Mississippi bubble

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Mississippi bubble

Post  Ryu on Wed Nov 12, 2008 1:28 pm

The Mississippi Bubble
In 1720, at the same time as England’s South Sea Bubble, France experienced its very own financial crisis. The Mississippi Bubble shares a striking similarity to the South Sea Bubble.

The crisis began in 1715, when France was bankrupt from war. It had defaulted on its debt as well as cut back on interest payments. High taxes quickly burdened the economy and the value of gold and silver currency fluctuated wildly. Eventually the youthful King Louis XV turned to his trusty advisor, the Duke of Orleans. In turn, the Duke of Orleans sought the help of his friend John Law, a Scottish financier.

John Law was born in Edinburgh, Scotland in 1671 to a goldsmith who lent money on the side. Law became his father’s apprentice and became well versed on the principles of banking. Tragically, Law became involved in a duel, killing his opponent and was convicted of murder. Law eventually managed to escape prison and quickly left England to travel Europe. Due to his keen mathematical abilities, Law earned much of his wages from gambling. John frequented destinations such as Amsterdam, Venice and Genoa. It was in these financial centers that John Law renewed his fascination for high finance. In 1705, Law published a monetary theory that argued against the use of metallic money and favored paper money, in true Keynesian style. Law favored paper money from his belief that its use would stimulate commerce (Smant).

With the desperate Duke of Orleans looking for John Law’s help, Law quickly devised a strategy to stabilize the French economy. In May 1716 Law established the Banque Generale, designed after the successful Wisselbank of Amsterdam (Smant). Banque General took deposits of gold and silver and issued paper money in return. These banknotes were payable in the value of the metallic currency at the time the banknotes were issued. Banque Generale gained equity through the conventional selling of shares as well as converting government debt. To John Law’s credit, the economy had begun to stabilize, helping to increase his rapport and influence within the French government.

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