The Mississippi Bubble, which derives its name from the French Mississippi Company, grew out of France’s dire economic situation in the early 18th century.
By the time of Louis XIV’s death in 1715, the treasury was in shambles, with the value of metallic currency fluctuating wildly. The following year, the French regent turned to a Scotsman named John Law for help.
Law, a gambler who had been forced into exile in France as the result of a duel, suggested the Banque Royale take deposits and issue banknotes payable in the value of the metallic currency at the time the banknotes were issued.
Law’s strategy helped the French convert from metallic to paper currency, and resulted in a period of financial stability, as well as his own increased fame and power.
In August 1717, Law incorporated the Companie des Indes (commonly known as the Mississippi Company), to which the French regent gave a monopoly on trading rights with French colonies, including what was then known as “French Louisiana.”
In August 1719, Law devised a scheme in which the Mississippi Company subsumed the entire French national debt, and launched a plan whereby portions of the debt would be exchanged for shares in the company.
Based upon the expected riches from the trading monopoly, Law promised 120 percent profit for shareholders, and there were at least 300,000 applicants for the 50,000 shares offered.
As the demand for shares continued to rise, the Banque Royale, which was owned by the French government but effectively controlled by Law, continued to print paper banknotes, causing inflation to soar.
The bubble burst in May 1720 when a run on the Banque Royale forced the government to acknowledge that the amount of metallic currency in the country was not quite equal to half the total amount of paper currency in circulation.
On May 21, the government issued an edict that would gradually depreciate Mississippi Company shares, so that by the end of the year they would be valued at half their nominal worth.
The public outcry was such that one week later, on May 27, the Regent’s Council issued another edict restoring the shares to their original value. On the same day, however, the Banque Royale stopped payment in specie.
When the Banque Royale reopened in June, the bank runs continued. By November, shares in the Mississippi Company were worthless, the company was eventually divested of its remaining assets, and Law was forced to flee the country.