The introduction compares two types of journeys: one that aims to reach a place within the shortest time, and another that begins without regard to speed and without a destination in mind. Balloon travel is said to be ideal for the second kind.
The main story begins with the rescue of Professor William Waterman Sherman, who is picked up by a steamship while floating among a strange wreck of twenty deflated gas balloons in the North Atlantic. Sherman, a recently retired schoolteacher, was last seen three weeks ago leaving San Francisco on a giant balloon, determined to spend a year drifting alone. The world waits breathlessly to find out how Sherman could have circumnavigated the globe in record time and landed in the ocean with twenty balloons rather than the one with which he began his journey. After several days' rest and a hero's welcome, the professor recounts his journey before a captivated audience.
Sherman's flight over the Pacific Ocean was uneventful until an unfortunate accident involving a seagull puncturing his balloon forced him to crash land on the volcanic island of Krakatoa. He discovers that the island is populated by twenty families sharing the wealth of a secret diamond mine - by far the richest in the world - which they operate as a cartel. Each year, the families sail to the outside world with a small amount of diamonds, to purchase supplies for the hidden and sophisticated civilization they have built on the island (they explain that introducing too many diamonds into the market at once would drive down their value to "a shipload of broken glass"). Each family has been assigned one of the first twenty letters of the alphabet, and lives in its own whimsical and elaborate house that also serves as a restaurant. The Krakatoa society follows a calendar with twenty-day months. On "A" Day of each month, everyone eats in Mr. and Mrs. A's American restaurant; on "B" Day, in Mr. and Mrs. B's British chop house; on "C" Day, in Mr. and Mrs. C's Chinese restaurant; on "D" Day, in Mr. and Mrs. D's Dutch restaurant, and so forth. Sherman's first friend on the island, Mr. F, runs a French restaurant containing a replica of the Hall of Mirrors. The houses are full of incredible items, such as Mr. M's Moroccan house, which has a living room with mobile furniture that operate like bumper cars. The children of the island invented their own form of amusement that combines elements from merry-go-rounds and balloon travel.
When the volcano on Krakatoa erupts, the families and Sherman escape on a platform held aloft by twenty balloons. As the platform drifts westward around the world, the families parachute off to India and Belgium to start their new lives. Sherman remains on the platform and finally descends onto the waters of the Atlantic Ocean, where he is rescued. The professor concludes his speech by telling the audience he intends to build an improved balloon for a year of life in the air, financed by the diamond cufflinks he obtained in Krakatoa.
The novel describes Krakatoa as an island in the Pacific Ocean, but the Sunda Strait that contains the island is considered an arm of the Indian Ocean.