History Repeating: Similarities Between the Mississippi Bubble and the Subprime Crisis

The Mississippi Bubble, that took place in France in 1717, has been compared to the subprime crisis that began in 2006 in the United States. The similarities between the two crises were not actually noticed until after the subprime crisis had begun. The similarities are present in the development, policy responses, and the roles that each government played. Could these two crises that occurred more than 300 years apart be so similar that with a proper analysis of the Mississippi Bubble have helped in any way with the subprime crisis? It is said that history repeats itself, so did the economic crises from 1717 reoccur in 2006?

Before being able to denote the similarities a thorough understanding of the two must exist. The Mississippi Bubble The Mississippi Bubble was a direct result of a scheme to make the French colonies in America and Canada look wealthier than they actually were between the years of 1717 and the end of 1720. The bubble was originated by the Mississippi Company, a French trading company, which was developed by John Law. Law’s company was developed in 1717 and quickly became a monopoly on trade rights with these colonies (Your Dictionary, no date).

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The Mississippi Company held trading privileges to the French territories along the Mississippi River for twenty-five years (Jon Moen, 2001). Terms for this deal included that the company was required to have 6,000 French residents and 3,000 slaves settle in the area (Sandrock no date). Law’s company was permitted to appoint its own governor and officers in the colonies as well as grant land to potential developers of their choice (Moen). In addition to this, the company was also permitted to hold a monopoly on the growing and selling of tobacco (Sandrock).

The company was originally funded by the selling of shares in the company for cash and state bonds at low interest rates (Moen). These bonds are what mattered most to Law. Eventually the Mississippi Company began to take over all of trade with France, first with tobacco trade with Africa and then trading with China and East Indies (Moen). This was all in scheme with the Banque Royale, the first central bank in France. The company then began involvement further with the French government by purchasing rights to print new coins and then the right to collect taxes in France (Moen).

At the end of 1718, Law was made the Controller General of Finances after the company was made royal institution because stockholders were bought out by Duc d’Orleans (Sandrock). By 1719, Law had developed a way for his company to become the holder of the French national debt, which then became a primary source of income for the company. To make this work, potions of the country’s debt was exchanged for shares in the company. The repackaging of this debt became appealing to investors, considering many wanted to be involved in the Mississippi Company.

The man behind all of this was John Law. He was a man of many trades, including gambling and murder. Law did however hold a strong background in banking and financial practices (Sandrock). He began getting involved in the industry at age 14. Law was not only the director and creator of the French central bank, but due to his company’s control of French trade and the monopoly held with the French colonies, was one of the most powerful men in France. Despite the trouble caused by Law with the Mississippi Bubble, he did help France make the transition from coined to paper money.

In 1715, France was the most powerful country in Europe but was on the verge of bankruptcy (Sandrock). France held a high level of national debt due to their involvement in many wars. Unlike other powerful countries, The French lacked a central bank that could stabilize their financial system. Law quickly took advantage of this and opened Banque Generale which later became Banque Royale (Sandrock). The paperbacked money that was issued became a legal tender (Moen). These paper banknotes being a legal form of tender meant that they could be used to pay taxes and repay debt (Moen).

The banking system was very successful in the regulation of this paper-backed currency. When the Mississippi Company was first created the shares available sold for 150 livres but quickly rose and by January of 1720 shares sold for over 18,000 (Sandrock). The livre was the currency at the time in France it was worth 4. 5 grams of silver in comparison to the US dollar that would be worth 24 grams. To invest at this time, one only needed to invest ten percent of the stock price and the rest could be put on credit (Sandrock).

As the value of these shares increased, investors from not only France but all over Europe became involved in this market (Moen). Despite the eventual burst of the bubble, people did get rich off of John Law’s Louisiana Territory scheme. The terms to begin investing were lenient, and to purchase shares it was only required to have a ten percent down payment (Sandrock). The market was so appealing that even the working class began investing any amount that they could into the company, in turn creating a new class of millionaires (Moen).

One example of this, according to the article published by John Sandrock, that a beggar invested his entire life savings and made 70 million livres. In 1719, as the debt repackaging was taken place, the French government continued to allow the printing of paperbacked money. This contributed to the one of the biggest weaknesses in Law’s efforts, which was that Law continued to print paperbacked money to fund the investments into the company. This resulted in the money supply almost doubling (Moen). June 1720 there were 2,696,000,000 in circulation (Sandrock).

This large supply of paper money resulted in a rise of the inflation rate because these notes outnumbered the amount of coins and gold that were supposed to back them. According to the article by Jon Moen, in January of 1720 the inflation rate for that month reached 23 percent. In May of 1720 bank runs began to occur on Banque Royale. The paperbacked currency in France at this time had less than half the value of the coin-based currency. During this time Law began to reduce the value of the shares in Mississippi Company (Moen).

In September of 1720 the value of the shares was at 2000 livre and a year later was valued at 500 livres (Moen). The Mississippi Company was eventually taken over by outside parties by taking over shares that were not actually purchased (shares that were purchased on credit), this taking of shares in turn reduced the number outstanding by two-thirds (Moen). This rapid decrease and confiscation of shares resulted in many of these newly made millionaires being left empty handed and financially destroyed, like France (Moen).

John Law’s original idea was to create a national bank, Banque Royale, which would be in control of national finance and create a state company, the Mississippi Company, which would be for commerce and exclude the private banks in France (Sandrock). These would then create a monopoly of trade and finance, which they succeeded at. The goal was to use the profits from these to pay off the national debt, which during the 1700s was at three billion livres (Sandrock). The Mississippi Company and John Law’s scheme was, in my opinion not intended to create a bubble that would eventually burst and eave France and many other European countries in economic turmoil. Law believed that the main purpose set forth for the government was to increase the wealth of its nation, and believed the way to do this was to increase the amount of currency that circulated throughout the country (Sandrock). As seen, this is what he attempted to do, it just happened to fail. Despite the financial devastation, Law did help straighten out the taxation and financial systems of France (Moen). The view that John Sandrock takes is that John

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History Repeating: Similarities Between the Mississippi Bubble and the Subprime Crisis. (2016, Dec 25). Retrieved from https://graduateway.com/history-repeating-similarities-between-the-mississippi-bubble-and-the-subprime-crisis-2/