the

The First Stock Market Crash The South Sea Company

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[Music]

building on a long tradition of

catastrophic financial market crashes

the economic meltdowns caused by the

bursting of the housing bubble in 2008

and more recently the rather turbulent

market due to covet 19 are only the

latest in a long line of stock market

fails

in fact nearly 300 years ago

unscrupulous players political cronies

and

laissez-faire government combined to

create a too big to fail company and

then stood around helpless when it did

this

is the story of the south sea company

bubble in 1710 england's finances were a

bit of a fright

different government departments

arranged their own loans and expended

money with little financial oversight

the chancellor of the exchequer robert

harley convinced parliament to

look into straightening out this mess

one of the first steps they took was to

reconsider their commitment to allowing

the bank of england to be the sole

manager

of the country's loans at the time the

bank of england was attempting to

finance britain's soldiers through

the sale of lottery shares but their

response was pretty lukewarm

harley granted permission for a

different private enterprise the hollow

sword blade company to conduct a lottery

its marketing was so successful that

soon the swordblade company was

conducting lotteries regularly

on behalf of the government near the end

of the war of spanish succession england

had about 10 million pounds worth of

debt that it needed to finance and

turned back to some of the geniuses from

the swordblade group

they formed the governor and company of

the merchants of great britain trading

to the south seas and

other parts of america and for the

encouragement of fishing or the south

sea company for short because

really needed a short version of that

this was formed in 1711. in return for

six percent interest the south sea

company would buy

england's outstanding debt in exchange

for shares in the company

investors were lured into the plan not

only by the prospect of sharing the

interest but

in the profits of the company as well in

addition to financing government debt

the south sea company was

intended to operate as a trading firm in

south america

in fact part of its charter from

parliament included a monopoly over

trade in the south seas

actually it was all of south america

although sounding like a sure thing by

1713 this monopoly portion of the

business

was actually worthless as the treaty of

ultra act eviscerated trade for england

in

the southern part of the new world in

any events in order for insiders to

reap the greatest profit the founders of

the south sea company began a

two-pronged

ethically challenged campaign prior to

the announcement

of the company's plan to buy government

debt insiders discredited britain's

ability to finance itself

driving down the value of that debt the

insiders then gobbled it up at the

greatly reduced rate

of 55 pounds over 100 pounds next to

encourage debt holders to exchange it

for shares

the insiders loudly proclaimed the great

value of the company's trading

operations including its

valueless south american monopoly to be

fair south seas still had a significant

slave trading operation although

this was not as lucrative as it had been

hoped in any event shortly after the

debt buying plan was announced south sea

company stock sold at 123 pounds per

share

up from the 100 pounds that it was

valued at pre-announcement and

definitely up from the 55 pounds that

the duped debt holders received the

enterprise appeared to roll along just

fine

until about 1718 when the war with spain

led spanish interests in south america

to seize the company's property there

although the company did lose some

assets the real loss from the seizures

came from the bad publicity in 1719

perhaps seeing the writing on the wall

the south seas company began a campaign

to protect its insiders

these few were sold options to purchase

stock at the current price

then the company began another marketing

campaign again touting the

high value of its south seas monopoly

since prominent members of government

held the options they participated in

spreading the rumor

and their cash gave credibility to it

the price of the stock skyrocketed from

about 100 pounds per share to nearly a

thousand pounds and the insiders reaped

extraordinary profits

at its peak based on the stock price the

company was worth about 200 million

pounds which by purchasing power today

would be

about 24 billion pounds or 37 billion

dollars by

average earnings though it would be 350

billion pounds

or 537 billion dollars

like the tulip mania in 17th century

holland which we'll get to in the bonus

facts later in today's video

and the stock market crash in 1929

america naive regular people

flocked to the irrationally exuberant

market

as did other stock trading operations

one of the most unscrupulous of these

was called i kid you not a company for

carrying on an undertaking of great

advantage but

nobody to know what it is after this one

even parliament could no longer sit on

its hands and at the urging of the south

sea company insiders to

protect their informal monopoly on

duping the public

in 1720 the bubble act was passed this

legislation prohibited the establishment

of new companies that competed with

existing

charters absent government permission by

june 1720 the share price of south sea

stock could soared up to 1050

pounds with many people purchasing their

shares on loans secured by the shares

that they were buying and the 1980s

thought that they

invented junk debt the price dropped

precipitously and by september 1720

it was at 150 pounds individuals and

companies went bankrupt and an

outraged nation demanded the parliament

act the subsequent investigation

identified a number of individuals who

had engaged in fraud or other bad acts

and

furtherance of the scheme including king

george the first two of his mistresses

the postmaster general a member of the

cabinet

two ministry heads and the chancellor of

the exchequer

the latter of which was jailed despite

all of this the south sea company stuck

around for some time but

rather than doing physical trading in

the south seas primarily just dealt in

government debt

until the mid-19th century and now for a

bonus fact

speaking of epic crashes despite how it

sounds tulip mania does not refer to

just a

general love of tulips it was actually

one of the world's first recorded major

financial bubbles beginning in 1624

