burst. It indicates that the formation and collapse of bubble economy has higher contagious in the world.

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The Bubble Act

    The South Sea Company successfully triggered a speculative mania for its shares in 1720, with stock prices burst from £128 on January, £330 on March, £550 on May and gone up to the highest (forward) stock price £1050, recorded on 25 June. The south sea company share has increased at least 700% during the short period. The south sea company was able to support unusually high valuations as a result of a £70 million fund of credit that was granted by Parliament for the purpose of commercial expansion (more information, here).

South Sea Company shares fluctuation in 1720

    In fact, Many investors became unbelievable wealthy almost overnight as their shares rose rapidly. Until the Parliament of Great Britain has passed the Bubble Act, it burst on the autumn of 1720 in London. When the managers realized that their company was not making much benefit from its operations so that they sold their stocks in the summer of 1720 and hoped no one would leak the failure of the company to the other investors. Eventually, bad news spread to public, Panic selling immediately ensued as investors dumped the south sea company's shares, fortunes lost like a heartbeat. Thereafter South Sea Company shares devaluate dramatically to £520 on September, £290 at the beginning of October and a low price £170 in the mid October, the Bubble had bust. Even sir Issac Newton also lost over 20,000 pounds(equivalent to about £268 million in present day value) due to speculation in the south sea company share.....

Newton's Nightmare

"I can calculate the motions of heavenly bodies, but not the madness of people."

                                                                       --- Isaac Newton
    
    Throughout history, one topic appears again and again - How to make money quickly!
    In 1720, the whole of England became involved with The south sea bubble as is well-known.
    The direct cause of this event is that as the House of Lords passed the South Sea Bill, their shares immediately increased to 10 times their value, speculation ran wild and all sorts of companies, some lunatic, some fraudulent or just optimistic were launched. The country went wild, stock prices increased in that period, and huge capitals were made at that time.

    In 1718, England government has amounted to around 30 million pounds national debt. In order to ease the financial stress, the government made a bold decision, selling the equity of the south sea company to the public. After that, under the government's connivance, the management of south sea company started to hype their stock, creating illusions of grandeur in the minds of investors and shareholders. In a short period of time,  the south sea company issued increasingly equities to the market, results were the only thing that mattered to south sea company’s stock was balloon, even Isaac Newton had invested the south sea company shares over 20,000 pounds. During that amazing time, it was extremely fashionable to own south sea company equities.....

Law's Shadow

One of the earliest financial bubble (economic bubble).

"A famous Scottish guy sleeping here, he's a calculation genius, but he tempts France economy failure with simple Algebra rules", from the epitaph of John Law.

    Sometimes economists and financial experts argue that which one is the earliest economic bubble? Basically, is Dutch Tulip mania? John law's Mississippi company 80 years later? Or British South Sea company?

    
    A “bubble” in the world of finance is defined as an unusually increase rapidly in stock prices or the value of some other assets, the increase is then followed by an equally quick collapse in share prices or other asset prices.

    No matter what is the earliest financial bubble, these three events are the most typical national financial crisis in European civilization. As far as I concerned, I am not going to care the Dutch flower because its only to be called a mania, I am not going to talk about the wizardly monetary theory of John law as well, although its pretty famous but it was popped a bit later than South sea bubble. So, I believe the title of the first economic bubble should belong to South sea company.

    Even if so, I have to start in John Law's intriguing story in order to recall the shocked all over the world that financial fraud event - South Sea bubble.

    In the early 18th century, when the economy of France was really depressed and the government got worse debt trouble and taxes were highly, John Law came up and pulled France government back in the deeply financial crisis. In 1716 John Law convinced the French government to let him open a bank that could issue bank notes. The paper notes, as a medium of exchange, would be replaced gold and silver and would circulate. John believed that banknotes could increase the money in circulation, which would increase commerce. There is no doubt, These series actions have saved the finances of the French government at that time.

    At the same period, a country which suffered same financial situations with France and it has £7 million loan to finance the war against France in 1720. Here it is, England, a such noising neighbor of France. In fact, the South Sea Company has established in 1711, but when the House of Lords passed the South Sea Bill, which allowed the South Sea Company has a monopoly in trade with South America in 1720. Then, an amazing plot begins.... 

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