The Smartest Man in the Room
And the truly disturbing part? The exact same mechanics that destroyed Britain in 1720 are running in markets right this second. Newton’s reflection on the disaster has echoed through financial history for 300 years—a warning that should terrify every modern investor:
I can calculate the motion of heavenly bodies, but not the madness of people.
The timeless lessons from this 300-year-old financial disaster are not just surprising—they are dangerously relevant to every investor today.
It Wasn't an Accident. It Was a Crime.
The common misconception about the South Sea Bubble is that it was a simple case of market mania gone wrong. The truth is far more disturbing: it was a deliberately engineered financial crime orchestrated by a man named John Blunt and the directors of the South Sea Company.
The scheme began with Britain buried under a catastrophic £10 million in war debt at crushing interest rates. Blunt proposed a deal: his South Sea Company would take on the nation's debt. In exchange, it received exclusive trading rights to South America—a promise it knew was a fantasy. Spain controlled those territories and was not about to grant access to its recent enemy. The company was built on a lie from day one.
This fraud could only succeed with the active complicity of the British government. To secure the deal, the company distributed "fictitious stock" to key figures of power. Members of Parliament, the Chancellor of the Exchequer, and even the King's mistress were given shares on the promise that the company would cover any losses. To fuel the fire, the company’s banker, the Sword Blade Bank, began offering loans to buy stock using the stock itself as collateral. With the nation's leaders personally invested, the investigation of the crime was left to the criminals themselves.
Price and Value Are Not the Same Thing
John Blunt understood a fundamental, and dangerous, principle of financial markets: a stock's price is determined by belief, not by its underlying value. The South Sea Company, which conducted almost no trade and had essentially zero profits, became a masterclass in exploiting this gap.
The deception was mechanical, a perpetual motion machine of fraud. When the company took on government debt, it created new shares to sell to the public. Here’s how it worked:
When creditors of the government debt convert their bonds into South Sea stock, the company gets to choose what price to value the stock at. If the government owes you £100, and the South Sea Company says its stock is worth £500 per share, you get one-fifth of a share. But here's the key: the company has just created the other four-fifths of that share out of thin air.
The higher the stock price went, the more shares the company could create from debt conversions, and the more money it made selling those new shares, which drove the price even higher. The results were staggering. The stock price, around £130 in January 1720, rocketed to a peak of over £1,000 by August, completely disconnected from its non-existent business fundamentals. For modern investors, this lesson is critical: in a bubble, an asset's price can completely detach from its intrinsic value.
Fear of Missing Out Is a Weapon
The financial mechanics of the fraud were amplified by a psychological weapon: the fear of missing out (FOMO). In 1720, logic was replaced by a single, powerful emotion. Your wife's friends are talking about it at church. The butcher's talking about it. The guy who shines shoes is talking about it. The fear isn't about losing money anymore. It's about being left behind.
The South Sea Company weaponized this fear. By offering stock subscriptions on installment plans, they opened the door for everyone to participate. Servants, clergy, and widows poured their life savings into the mania, desperate not to be the only ones who missed out on easy riches.
The irrationality reached its peak with the appearance of copycat "Bubble Companies." One infamous venture was launched "for carrying on an undertaking of great advantage, but nobody knew what it was." The founder sold shares in the morning and vanished by the afternoon. This psychological trigger is timeless, driving modern bubbles from meme stocks to crypto. When you feel panic about missing out, it is a sign that your judgment is being compromised.
The Pattern Never Changes
While technology has evolved, the psychological patterns and fraudulent structures of 1720 are mirrored perfectly in the modern era. The core elements of hype, questionable value, and a fear of missing out remain identical.
• GameStop (2021): The stock's price exploded based on social media hype and complex short-squeeze mechanics that most investors did not understand, leading to catastrophic losses when it collapsed.
• Cryptocurrency / FTX (2022): This exchange was a modern fraud that "would have made John Blunt proud," secretly using customer funds for risky bets while being promoted by celebrities and politicians.
• SPACs (2020-2022): Special Purpose Acquisition Companies used a structure almost identical to the South Sea Company's core promise: "trust us, we'll find something profitable to do with your money later." Most failed.
• Nikola & Theranos: Both companies were built on fraudulent technology, from a promotional video featuring a truck that wasn't running—they'd rolled it down a hill—to non-existent blood testing machines, wiping out investors who believed the hype.
The playwright John Gay, watching the South Sea carnage, wrote a line that applies to every subsequent bubble:
Those who are caught by such blunt artifices deserve their fate.
Technology changes, but human psychology is a constant. As Isaac Newton’s failure demonstrates, intelligence offers no protection against these timeless patterns.
Conclusion: The Uncomfortable Truth
The South Sea Bubble didn't happen because people were stupid. It happened because they were human—wired to follow the crowd, trust authority, and give in to the fear of being left behind.
The most uncomfortable truth is that for its architects, the scam worked. Most of the insiders who engineered the bubble kept their wealth. This reveals the core reason the pattern keeps repeating: the incentive structure. If you can make a fortune by inflating a bubble, and the worst consequence is giving back some of the money you stole, why would you stop?
When the next bubble inflates, when everyone around you is getting rich, when authorities and celebrities are telling you it’s safe—will you remember Isaac Newton?
