Philosopher George Santayana once stated “Those who forget the past are condemned to repeat it.” When speculating in today’s financial markets, it is important to understand lessons from the past such as the Great Depression and Black Monday. One of history’s oldest and most dramatic financial calamities was the Mississippi Bubble.
The Mississippi Bubble was a disastrous economic scheme which took place in France during the early 18th century. The mastermind behind this scheme was Scottish financier John Law, renowned for being a royal adviser, banker, adventurer, gambler, murderer and exile, in addition to being a cunning economist.
Law and the Mississippi Company
After spending a decade travelling throughout Europe as a financial speculator, Law made a home in Paris in the early 1700s. An expert in statistics, he built an excellent reputation in France as a successful banker and financier. Law ascended quickly into the upper echelons of French society, partially due to his friendship with the Duke of Orleans, and eventually became the French government’s primary financial advisor.
In 1716, Law started the first central bank in France. Recognizing that physical gold and silver were too scarce to increase the money supply, his Banque Generale introduced bank notes, or paper money. This was the first paper money system ever used in France.
Shortly after establishing the central bank, Law acquired the Mississippi Company which was devoted to developing the French territories along the Mississippi River valley. Soon after he was granted a government-backed monopoly over trading with all of France’s Louisiana Territory, believed to contain an abundance of natural resources including precious metals and beaver skins.
Under Law’s authority, his company soon expanded to include tax collection and all trade outside of Europe.
John Law, 1671-1729
In January 1719, Law’s Mississippi Company began offering shares to the public for 500 livres per share, allowing investors to purchase shares with bank notes or government debt. Under the assumption that the Louisiana Territory was rich with gold and silver, investors of all social classes leaped at the opportunity to purchase shares. By December 1719, the share price had skyrocketed to 10,000 livres.
With share prices at such astronomical levels, John Law had become one of the wealthiest and most powerful men in Europe. French people of all classes had also become wealthy and prior peasants scrambled to buy luxury goods. The combination of high share prices and the millions of bank notes in circulation gave birth to the term “millionaire” which was first used during this time.
Demand became so high for Mississippi Company shares that Law began printing additional money. His Banque Generale issued immense amounts of cash to stock buyers, far exceeding the equivalent amount of gold and silver reserves required to redeem it.
This expansion of the money supply resulted in powerful hyperinflation. France saw the prices of goods and homes soar many times their original value.
In January of 1720, the price of Mississippi Company shares started to drop as investors began taking profits. To Law’s dismay, these investors wanted gold and silver. To avoid depleting his reserves, Law then limited the redeemable amount of gold and silver to 100 livres worth.
Furthermore, investors began to realize that the once believed to be abundant Louisiana Territory was devoid of precious metals. The last straw fell when John Law devalued both the company’s share price as well as the bank notes themselves.
Outraged, shareholders began selling aggressively, resulting in a dramatic price drop from 10,000 to 1,000 livres per share. Investors who were once millionaires were financially-ruined. The paper currency eventually became worthless and Law was exposed as a scam artist.
Escaping France disguised as a woman, John Law lived out the rest of his days as an impoverished exile.
Technically Not a Bubble
Although this historic event is referred to as the Mississippi Bubble, it was not simply maniacal speculation followed by a collapse in value. Rather, the Mississippi Bubble was a combination of failed monetary policies along with unbridled market enthusiasm.
This catastrophic series of events plunged France into a brutal economic depression which ultimately set the stage for the French Revolution a few decades later.
Lessons Learned from the Mississippi Bubble
The story of John Law and the Mississippi Bubble gave us a better understanding of economic policy, namely the role of a central bank. According to economist William Goetzmann, the concept of too little money in circulation restricting economic activity while too much stimulating inflation is the same “essential principle underlying the decisions by the U.S. Federal Reserve today.”
For everyday traders and investors, an important takeaway from the Mississippi Bubble is to be skeptical of the seduction an asset bubble can have. In the words of legendary investor Warren Buffett, investors should “try to be fearful when others are greedy and greedy only when others are fearful.”
There are many resources to ascertain data for fundamental analysis, and a good place to start is the NinjaTrader Trade Desk Calendar. Stay up-to-date on employment reports, Federal Reserve meetings, futures roll dates and contract expirations.
No matter your approach to the markets, the award-winning NinjaTrader software can be customized to suit all trading styles. With over 100 built-in trading indicators, NinjaTrader is equipped for sophisticated technical analysis & advanced charting. Download the NinjaTrader trading platform for FREE and started with a free trading demo!
For up-to-date market commentary, news announcements & more, bookmark the NinjaTrader Blog!