It was caused by John Law, a Scotsman who broke prison and fled England for the Netherlands, where he learned about banking and stock trading in Amsterdam. He went to France during the minority of Louis XV, which had been in an on-again, off-again state of financial crisis for years. Law persuaded the Regent to let him charter a bank and then consolidate nearly all the government's far-flung interests in it: taxation, issuing currency, financing colonies. For quite a while, the ever-expanding offerings of the Banque Royale and its offshoots seemed like investments that could go nowhere but up, and Frenchmen bought and bought some more. Peers, merchants, everybody bought.
The thing that kept the bubble going was the absolute power of the French monarchy that Law was borrowing. He could make up rules, change them next week or next day, add more rules, anything. He almost succeeded in having the government simply create prosperity, but it was all riding atop a mountain of paper held up by the government. The discussion of Law's bubble reminded me of nothing so much as Obamacare. Here are some striking quotes from Ferguson's book.
'How great is the benefit of a despotic power', [Law] observed, 'in the beginnings of an institution subject to so much opposition on the part of a nation that has not yet become accustomed to it!' (p. 142) If that doesn't describe the way Obamacare was passed and promulgated, I don't know what does.
At the same time, Law obsessively tinkered with the exchange rate . . . altering the official price of gold twenty-eight times and the price of silver no fewer than thirty-five times between September 1719 and December 1720 -- all in an effort to make banknotes more attractive than coins to the public. But the flow of sometimes contradictory regulations served only to bewilder people to illustrate the propensity of an absolutist regime to make up the economic rules to suit itself. (p. 151) We've seen that, too, and done under even less color of law by President Obama than by Controller General Law.
Cranks and con artists have been around since the beginning of civilization. They gather wherever there is money, and they love authoritarian governments. And they always leave the people worse off. Law's failures meant that France lurched from one financial crisis to the next until finally royal bankruptcy led to revolution. We're headed down the same road, I fear; at least, our bankruptcy is coming -- whether the government in power when the bubble finally bursts can fix things without a revolution, I don't know.