The First Modern Financial Crises : The South Sea and Mississippi Bubbles in Historical Perspective

In 1720, Britain and France convulsed in the South Sea and Mississippi bubbles. Manias and crashes have stalked financial markets ever since, demonstrating the profound difficulty of preventing or mitigating them. Conventional narratives depict the crises as the product of hubris, folly, and greed, emerging from what John Kenneth Galbraith identified as “insanity born of optimism and self-serving illusion.” We argue for a more nuanced view. Human foibles should not obscure the powerful influences of institutions, interests, ideologies, and government policies. The events of 1720 embodied a transition to a new era defined by financial innovations and by profound civic reactions to the crises. The 300th anniversary invites a reconsideration of how and why these crises emerged, how they affected their host societies, and what lessons they have for us today. The modern relevance of the twin crises hinges on answers to several questions that this paper addresses: Is there more to the origins of bubbles than hubris, folly, and greed? Were the market manias of 1719-20 “bubbles?” What triggered the crashes in 1720? Did political and financial leaders respond appropriately to the crises? What precedent did the twin crises set? How did the crises affect financial development in their societies?