What Burst the Mississippi Bubble?

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Updated May 31, 2023
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France established the Mississippi Company in the 18th century to develop its territories in the U.S. Shares in the company were sold at inflated prices in exchange for national securities. Speculation led France to print more paper money. The bubble burst in 1720 and the market crashed due to a bank run following a drop in the value of French banknotes and Mississippi Company shares.

Our history is full of economic bubbles. A bubble is a period in the economic cycle when market values rise to the point where a crash or severe drop in prices/values is inevitable. The Mississippi Bubble is among the first bubbles in economic history and is often used as a lesson in how speculative bubbles can burst and what they can do to the economy of an entire country. Let's take a look at what led to the bubble, how it burst, and the aftermath.

Key Takeaways

  • The Mississippi Bubble was one of the first known economic bubbles in history.
  • France was heavily in debt because of its wars and was looking for a way to regain economic prosperity.
  • Scottish adventurer John Law had the authority to open a bank and acquire the Mississippi Company to print new banknotes as well as sell shares in the company.
  • Law printed vast amounts of money and began selling French bonds to fund the Mississippi Company's operations and pay France's debts.
  • The bubble burst in 1720 following a bank run after the value of French banknotes and shares in the Mississippi Company dropped.

France's Depressed Economy

France was essentially insolvent as a nation when King Louis XIV died in 1715. This was largely due to a large amount of debt used to finance the country's war. Even though the treasury raised taxes to extremely high levels, the hole that warfare left in the French treasury was too deep. As a result, France began defaulting on its outstanding debt and the value of its gold and silver currency whipsawed as people feared for the future of the nation.

The Duke of Orléans, who became regent after the king died in 1715, turned to John Law to solve France's problems. Law was a Scottish exile who killed a man in a duel and had talents in gambling and finance. This gave him great weight with the government.

Law thought it was the unpredictable supply of gold and silver that was slowing France's economy rather than being a true economic problem. He also had an eye on France's interests in North America—notably, Louisiana and the area along the Mississippi Gulf Coast. So he came up with an idea to help bring France into economic and financial prosperity.

What Caused the Bubble?

France's financial system relied on a metallic currency. But because of the state of the economy, the currency's value was uncertain and constantly fluctuated. Law reasoned that switching to paper would mean that more currency could be issued and trade would speed up.

As a result, he received permission from the French government to open a bank in 1716. La Banque Générale began taking deposits in metallic coins and issuing loans and withdrawals in paper banknotes. The bank built up its reserves through a stock issue and also made a good profit by handling the government's financial needs.

Convinced that he could lead France to economic prosperity, Law decided to expand by acquiring the Mississippi Company in 1717. The company held a government-backed monopoly over trading with French Louisiana. Under Law's influence, the company's charters grew to include tax collection and all trade outside of Europe. The Mississippi Company also absorbed all of France's debt.

Law began selling shares in the company to investors in order to fund the company's operations and for France's national bonds. People were lulled into putting up cash as investments under the premise that they would receive gold and silver when it came time to cash in their holdings. But the stock price shot up and the amount of cash needed to buy Mississippi shares meant more money had to be printed.

The South Sea Bubble happened in Britain at the same time as the Mississippi Bubble. Although they are often confused with one another, the Mississippi bubble is sometimes considered to be more of a currency blunder than a true speculative bubble.

Why the Mississippi Bubble Burst

The demand for shares in the Mississippi Company started to rise. This caused the price to increase, too. With about 625,000 shares issued, Law decided to merge the company with the bank. But people wanted gold and silver when they took profits—not cash.

Law capped investors' redemption in gold and silver to avoid depleting reserves. This removed France's paper currency from the gold and silver standard and put it on the Mississippi Company share price standard. The amount of paper currency afloat became many times the actual reserves of gold and silver, which led to hyperinflation.

Realizing the share price was vastly overestimating the wealth of beaver hides and gold in the French colonies, Law attempted a controlled slowdown. The currency depreciated and the shares' value also dropped by half, but the decision triggered a selling frenzy that drove the share price down sharply. The paper currency became worthless, causing the bubble to burst in 1720.

After the Bubble

In order to calm the investing public, the French government promised to return corporate shares in the Mississippi Company back to their original value. This caused the market in France and other parts of Europe to collapse.

People continued to pull out money from La Banque Générale and the company's shares completely lost value. As a result, the assets of the Mississippi Company were sold off. Even though he didn't directly cause the crisis, Law took the brunt of the blame. He fled the country and went into exile again.

Why Did the Mississippi Bubble Burst?

The Mississippi Bubble was caused by a few different factors. France was heavily in debt because of the money it spent on its wars and a currency crisis led to volatility in its economy. John Law convinced the French government to let him open a bank and take control of the Mississippi Company, which oversaw the country's interests in the U.S. Law swapped the system to paper currency and began to sell shares in the company and bonds to pay France's debts. Demand increased, which pushed prices up. A bank run and speculation led to a drop in currency values and share prices, causing the bubble to burst.

Who Were the Key Players in the Mississippi Bubble?

The Duke of Orléans acted as regent after King Louis XIV died. The duke assumed the role because Louis XV was a minor at the time. He brought John Law into the picture because of his perceived financial prowess. Law convinced France to allow him to open a bank and acquire the Mississippi Company. He switched to paper banknotes instead of metallic coins that France used and sold shares in the Mississippi Company. Law also sold bonds to pay down France's debt.

What Happened to John Law After the Mississippi Bubble Burst?

John Law was a Scottish adventurer, living in exile abroad. He is generally credited for being the person behind the Mississippi Bubble. That's because he was responsible for the Mississippi Company and for funding France's efforts to pay off its debts. But when things went awry, the market crashed and the bubble burst. Law took the brunt of the blame and left the country. He later returned to London, where he received a pardon for the death of the man he had killed in a duel; he ultimately died in Venice in 1729.

The Bottom Line

The Mississippi Bubble was one of the first bubbles to have occurred in economic history. France, along with the rest of Europe, learned a valuable lesson about debt as well as currency and corporate share values when the bubble burst in 1720. Not only does it serve as a valuable history lesson, but it also serves as a cautionary tale for those responsible for fiscal and monetary policy, warning them about printing excess money and devaluing currencies.

Article Sources
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  1. Arizona State University, Center for the Study of Economic Liberty. "Two Bubbles and a Plague."

  2. Mississippi History Now. "John Law and the Mississippi Bubble: 1718-1720."

  3. Velde, François R. "Government Equity and Money: John Law’s System in France." Federal Reserve Bank of Chicago, January 2014, pp. 80, 90-91.

  4. Federal Reserve Bank of New York. "Liberty Street Economics:: Crisis Chronicles: The Mississippi Bubble of 1720 and the European Debt Crisis."

  5. Velde, François R. "Government Equity and Money: John Law’s System in France." Federal Reserve Bank of Chicago, January 2014, pp. 90-98, 152-153.

  6. Velde, François R. "Government Equity and Money: John Law’s System in France." Federal Reserve Bank of Chicago, January 2014, pp. 93-95.

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