Mini Essay: The Mississippi Bubble

In 1717, the Mississippi Company had big plans to colonize the area around modern day New Orleans. John Law – the director – was also the governor of the French central bank and worked closely with King Louis XV. To finance their colonization, the company issued shares on the Paris stock exchange, spreading the narrative that the valley offered riches aplenty to enterprising shareholders. In reality, it was little more than a swamp.

Company shares, which were 2750 livres on the 1^st of August 1719, rocketed to 10000 livres in December of that year. In a frenzy, many sold everything they could to get their hands on the stock. The mania was unsustainable. When prices inevitably dropped, the panic-selling began.

To try and stabilize prices, John Law arranged for the central bank to buy Mississippi shares en masse. Even the deep French coffers soon ran dry trying to prop up the price, and soon they resorted to printing money to finance the purchases. The entire French financial system was inside the bubble.

The share price zeroed, and both the treasury and the central bank were left broke with worthless assets in hand. The public perception of the French banking system was irreparably damaged, and Louis XV struggled to raise the credit he needed to maintain his empire.

Meanwhile, the British had no trouble getting loans. Over the next 50 years, as France committed more money to higher interest rates, this difference in ability to fund expansion led to the British claiming ever more inches of the French territory.

In 1774, nineteen-year-old Louis XVI inherited his grandfather’s failing empire. The financial poverty after the Mississippi crash, and the fact that the rich early investors got out while the common folk were left destitute in its wake, had soured public opinion towards the monarchy. In desperation, Louis XVI summoned the French parliament – a nearly two centuries old institution – to try and solve this crisis. Thus the French Revolution began.