Reform of American Business Law

Now let's measure cost and quality of the Bubble Act of 1720. It was passed in the midst of the South Sea Bubble, while the stock of the South Sea Company was still rising towards its peak at 700% of initial value, before collapsing to a few nickels above that initial value by the end of the year.

This historical fact leads to the discussion of success or failure of the Act. One needs to conclude to failure, if the purpose of the Act was to prevent the formation and burst of the bubble. On the other hand it was a resounding success if the purpose was the opposite.

Can we envision the possibility that the Act might have been passed to favor, not combat, a bubble; or is this too far fetched? The Statute's recitals referred to

persons who contrive or attempt dangerous and mischievous undertakings or projects, under false pretences of public good, do open books for public subscriptions, and draw in many unwary persons to subscribe therein towards raising great sums of money.

The Act prohibited this type of scheme and imposed penalties for those involved in the issue and trading of such shares. But was the South Sea Company itself a target or a beneficiary? All depends on whether it was or wasn't comprised in the language "persons who contrive or attempt dangerous and mischievous undertakings or projects, etc.".

The South Sea Company wanted to prevent other opportunities from diverting investment away from its own stock, that is fact. Also fact is that South Sea Stock was fashionable, and many influential people (from the King's mistress downwards) owned such stock and had everything to win from a prohibition of alternative investment products.

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