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
Q1. Did Mississippi Bubble cause the French Revolution?
The Mississippi Company utilized its political clout for financial gain as a result of the Mississippi bubble, undermining trust in the French financial system and the French King. The English, on the other hand, had more faith in financial markets and were able to borrow loans on better terms than the French, allowing the British to surpass France as a global superpower.
Due to the need to take on more loans and credit, the King of France spent half of his budget servicing his debt until, in 1789, he held a meeting of financial advisors to come up with a solution, sparking the French Revolution.
Q2. How did the Mississippi Bubble collapse?
Mississippi Company's stock values began to fall as the government was unable to generate money out of thin air to raise them. John Law had also earned a reputation for being a tyrant. The Mississippi Company's lies were revealed in front of the public as a result of this. When the public realized that France's most successful company had gone bankrupt, they began selling their shares, thus rendering them worthless almost immediately. The brazen deception presented by John Law resulted in the loss of many fortunes.
Q3. Who was Johan Law?
He was a Scottish man who was considered as a monetary reformer as well as a man behind the Mississippi scheme which was related to the French territories and their development in America. He was an economist and the major work written by him was "Money and Trade Considered, with a Proposal for Supplying the Nation with Money".
