The Mississippi Bubble - Investment & Finance Definition
A market bubble that derives its name from the Mississippi Company, a French trading company. The Mississippi Bubble occurred from August 1719 to May 1720, growing out of France’s terrible economic situation in the early 18th century. When Louis XIV died in 1715, the French Treasury was a disaster, with the price of metal coins fluctuating wildly.
The French regent turned to a Scotsman, John Law, for assistance. Law was a gambler who had exiled himself to France in order to avoid a duel. He suggested that the Banque Royale take deposits and issue bank-notes that would be payable in the value of the currency when the notes were issued. His ideas helped France make the transition from metal-based currency to paper currency, which resulted in a brief period of financial stability.
In August 1717, Law formed the Companie des Indes (commonly called the Mississippi Company), which received a monopoly on trading rights with the French colonies in the Americas (the Louisiana territory). By August 1719, Law had created a scheme that would let the Mississippi Company take on the entire French national debt. Portions of the debt would be exchanged for shares in the company. Law promised a 120 percent profit for shareholders. Not surprisingly, 300,000 would-be shareholders vied for the 50,000 shares that were being offered. As demand for the shares soared, the French government, which was effectively controlled by Law, continued to print paper banknotes, which caused inflation to skyrocket.
The euphoria was short-lived. The bubble burst in May 1720 when a run on the Banque Royale forced the government to admit that the amount of metal-based currency in France wasn’t equal to half the amount of paper currency that was circulating. The government issued an order that would gradually depreciate Mississippi Company shares, so that by the end of the year they would be valued at half of their nominal worth. That order was reversed a week later due to extreme public outcry, but the Banque Royale closed. It reopened in June, and the bank runs continued. By November 1720, the Mississippi Company shares were worthless and Law was forced to flee the country.