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Mississippi Bubble: 1720 – the year of the first major crash


The principle was simple: you swapped your worthless government bonds for shares in the company – and hoped for a big profit

Nevertheless: John Law had kept his word and within a short time breathed new life into the French economy. In the meantime, he had not lost sight of his even greater goal, the reduction of national debt. The economist was particularly inspired by the large English trading companies such as the East India Company or the South Sea Company, founded in 1711. These were profit-oriented and mostly privately owned stock corporations, which were, however, endowed with state privileges and closely linked to the state apparatus. Years earlier, the South Sea Company in particular had relieved the British state of part of its debts. A model to imitate? France also had territories in North America and had a trading company. Louisiana, so the name of the overseas territory, stretched for almost 5000 kilometers along the Mississippi from the Gulf of Mexico to what is now Canada.

A gold mine, found Law, whose almost inexhaustible resources and potential only need to be promoted. In 1717 the French West India Company was re-established as the Compagnie d’Occident (Company of the West). To this day it is also known as the Mississippi Company. It had two goals: to develop trade with Louisiana and make a profit. Above all, however, it was supposed to help, following the example of the South Sea Company, to pay off the mountain of state debt.

Bonds become company shares

The principle was very simple: the creditors could exchange their government papers for shares in the company. In this way, the state lost its debts, while with rising share prices and high dividends, shareholders could speculate on even greater profits than had previously been possible with interest. So the higher the interest in the shares of the Compagnie d’Occident, the more debts could be converted. And the interest, in turn, was tied to the belief that the trading company was actually able to make enormous profits from the French areas on the Mississippi. An idea that was constantly nurtured by Law.

Until now, following on from Karl Marx, the Scots still had the prophetic dominance, now the swindler came to the fore. The economist used his political influence to inflate the Mississippi Company into a monstrous conglomerate over the next three years. The monopoly on trade with Louisiana was swiftly extended to all French colonies. Soon the company also had the royal privilege of minting coins and collecting taxes. Such an abundance of power alone would have been enough to drive the share price up. There was also targeted manipulation by the media. Numerous newspaper reports were launched from the ranks of the company, in which Louisiana was praised as a promised land with a mild climate and wild reserves as rich as gold, silver, copper and even emerald. In truth there was very little there that could be converted into good money. To attract more settlers to the New World and sell them expensive land, the city of La Nouvelle Orléans, named after Law’s royal patron, was founded in 1718. Just a year later, you could read in the newspaper “Nouveau Mercure” that there were 800 houses in New Orleans, each of which included an impressive 120 acres of land. A few years later, a traveler described the city as a poor cluster of a few wooden huts.

Since Law was not only head of the trading company, which had since been renamed Compagnie des Indes (Company of the Two Indies), but also continued to be director of the Banque Royale, he could easily open the money locks to provide the company’s shareholders with even more capital. “The more value a shareholder owned, the more credit he got,” writes Swiss economist Mathias Binswanger. »The rise in share prices led to more money being created, which in turn led to further share purchases and thus to a further rise in share prices. These were really optimal conditions for the development of a speculative bubble. “

A return of almost 2000 percent – within one year

So it is not surprising that the Mississippi Company’s share price soon soared to fantastic heights, fueled by constant new share issues and ridiculous dividend announcements. While in January 1719 a security could still be bought for 500 livres, the price in December was just under 10,000 and had thus increased twenty-fold within a year. The epicenter of the stock mania was in Paris’ Rue Quincampoix, where the company’s offices were located. There was a tumultuous hustle and bustle here. While some were carrying away sacks of the money they had received by selling their shares, people from all over Europe and from all walks of life crowded the narrow alley to somehow get hold of a few securities. A member of the British Embassy told of princes and dukes who sold their estates and jewels to buy shares with the proceeds.

