Chapter

The South Sea Bubble

Peter Temin and Hans-Joachim Voth

in Prometheus Shackled

Published in print January 2013 | ISBN: 9780199944279
Published online January 2013 | e-ISBN: 9780199980789 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199944279.003.0006
The South Sea Bubble

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This chapter begins by connecting the South Sea Bubble with the British government's need to finance its wars. It explored the use of a debt-equity swap to lower its interest cost. The bubble resulted from a good idea badly designed and administered. Hoare's Bank made a healthy profit from buying and selling stock in the South Sea Company in 1720. Examination of the bank's lending to other investors reveals that the bank understood it was riding a bubble. The bank required more and more collateral for loans as the price of South Sea shares rose. Hoare's Bank sold out in time to retain its profits; Isaac Newton was not so lucky.

Keywords: South Sea Bubble; Bubbles; speculation; debt-equity swap; Bubble Act

Chapter.  11173 words.  Illustrated.

Subjects: Economic History

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