DEFINITION of 'Mississippi Company'
An example of a famous speculative bubble that occurred from 1719-1720. In 1715 the country of France was in a dire economic straits, with an unstable treasury and a wildly fluctuating currency. John Law, a Scotsman and noted gambler living in exile in France, helped the government convert to paper currency (by taking metallic coinage deposits and giving banknotes equal to value of the currency on the day of deposit) and find its economic footing. In 1717 he acquired the Mississippi Company, to which the French government gave a monopoly on trading rights with its colonies in gratitude for his assistance.
BREAKING DOWN 'Mississippi Company'
In 1719 Law created a plan to restructure the French national debt under the Mississippi Company's auspices, exchanging company shares for debt and guaranteeing significant profits. Investors flocked, the national bank (now effectively owned by Law) printed money in response and massive inflation ensued. A bank run followed in May 1721 and the French treasury admitted that it did not have enough metallic currency to cover its paper instruments. It attempted to devalue Mississippi Company shares to no avail and finally the bank stopped paying in coinage. Shares in the company quickly plummeted to zero, the company was overtaken and divested of its assets divested and Law went into exile once more.
Other famous speculative bubbles include:
- The 1630s tulip bubble in the Netherlands
- The South Sea bubble of 1720
- The bull market of the roaring 20s from 1924-1929
- Japan's bubble economy of 1980