The Mississippi bubble

Prior to the arrival of John Law, France’s government was broke. This depressed state is mainly caused by a huge shortage of Livre, France’s currency which is denominated in silver and gold coins. Debasing a currency by decreasing the silver or gold content of each coin just to make more is basically the same as printing more money to meet the demand for currency. During this era, people are convinced that precious metal is money, but they did not get the fact that trust between trading parties is what makes gold and silver retain its value. John Law moved to Amsterdam after he escaped prison in England during the early years of the 1600s. At that time, Amsterdam was a global financial center having pioneered the joint stock company in the form of the Dutch East India Company and the foundation of the first true stock exchange, the Amsterdam Stock exchange in 1602 where shares of the Dutch East India Company are traded. John Law saw Amsterdam’s financial revolution first hand; this multinational company can raise the needed capital by offering shares of stake on its profits to the public instead of issuing debt through bonds. Investors can sell their shares at the Amsterdam stock market where its price is ultimately decided by the market forces of supply and demand. John Law witnessed people make vast amounts of wealth by buying and selling shares of this joint stock company. However, to John Law and his financially savvy mind, the Dutch system is very conservative and somewhat leaves money on the table by restricting total shares issued by the Dutch East India Company when people demand more for it and the Bank of Amsterdam limiting the available issued currency by allowing huge transactions made through the settlement of stocks and not allowing the newly created value to materialize by printing more bank notes. To John Law, there is a flaw in the system that needs to be seized and taken advantaged of and his newly formulated plan to imitate this financial revolution will be applied on a faraway place, and this place is none other than the desperate French economic system. This financial system will be exported by John Law from Amsterdam to Paris but this time this system will be under steroids.

Upon John Law’s arrival in Paris in 1716,  France’s government is under the brink of bankruptcy as a result from wars under Louis XIV. During this time, the Duke of Orleans was the acting regent of the country on behalf of Louis XV. John Law introduced his plan to the Duke that promised to revive France’s economy and turn it into a European financial juggernaut. The plan was to establish a central bank that has the authority to print official bank notes. The result in this expanded money supply will jolt a contracting economy back into an inflating one. The idea is that with more money available to the public, some of it will spill into investment ventures. The second part of the plan was to establish a Joint stock company just like Amsterdam’s Dutch East India Company and offer its shares to the French public. This version of John Law’s joint stock company would be based on the huge stretch of land that the French Government owned in North America which spans from the southern tip of the Mississippi river, across the central plains and all the way up to the Canadian border. This Joint Stock Company will be the restructured Mississippi Company founded in 1684 later renamed The Company of the East in 1717 which would conduct trade monopolies in French Louisiana in North America. Shares of the Mississippi Company was first offered to the public at 500 Livres and from there, market forces worked its magic and turned the value of the share price higher. The higher the share prices went, the more the people of France wanted it. One factor that contributed to this boom is that while the Bank of Amsterdam restricted the printing of bank notes based on the transaction of share trades, John Law’s Banque Royale printed bank notes and made it widely available to the public. As soon as the bank notes got into the hands of the people of France, it is freely available for exchange of Mississippi shares which boosted the demand for it.

Meanwhile, the underlying business that the shares are supposed to be based on in Louisiana is merely nothing but a swamp land. Trade with the natives, established trading posts and a regular shipment of merchandise is nothing but a pipe dream. John Law simply manipulated company profits by booking them from the sales of newly issued stocks. The Mississippi Company is registering profits not from trade but as a result of issuing additional shares to the public. In accounting principles, new share issues are supposed to dilute the value of existing shares, but since the current French equities market in 1720 is under a mania, people turned a blind eye to it and pawned or sold jewelry and some property and kept buying the steadily rising shares of the Mississippi Company. This era is when the term “millionaire” was first invented.  The rise in price of the Mississippi shares got so high and unsustainable and as a consequence of the lack of willing fools to buy the shares, prices started to decline. Another reason for the loss of confidence in the markets is that John Law constantly manipulates the value of silver and gold to conform with the new bank notes generated by his bank, the Banque Royale. People are left confused in the market and became weary of the situation. The devaluation of the bank notes, the constantly changing rules on the export of gold and silver and the fluctuation in the volume of bank notes printed resulted in fear and panic among the French. From an initial public offer of 500 Livres, shares of the Mississippi Company rose to 10,000 Livres by 1720 and from there, the slide was unstoppable. Fortunes created from the Mississippi bubble were left in the hands of a few people and left a lot of people desperate and penniless. As a result of this financial meltdown, John Law fled the country and left a mark as the inventor of the stock bubble.

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