What is the Mississippi Company
The Mississippi Company is a company that experienced rapid growth and decline in 18th century France. It is commonly used as a cautionary tale when discussing speculative bubbles.
BREAKING DOWN Mississippi Company
The Mississippi Company is often used as an anecdote when discussing speculative bubbles and the impact their bursting can have on an economy. The company is an example of how speculation can cause rapid growth and then rapid decline across an economy.
France had been struggling with unstable currency and a volatile treasury status for some time when a Scottish adventurer named John Law introduced a plan to help settle the nation’s debts. Law had acquired a company that was developing a strong foothold in the United States called the Mississippi Company. Law proposed to his friend, the Duke d’Orleans, that selling off shares of the company could help pay off some of the debts that France had incurred during the reign of King Louis XIV.
The Mississippi Company had been working on developing the U.S. French territories in the Mississippi River valley and was doing extremely well. The company quickly grew to hold a monopoly on both French tobacco and African slave trades in the region. Just two years after Law acquired it, the company had monopolized the entirety of French colonial trading, thanks in part to support from France.
Speculation of continued growth spread and the public’s interest in purchasing shares of The Mississippi Company increased. Law theorized that he could sell the shares at a high price and use the profit to pay off most of France’s national debt. He intended to sell these shares in exchange for billets d’etat, the nation’s public securities, as these had also experienced a rapid rise in value. These activities lead to a period of economic growth throughout Europe. France responded to the positive speculation by increasing production of their paper money.
Inevitably, inflation caught up with France and both the currency and the billets d’etat began to decline in value. The economic boom resulted in a stock market crash around the globe. While Law was not the sole entity responsible for this sudden economic downturn, he was largely blamed for the rapid rise and fall of the market. In 1720, Law left behind both France and the once profitable Mississippi Company. France absorbed both the company and its large debts in his absence and was left with no choice but to raise the nation’s taxes to compensate for the losses incurred.
What is a Speculative Bubble
A speculative bubble occurs when there is an expected growth or value increase across a specific group. These expectations can refer to an industry, commodity or an asset. The speculation of growth intensifies both demand of the commodity and increased activity in that sector. This results in applying an over-inflated value to an asset, one that exceeds the asset’s intrinsic value.
These bubbles, or periods of rapid growth, either end in deflation or by bursting. A deflation of the bubble occurs when the prices and demand adjust back down to proportion with the fair-market value of the assets.
The bubble is said to burst when the period of rapid growth is followed immediately by a period of rapid decline, and many investors attempt to unload their investments as quickly as possible with little regard to their current worth.