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

• Published date: 01 December 2020
• Author: Robert F. Bruner,Scott C. Miller
• Date: 01 December 2020
• DOI: http://doi.org/10.1111/jacf.12429

IN THIS ISSUE:

Public

Finance and

Central Banks

8Rethinking Macro Measurement

James Sweeney, Chief Economist, Credit Suisse

17 e First Modern Financial Crises: e South Sea and Mississippi

Bubbles in Historical Perspective

Robert F. Bruner, University of Virginia; and Scott C. Miller, Yale University

34 Convergence and Reversion: China’s Banking System at 70

Carl Walter

44 Apocalypse Averted: e COVID-Caused Liquidity Trap, Dodd-Frank,

and the Fed

Craig Pirrong, University of Houston

49 e Poverty of Monetarism

Patrick Bolton, Columbia University

68 Columbia Business School Roundtable on Broken Models of Public Finance

Panelists: Jared Bernstein, Center for Budget and Policy Priorities; and Paul Kazarian,

Japonica Partners. Moderated by Shiva Rajgopal, Columbia University

82 Columbia Business School Roundtable on e Fed’s Response to the

Global Financial Crisis—and Now the Pandemic

Panelists: Frederic Mishkin and Patricia Mosser, Columbia University. Moderated by Kate Davidson,

The Wall Street Journal

90 e Euro @ 20: How Economic and Financial “Asymmetries”

Marred the Promise of the Single Currency

George Alogoskous, Athens University of Economics and Business; and Laurent Jacque,

Tufts University

105 e Benets of Buying Distressed Assets

Jean-Marie Meier, University of Texas at Dallas; and Henri Servaes, London Business School,

CEPR, and ECGI

117 Using ESG to Enhance Fixed-Income Returns: e Case of Inherent Group

Nikhil Mirchandani and Chelsea Rossetti, Inherent Group

127 e Economic (Not Literary) Oenses of Michael Lewis:

e Case of e Big Short and the Global Financial Crisis

Don Chew, Journal of Applied Corporate Finance

VOLUME 32

NUMBER 4

FALL 2020

APPLIED

CORPORATE FINANCE

Journal of

17

Journal of Applied Corporate Finance • Volume 32 Number 4 Fall 2020

e modern relevance of the twin crises hinges on ans wers

to several questions that ca n help us understand these sem i-

nal events:

• Is there more to the origins of bubbles than hubris, folly,

and greed? Economic historians sugges t that decades of nan-

cial transformat ion across the Western world—particu larly in

Britain—prepared the way for the t win crises. A “new world

economy” produced global commercial expa nsion, but also

widespread volatility. Financial innovation in the form of

new institutions, markets , and instruments began to democ-

ratize nance and socialize risk. e nancia l revolution of

the late 17th and early 18th centuries opened opportunities

for economic growth and instability that would have been

unthinkable just 50 year s before.

• Were the market manias of 1719-20 “bubbles?” C onven-

tional wisdom suggests as much. However, the body of

scholarship presents a more complicated assessment: the

manias included both va luations detached from market

fundamentals a long with rational and farsighted decisions

by investors. ese events force us to confront the uncomfor t-

able truth on which many economists and historians agree:

there is no objective denition of “bubble” on which we are all

likely to agree. And t he heterogeneity of the crises challenges

simple conclu sions.

• What triggered the crashe s in 1720? According to nance

theorists Douglas Dia mond and Philip Dybvig,² behav ioral

quirks and misperceptions ca n trigger crisis behavior. On the

other hand, Charles Ca lomiris and Gar y Gorton,³ among

others, suggest that crises originate in economic shocks li ke

the Panic of 1907 (the San Francisco earthquake of 1906)

and the Panic of 1861 (the onset of the Civil War). e

facts of the twin crises favor the theory of economic shocks.

Interventions by both the British and French states rst i nten-

sied the bubbles and then prompted, if unwitting ly, their

collapse. Nevertheless, contemporary accounts also reveal

that emotions, swings in investor sentiment, and cognitive

biases amplied the cri ses.

2 Diamond and Dybvig (1983), pp. 401-419.

3 Calomiris and Gorton, (1991), pp. 109-173.

n 1720, Britain and France convulsed in the South Sea and Mississippi bubbles.

Manias and crashes have stalked nancial markets ever since, demonstrating the

profound difculty of preventing or mitigating them. Conventional narratives depict the crises

as the product of hubris, folly, and greed, emerging from what John Kenneth Galbraith

identied as “insanity born of optimism and self-serving illusion.”1 We argue for a more

nuanced view. Human foibles should not obscure the powerful inuences of institutions,

interests, ideologies, and government policies. The events of 1720 embodied a transition

to a new era dened by nancial 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.

by Robert F. Bruner, University of Virginia; and Scott C. Miller, Yale University

e First Modern Financial Crises: e South Sea

and Mississippi Bubbles in Historical Perspective

I

1 Galbraith (1952), p. 43. Full citations are provided in References at the end of the

article.