Was the bubble invented by John Law in the early 18th century ? At first glance this contention might seem obviously wrong , or even nonsensical . It is , however , much truer than it seems .

Many of those familiar with financial history will have one of two objections to the contention . First , one of history ’ s most famous financial bubbles is the Dutch Tulipmania of 1636 , which occurred 35 years before John Law was born . However , recent financial history research has played down the significance of the Tulipmania . The price movements involved were striking , and likely reflected some degree of speculative investment , but this is common in markets in rare and unusual goods . This is particularly true of goods predominantly used to signal status , as tulips were in 1636 . Furthermore , tulips are a commodity , not a financial asset , and the economic fallout of the episode was minimal . A 20th century equivalent might be the price reversals that occurred in comics , baseball cards and beanie babies , and we would not describe any of these as “ financial ” bubbles . The first documented financial bubble occurred in 1720 .

Second , financial bubbles are widely thought of as naturally occurring . Some , for example , see bubbles as an inevitable part of the business cycle ; others believe that they break out spontaneously . Either way , they are not something that ever needed to be invented .

However , this too is a misconception . Financial bubbles do not happen at regular , cyclical intervals . The first two major bubbles , in 1720 and 1825 , were separated by 105 years , but since 1990 , a major bubble has occurred , on average , once every six years . Nor are they spontaneous in any real sense . They always happen for a reason , and are often deliberately and knowingly created — none more so than the first financial bubble of 1720 .

The problem facing John Law in 1719 was the French government ’ s unaffordable levels of debt . His original plan was to have the holders of government debt trade it for equity in his Mississippi Company ,

By William Quinn

Portrait of John Law by Casimir Balthazar , 1843 .

10 FINANCIAL HISTORY | Spring 2021 | www . MoAF . org