In January 1720 a share in the South Sea Company cost about £128. By the summer it cost about £1,000, and by December it was back near where it started. The company made almost nothing from the trade in its name. What it sold was a story about the national debt, and the people selling it had arranged to be paid on the way up. Here is how the scheme worked, who it caught, and what was left when it ended.
A trading company that barely traded
The company was founded in 1711 to take on about £9 million of government debt that had no money set aside to repay it. In return it got a monopoly on British trade with Spanish America [1].
The main trade it won, under the 1713 Treaty of Utrecht, was a contract to supply enslaved Africans to the Spanish colonies [2]. Over 96 voyages in 25 years the company bought about 34,000 people, and it never made a significant profit from the monopoly [1]. The real business was the debt.
Swap your bonds for our shares
In 1720 the company offered to take over most of Britain's remaining national debt, about £31 million [1]. Holders of government bonds could trade them for South Sea shares. New stock was created at a face value equal to the debt it replaced, and whatever the shares fetched above that, the company could sell. The more the price rose before the swap, the more the company made [1]. So it needed one thing above all: a rising price.
It got Parliament's approval with huge bribes. Shares were "sold" to politicians at the market price, but they never paid for them; they simply held them, and could sell them back to the company for the rise in price [1]. The Chancellor of the Exchequer was given £20,000 of stock in exchange for his political support [2].
Paying for the climb
The company sold new shares in instalments and lent people money to buy them, with the shares as security, so a buyer needed very little cash to join in [1]. The price went from about £128 in January to almost £350 by the end of April, nearly £600 by the end of May and £950 by the end of June [1] [2]. It topped out at about £1,000 to £1,050 that summer [1] [2].
The company also went after the competition. A law passed on 11 June 1720, later called the Bubble Act, banned new joint-stock companies without a royal charter. Recent research concludes it was passed to stop other companies competing with the South Sea Company for investors' money. It passed before the peak, and stayed on the books until 1825 [3].
How it ended
The scheme needed buyers who could keep paying. In August the first instalments on the new stock fell due, and many buyers could only pay by selling [1]. By late summer the price was down to about £190, and by December to between £100 and £125 [1] [2].
The 1721 inquiry found widespread fraud among the directors and corruption in the Cabinet [1]. The Chancellor was removed from office and imprisoned in the Tower of London, and directors had their estates confiscated to pay investors back [2], losing on average 82% of their wealth [1]. The company itself carried on as a manager of government debt until 1853 [1].
The genius who bought back in
The Master of the Royal Mint, the man who worked out the laws of gravity, very likely held at least 100 shares early in 1720 and sold them in April, well before the top. Then he bought back in, at very high prices, close to the peak. His fortune fell from somewhat over £30,000 to about £20,000, a loss of about £10,000 [4]. The Royal Society itself lost about £600, and many of its Fellows took a hefty hit [2].
He is supposed to have said he could calculate the motions of the heavenly bodies but not the madness of people. That line has only been traced to about two generations after his death [4].
The legend
The most quoted story of 1720 is a company floated "for carrying on an undertaking of great advantage, but nobody to know what it is", started by "an unknown adventurer". It comes from the same 1841 bestseller that made tulip mania famous. A historian who went looking found no evidence that any such offering ever happened, and a later one judged many of the strangest-sounding offerings of 1720 to be "no doubt hoaxes" [5].
It did not need to be true. A company that ran the national debt, bribed the people who regulated it and had a law passed against its rivals was a stranger story than anything the pamphlets made up.
The game on top
The South Sea Company had everything a pump needs: a story nobody could check, a price that made the story pay for itself, buyers on credit, and insiders paid on the way up. Synthetic Demand is a satire of exactly that. You are the CEO of an invented company with one job: make the stock go up before you sell. The markets you can be dealt come from real years of market history; this one isn't among them, since 1720 had no ticker.
Every call you make is graded A to F. The directors of 1720 got the pump right. Getting out before the instalments fall due is the game.