Economics: The South Sea Bubble

South sea bubble

After Isaac Newton lost his money in the south sea bubble Crisis, he quoted, “"I can calculate the motions of heavenly bodies, but not the madness of people." The two crisis were important events in the history of Economics, which did only leave economists and investors with a lesson but also affected a common man. Bubbles are more far reaching than the two pages of the Economics textbook as they affect the lives of everyone directly or indirectly involved. That said, Bubbles are evidently an outcome of ‘Economic’ speculation, but also of sophisticated institutions, corruption, political greed, irrationality, unleashed capitalism; like every other bubble recorded in the history these two did too.

THE BACKGROUND

The setting

John blunt decided to loan money to buy south sea shares but they were in debt and making insignificant profits it deteriorated the condition of the company. Paradoxically, as the share prices went up, the initial investors sold the stock they had bought at a low price at the “current” price.

2. Blunt increased the dividend share of shareholders and a further increase of this share in the following years. Unrealistic to the population, because the company would have to make gigantic profits.

3. The bubble act- ironically raised the prices of the stocks.(The South Sea Bubble: An Economic History of its Origins and Consequences. By Helen Paul)

4. Reserve too low and share price too high.

As for Mississippi the over minting of the currency to increase the amount of money, which led to inflation, in circulation to buy more shares was an important factor. The value of shares and the currency went down and the profits of the company were slow to materialize.

Large decrease in purchasing power led to low demand and left the economy in depression

6. High unemployment.

7. Rapid increase in savings and hoarding of money due to panic and lack of confidence (John Maynard Keynes,General Theory of Employment, Interest, and Money=1936)

8. Higher interest was a consequence and the cause for a further depression as that led to a reduction of money supply in the Economy and as the Economy was on Gold standard the Federal bank couldn’t increase the supply of money without backing it with gold reserves 9. Cycle of depressions- as more companies bankrupt, so more layoffs, so more bankruptcy.

CONCLUSIOm

Both the crashes were similar and different in different ways. It would be irrational, tough and unjust to compare the importance of each of the event as they both mark important events in the history of Economics and had important lessons for the people of the world. The crashes did not just have an economic or financial basis but also political. It shows how connected the different fields of study are in the real world. The later crisis haunts us with the question if people learnt some lessons from these crashes or dismissed and left them to the studies of