South Sea bubble

Abstract

The South Sea Company was founded in 1711, in the expectation that peace between Spain and England after the end of the War of the Spanish Succession would produce profitable trading opportunities with the ‘South Seas’ (that is, Spanish America). The company’s trading activity remained intermittent and unprofitable throughout the 1710s. In 1719, a new scheme was launched — the conversion of government debt into equity of the South Sea Company. Debt-holders of the 1710 lottery loan were offered the option to convert their holdings into company shares. The government agreed to make interest payments to the company instead of to debt-holders. As old (and illiquid) loans were swapped for liquid company shares, debt-holders gained. The government negotiated a lower rate of interest, and the South Sea Company made a modest profit. The 1719 equity-for-debt swap is generally seen as Pareto-improving.