The South Sea Bubble: An Economic History of Its Origins and Consequences

Published by EH.Net (February 2011)

Helen J. Paul, The South Sea Bubble: An Economic History of Its Origins and Consequences. London: Routledge, 2011. xx + 155 pp. $145 (hardcover), ISBN: 978-0-415-46973-9.

Reviewed for EH.Net by Anne L. Murphy, Department of History, University of Hertfordshire.

As Helen Paul argues in the introduction to this book, the South Sea Bubble has become a byword for human folly. Despite the passing of nearly three hundred years, it is still cited by journalists seeking examples to prove the ubiquity of irrationality and fraud in financial markets. Popular histories of the Bubble too, present a world momentarily driven mad by the possibilities and disappointments of speculation. Perhaps in reaction to this characterization, when economists and economic historians consider the Bubble, they often view it a test case for the efficiency, or otherwise, of early modern financial markets. The consequence has been that the real history of the South Sea Company and the scheme of 1720 has disappeared behind disagreements about the nature of bubbles, how they blow up, why they burst and whether they can ever be judged as rational.

Paul, a fellow in economics at the University of Southampton, offers an explanation for the Bubble that does not rely upon the assumption that everyone in 1720 had lost their wits. In doing so she also attempts to rescue the history of the South Sea Company from its distracting association with the Bubble. A wide variety of sources, rather than just stock ledgers and price data, are employed to place the Bubble in broader economic and social contexts and, in particular, to help the reader understand the purpose and strengths of the South Sea Company, both before 1720 and until its dissolution in 1854. All this is done in a style which, although employing economic theory and making use of quantitative methods, remains accessible and appealing to an audience of economists and non-economists alike.

Following an introduction which explains both the historiographical and theoretical backgrounds to the Bubble debate, Paul goes on to provide a thematic account of the rise of the financial market in London, the development of the South Sea Company and the contexts and consequences of the Bubble.

The early chapters provide a history of the stock market in early modern England, discuss the development of the national debt and explain the reasons for the establishment of the South Sea Company. Paul emphasizes that the Company, the scheme of 1720 and the blowing up and bursting of the Bubble were just one part of the broader development of the British financial system. She also explains the origins of the mistrust of finance and financiers and makes the particularly useful and oft-forgotten point that most financial innovation during this period was deeply criticized. The South Sea Company, in other words, was not alone in attracting the disapproval of contemporaries.

Chapter 6 is key to Paul?s argument. It explains the reasons why investors might have chosen to commit their funds to the South Sea Company. And this is indeed an important point. The Company was not established solely for the fraudulent management of government debt, nor was its only focus on conning the na?ve investor. The South Sea Company did engage in trade, both slaving and later, whaling. Paul makes the point that, given this knowledge, those who invested in the Company might have had sound reasons for doing so. Moreover, in addition to its trading activities, the South Sea Company?s connections with the management of the national debt ensured a guaranteed and lucrative income. The Bank of England had already grown rich and secure from just such connections with the state. It might also be argued that there were some fine business minds among the Company?s management. Even John Blunt, although undoubtedly duplicitous, was precociously talented in managing matters financial.

Chapter 7 explains the complexities of contemporary financial analyses of the South Sea scheme and casts doubt on the notion that Archibald Hutcheson was the lone voice of sanity speaking out against the iniquities of the project to convert the national debt to Company shares.

Chapters 8 and 9 examine the aftermath of the Bubble. The former details the reaction to the crash and the creation of the popular myths that have tended to dominate our understanding of the events of 1720. It also notes the anti-Semitic nature of much of the post-Bubble rhetoric, a factor that has largely been ignored by later commentators. Chapter 9 shows that there was little evidence of widespread economic depression in the wake of the collapse of the South Sea scheme.?
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In the conclusion Paul notes that, while the Bubble has been studied by both those who claim that Georgian society was, for a moment, gambling mad and those who claim that financial markets are always inherently rational, ultimately both views are too simplistic. The value of this book to scholars is that it effectively straddles the divide between those two points of view and complicates much of the accepted wisdom on the South Sea Company. In doing so, it offers a much needed reconsideration of the causes and consequences of the Bubble.

Anne Murphy is a lecturer in early modern history at the University of Hertfordshire. Her publications include articles in History, Business History, and the Economic History Review and a monograph published by Cambridge University Press entitled The Origins of English Financial Markets: Investment and Speculation before the South Sea Bubble.? a.l.murphy@herts.ac.uk

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