People in the United States have become accustomed to bubbles of late. The tech boom of the late 1990s convinced many—for a while, at least—that every company with a .com in the name was a can’t-lose proposition, regardless of whether it even had a business plan. And no one should need a history book to recall what happened when the last decade’s housing bubble finally burst in 2008.
Before that, though, the country went 70 years without the kind of asset bubble that can shake an economy. Even accomplished economists have been stunned by the volatile and seemingly irrational nature of the U.S. economy in recent years. But to observers who take a longer view of economic history, recent events haven’t been as much of a shock.
History is littered with the discarded dreams of those seduced by asset bubbles. The most famous historical bubble, of course, is the great tulip mania of 1630s Holland. But such events were fairly common in the 18th and 19th centuries. One less celebrated bubble, in 1720, involved the Mississippi Company, which was run by a Scottish financier named John Law and at one point controlled all French commerce outside of Europe.
The Mississippi Company was created to manage France’s holdings on either side of the Mississippi River. Law, who fled England after killing a man in a duel and then ran a gambling operation in Amsterdam before being appointed controller general of France, managed to sell large portions of the French population on the promises of the New World. But, as William Goetzmann, Edwin J. Beinecke Professor of Finance and Management Studies, explains in a lecture on the bubble, there wasn’t nearly enough economic activity in the territory to justify a run-up in the stock price of 1,900% in less than a year. Investors were speculating on the future value of the central part of the United States, Goetzmann said, at a time when “there might be 30 or 40 people in New Orleans but that’s about it”.
The story of John Law, the Mississippi Company, and the first stock bubble, Goetzmann said, can give us a better understanding of the forces and tendencies that underpin what can seem like nothing more than collective insanity. “He understood how much people loved gambling,” Goetzmann said of Law. “He understood that if you give somebody the dream of being able to make 10 times, 15 times, 20 times their money, they’ll be willing to accept something that maybe had a low dividend. This was the electric spark that got the whole idea of stock speculation going.”