The Mississippi Bubble 1720: A Financial Fable

The Mississippi Bubble, also known as the Law’s Bubble, was a financial speculation scheme that occurred in France in 1720. It was orchestrated by John Law, a Scottish economist who had been granted authority by the French regent to establish the Banque Royale and issue paper money to stimulate economic growth.

How It Started?

The Mississippi Bubble started with the establishment of John Law’s Banque Royale in 1716. The bank was granted the exclusive right to issue paper money in France, which was a new concept at the time.

At the time, France was facing significant economic challenges. The country had recently fought a series of costly wars, and the government was struggling with a large national debt. Law believed that by increasing the money supply and encouraging investment, he could stimulate economic growth and reduce the debt.

In 1719, Law established the Company of the West, later known as the Mississippi Company, to develop trade with the French colonies in North America. The company was granted a monopoly on trade with these colonies and was given the power to issue shares to raise capital.

Law then began to aggressively market the shares of his company to the French public, using various tactics such as offering high dividends and creating a sense of scarcity by limiting the number of shares available. The shares quickly became very popular, and the demand for them increased dramatically.

As more and more people invested in the company, the stock price continued to rise rapidly, leading to a speculative frenzy. Many people invested their entire savings in the Mississippi Company, and the stock price reached a peak in January 1720, at which point the company’s market capitalization exceeded the entire French economy.

Bubble Burst

However, the company’s profitability was greatly exaggerated and the company’s success had largely been driven by speculation and hype, rather than actual profits.

As doubts about the company’s profitability grew, investors started to sell their shares, causing the stock price to plummet. This triggered a wave of panic selling, as investors rushed to get out of the market before prices fell further.

The Mississippi Bubble collapsed due to a combination of factors. One of the primary reasons was that the Mississippi Company was not as profitable as many investors had believed.

The bubble burst was also exacerbated by a series of financial crises that occurred in France at the time. The Banque Royale had issued a large amount of paper money to fund the Mississippi Company, which had contributed to inflation and a weakening of the French currency.

Aftermath

The collapse of the Mississippi Bubble had a significant impact on the French economy, causing a wave of bankruptcies and financial ruin for many investors. The government was forced to step in and bail out some of the affected parties.

It undermined confidence in paper money and banking and led to a broader economic crisis in Europe. It also had a lasting impact on economic theory, as economists sought to understand the factors that had contributed to the bubble and its subsequent collapse.