In economic terms, a "bubble" is a scenario in which the price of something—a single stock, an entire sector, or even a financial asset, market, or asset class—exceeds its underlying value by a significant margin. Because speculative demand fuels inflated prices rather than fundamental value, the bubble will eventually burst, and enormous sell-offs will cause prices to fall, often substantially. In the vast majority of situations, a speculative bubble is followed by a catastrophic crash in the underlying securities.
As this article intends to provide information about the Mississippi Bubble, let’s know about the Mississippi company and then we will learn what is Mississippi Bubble, john law, and the Mississippi bubble, and also about the Mississippi bubble burst.
About Mississippi Company
The Mississippi Company was a corporate monopoly in French territories in North America and the West Indies during the 18th century. The Mississippi Company was granted exclusive trading privileges for 25 years by a royal grant in 1717. The company's rise and fall is linked to the operations of Scottish financier and economist John Law, who was France's Controller-General of Finances. The Mississippi bubble became one of the earliest examples of an economic bubble when speculation in French financial circles and land development in the region became frenetic and disconnected from economic reality.
What is Mississippi Bubble?
The Mississippi Bubble is a stock market bubble named after the French trade corporation the Mississippi Company. The Mississippi Bubble erupted between August 1719 and May 1720, resulting from France's dire economic circumstances in the early 1800s. The French Treasury was a disaster when Louis XIV died in 1715, with the price of metal coins swinging drastically. The French regent sought help from a Scotsman named John Law. Law was a gambler who had sought exile in France to avoid a duel. He proposed that the Banque Royale accept deposits and issue banknotes that would be payable at the currency's value at the time of issuance.
His theories aided France's shift from a metal-based to a paper-based currency, resulting in a brief era of financial stability. Law founded the Companie des Indes (also known as the Mississippi Company) in August 1717, and it was granted a monopoly on commercial privileges with the French colonies in the Americas (the Louisiana territory). By August 1719, Law had devised a plan that would allow the Mississippi Company to assume full responsibility for the French national debt. A portion of the debt would be exchanged for company stock. Shareholders were promised a profit of 120 percent under the law. Unsurprisingly, 300,000 potential owners competed for the 50,000 shares on sale.
The French government, which was virtually controlled by Law, continued to manufacture paper banknotes while demand for the shares increased, causing inflation to explode. The bliss was fleeting.
John Law and the Mississippi Bubble
The plot begins with King Louis the XIV. He was well-known for his lavish lifestyle. He had constructed several magnificent castles throughout France. There was, however, a problem with these castles. They were all created with borrowed funds. After the death of Louis XIV, he left the French throne deeply in debt and with no means of repaying the debt. France was technically bankrupt, and the king who succeeded Louis the XIV was a 5-year-old boy, leaving the affairs in the hands of one of the royals, the Duke of Orleans, who was acting as the young king's regent advisor.
John Law, an unknown figure at the time, presented the Duke of Orleans with a proposal that would help them pay off their debt almost immediately. This concept, which would subsequently lead to the French economy's downfall, comprised two fundamental steps. The steps are:
Fiat Currency Introduced - To begin with, John Law persuaded the Duke of Orleans to accept fiat currency into the system. This entailed the creation of a state-owned bank that would accept gold and issue paper receipts. The receipts might theoretically be exchanged for gold at any time. However, such a scenario is unlikely to occur. The Duke was persuaded by John Law that such a system would allow the state to issue loans to young entrepreneurs with money they didn't have, collect interest on those loans, and pay off the amount owing. The Duke of Orleans seemed to approve of the concept, and France adopted fiat currency.
The Mississippi Company - The Mississippi Company was formed as the second step in the process. This firm would be granted a royal charter, allowing them to do trade exclusively with the Louisiana region of the United States, which was then a French territory. Because trading with the East Indies had provided wealth to Europe, it was assumed that trade with the United States would bring equal wealth. As a result, the Mississippi Company generated a lot of buzz, and when consumers were given the opportunity to exchange their debt for shares in the company, they jumped at it.
Price Inflation with Fiat Currency
One advantage of having Fiat money and newly created shares coexisting was that John Law could simply inflate the stock prices at will. When stock prices began to fall, John Law would print more fiat money. A significant portion of this newly created money would flow into Mississippi Company shares, increasing their value and creating the illusion of a successful company. In reality, the company was underperforming. The Louisiana colony in the United States was nothing more than a swamp, with no prospect of riches. However, John Law used the Louisiana illusion to keep the Mississippi Company's prices inflated.
Withdrawal of Paper Money
The Mississippi bubble was therefore founded on the availability of fiat money, which inflated prices by causing individuals to buy more shares, causing prices to rise even higher. Some people, however, discovered that the government's bank was issuing more receipts than there was gold in the system. As a result, they showed up to make withdrawals. Due to the banks' inability to make payments, a large number of customers began demanding their gold, resulting in bank runs. As a result, individuals in France began to doubt the strength of the paper money system, and they returned to trade with gold as the standard currency.
