The Mississippi Bubble
Some in clandestine companies combine; erect new stocks to trade beyond the line; with air and empty names beguile the town, and raise new credits first, then cry ’em down; divide the empty nothing into shares, and set the crowd together by the ears. ~ English trader, writer, and spy Daniel Defoe
While England was sinking from the South Sea debacle, France was blowing its own Mississippi Bubble, ostensibly over French possessions in North America, then called Mississippi.
Scottish economist and gambler John Law (1671–1729) believed that money was merely a means of exchange that did not, in of itself, constitute wealth. Law thought that national wealth was based upon trade.
Law had a mind for math. He won card games by mentally calculating the odds.
Anticipating monetarism, Law held that printing money would stimulate the economy. Law favored paper money rather than metal, which he would have banned.
To Law, shares were a superior currency, as they paid dividends. Stock punters would forever agree.
The War of the Spanish Succession had left France’s economy stagnant, and its national debt crippling. Law proposed simulating the economy by replacing gold with paper money, then increasing the country’s capital stock. Sovereign debt would be salved by replacing it with shares in economic ventures.
Desperate, France’s Regent, Philippe d’Orléans, appointed Law as Controller General of Finance in 1715. Law instituted numerous reforms: he endeavored to break up large land holdings to benefit the peasants, abolished road and canal tolls, encouraged road building and new industry through low-interest loans, and aimed to revive maritime trade.
In 2 years, industrial production leapt 60% The number of French trading ships went from 16 to 300.
Law set up General Private Bank in 1716. Although a private bank, 3/4ths of its capital came from government bills and government-accepted notes.
The next year, Law established the joint-stock Mississippi Company, for which he obtained a trade monopoly in the West Indies and North America from the French government.
In 1718, Law’s bank became the Royal Bank, meaning that its notes were guaranteed by the king. Meantime, the Mississippi Company absorbed rival trading companies.
By 1719, the engorged entity had a monopoly on all overseas trade. Simultaneously, the Royal Bank was issuing more notes than it could back. This led to inflation.
Meanwhile, Law was hustling the fabulous wealth of Louisiana in an effective marketing dodge. Wild speculation over the Company ensued, which sparked printing more paper banknotes. When shares generated profits, they were paid in the notes.
In 1720 the Company and Bank merged. To attract capital the Regent appointed Law as Comptroller General of Finances.
The bubble burst at the end of 1720. The government admitted that there were more paper notes than precious-metal coinage could cover.
Investors attempted en masse to cash in. The Royal Bank had to stop payment on its notes.
The Regent dismissed Law. Impoverished, Law fled to Brussels.
Law spent years gambling in Rome, Copenhagen, and Venice, but never regained prosperity. In Venice, Law contracted pneumonia and died a poor man.
The fiasco haunted French memories for generations, eliminating banknote issuance in France on a wide-scale basis until 1790. This tardiness in financial evolution, along with irresponsible governance, retarded the country’s industrial development through the next century.