In the spring of 1720 Sir Isaac Newton — Master of the Royal Mint, president of the Royal Society, the most celebrated mind in Europe — sold his South Sea Company shares and pocketed a handsome profit. Then he watched the price go on climbing without him, lost his nerve in the opposite direction, and bought back in near the top. By the end of the year he was poorer by a sum reported at around £20,000 — millions in modern money. He is famously said to have sighed that he could calculate the motions of the heavenly bodies, but not the madness of people. The quotation is very likely apocryphal — it surfaces long after his death, in varying wording — but the loss itself is well attested, and the sentiment fits the year perfectly.
The South Sea Company had been founded in 1711 by Robert Harley as a Tory counterweight to the Whig-dominated Bank of England; King George I himself later served as its governor, lending the venture a royal glow. It held a monopoly on British trade with Spanish South America — the "South Seas" — including, from the Treaty of Utrecht in 1713, the asiento: the contract to supply enslaved Africans to Spain's colonies. As a trading concern it was mediocre at best, since Spain permitted very little actual commerce. Its real business was financial engineering. In 1720 it outbid the Bank of England for the right to take over the bulk of the national debt, persuading the government's creditors to swap their annuities for company shares — a conversion that became more profitable for the company the higher its share price climbed. It therefore had every incentive to talk the price up, and did so relentlessly, lubricating the scheme with bribes of fictitious stock to ministers, courtiers and royal mistresses.
The year of the bubbles
It worked beyond parody. Stock that stood near £128 in January touched roughly £1,000 by midsummer, and the frenzy centred on Exchange Alley, the cramped lane of coffee-houses off Cornhill that served as London's unofficial stock market, where shares changed hands from morning until night. A swarm of imitation ventures — the "bubbles" that gave the year its name — floated schemes of every description, the most quoted being a company "for carrying on an undertaking of great advantage, but nobody to know what it is". That prospectus, alas, is probably embellished too: it is recorded only in a history written decades later. Parliament responded with the Bubble Act of June 1720, which required joint-stock companies to hold a royal charter — legislation promoted with the South Sea Company's blessing to kill off its competitors, and a strong candidate for the most self-interested financial law ever passed. It stayed on the statute book until 1825.
The collapse, when it came in late summer, was vertiginous — and, fittingly, the company helped burst its own bubble, since writs issued under the Bubble Act against rival ventures in August set off a scramble for cash that dragged every share price down together. By September the stock was in freefall; by December it had sunk back close to where it had begun the year. Fortunes evaporated across the country, goldsmith-bankers failed, and the ruin reached from country parsons to great houses — the historian Edward Gibbon's grandfather, a director of the company, was stripped of almost everything. France offered a grim mirror: the Mississippi Bubble, engineered by the Scottish financier John Law, was collapsing in Paris over the same months, and the two manias had fed off each other.
The Screen-Master General
Then came the reckoning. A parliamentary investigation uncovered corruption reaching into the cabinet. The Chancellor of the Exchequer, John Aislabie, was expelled from the Commons and imprisoned in the Tower of London; the company's directors had their estates confiscated for the relief of victims. Robert Walpole, who managed the clean-up and carefully shielded the king and court from the worst revelations, was mocked as the "Screen-Master General" — and rewarded, from 1721, with two decades of power as the man history regards as Britain's first prime minister. The company itself limped on as a debt-management vehicle until the 1850s. Newton's apocryphal lament has endured because 1720 keeps happening: every mania since has been compared to the South Sea, and every generation, sooner or later, has bought back in near the top.
Quiz nuggets
- The South Sea Company was founded in 1711 and from 1713 held the asiento, the contract to supply enslaved Africans to Spanish America.
- In 1720 its share price rose from about £128 in January to roughly £1,000 by midsummer, then collapsed back near its starting level by December.
- Isaac Newton lost a sum reported at around £20,000 after buying back in near the peak; his "madness of people" remark is very likely apocryphal.
- John Aislabie, Chancellor of the Exchequer, was expelled from the Commons and imprisoned in the Tower over the scandal.
- Robert Walpole's handling of the crisis earned him the nickname "Screen-Master General" and helped make him Britain's first prime minister from 1721.