However, in 1702 broke the War of English Succession and England declared war on Spain, the conflict was short and resented British coffers. The British government issued debt endlessly, thinking that the economic situation change before having to deal with major interests, but it was not and had to proceed to invent something, and that invention was the Company South Seas.
This company was founded by Robert Harley , the then governor of the English treasury, and made a masterful move: In the eighteenth century Europe viewed the New World as a land of great opportunity and that, supported by the suggestive name of the new company, the British government persuaded the public debt holders to redeem their obligations new company shares, while also ensuring the new shareholders a return of 6% ... perpetual. However, if the new shareholders had given them to research instead of going out there to celebrate, have fallen on account of the Company of the South Seas was only benefits, since the Treaty of Utrecht of 1713 established a quota of one boat and trip a year to deal with "the Indies." Naturally, all that information was hidden or overlooked by the long-term prospects seemed excellent.
The company was fashionable everyone wanted their actions and they did not stop rising. Since the stock market did not yet exist, the securities are traded in an alley in the worst area of \u200b\u200bLondon, literally could not cope with the number of people who, after selling their farms or workshops are planted in the capital with a wad of cash under his arm, eager to participate in a business that seemed to have no limits. On the other hand, it triggered a perverse effect, common to all financial bubbles: to any potential investor was left with shares of the company, the bank began lending for purchase ... and loans to cover those loans ... crazy.
At some point, the action came to a head and that he invested 50 pounds six months ago, earned a profit equivalent to the salary of a blacksmith for twelve years work. Suddenly, the share price remained stable and due to a contagion effect of a similar company in France, which failed to meet any expectations, began to decline. The government tried to stop the slide by ordering the purchase of shares ( what today we might consider ... treasury) and, later, by prohibiting any company could carry out any operation with the American territories without express permission. But to no avail. As usual, those best able to minimize the losses reported but a multitude of small investors were trapped, virtually bankrupt and with huge loans to pay.
The only thing was winning the British government, which paid off in a short time 83% of its public debt. As mentioned, thousands of small bondholders became shareholders so that, ultimately, resigned to return the principal to accept the exchange proposed by the government. England impoverished, and though the administration pushed measures to restore confidence and the final arrival of the Industrial Revolution helped alleviate the situation, many banks failed and many individuals have lost much of its heritage ... Included Isaac Newton, which lost 20,000 pounds ...
As in most financial bubbles, the lessons learned are similar: Poor risk management, the artificial creation of expectations, the stubbornness in thinking that something may go on indefinitely ... Perhaps, in this particular case, we are extremely aware of the mechanism used in many investment placements that attempts to remedy the situation becoming the bondholder (creditor of the company ) a shareholder (owner of the company ) and transferring via coupon yield (n or linked to business progress ) to a via dividend payment model ( linked to company performance ) thus completely distorting the conditions under which that person agreed investment. Beware
that.
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