John Law’s Financial Scam and the South Sea Bubble

I showed in the previous two chapters how Austrian business cycle theory (ABCT) can explain the episodes of the business cycle that occurred during recent history in America. This period is the best period to investigate to understand the business cycle because of the great availability of data and other information relevant to the cycle. The occurrence of the recession of the early 1980s during this period provides a great opportunity to understand the cycle because there is an abundance of data available during this cycle and because this is about as close as one can get to an economic experiment, where one variable is changed (the inflation of the money supply) and we get to see the effects this had. However, the Fed’s actions in connection with the recession of the early 1980s are not the only example of an episode that has occurred in economic history and is almost like an economic experiment. What has come to be known as the Mississippi Bubble in France in the early eighteenth century is another example. This episode is more appropriately titled “John Law’s Financial Scam” and is the main subject of this chapter.1 Why it was a scam will become apparent as the discussion progresses.