It was the first “bubble” in stock-market history, and even Isaac Newton got caught up in the rush.
In 1720, like many other wealthy men in Britain, Newton’s investments in the South Sea Company evaporated when the company’s shares skyrocketed, then crashed. Proving that even the most intelligent among us can be baffled by the stock market, Newton’s problems started when he re-bought some of the volatile stocks that he’d sold at a profit, leading to a major loss.
The story of the South Sea Company, a publically-traded company that was founded in 1711 to trade with the Spanish South American colonies, is one of the first big market crash stories. Between January and June of that year, the shares in the South Sea Company skyrocketed from £128 each to £1050. By September, they were again worth £175.
That year was the first time “bubble” was used in reference to publicly traded companies. In fact, writes Richard Evans for The Telegraph, 1720 was sometimes referred to as the “Bubble Year.”
Towed along by the success of the South Sea Company, “newly floated firms were seen as appearing like bubbles,” Evans writes. But alas, all bubbles burst.
In June 1720, Parliament passed the Bubble Act. It required all companies that sold stock to the public to hold a royal charter, reports the Harvard College Library.
Sounds like it would help control rampant speculation, right? But there was a problem. “The legislation had been introduced by the South Sea Company,” the library reports, “presumably as a means of controlling competition in the burgeoning market.”
The South Sea Company’s charter was seen as a vote of confidence in the company, writes Evans, and shares kept rising. But, he writes, “investors started to lose confidence in early July.”
By September, the bubble had burst, investors had lost the bulk of their investments,and the public was outraged, writes scholar Helen Julia Paul. The following year, she writes, a Parliamentary committee charged with investigating the matter released a report on this day in 1921, finding that the company’s directors had “circulated false claims of success and fanciful tales of South Sea riches,” Evans writes. Government officials were also implicated. Many appeared in the resulting trials.
Where was Newton while all this was happening? Selling and buying, it seems. One quotation attributed to him from this period had him stating that he “could calculate the motions of the heavenly bodies, but not the madness of the people,” writes author Jason Zweig.
Early in the year, “Newton dumped his South Sea shares, pocketing a 100% profit totalling £7000,” he writes.
"But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price—and lost £20,000 (or more than $3 million in today’s money). For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence."