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•140 The 100 Greatest Business Ideas of All Time

on the company’s expectation that the end of the war of Spanish Succession would
signal a treaty to permit such trade.

The company’s stock, with a guaranteed high interest rate of 6%, sold well, but
the relevant treaty was less favourable than had been hoped. It imposed a tax on
imported slaves and allowed only one ship each year for general trade.

The first voyage was moderately successful, but the real fillip to the share price
of the company came from the confidence created by King George I agreeing to
become the governor of the company. The lack of profits now, however, made loan
capital to the company very expensive, reaching 100% per annum at one point.

In 1720 there was an incredible boom in South Sea stock as the result of the
company’s proposal to take over the national debt. The company expected to thrive
in terms of growing trade, but the real profits were made in the value of the stock.
The shares rose in January of that year from 128 to over 1000.

Overoptimistic company promoters inveigled a lot of people into a series of
unwise investments. The market collapsed in December 1720 and many people
were ruined. The share price returned to 120 and dragged many others with it. It
also damaged the value of government stocks. The subsequent enquiry by the House
of Commons uncovered a lot of fraud and corruption. At least three ministers had
accepted bribes and speculated for themselves.

Obviously this criminal activity was an unusual feature in the collapse, but the
situation reflects a truth about the underlying value of a company. The current
share price of a business does reflect its future earnings stream, but if the gap be-
tween today’s business performance and that expected in the future becomes too
large, bubbles have a nasty habit of bursting.

‘Behind every great fortune there is a crime.’
Honoré de Balzac (1799–1850)