Mississippi bubble

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The Mississippi Bubble (English Mississippi Bubble ) was a speculative bubble around the French Mississippi Company in the 18th century.

History of John Law

In London John Law had to see how Gresham's law worked, according to which inferior money drives more valuable money out of circulation. For state welfare, “healthy” money was crucial. Coin money in Europe had been deteriorating for generations , good money was being hoarded; the result was a lack of money and stagnation. After his experiences in Amsterdam, money could also consist of banknotes if only the cover was secured. In addition to a sufficient supply of money, Law was convinced that the confidence of market participants in the currency was the decisive factor for a flourishing economy. In Scotland in 1705 he wrote the script that made him widely known: Money and Trade Considered, with a Proposal for Supplying the Nation with Money . He demanded - unsuccessfully - the establishment of a bank that should provide financing instruments (loans) and at the same time issue paper money (banknotes) that should be secured by precious metals and also by real estate. After leaving Scotland, he made similar proposals in Vienna and later in Turin , but these were also rejected.

In 1715 , due to his relations with the regent in France, Law was granted a license to found a private central bank to rescue the state finances, which had been shattered by the costly War of the Spanish Succession . The French currency had been devalued forty times since 1690. The measures taken by the chairman of the Finance Council, Duc de Noailles , to reorganize the state finances had only further undermined business confidence. In 1716 Law founded the Banque Générale and issued loans on paper money basis . The bank was private, but three-quarters of its capital was raised from - largely worthless - government bonds . Despite the initial undercapitalization, it slowly gained the public's trust and its notes were accepted as a means of payment, especially as a result of the personal support from the regent. From 1718 on, the bank was run under the Banque Royale company. Law remained its director; he could no longer control the circulation of notes.

The issuance of banknotes carried out under the direction of Law in connection with an uninhibited speculation in the shares of the Compagnie des Indes founded by Law is known as the Lawsches system .

course

In 1717 Law founded the trading company Compagnie de la Louisiane ou d'Occident (also for short: Compagnie d'Occident or Mississippi Company ), which was specially designed for , against the opposition of the Parliament , the highest court in France, but with the consent of the regent the French colonies in America were established and privileged. This company, too, was initially undercapitalized, as the capital only came from the devalued government bonds. However, when Law was able to acquire additional profitable privileges and monopolies for the Mississippi Company , the situation changed. As an experienced gambler , he had put everything on one card. The company's shares were exposed to very strong demand - also due to the temporary artificial supply shortage - which led to several capital increases. At the same time, the Banque Royale issued more and more banknotes and issued bonds so that the new shares could be purchased. In 1719 the company acquired the rights to the royal mint. The stock bubble sparked further speculation in real estate. Foreigners who also pounced on the stocks brought foreign currency to the country and were all too welcome in Law's role as general controller of finances. His company took over all of France's colonial societies within a year; with this fresh capital he was able to hide the high national debt by rescheduling it into huge, low-interest loans. He cut countless petty taxes in favor of the economy and replaced them with an income tax . But he had almost completely cut the tax revenues of the tax tenants , who as tax collectors had collected interest and had made such large profits for generations, who financed the heavily indebted state budget. Although the introduction of paper money initially revived the economy significantly, the excessively high money supply soon led to inflation and gradually the new artificial currency lost confidence. Within a few months (non-aristocratic) speculators had become “ millionaires ” (this expression first appeared in 1720), which turned the social order on its head. The frenzy went so far that 160 kiosks were set up in the park of Vendôme and Hôtel des Soissons to meet the demand for stocks. Guards had to prevent action even during the night.

His opponents formed. It became evident that the colonies in Louisiana were by no means the " Eldorado " from which the promised returns could have been made. After the price for a share had risen to 10,000 Livre in December 1719 (in the case of futures transactions even to 14,000 Livre), the first shareholders began in early 1720, unnoticed by the crowd, to exchange their shares for coins. The countermeasures taken, including a ban on precious metals and the price fixing and halving of the share price in March 1720, no longer had any effect: confidence waned; after a bank run , the Banque Royale stopped paying out. By December 1720 the value of the share had dropped to 1,000 livres. The extreme overvaluation of the Mississippi society in France coincided with the South Sea bubble in England: speculators' capital moved from Paris to London. The desperate attempts to stop capital flight with bans and draconian threats of punishment had no effect. Law's further plans to contain the crisis were welcomed by the regent, but the parliament and the aristocratic upper class refused to offer any solution. On May 29, Law was temporarily deposed and feared for his life. The shares of the South Seas Company in London had also been in free fall since the end of August. In December he was allowed to leave Paris. A later investigation revealed, among other things, that large quantities of banknotes had been put into circulation without official approval - and thus without Law's involvement. The lack of control over paper money issuance led to banknotes and banks being abolished in November and France reverting to the coin standard.

literature

Individual evidence

  1. ↑ a b c d Tina Haldner: The Mississippi bubble of 1720. In: fuw.ch. Finanz und Wirtschaft , May 26, 2015, accessed on September 20, 2019 .
  2. ↑ Full text on Archive.org
  3. ^ John Law and the Mississippi Project (1720) / John Law's concept of a land bank
  4. ↑ Helmut Kahnt, Bernd Knorr: Old dimensions, coins and weights. A lexicon. Bibliographisches Institut, Leipzig 1986, licensed edition Mannheim / Vienna / Zurich 1987, ISBN 3-411-02148-9 , p. 386 f.