The Mississippi Bubble was the first European financial bubble to reach the shores of America. This bubble was caused when the central bank of France over inflated French currency by issuing paper money and government-backed bonds to fund a speculative trading company created by John Law, a Scottish economist, to help the French government cover its national debt. High expectations about the potential value of beaver skins and precious metals in France’s New World colonies underlay the scheme, which ultimately led speculators from all social classes to lose vast sums.
The roots of the Mississippi Bubble went back to the financial collapse of the French treasury in 1715. Years of paying for wars with Great Britain in Europe and in America had bankrupted France. Participation in the War of the Spanish Succession (1701–1714) had not only strained the French treasury but had also slowed income from the French colonial fur trade. War debt had left France deprived of gold and silver, the basis of most national currencies at this time, which limited any growth in the French economy. France’s debt had overwhelmed it, forcing it to default on most of its bonds and to cut back its interest payments to its creditors.
John Law, a Scottish economist and monetary expert, was brought in to help. Beginning in 1716, Law established a bank that ultimately became the French national bank (Banque Royale). Under Law’s guidance, the Banque Royale, in a novel move for this age, issued paper money that was only backed by gold and silver. This ingenious creation of paper money increased monetary liquidity in the French economy and brought brief economic stability. However, France still did not possess enough gold and silver to fully back, or pay for, the paper money the Banque Royale had put into circulation.
Law had seen that Spain’s success in gold mining in South America had helped Spain’s economy by putting more Spanish gold into circulation. Law hoped that the shareholder trading company he created, the Mississippi Company, would find gold or silver in France’s Louisiana colonies and would be able to exploit the French fur trade. Based on the potential of finding this New World gold and silver, Law convinced the Banque Royal to print paper currency well beyond any physical amount of precious metal in the French treasury. They thus created currency by fiat, based on speculation, on the hope that precious metals would be discovered.
Another part of Law’s plan was his scheme to merge the Banque Royale and the Mississippi Company. The French government backed the company’s bonds and promised a high return to investors. High expectations and wild speculation drew in investors from all social classes. Shares in the Mississippi Company rallied from 500 livres per share to 10,000 livres per share in 1718 and to more than 20,000 livres per share in 1719. This created Europe’s first major investment bubble.
Meanwhile, Law expanded the Mississippi Company’s operations by sending colonists and supplies to search for mining opportunities, hoping to duplicate Spain’s success in finding gold and silver. The company expanded settlements in Mississippi and other parts of the Louisiana colony. Furthermore, Law’s company was granted a full monopoly on the French tobacco, fur, and slave trade. Law also took over tax collections on trade in French America with the idea of backing French debt with company bonds and stock.Finding settlers for swampy Louisiana was a tough sell, though, and Law had to advertise all over Europe. He was able to induce many poor Germans to join the venture, and he used French convicts to establish a foothold of settlements around New Orleans and the Mississippi. France’s initial success with the Mississippi Company scheme led Great Britain to copy it with its own South Sea Company, which would create a historic bubble in Britain as well.
The rapid rise of prices in Mississippi Company stock and the uncontrolled printing of paper currency created a huge, inflationary, bubble-driven speculative mania. It is believed that the first use of the term “millionaire” came into being to refer to the Mississippi Company stockholders. In 1720, investors wanted to take their profits in the company in gold, but the French government did not have enough gold to cover the payments, so the Banque Royale imposed a limit on the amount of paper currency that could be converted back into gold.
Slowly, word got out among investors that there was a problem. Law’s next response was to lower the price of Mississippi Company shares and to stop gold payments. Panic hit, and the company’s shares traded down to less than 500 livres, devastating investors and causing the loss of many fortunes. As a result, an economic crash occurred in France in 1720. France’s trade in its American colonies was destroyed. Law came to be viewed as a scam artist and was exiled from France.
John Law died in poverty, unheralded, even though many see him as the world’s first practitioner of the monetarist school of economics. The Mississippi Bubble also had a devastating effect on French-American colonists. Supplies stopped flowing to Louisiana, and many of the company’s colonists died of starvation. Some of the Germans migrated to the English colonies for better land after it became apparent no relief was coming from France. A few colonists built settlements on high ground between the Mississippi River and Lake Pontchartrain and survived by fishing. It took decades, but this small colony developed into a trade center that we now know as New Orleans. In Great Britain, where a similar scheme evolved, Parliament passed the Bubble Act of 1720, which put tight restrictions on paper money in Britain and its colonies to prevent the re occurrence of another Mississippi Bubble.
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