The British government in 1720 instructs governors of American colonies to consent to no Act permitting Bills of Credit.

The South Sea Company, established in 1711 by the Lord Treasurer, Robert Harley, had been granted exclusive trading rights in Spanish South America, anticipating the successful conclusion of the War of the Spanish Succession, which did not end until 1713, and the actual treaty rights granted had not been as comprehensive as Harley had originally hoped.

Needing to provide a mechanism for funding government debt incurred in the course of that war, Harley could not have established a bank, because the charter of the Bank of England made it the only joint stock bank.

He had therefore established what was ostensibly a trading company, though its main activity was in fact the funding of government debt.

In return for its exclusive trading rights, the government had seen an opportunity for a profitable trade-off.

The government and the company had persuaded the holders of around £10 million of short-term government debt to exchange it with a new issue of stock in the company.

In exchange, the government had granted the company a perpetual annuity from the government paying £576,534 annually on the company's books: in essence, a perpetual loan of ten million pounds paying six percent.

This had guaranteed the new equity owners a steady stream of earnings to this new venture.

The Treaty of Utrecht of 1713 had granted the company the right to send one trading ship per year (though this was in practice accompanied by two 'tenders') and the 'Asiento', the monopoly contract to supply the Spanish colonies with slaves.

The company had not undertaken a trading voyage to South America until 1717 and had made little actual profit.

Furthermore, when ties between Spain and Britain deteriorated in 1718 the short-term prospects of the company had been very poor.

Nonetheless, the company had continued to argue that its longer-term future would be extremely profitable.

The company in 1717  had taken on a further two million pounds of public debt, and in 1719 proposed a scheme by which it would buy more than half the national debt of Britain (£30,981,712), again with new shares, and a promise to the government that the debt would be converted to a lower interest rate, five percent until 1727 and four percent per year thereafter.

The purpose of this conversion was similar to the former one, allowing a conversion of high interest, but difficult to trade, debt, into low interest, readily marketable debt/shares of the South Sea Company.

All parties could gain.

The Bank of England proposes a similar competing offer, which does not prevail when the South Sea raises its bid to seven and a half million pounds (plus approximately one point three million pounds in bribes).

The Chancellor of the Exchequer, John Aislabie, is a strong supporter of the scheme.

Parliament in April 1720 accepts a slightly altered form of the company’s proposal, and the ensuing speculation causes the company’s stock to rise from one hundred and twenty-eight and one-half pounds sterling in January to one thousand pounds sterling in August.

Panic selling by British investors in September 1720 bursts the South Sea Bubble.

The stock has fallen by the end of September to one hundred and fifty pounds.

The company failures now extend to banks and goldsmiths as they cannot collect loans made on the stock, and thousands of individuals are ruined (including many members of the aristocracy).

With investors outraged, Parliament is recalled in December and an investigation begins.