The South Sea Bubble

"The “South Sea Bubble” is one of the most startling lessons which history gives us of the ease with which the most monstrous, and absurd, and wicked humbugs can be crammed down the throat of poor human nature. It ought also to be a useful warning of the folly of mere “speculation,” as compared with real “business undertakings.”"

- P. T. Barnum

The South Sea Bubble is proof that speculation is nothing new. This wasn't the first "bubble" (Tulip mania took place nearly a century earlier, and the Mississippi Company bubble predated the South Sea Bubble by a year) and it certainly wasn't the last.

History
The South Sea Company held a monopoly on English trade with South America, particularly the Transatlantic Slave Trade, which was really getting going at this time. However, the only markets for slaves in that part of the world were the Spanish and Portugese colonies, none of which were inclined to do business with the English. (One of the effects of the War of the Spanish Succession was that Britain obtained the asiento, the exclusive right to sell slaves to Spanish colonies, but that came later.)

So, instead of selling slaves, the South Sea Company started dealing in debt. It bought a large portion of the British national debt by selling shares. In 1720, the company engaged in practices that were distinctly dodgy to drive up the price nearly eightfold, such as "selling" shares to politicians: the politicians didn't actually pay for them, and sold them back, thus increasing the price. There were also false rumours of potential profits.

Other companies joined in. (Some choice example are the company for inventing a wheel for perpetual motion, capital one million, and the notorious company "for carrying on an Undertaking of great Advantage; but nobody to know what it is." The proprietor of the latter company raised the then-huge sum of two thousand pounds in one day, and promptly skipped town.)

By 1720, the price had reached its peak and people were selling en masse. Those who had bought shares on credit saw the price collapse and many ended up bankrupt. The banks had to write off a load of debt they could not get back. Parliament was recalled, investigated and found massive fraud going on.

Fallout
King George I was not directly involved in the bubble, but he was recalled from Hanover to deal with it, and the government became rather unpopular.

The South Sea Company's primary competitor in the national debt business, the Bank of England, was the clear winner from this bubble. It had not engaged in the shady dealings that the South Sea Company did (although its stock prices were affected), and thus it became the de facto national bank.

The South Sea Company survived, finally selling slaves to the Spanish colonies and funding whaling expeditions to Greenland until the end of the Seven Years' War, alongside its dealing in government debt, until they were finally disestablished in 1853.

As for the debt that kicked off the bubble, it stayed on the government's books until World War I, when it was consolidated in a way that let the UK avoid paying the principal.