Anyway, on the other side of the English Channel, one could only rub one’s eyes in amazement at what the escaped convict Law was doing in the neighboring country. The fear of being left economically behind by France was great. And so the British South Sea Company, which had once been the model of Law, copied his system and began in early 1720 to convert the entire national debt into company shares, the company using the same questionable methods to attract interest in its shares increase. With success: The price of the South Sea Company in February was 130; by August 1720 it will peak at over 900 pounds.

Law’s power and prestige increase with the share price

On January 8th, John Law was at the height of his fame. On that day the price had risen to an all-time high of 10,100 livres. Law was director of the French central bank, head of the first diversified mega-corporation in history with a value of more than six billion livres, and for three days he had also been France’s finance minister. And he was downright incredibly rich. All of Europe saw the Scotsman as the greatest living financial genius.

Then something strange happened.

The share price of the Compagnie des Indes did not rise any further, it stagnated. Presumably, many investors thought the time was right to sell their stocks and reap the profits. Perhaps the idea crept into her that the company value could no longer in any way reflect the actual economic activities of the trading company. In order to dispel fears of an even greater overheating, John Law had the course fixed at 9,000 livres in March. But then the Scot made a capital mistake: To counter the rampant inflation, he decided on May 21 to halve the value of the shares and banknotes. His hope was that the course would level off at around 5000 livres. He achieved the opposite. Angry people threw the window panes of the Banque Royale and demanded that their paper money be exchanged for coins. Suddenly France had lost confidence in the Law system. After a few days the bulkhead gave in to the pressure and took the halving back, but it did not change anything: the bubble had burst.

The stock market is running out of air

In a very short amount of time, the stock plunged from 9,000 to about 4,000 livres and fell continuously from then on. In December 1720 the rate reached the mark of 1,000 livres, by which time the Mississippi Company had been insolvent for months. Law had since lost his offices and was placed under house arrest. In September 1721 the shares of the Compagnie des Indes had again reached their starting value of 500 livres. The Banque Royale had already been wound up at this point.

The events in France and England trigger a financial quake across Europe

The South Sea Company, which officially existed until 1853, fared somewhat better, but the British speculative bubble also burst. The rapid rise in company prices had led to a general boom in stocks in England and the establishment of countless small stock corporations. When the British Parliament wanted to put a stop to this development by law, many investors anxiously withdrew their capital from the stock market; they also caused the price crash of the South Sea Company, which by the end of 1720 had already reached its value at the beginning of the year.

The events that played out in France and England sparked a financial quake that was felt across Europe. There were massive price drops on the stock exchanges from Lisbon via Amsterdam to Hamburg, and a banking crisis broke out in Switzerland. The French people were so traumatized by John Law’s reforms that they turned back the wheel of time and abolished paper money for several decades.

There aren’t all losers

The speculative bubbles that shook Europe 300 years ago produced innumerable losers, but just as many profiteers. Isaac Newton, who in the spring of 1720 had mocked the stock mania by saying that he could calculate the course of the heavenly stars but not the madness of people, was shortly afterwards just as dazzled by the prospect of astronomical profits as many others – and lost a huge fortune. The bookseller Thomas Guy, in turn, sold his securities on time and got rich in one fell swoop. From the profit he donated to a hospital in London that still bears his name today. The French king, whose 20 percent stake in the Compagnie des Indes was sold at almost the highest price, was also one of the big speculative winners. Ultimately, both the Mississippi Company and its English equivalent failed because they offered investors the prospect of an economic success for the company that was completely unrealistic from the start.

John Law and the directors of the South Sea Company had constructed a fabric of lies and deceit to achieve their goal. In the end, France and England were rid of their debts. But the trust of many citizens in the still young financial market was permanently shaken, and the success was paid for with the ruin of countless economic livelihoods – throughout Europe.

And Law? He escaped arrest again and secretly left France to avoid prosecution. He soon got back to his old nomadic life. In 1729 the Scot, who had been one of the most powerful men in France, died in humble circumstances in Venice.

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