Fueling the Flames: The Expansion of Credit

Speculative manias gather speed through expansion of credit. Most increases in the supply of credit do not lead to a mania — but nearly every mania has been associated with rapid growth in the supply of credit to a particular group of borrowers. In the last hundred years, the increases in supplies of credit have been provided in part by the banks, in part by the development of new financial instruments and in part by cross-border investment inflows. The mania in tulip bulbs in the seventeenth century occurred because the sellers of the bulbs provided credit to the buyers.1 John Law had his Banque Générale, later the Banque Royale, as his source of credit while the South Sea Company relied on the Sword Blade Bank. In 1763 credit expansion in Holland was financed by the Wisselruiti, or chains of accommodation bills (think post-dated checks) from one merchant to another. The British canal mania of 1793 was fed by spending facilitated by loans from many newly established country banks to the entrepreneurs who were developing the canals.