The Banque Royale and the South Sea Company: how the bubbles began

Abstract

We are now to enter upon the year 1720; a year remarkable beyond any other which can be pitched upon by historians for extraordinary and romantic projects, proposals, and undertakings, both private and national; … and which, … ought to be had in perpetual remembrance, not only as being what never had its parallel, nor, it is to be hoped, ever will hereafter; but, likewise, as it may serve for a perpetual memento to the legislators and ministers … never to leave it in the power of any, hereafter, to hoodwink mankind into so shameful and baneful an imposition on the credulity of the people, thereby diverted from their lawful industry. Adam Anderson, Origin of Commerce , Vol. 3, pp. 91–2. The Mississippi Bubble in France, the South Sea Bubble in England, and similar bubbles in Holland and Germany during the years 1719 and 1720 were parts of the first international stock market speculative boom and bust in capitalist Europe. The legacy of those episodes was substantial. The Bubble Act of 1720 in England limited the use of joint-stock corporations until well into the nineteenth century, and the French collective memory of John Law and his Banque Royale meant that “there was hesitation even in pronouncing the word ‘bank’ for 150 years thereafter,” and, of course, they gave us the word “bubble” for describing purely speculative movements in asset prices. It is useful to present and analyze as clearly as possible these classic bubbles, useful not only for better understanding the economic history of the eighteenth century but also for grasping its significance for economic theory.