international school of management PATNA

BUBBLE BURST

ORIGIN OF MISSISSIPPI BUBBLE

In 1715, France was actually very weak in respect of its economy. Due to warfare, French treasury was
totally crashed and even the high tax rates could not able to solve the problem. The value of its gold and
silver currency fell down immensely and the people were worried about the future of the nation. Then
France called John Law to solve this problem. John law was an economist from Scotland. He tried his
best to solve the problem and he succeeded also in the beginning but unfortunately at last he lost his
way and the bubble burst out in May 1720.

EVENTS BEFORE THE BUBBLE

In May 1716, John law set up the Banque Generale Privee, which was a general private bank . It was set
up to develop the use of paper money. In August 1717, he bought the Mississippi Company to help the
French colony in Louisiana. Soon after Law was named, the Chief Director of the company whi8ch was
granted a monopoly on trading rights.

Later on in 1917, the bank was renamed as Banque Royale, which means that the King, Louis XV of
France, guaranteed the notes. The company absorbed Compagnie des Indes Orientales, Compagnie de
Chine and other rival trading companies and became the Compagnie Perprtuelle des Indes on 23 May,
1719.

ECONOMIC EFFECT
Law thought that that the slowness of the economy is due to unpredictable supply of gold and silver
rather than a true economic problem. Therefore, Law decided to switch the nation currency to paper
from coin. For this, he created a bank that took deposits in coin and issue loans and withdrawals in
paper. After this policy of Law, his bank started making profits and so he thought to expand it by
acquiring the Mississippi Company. At that time, Mississippi Company was having a monopoly of trading
with French Louisiana. Under the control of law, the share price of Mississippi Company started to
grow on a high node. Seeing the growth of the share price of the company, Law promised the
shareholders to give 120% profit. The demand for buying the share continued to rise because the
total numbers of shares were 50000 and the total applicants were 300000. Unfortunately, people
wanted gold and silver when they took profits and Law then refused to give them the profits in gold
and silver and continued giving the profits in paper currency.

Due to this, the amount of paper currency was turned out to be double the gold and silver coins. Still
Banque Royale continued printing the paper currency that finally results in great inflation.

Realizing the high growth in share price, Law decided to lower down the value of shares a bit. So, he
depreciated the currency and the shares by half, but the decision triggered a selling anger due to
which the share price fell down very sharply. As a result, the paper currency became worthless. The
Mississippi bubble is actually more of a currency blunder than a true tentative bubble.
BUBBLE BURST

EFFECT OF BUBBLE BURST

On may 21 the government announced about the depreciation of the shares of Mississippi Company so
that by the end of the year they would be valued at half the price of their nominal value. However, due
to immense public protest, another announcement was made on May 27 to restore the shares’ value at
their original price. On May 27 itself, Banque Royale stopped the payment to their shareholders and
finally it was closed.

The Mississippi Company again reopened in June 1720 and by November, its shares became worthless.
As a result, the Company was divested of its remaining assets and John Law was then forced to leave the
country. He left the country immediately and went to Belgium.