Mississippi Bubble Burst
The bubble burst in May 1720, when a run on the Banque Royale compelled the government to concede that the amount of metal-based currency in circulation in France wasn't half that of paper currency. The government issued an order gradually depreciating Mississippi Company shares, with the goal of valuing them at half their nominal value by the end of the year. Due to widespread public uproar, the decision was overturned a week later, but the Banque Royale remained closed. The bank runs persisted after it reopened in June. The Mississippi Company shares were worthless by November 1720, and Law was compelled to abandon the country.
Conclusion
Thus, we can conclude that the Mississippi Bubble was nothing but a financial scheme which was speculative and collapsed later. The person behind this was John Law who got privileges in order to develop the vast territories of France in the Mississippi valley. His company later also monopolised trade like Tobacco as well as slaves. Later, prices of the shares of his company started increasing sharply which led to a number of consecutive events that ended with stock market crash.
FAQs on The Mississippi Bubble
1. What was the Mississippi Bubble of 1720?
The Mississippi Bubble was a major financial crisis that occurred in France between 1716 and 1720. It was engineered by Scottish economist John Law, who established a bank that issued paper money and a trading entity called the Mississippi Company. The company's value was based on the perceived immense wealth of French colonies in North America. This led to a massive speculative frenzy where the price of company shares skyrocketed, only to collapse dramatically when investors realised the company's profits were minimal, plunging the French economy into a severe depression.
2. Who was John Law and what was his role in the scheme?
John Law was a Scottish economist and financial theorist who became the Controller General of Finances in France. his primary role was to solve France's massive national debt crisis. he did this by:
- Founding the Banque Générale (which became the national bank) to issue paper currency.
- Establishing the Mississippi Company (later the Company of the Indies) and convincing the public to exchange their government debt for shares in this company.
3. What was the primary purpose of the Mississippi Company?
The official purpose of the Mississippi Company was to manage and exploit the vast French colonial territories in North America, particularly the Mississippi River valley, which was believed to be rich in gold and silver. however, its role quickly expanded to become a state-backed conglomerate that held a monopoly over all French foreign trade, tax collection, and management of the national debt. Its real purpose became a vehicle for John Law's financial reforms.
4. What were the main causes for the Mississippi Bubble to burst?
The bubble burst due to a combination of factors:
- Lack of Real Profits: The company failed to generate the promised riches from its American colonies, meaning the sky-high share prices were not backed by actual value.
- Inflation: To keep share prices high, John Law's bank printed an excessive amount of paper money, leading to massive inflation.
- Loss of Confidence: Savvy investors began to doubt the scheme's viability and started selling their shares to convert their paper profits back into gold.
- Bank Run: As panic spread, a rush of people demanded gold in exchange for their paper notes. The bank could not honour these requests, leading to the collapse of both the bank and the company's share value.
5. how did the Mississippi Bubble indirectly contribute to the later French Revolution?
While not a direct cause, the Mississippi Bubble's collapse had profound long-term consequences that fuelled revolutionary sentiment decades later. It shattered public trust in the French monarchy and its ability to manage the nation's finances. The disaster created a deep-seated suspicion of paper money, central banking, and financial innovation, which hampered France's economic development. This legacy of financial instability and deep public distrust in the government was a key factor that contributed to the fiscal crisis precipitating the French Revolution in 1789.
6. What was the core economic theory John Law used to justify his scheme?
John Law's core theory was that a nation's wealth was not limited by its supply of gold and silver (specie). he argued that wealth could be dramatically expanded by increasing the supply of paper money and credit. he believed this would stimulate commerce, trade, and industry. his plan was to replace metal currency with paper notes issued by his national bank and to convert France's huge government debt into shares of the Mississippi Company. In theory, this would create a vibrant, credit-driven economy; in practice, it led to uncontrolled speculation and hyperinflation.
7. how did the Mississippi Bubble differ from the South Sea Bubble in Britain?
Although both were major speculative bubbles that occurred around the same time, they had key differences. The primary distinction was the level of integration with the state. In France, John Law merged the central bank (Banque Royale) and the main trading company (Mississippi Company), directly tying the entire nation's money supply to the company's stock value. In Britain, the South Sea Company and the Bank of England remained separate entities, which helped contain the financial damage when the South Sea Bubble burst.
8. What were the most significant long-term consequences of the Mississippi Bubble for France?
The most significant long-term consequences were:
- Economic Setback: It created a lasting aversion to paper money and modern financial institutions in France for nearly a century, putting it at a disadvantage compared to Great Britain.
- Erosion of Royal Authority: The crisis severely damaged the reputation and authority of the French monarchy, showing it to be fiscally incompetent and corrupt.
- Social Destabilisation: The collapse wiped out the savings and fortunes of a vast number of citizens, from nobles to merchants, leading to widespread social bitterness and distrust towards the ruling class.
