In October 1720, John Hanger, governor of the Bank of England (BoE), and his fellow directors confronted the imminent collapse of the South Sea Company (SSC). The SSC directors urgently appealed to the BoE for funds to prevent collapse. Should the bank rescue the SSC? The answer to this question hinges upon an assessment of the origins of the market bubble, Britain's strategy of creating trading monopolies, the development and role of the new BoE, and Britain's jockeying to be a major power. Excerpt UVA-F-1820 Rev. Jun. 2, 2020 The South Sea Bubble and the Rise of the Bank of England (A) In early October 1720, John Hanger, governor of the Bank of England (BoE), and the bank's board of directors faced the decision of whether to rescue their principal rival, the failing South Sea Company (SSC). The price of SSC shares had fallen from a high of GBP950 in late June to just GBP290 on October 1 and to GBP210 on October 12. Panic gripped the financial markets. So-called bubble businesses were collapsing every day—such firms had started up and raised aggressive amounts of capital during the height of the bubble (see Exhibit1 for a list of some firms). “Men were running to and fro in alarm and terror,” writer Charles MacKay reported, “their imaginations filled with some great calamity, the form and dimensions of which nobody knew.” The situation in London became so desperate that the Cabinet called Parliament into an emergency session and desperately urged King George I to return to England from his native Hanover. When Hanger opened the meeting of the BoE board, director Robert Walpole presented a desperate plan to prevent total economic meltdown. Walpole proposed that the BoE take on nearly GBP4,000,000 of its rival's stock at a significant discount in exchange for approximately GBP3,750,000 of government securities. Walpole hoped this action would recapitalize the teetering SSC and keep its stock out of liquidation auctions. Yet the sheer size of the SSC made any rescue financing a risky prospect. Before the crisis, the SSC had dominated the British business landscape with a capitalization over four times larger than that of the BoE itself. Could the BoE take on so much SSC stock, and thus its liabilities, without threatening its own existence? What if SSC stock continued to slide and the BoE inherited a massive hole in its balance sheets? The Crown had chartered the BoE in 1694 to “support public credit.” But no one conceived of the BoE as a bailout mechanism for a massive bubble company with uncertain prospects. Nonetheless, Hanger and the board knew that the stability of the British financial system, and the budding British Empire, rested on their shoulders. The “Glorious Revolution” of 1688 . . .