This series is adapted, with permission, from a Chinese-language series by our friend Marcus Ji, who looks at historical events through an economic lens. We have condensed and adapted the original for an international audience.
The story, as it has been told for three hundred years, goes like this: Isaac Newton lost a fortune in the South Sea Bubble of 1720, and afterwards sighed the most famous line in financial history – “I can calculate the motion of heavenly bodies, but not the madness of people.”
There is no reliable evidence he ever said it. The line first appears in a notebook in 1756, nearly thirty years after Newton’s death, and even then as one man’s recollection of another man’s remark. It survived and spread for one simple reason: it fits so perfectly with what we want to believe – that even the smartest man alive can be ruined by a crowd – that nobody bothered to check whether it was true.
Hold on to that mechanism, because it is the key to the whole story. A claim that matches what people want to believe does not need to be true to spread. In 1720, all of London wanted to believe that South Sea stock could only go up. Same mechanism, same city, same result.
How much he actually lost
To feel the size of Newton’s loss, use the measuring stick this series always uses: an ordinary labourer’s income, which in 1720s England was about £19 a year. Newton was not a struggling academic – as Master of the Royal Mint, his income in a good year reached about £3,500, or 184 times what an ordinary workman earned. He was, by any standard, one of the best-paid public officials in Britain.
In the South Sea crash, he lost around £20,000 – roughly 77% of his capital, and the equivalent of about 1,050 years of an ordinary worker’s income. A labourer would have had to work, without eating or spending, for a millennium to earn back what Newton vaporised in about six months. He wasn’t ruined – he still died wealthy – but it was a catastrophic, and entirely avoidable, loss.
It started as a perfectly sensible idea
The part of the story most worth telling is the part usually skipped: the South Sea scheme did not begin as a scam.
It began in 1711 as a reasonable piece of public finance. Britain had run up enormous war debts, and the South Sea Company was created to absorb a portion of them – creditors swapped government debt for company shares, the government paid the company fixed interest, and the company held a monopoly on trade with Spanish South America as its upside story. Debt restructuring of this kind was standard practice; nothing about it was mad.
In 1719, the company converted £1 million of government debt into shares, and the operation genuinely worked – the shares traded above face value, and creditors, government and company all came out ahead. That first success was the seed of everything that followed. Emboldened, the company bid £7.5 million in 1720 for the right to convert roughly £31 million of the national debt – effectively betting half the country’s debt on the price of one stock.
For that bet to work, the share price had to keep rising. So the company’s leading director, John Blunt, deployed three measures, each defensible in isolation, which together formed a self-igniting engine. Shares could be bought on installment – 20% down – which flung the door open to everyone. The company lent investors money with which to buy its own shares, manufacturing demand out of thin air. And members of Parliament received generous bribes and share allocations, so the people running the country acquired a personal interest in the price going up – and when ordinary Londoners saw the powerful scramble to buy, they followed.
The result was a loop with no floor under it: the promised South American trade never materialised, and the company was essentially using its own paper to prop up the debt it had swallowed. The share price went from about £128 in January 1720 to £330 in March, £550 in May, and touched £1,000 in August – by which point the company’s paper value was close to £300 million, roughly 80% of Britain’s GDP, for a business that had never done any substantial business.
Newton’s own trades trace that curve. He judged the bubble correctly and sold his shares in April, doubling his money. Then the price kept climbing without him – and in June, near the very top, he went back in with nearly everything. He did not misread the market. He read it right, exited – and was pulled back in by the roar of the engine.
Why being right once is the dangerous part
The real value of Newton’s case is not the old moral that even smart people can be fools. It is that his failure can be broken down into specific psychological mechanisms – and every one of them works on the rest of us exactly as it worked on him.
The money he didn’t make registered in his mind as money lost. He had doubled his capital, but the stock then doubled again without him, and behavioural economics has since confirmed what he felt: the pain of missing out is felt like a real loss, often more sharply than an equivalent gain is enjoyed. His June re-entry was an attempt to recover a loss that had never actually occurred.
His expertise made it worse, not better. Newton understood money – he ran the Mint, had set the gold price, and was an early investor in the Bank of England. Competence in an adjacent field inflates confidence in one’s ability to time a market. Expertise has boundaries; confidence rarely respects them.
