Pitfalls in the quest for South Sea rationality

offers three main criticisms of our article. 1These relate to the legal status of subscription receipts, the relevance of post-crash trading data and the appropriate treatment of counterparty risk.In sections i-iii we refute Shea's arguments, and in section iv we suggest some further areas for research. IIn an earlier paper Shea considered the legal status of subscription contracts issued by the South Sea Company. 2 He says, 'The subscriptions were sometimes referred to as subscription contracts and as such may be viewed as ironclad agreements between the issuer and the subscriber . . .this was the interpretation of the subscription contracts that particularly suited the purposes of the [South Sea] Company's management and there is substantial documentary evidence of the Company's pursuit of defaulting subscribers'. 3 From this it would seem that Shea accepts that the South Sea Company itself treated the subscription contracts as binding commitments, even if (as he argues) this is not how they were viewed by the investing public.In his current paper, Shea goes further and states unequivocally that the South Sea subscription contracts were options, because the statute authorizing the Company's 1720 conversion scheme (6 Geo. 1, c. 4) 'stated explicitly that a defaulter's liability to the Company was limited to his holding of stock in the Company'. 4 The statute makes no such assertion, and Shea gives the statutory provision a misleading heading ('Concerning additional South Sea stock and installments').His article goes on to develop a theory of 'sanctioned default', which allegedly allowed those who defaulted on their subscription contracts to do so without penalty other than forfeiture of their part-paid scrip.There are several flaws in Shea's legal analysis.Most importantly, the passage from 6 Geo. 1, c. 4 on which he relies clearly relates not to subscription contracts but to calls on existing shareholders.The heading for this section of the act, in the first printed version which appeared in 1 Dale, Johnson, and Tang, 'Financial markets can go mad'. 2

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• Actif sous-jacent et produits dérivés financiers de la Compagnie des Mers du Sud

  Nesrine Bentemessek Kahia•Revue économique•2014

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• Financial markets can go mad

  Open Access•Richard Dale, Richard S Dale et al.•The Economic History Review•2005

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