Bubble Act

The so-called "Bubble Act" was a durable, if inconsistently enforced, feature of British law from its passage on 9 June 1720 to its repeal on 29 June 1825. To modern eyes, the central clauses of the Act are those that prohibited the establishment of joint-stock cor- porations issuing transferable stock unless a charter had been secured from the Crown. The Act has often been interpreted as the British Parliament's attempt to broadly con- strain speculative manias of the type that developed around the South Sea Bubble of 1720. Beyond the formal penalties prescribed for use against unincorporated firms, it has commonly been argued that the Act exercised a "symbolic force" that delayed the evolu- tion of corporate organization in Britain (McQueen, 2009, p. 20).

More recent scholarship has greatly clarified the origin, intent, and lasting effects of the Act. Formally titled "An Act for better securing certain Powers and Privileges, intended to be granted by His Majesty by Two Charters, for Assurance of Ships and Merchandize at Sea, and for lending Money upon Bottomry; and for restraining several extravagant and unwarrantable Practices therein mentioned", the pejorative title "Bubble Act" found common usage only in the nineteenth century. The Act granted charter to two maritime insurance companies, and dealt with speculative activity in but a few of its clauses. Upon closer inspection, the Bubble Act was not originally intended to limit all speculation in joint-stock shares. Rather, the crucial clauses of the Act were passed at the behest of the directors of the South Sea Company (SSC). Modeled on the Bank of England, the SSC was chartered in 1711 largely with the object of refinancing a portion of the Crown's existing floating debt. Its role expanded greatly over the course of the 1710s, and in February of 1720 the SSC was granted the right to convert the entirety of the State's 30 million pounds of outstanding debt into SSC shares, a concession for which the Company paid 7.5 million pounds. For the SSC, the profitability of the scheme depended upon a sustained rise in its share price to both reduce the costs to the Company and to attract holders of the Crown's irredeemable debt (Carswell, 1960).

The first half of 1720 witnessed a marked appreciation in the share prices not only of the SSC, but also of a broad spectrum of joint-stock ventures, some with tenuous or wholly illusory ties to any commercial ambition. As the SSC's share price temporarily plateaued, this broader market in joint-stock shares threatened to divert interest from the SSC. Drawing upon their long-standing alliance with Tory members of Parliament, a great number of whom held SSC shares themselves, the directors of the SSC pushed for the passage of the Bubble Act to limit competition and defend their share price (Harris, 1994). Crucially, the Act was not passed in the wake of the South Sea Bubble's collapse, but instead during the last days of the Bubble's expansion. Fleetingly successful, the prices of SSC shares continued to rise for the two months following the Act's passage, before collapsing dramatically by mid-September of the same year.

Though the Act nominally restricted the formation of new joint-stock companies to those granted Parliamentary charter, prosecutions on the basis of the Act were nearly unheard-of in the eigthteenth century. Only in the final 15 years of the Act's existence as law did prosecutions accelerate. While a number of firms were prosecuted for abusing and moving beyond their chartered purpose, these legal challenges were not dependent upon the text of the Bubble Act. Broadly and imprecisely worded, the Act arguably added little, beyond additional punishments, to the existing body of law circumscribing British corpo-rations (Harris, 2000). If the Act exercised significant symbolic force, this rested upon the hesitancy of Parliament to grant new charters. Plainly fraudulent firms were, no doubt, deterred from petitioning the Parliament for incorporation, but new joint-stock ventures continued to be established throughout the period. Those new charters that were granted were predominantly for the construction of turnpikes, canals, and other transportation infrastructure, ventures that required significant long-term financing. Few chartered joint-stock companies emerged within the nascent manufacturing sector, where capital needs were comparatively modest and short-term. Indeed, there is little clear evidence that the Bubble Act slowed the growth of the British economy in the eigtheenth century. The eventual repeal of the Bubble Act in 1825 was linked to another burst of specula- tive activity in London markets. From 1821 onward, interest in the stock of domestic infrastructure firms and of mining ventures in Latin America multiplied. With this increasingly frenzied activity in markets came an unprecedented flood of petitions to Parliament for joint-stock incorporation. With this development came a push from some members of the judiciary, Lord Eldon among them, for more stringent enforce- ment of the now-dated Bubble Act (Harris, 1997). The Parliamentary opposition to the Bubble Act that soon emerged was a reaction to this threat. Members of Parliament that stood against the Act, some of whom served as directors of a number of newly formed joint-stock firms, argued that the Act was, in its current form, unintelligible. Further, it was argued that the legal uncertainty surrounding the status of unchartered corpora- tions hindered the growth of many legitimate ventures. Following limited debate, the crucial clauses of the Bubble Act with respect to Parliamentary assent for joint-stock incorporation were repealed, with royal assent granted on 5 July 1825.

See also:

Bubble; Financial crisis; Financial instability.