Fueling the Flames: the Expansion of Credit



Speculative manias gather speed through expansion of money and credit. Most expansions of money and credit do not lead to a mania; there are many more economic expansions than there are manias. But every mania has been associated with the expansion of credit. In the last hundred or so years the expansion of credit has been almost exclusively through the banks and the financial system; earlier, non-bank lenders expanded the supply of credit. The tulip bubble mania of the seventeenth century developed with credits from sellers of the bulbs, a seventeenth-century version of ‘vendor financing’.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 from one merchant to another. The canal mania of 1793 in Great Britain was fed by spending facilitated by loans from many newly-established country banks to the entrepreneurs who were developing the canals.


Interest Rate Central Bank Money Supply Stock Market Crash Bank Note 
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Fueling the Flames: the Expansion of Credit

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© Palgrave Macmillan, a division of Macmillan Publishers Limited 2005

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