Isaac Newton lost a fortune in the South Sea Bubble.
In 1720 shares in Britain's South Sea Company rose from about £100 to £1,000, then crashed back down within months. Its trade barely made money; its real business was government debt. Among those who lost money was Isaac Newton, who is said to have admitted he could not calculate the madness of people.
The South Sea Company was founded in 1711 as a financial device. Holders of Britain's unfunded national debt swapped it for company shares, and the government paid the company interest. To make the shares attractive, it was also granted a monopoly on trade with South America, which was controlled by Spain, then at war with Britain. From 1713 its main trade was the Asiento, a contract to carry enslaved Africans to Spanish colonies. It trafficked more than 34,000 people, and the trade was never significantly profitable.
In 1720, the company won a scheme to take over most of Britain's remaining national debt in exchange for new shares. The higher its share price rose, the more it stood to gain, so it talked up extravagant rumours of trade riches. Politicians, and even the King's mistress, were given shares they did not pay for, with the right to sell them back at the market price. The company lent people money to buy its own stock. The price climbed from £128 in January to about £1,000 in early August.
Then selling set in. By the end of September the price was down to £150. People who had bought on credit went bankrupt, banks and goldsmiths failed, and a parliamentary inquiry uncovered fraud among the directors and corruption reaching into the Cabinet. The Chancellor of the Exchequer, John Aislabie, was imprisoned, and all 33 directors were stripped of much of their wealth. Robert Walpole emerged as the man who restored confidence.
Newton reportedly said he could not calculate the madness of people, though the remark comes to us secondhand. He held nearly £22,000 of the stock in 1722 and lost at least £10,000. The company itself survived, managing part of the national debt until 1853.
Source: Wikipedia — South Sea Company · Text summarised from Wikipedia (CC BY-SA 4.0)