and peaking around 1636-1637

while the extent of the mania in terms

of how widespread it was

is still largely debated as is what all

the elements involved were

that caused it nevertheless for a brief

time tulip prices in the netherlands

rose to ridiculous levels with one

flower costing

more than the annual income of a skilled

tradesman

and for certain types of tulips over 10

times more

so why the frenzy over tulips it seems

like such a simple

almost run-of-the-mill flower to us just

about

every neighborhood in middle america has

some blooming in their yard

but to dutch horticulturalists of the

17th century the tulip was lauded as

exquisitely unique and

put on a high pedestal the colors were

far richer lush and

concentrated than those of just about

any other flower in europe before the

tulip was introduced via importation

from

turkey initially in the mid 16th century

and from then slowly spreading

throughout europe the dutch people

quickly became enamored with the tulip

and having tulips in your garden was

soon something of a status symbol once

this psychological component was in

place the ground was made fertile

for a buying craze and a bubble the life

cycle of the tulip itself was another

factor in the buying squeeze and frenzy

the mother bulb of a tulip only lasts a

few years and can only produce two to

three clones per

year it takes a full seven years to grow

a tulip from a seed while the demand of

tulip buyers spiked during tulipmania

the supply of actual tulip bulbs did not

tulip bulb prices rose at a steady pace

through the 1630s as

more and more speculators entered the

market who all these speculators were

is up for debate but it appears they

comprised mostly of wealthy merchants

and tradesmen

rather than members of the nobility and

more traditional investors

for this reason tulip trading tended to

take place more in taverns than

at the stock exchange by 1636 any tulip

even low quality bulbs could be sold for

a small fortune with an average price of

about 160 gilders

and at its peak nearly 200 gilders

unfortunately there's no

really accurate way to translate that to

modern day currency but

for reference a typical skilled

tradesman at this time

generally only made about 150 gilders so

if you

want to translate it that way a typical

skilled worker today in the united

states someone with

some sort of post-high school education

but not post-secondary education

averages about 48 thousand dollars per

year so using that extremely loose

correlation

an average tulip bulb would cost around

64 000

at the mania's peak at this peak in late

1636 some tulip bulbs were changing

buyers

up to 10 times per day with people no

longer typically even taking possession

of the bulb simply

purchasing them in the futures market

and then trying to sell them for a

profit

in fact with many of these exchanges not

only did the bulbs not change hands but

money usually didn't either at this time

with the exchange to happen when the

bulbs were physically taken possession

of which

was no longer happening in most cases

the height of the frenzy came

in a famous incident when seven orphaned

children auctioned off their inheritance

from their deceased father

70 tulip bulbs one was an extremely rare

violet and admiral van eckhuzen bulb

which ended up selling for 5 200 guild

as an all-time record

the total value of the auction was 53

000

gilders for 70 bulbs in another auction

in 1635

40 bulbs were sold for a hundred

thousand gilders

again a typical skilled tradesman at

this time only made

about 150 gilders per year according to

british

journalist charles mckay in his book

extraordinary popular delusions and the

madness of crowds published in 1841

which

some economists speculate exaggerated

the extent of tulipmania

so take his word on the extent of the

craze with a grain of salt many

individuals grew

suddenly rich a golden bait hung

temptingly out before the people

and one after the other they rushed to

the tulip marts like

flies around a honeypot everyone

imagined that the passion for tulips

would last forever and

that the wealthy from every part of the

world would send to holland and

pay whatever prices were asked for them

the riches of europe would be

concentrated on the shores of the zoo to

z

and poverty banished from the favored

climbs of holland nobles citizens

farmers mechanics seaman footman maid

servants even chimney sweeps and old

clothes women

dabbled in tulips mckay went on to say

that there was one

very rare tulip bulb that was traded not

for money but for four fat oxen eight

fat swine twelve fat sheep two hog head

of wine four turns of beer one thousand

pounds of cheese two tons of butter a

bed a silver cup a set of fine clothes

two lasts of wheat and

four lasts of rye this was all valued at

around fifteen hundred to two thousand

gilders

in another instance he stated a simple

augustus bulb was traded for 12

acres of farmland but not long after

this the tulip market crashed in

spectacular fashion

there was nothing gradual about it it

began in the city of harlem

at a routine bulb auction when an

investor did not show up and

pay for his tulip bulb purchase this

started people worrying over the fact

that there seemed to no longer be anyone

who

was actually buying the bulbs to acquire

the physical tulips rather they were

simply buying them to turn around and

sell them again without any apparent

buyers only sellers

within days widespread panic ensued

among the tulip traders some of the more

savvy investors tried to prop up the

market but the demand for tulips very

quickly dried up and the market soon

evaporated tulips that had fetched a few

thousand guilders just weeks before

were now valued at only one percent of

that surprisingly the fallout from this

doesn't appear to have been very drastic

while some lost their fortunes most

simply paid small penalties on

not honoring their tulip contracts and

moved on with their lives

tulip futures speculators were not

obligated to pay the full amount of

their contract simply

a small percentage of it if they chose

not to pay for their purchase which also

seems to have contributed to the growth

of the bubble this combined with the

fact that most of the trading took place

on main street rather than at the stock

exchange and among nobility and

thus in general no money or tulips

changed hands during the height of the

bubble

resulted in the overall economy not

being affected much at all contrary

to what you might often read so i really

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