And the fuel of the mania was not greed but social proof. A London banker wrote that summer: “When the rest of the world is mad, we must imitate them in some measure.” When every intelligent person you know is doing the same thing, the question “can they all be wrong and I alone right?” becomes harder to answer the smarter your friends are. Once Newton was back in at the top, confirmation bias and sunk cost did the rest – a man heavily invested needs to believe he is right, and filters the evidence accordingly.
The bookseller who beat him
The same bubble made a fortune for a man with none of Newton’s gifts. Thomas Guy was a bookseller who had grown rich printing cheap Bibles, famously stingy, eating plain meals off old newspapers at his own shop counter. As the stock soared, he sold his entire holding over six weeks in the spring – about £234,000, the equivalent of twelve thousand years of a labourer’s income – and never looked back. He used the money to found Guy’s Hospital, which treats patients in London to this day.
The difference between the two men was not intelligence; it was temperament. Guy simply did not feel the pain of missing out. He sold, watched the price keep rising, and did not care. The survivors of bubbles are rarely the people who see most clearly. They are the people whose emotions are hardest to ignite.
The crash, and a very long shadow
In September the buyers vanished, and by December the stock had fallen from nearly £1,000 to £124. Thousands were ruined – clergy who had invested church funds, widows who had swapped pensions for shares, merchants who lost their working capital. The panic spread through the banks, suicides rose, and together with the simultaneous collapse of France’s Mississippi scheme it formed history’s first international stock market crash. The scandal’s cleanup elevated Robert Walpole to what became Britain’s first premiership, and the investigation that followed stripped the company’s directors of, on average, 82% of their property to compensate victims – establishing, at least for a moment, the principle that financial misconduct has consequences even for the powerful.
But the strangest legacy was legal. Parliament’s response, the Bubble Act, was actually passed in June 1720 – before the peak – and its purpose was partly to protect the South Sea Company by banning rival joint-stock ventures from competing for investors’ money. Written to shield the very engine of the mania, it outlawed forming joint-stock companies without a royal charter – and stayed on the books for over a century. In that century, Britain chartered on average about 1.4 new joint-stock companies per year. One deranged summer effectively froze public company formation for a hundred years, and some scholars argue it slowed the capital mobilisation of the Industrial Revolution itself. As earlier installments of this series described, Britain did not allow simple company registration until 1844, or limited liability until 1855 – about 135 years after the crash. The South Sea Company itself, meanwhile, quietly restructured and survived until 1853, outliving its own bubble by 130 years.
The cleanup also contained a lesson in what actually works after a crash. Parliament’s instinct was prohibition – ban the kind of company that caused the mania – and that mistake lasted a century. Walpole took a different route: instead of banning things, he worked on restoring trust in the system itself, moving the South Sea Company’s debt into safer hands – the Bank of England and the Treasury – with a dedicated fund set up to repay it. Investors calmed down not because speculation had been outlawed, but because the government’s finances were credible again. After a crisis, bans rarely fix anything; rebuilding something people can trust does.
What to take from 1720
Few of us will ever be as brilliant as Newton – and the comfort in this story is that it would not matter if we were, because intelligence is not what a bubble tests. Bubbles rarely open as frauds; they open as good ideas – a debt reform, a technological revolution, a new asset class – and are pushed across an invisible line by installments, leverage and the sight of powerful people buying. The moment of maximum danger is not the beginning but just after your first win, when the profit quietly recalibrates your sense of risk. What finally pulls you in over your head is never a stranger’s pitch – it is that everyone you respect is already in. And don’t expect the rules to save you in time: regulation arrives late, and its first draft often protects the wrong party, as the Bubble Act did.
Newton could predict the return of a comet decades into the future. What he could not predict was how it would feel to spend six months watching everyone around him get rich – and whether he could resist joining them. As for that famous line about the madness of people: he almost certainly never said it, yet it has outlived every other fact of the episode, because it sounds too right for anyone to bother checking.
Which is exactly how a bubble works.
Previously in this series: How did a US law destroy China’s economy in 1934?
Next in this series: If money isn’t what you own, what is it?
