Why Even Isaac Newton Lost His Fortune in the First Great Stock Market Bubble

In the summer of 1720, the most traded stock in England represented no real business at all: it represented public debt disguised as opportunity, and for a few months it convinced a king, a genius, and half of Europe that easy money had no limit.

Writer Robert Greene tells the story in The Laws of Human Nature (2018), as the central example of what he calls the law of short-sightedness: the human tendency to lose sight of the consequences of an act once the present becomes dramatic enough.

Bad news arriving from Paris

In 1719, Englishman John Blunt, director of the South Sea Company, watched with growing unease the news arriving from France.

An expatriate Scotsman named John Law had founded the Mississippi Company to exploit the riches of Louisiana, and its share price kept climbing. The French, across every social class, were getting rich overnight.

From that boom, according to Greene, came the word “millionaire” itself.

Blunt, a shoemaker’s son, had spent his whole life wanting to rise in English society. Watching France become Europe’s new financial capital was unbearable to him. He needed to devise something better, on a bigger scale.

A plan to turn debt into wealth

The South Sea Company had been founded in 1710 to manage part of the British government’s debt, in exchange for a trade monopoly with South America that, in practice, it never got to exercise.

Blunt’s plan, presented in 1720, was this simple:

• The company would pay the government a huge sum to absorb its entire debt, valued at 31 million pounds.
• It would then convert that debt into its own shares, sold to the public at 100 pounds each.
• If the share price rose, as Blunt assured everyone it would, everyone (government, creditors, and buyers) would profit at once.

King George I, obsessed with freeing the crown of its debts, backed the plan without fully understanding the financial jargon behind it. In April 1720, Parliament approved it, and the king himself went to deposit 100,000 pounds in the company’s shares.

The Exchange Alley fever

What followed, Greene recounts, was a speculative fever that didn’t distinguish between social classes. The narrow streets of Exchange Alley, in London, filled with carriages every day.

Among the buyers were writers Jonathan Swift, Alexander Pope, and John Gay. So was Isaac Newton, who invested 7,000 pounds of his savings.

The share price, which had started at 100 pounds, passed 300, then 400, and by June had already reached 1,000 pounds, with payment terms so generous they were almost impossible to refuse. That same month, the king knighted Blunt.

The social contagion reached specific scenes Greene recounts in detail:

• An aristocratic lady was startled one night at the opera to see that her former maid occupied a more expensive box than her own.
• Grooms and footmen quit their jobs, bought their own carriages, and hired footmen of their own in turn.
• A young actress made such a fortune that she decided to retire and rented an entire theater to say goodbye to her admirers.

Jonathan Swift summed up the mood in a letter to a friend: asked about religion, politics, and trade in England, the answer to all three questions was the same, “South Sea.”

When even genius gets caught

Newton, cautious, sold his shares weeks after buying them and doubled his money. That should have been the end of the story for him.

But the price kept rising without him, and in August, seeing others earn far more than he had, he invested again, right before the collapse.

When the bubble burst, Newton lost around 20,000 pounds (several times what he’d made the first time), and, according to Greene, from then on the mere mention of finance made him deeply uncomfortable. His is the line that sums up the episode better than any later analysis: “I can calculate the motion of heavenly bodies, but not the madness of people.”

The collapse and the flight

To rein in the parallel speculation that had sprung up in other companies, some as absurd as a perpetual-motion wheel, Blunt pushed through the Bubble Act of 1720, which banned joint-stock companies not authorized by the crown.

The measure had the opposite of its intended effect. Thousands of people, unable to recover the money they’d invested in those now-illegal companies, rushed to sell their South Sea shares to cover their losses. The price collapsed.

In August 1720, desperate crowds gathered outside the company’s headquarters trying to sell. There was a wave of suicides, including Blunt’s own nephew. Blunt had to flee London pursued by an assassin and spent the rest of his life on the modest resources left to him after Parliament confiscated nearly all his gains.

Why neither Blunt nor Newton saw it coming

The question Greene asks is an uncomfortable one: how could a pragmatic man like Blunt, and a mind as rational as Newton’s, fail to anticipate something so obvious? The entire scheme depended on the share price rising forever, something mathematically impossible without any real business behind it.

His explanation is that both men’s time frame shrank, little by little, until it narrowed to just a few days. Blunt stopped being able to think in months and started thinking only about the following week. Newton, the epitome of rationality, stopped thinking beyond the day he was living in.

Greene connects this mechanism directly to the 2008 financial crisis: the same loss of long-term perspective, multiplied by financial instruments far more complex than the shares of an eighteenth-century company.

Two bubbles that fed each other

Blunt’s bubble wasn’t an isolated phenomenon. John Law’s Mississippi Company, the one that had first sparked Blunt’s envy, collapsed in France that same year, just a few months before the South Sea Company did.

Both schemes shared the same underlying logic: turning public debt into tradable shares and trusting that the mere expectation of future wealth would sustain an ever-rising price. When the money in circulation in France began to run short and French investors lost faith in Law, that news reached London and accelerated the loss of trust in Blunt himself, who was already struggling to keep his plan afloat.

Greene points to this detail as part of the problem: Blunt had built his plan by imitating Law’s, “only on a bigger scale,” without anticipating that both schemes would collapse almost at the same time, for the same structural reasons.

A pattern that needs no new accomplices

What’s striking about the case, three centuries later, isn’t that ordinary people got swept up by the promise of easy money. It’s that neither social standing nor intelligence worked as protection: a king, a Dutch banker who described the scene as if “all the madmen had escaped the asylum at the same time,” and the most rigorous scientist of his era all bought the same illusion, each convinced their own case was different.

Sources

• Greene, R. (2018). The Laws of Human Nature. Viking.