The Bubble Act of 1720: How a Stock Market Crash Made England Scared of Corporations

This is the first essay in a series of twenty-five installments — tracing the rise of the big corporation in America: how we went from a world where forming a corporation required a special act of the government, to a world where Justice Louis Brandeis could warn in his famous 1933 dissent in Liggett v. Lee that big companies were capable of dominating the state itself.

To get to America, we have to start in London, in a narrow alley behind the Royal Exchange, in the spring of 1720. Because the modern argument about whether corporations are dangerous all starts there, in what was probably the wildest stock mania the world had ever seen — and in the oddly named law it left behind, the Bubble Act.

Exchange Alley, Spring 1720

Picture the scene. Britain is rich, flush with victory in a long war, and full of money looking for somewhere to go. There are no mutual funds, no ETFs, no brokerage apps. What you have are joint-stock companies — the ancestors of the modern corporation — whose shares ordinary people can buy, sell, and argue about in coffeehouses. In 1720, everybody wanted shares. Beggars and earls alike, as one historian put it, were playing the market. Around the corner on Exchange Alley, promoters were selling stock in new companies at a rate London had never seen — roughly 190 joint-stock ventures floated in the first half of 1720 alone.

And what ventures they were! Some were genuine. Many were hopeful. And some were pure smoke — including, famously, one that advertised itself as "an undertaking of great advantage, but nobody to know what it is." The promoter collected a fortune in deposits, closed the office, and vanished. Modern readers will recognize the species.

Why was everyone so hungry for shares in anything? Two words: the South Sea Company.

The Company at the Center of Everything

The South Sea Company had been chartered back in 1711 with a monopoly on trade with Spanish South America — a part of the world Britain was, inconveniently, at war with Spain about. The trade never amounted to much. What the company was really good at was finance, and its big moment came in 1720: Parliament agreed to let it take over a huge slice of the national debt — over £30 million of it — in exchange for issuing new shares to the government's creditors, who swapped boring bonds for exciting stock. Stockholders included half of polite society, and the company's governor was the King himself. Cabinet ministers, the King's mistresses — everyone was in. The share price told the story: from around £130 at the start of the year to over £1,000 by late summer. Thousands of ordinary families borrowed money to climb aboard. There seemed no limit. Until there suddenly was.

Parliament Slams the Door

Enter Parliament, which had been watching all these new bubble companies with growing alarm. In June 1720 — note the date, we'll come back to it — it passed the Bubble Act (formally, 6 Geo. 1 c. 18). What the Act did, in plain terms:

It outlawed going corporate without permission. It declared illegal and void any business that acted like a corporation — issuing transferable shares, raising money by subscription — without a royal charter or an act of Parliament.
It hit the whole food chain. Promoters, brokers, and even investors who dealt in the shares of unauthorized companies faced ruinous penalties, including the ancient and terrifying sanction of praemunire — which, in practice, meant prison and the loss of all civil rights — plus crushing fines.
It protected the insiders. The Act quietly handed royal charters to two well-connected insurance companies, the Royal Exchange Assurance and the London Assurance, making them the only joint-stock insurers in the realm for the next century.

Here's the thing about the Bubble Act's motives, and this is important for our story: it was not primarily a consumer-protection law, and it did not come after the crash. It was passed in June 1720, while the mania was still raging — before the peak of the bubble. Recent scholarship says the driving force was the South Sea Company itself, which wanted the upstart bubble companies shut down before they siphoned investor money away from South Sea stock. Parliament obliged.

The Act only covered nonchartered companies. If you had a charter — like the South Sea Company, like the mighty East India Company (that we will talk about in the next essay) — you were untouched. Which tells you exactly what the law was really for: not "corporations are dangerous," but "unauthorized corporations are dangerous."

The Bubble Bursts Anyway

The irony deserves a drumroll. In August 1720, the South Sea Company and its allies persuaded the government to enforce the new law against several of its smaller competitors, bringing legal actions that knocked them out of the market. But watching the authorities come for the little bubbles spooked everyone into wondering — wait, how real are any of these things? Including ours?

Confidence cracked. By September the panic had set in. South Sea shares collapsed from over £1,000 to under £200 by the fall, and kept falling. Fortunes evaporated — not just speculators', but the savings of clergymen, widows, and tradespeople. There were riots in the coffeehouses and, reportedly, suicides in the streets. The scandal reached the highest offices in the kingdom: the Chancellor of the Exchequer was expelled from Parliament and packed off to the Tower, and the estates of the Company's directors were confiscated to repay the victims.

So did the Bubble Act "cause" the crash? Historians still argue about it — the South Sea scheme was probably doomed to burst regardless, and the French market had already blown up earlier that year under the equally spectacular Mississippi Scheme. But the timing is unmistakable: the Act's enforcement was the shove that started the avalanche.

A Hundred-Year Chill

Here is where the Bubble Act earns its place at the start of our story about the rise of the giant corporation in America — not for causing the crash, but for what came after. The Act stayed on the books for 105 years. It was not formally repealed until 1825. And over that century-plus, corporate formation in Britain slowed to a trickle. There are honest debates among historians about how much of that was the Act itself versus simple post-crash reluctance to grant charters — but the numbers are striking: only about 150 new charters in the century after 1720, barely more than one a year, against the flood of 1720. Wanting to incorporate became a supplicant's errand: you petitioned the Crown or Parliament, explained why your venture deserved corporate privileges, and usually got told no.

Business didn't stop — entrepreneurs are endlessly inventive — so they built workarounds. Partnerships. Trust deeds. "Deed-of-settlement companies" that mimicked corporate life, with transferable shares and boards of directors, while nervously staying just shy of acting as a corporation in the eyes of the law. But the legal form itself — limited liability, perpetual life, the machinery that makes big accumulations of capital possible — was locked in a government vault. Two lessons soaked into the British legal mind, and then into the colonial American mind, from 1720 onward:

First: big corporate ventures were vehicles of fraud. Companies could be confidence tricks with an official seal. Ordinary people lost their savings; ministers lost their honor.

Second: the only safe corporation was one the government had examined, chartered, and kept on a short leash. Incorporation wasn't a right. It was a grant of public privilege — rationed, conditional, revocable.

Across the Ocean

And the colonies? The Bubble Act formally applied to Britain, but in 1740 Parliament extended the whole apparatus to the American colonies, making it illegal there as well to act as a corporation without a charter.

The practical effect was already the same: before the Revolution, corporations in British North America were astonishingly rare — a handful of municipalities, colleges, churches, and a few businesses, each one chartered individually and treated as a special, conditional favor. When you read, in the next essay, that colonial Americans greeted a giant chartered corporation with fear and loathing, part of the answer is right here: they had been raised in a world where incorporation was scarce, gated, and guarded — and where the last time the ungated version had been let loose, in London in 1720, it had ruined half the investing public.

They had also spent decades reading about one chartered corporation that had done far stranger things than lose money — a company with an army, a navy of sorts, and its own country. And in 1773, that company decided to sell tea in Boston. That's the next essay.

A few sources worth a look

The Bubble Act 1720
The Bubble Schemes (Colonies) Act 1740 — extending the Act to America
Accounts of the South Sea Bubble and Exchange Alley, 1720 (contemporary pamphlets)
Ron Harris, Industrializing English Law (2000), on incorporation before and after the Bubble Act
On the South Sea Company's role in pushing the Act: R. S. Sperling and more recently T. G. Arne and colleagues, The Bubble Act (2020)