Mississippi Company
Categories: Regulations
Bubbles are awesome when they’re in our champagne or when we’re blowing them in the park. But they aren’t so awesome when they’re what we call speculative bubbles, i.e. assets that grow astronomically in value based on speculation instead of on concrete facts about capital, liabilities, growth potential, and stuff like that.
But speculative bubbles do happen, and one of the greatest speculative bubble cautionary tales out there is the story of the Mississippi Company.
The story begins as many tales of woe do, with a country in economic turmoil that is struggling to pay its debts. In the 18th century, France was that country, and the Mississippi Company seemed at first to be an answer to its debt-related prayers. The Mississippi Company was a French trading company owned by a man named John Law, and it had a monopoly on the whole French trading industry here in the United States. Law’s thought was that he could keep upping the cost of Mississippi Company shares (the company was backed by the official bank of France, the Banque Royale, at this point) and use the profits to help pay down France’s debt. Everyone seemed to think this was a great plan, and France excitedly began printing more money in response to all this investor confidence.
But it all backfired.
France was beyond broke. A bunch of wars and a spend-happy monarch will do that to a country. And printing more money is pretty much never a good way to stabilize an economy (hello, inflation), nor is putting all our debt-solving eggs in a basket lined with speculation. All those Mississippi Company shares declined big-time in value as it became increasingly clear that the Banque Royale was not in a strong economic position by any stretch. Eventually, Mr. Law bailed on the Mississippi Company, investors lost their shirts, and France ended up having to raise its taxes to combat all the additional debt caused by the bubble. And that, friends, is the story of the Mississippi Company.
