1. Historical Context
By the early 18th century, the British government was accumulating massive debt due to wars with France. In 1711, the South Sea Company was founded with the agreement to absorb part of the national debt in exchange for receiving an exclusive monopoly on trade with the Spanish colonies in South America.
2. The Breakdown Event
Although the commercial monopoly was practically unviable due to Spain's military control over its territories, the company's directors mounted a sophisticated propaganda campaign that promised infinite riches based on South American gold and silver. The company's shares rose from 128 pounds in January 1720 to more than 1,000 pounds in August of the same year. The market was flooded with liquidity and irrational speculators from all social classes. Isaac Newton himself, after selling his shares obtaining an initial profit of 100%, bought again at the peak of enthusiasm driven by collective envy. Weeks later, stock values collapsed to the ground as the complete absence of real merchant ships was revealed, destroying the savings of all of Britain.
3. Global Economic Impact
The outbreak of ruined countless aristocratic families and merchants, seriously damaged the credit of the British crown and led to the passage of the 'Bubble Act' of 1720, which prohibited the creation of companies with transferable shares without express authorization from Parliament for more than a century.
Key Financial Lesson (Psychology of Money)
No amount of academic intelligence protects an investor from the speculative madness of the masses. Herd psychology and greed cloud critical judgment, leading to irrational decisions based on rumors and collective illusion.
4. Practical Case or Real Life Example
The physicist Isaac Newton immortalized the experience after losing the current equivalent of almost 3 million dollars with his famous historical phrase: 'I can calculate the movement of celestial bodies, but not the madness of people. '