Fueling the Flames: Monetary Expansion

Speculative manias gather speed through expansion of money and credit or perhaps, in some cases, get started because of an initial expansion of money and credit. One can look back at particular manias followed by crashes or panics and see what went wrong. The tulipmania, part of speculative excitement over many objects, was fattened on personal credit.1 John Law had his Banque Générale, later the Banque Royale; the South Sea Company, the Sword Blade Bank. In 1763 Dutch expansion was financed by the unpronounceable Wisselruitij, or chains of accommodation bills; the canal mania of 1793 in Britain, by a sudden explosion of country banks. In 1825, it was country banks again. The 1830s saw the formation of joint-stock banking in Britain, after the banking legislation of 1826 and 1833. In the United States, monetary expansion came less from operations of the Second Bank of the United States, it is claimed, than from substitution of bills of exchange for silver in triangular trade among the United States, China, and Britain. Instead of buying silver from Mexico and shipping it to China, which sent it on to Britain, thus paying in turn for U.S. net imports from China and Chinese net imports from England, American merchants sent sterling bills to the Orient in payment for goods, releasing silver to add to monetary stocks and stimulating inflation in the United States.2