scorecardresearchInvestors' frenzy leads to Mississippi Bubble

Investors' frenzy leads to Mississippi Bubble

Updated: 19 Jan 2023, 01:05 PM IST
TL;DR.
Mississippi Bubble is one of the most famous financial disasters in history. Read further to know
The franc is any of various units of currency

The franc is any of various units of currency

Last week we took you through John Law's efforts to repair the economy of France. This week we are talking about how investors' frenzy leads to the Mississippi Bubble.

The street, the Rue De Quincampoix became the haunt of jobbers, crowded at every time, accidents occurred regularly, fights broke out. All kinds of nefarious activities began taking place on the street, and soldiers would need to be deployed in order to keep the law and order.

Law then moved to another street, where the crowds followed him. Tents were erected, street stalls sold refreshments, gamblers set up their dens. When the crowd there got too noisy for the Chancellor who also had his office there, Law was compelled to move to the Hotel de Soissons which had a garden at the back that could be decreed the venue for all shares sales and purchases.

Five hundred tents were set up there, and the Prince de Carignan who owned the garden charged 500 livres per month for each tent. Shares in the company that began at 500 livres tournois per share in January 1719 had risen to 10,000 livres by December of the same year, an unprecedented rise of 1900 percent.

Working class citizens began putting their money into the shares, wealth was being created. What did Law in, though, was his keenness to issue more bank notes to fund the purchase of shares. Investors took advantage of this to sell shares and turn their gains into gold. Share prices began falling in January 1720.

To counter this fall, Law banned payment in gold over 100 livres. He then got the paper notes of the bank acknowledged as legal tender, which meant that people could use the bank notes to pay their taxes, settle debts, make purchases etc, making the bank notes acceptable over gold as a commodity of purchase.

The bank promised to exchange notes for shares at the current rate of 10,000 livres. This turning of stock shares into liquid cash doubled the money supply in France, and this naturally resulted in inflation. By January 1720, inflation reached a monthly rate of 23 per cent.

Parliament had been consistently sounding the alarm about the creation of so much paper money without the back up of assets. It would lead to bankruptcy they said, but their warnings were not heeded. The alarm bells of the foolishness that the printing of notes had led to was sounded when the Prince de Conti, offended by Law denying him fresh shares in India stock, sent three wagons full of paper notes to his bank demanding payment in specie.

The Regent on hearing of this ordered the Prince to refund two third of the specie he had withdrawn from the bank. Whispers began floating around, others began following de Conti’s lead. The jobbers who had early sniffed the possibility of a crash, quickly converted their notes into specie, gold and silver, sending their gains away to England or Holland.

This led to a shortage of specie and Law outlawed the ownership of more than 500 livres and the purchase of gold, silver and precious gems were banned as well. Naturally this led to an outcry amongst the citizenry, with folks decrying this despotic ruling. Folks were quick to report neighbours, friends or family for transgressions.

Law made a desperate effort to restore public confidence in the Mississippi project, by conscripting 6,000 vagrants from the streets of Paris and sending them off to work in the mines of New Orleans. Many managed to escape and returned to Paris within the week.

Law then decided to tackle this by devaluing the shares of the company in stages, reducing the value of the bank notes to 50 per cent of their face value. By September 1720, the share price had fallen from a high of 10,000 livres to 2,000 livres and to 1,000 livres by December of the same year. This resulted in Law’s enemies taking control of the company, by confiscating shares of investors.

In the last three months of 1720, the paper livres had no quoting price, they had no value left. People rushed in hordes to the banks in order to convert their notes back to coin and bullion and many were crushed in the stampede. The mobs almost killed John Law when they thought he was in the coach, but he and his coach man managed to escape providentially and the Regent, who still looked kindly upon him, offered him a passport and means to escape.

He declined the money the Regent offered and took a post chaise from a Madame de Prie, the mistress of the Duke of Bourbon crossing the border to Brussels and from there to Venice where he lived in acute poverty, a penniless unknown pauper, until he died in 1729.

This is the famous Mississippi Bubble, one of the most famous financial disasters in history. A bubble in the financial world, is an unusually rapid rise in the price of a stock or any other commodity like real estate, followed swiftly by an equal fall in prices. These price fluctuations are the result of speculation, rather than investment practices.

The Mississippi Bubble was a modern financial disaster, destroying many new millionaires and destroying the French economy yet again. France wouldn’t dare to introduce paper money into its economy for another 80 years after this. The citizens would revolt against the excesses and mismanagement of the French royalty years later in 1789 with the French Revolution.

References:

  1. Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, 1841
  2. John Law and the Mississippi Bubble – 300 Years Later: Mises Wire, Mises Institute. Mises.org
  3. History of Hard Money: The Mississippi Bubble, Vaulted.com

Kirit Manral is a professional trader, and has been running a mentorship program in trading since 2019, with mentees from around the globe. He can be found on Twitter at @KiritManral

 

First Published: 19 Jan 2023, 01:05 PM IST