Financial Support-Bargaining and the South Sea Bubble

The South Sea Bubble and the Mississippi Bubble had similar origins. The British crisis developed under new structural arrangements for financial support-bargaining, established through a financial revolution that accompanied the Glorious Revolution of 1688–1689. Shortages of money and credit were seen as impeding the growth of trade. The establishment of the Bank of England was a major institutional innovation in British finance, promising increased money supply and credit for business growth. It was seen, however, as serving ‘Whig’ interests, and aroused Tory ambitions for a similar institution with Tory sympathies. The South Sea Company was established to relieve government of the burden of debt arising from long wars, but was also a Tory riposte to the Bank of England. The internal financial support-bargaining of the South Sea Company played an essential part in the inflation of a bubble in the company’s stock. John Blunt led a faction promoting the rise in price of the stock to facilitate the conversion of government debt into stock of the company. The Sword Blade Company bank, closely linked to the South Sea Company, provided credit for purchases of stock. The idea of a ‘Fund of Credit,’ involving expectations of copious credit for business on the back of government debt, had a potent influence on the inflation of the South Sea Bubble.