Socius News500 livres in January 1719. 10,000 livres by December. That is a 1,900% rise in one year for a share of the Compagnie des Indes, according to the Mississippi Department of Archives and History, and it is the number that defines the Mississippi Bubble. The Mississippi Bubble is the 1719 to 1720 boom and collapse in the shares of John Law's company, which held France's colonial trade, its mint, its tax collection and most of its national debt, and whose sister bank printed the notes that bought the shares. By September 1721 the share was back at 500 livres.
The bubble had a buyer of last resort, and the buyer was the issuer. From March to late May 1720 the company spent 1,213.5 million livres of its own bank's notes to buy back 27% of its stock, François Velde records in a Federal Reserve Bank of Chicago working paper. The previous episode in this series, Black Monday 1987, showed a rule selling into a fall. In 1720 a rule bought into a rise, with money created for the purpose. The South Sea Bubble in London was its twin.
How did John Law turn a bank into the Mississippi Bubble?
John Law, baptised in Edinburgh on 21 April 1671, published Money and Trade Considered in 1705, a case for paper money, Encyclopaedia Britannica records. In 1716 the French Regent, Philippe II, duc d'Orléans, let him try. France's state paper, the billets d'État, traded far below face value.
Velde dates the pieces. The Banque Générale opened in May 1716 with a capital of 6 million livres, a quarter paid up. The Compagnie d'Occident opened its subscription on 14 September 1717 with a monopoly on trade with Louisiana; 29 million livres were subscribed within two weeks, and its 500-livre shares could be paid in billets d'État at face value. That clause is the engine of the story. A holder of discounted state paper could swap it, at par, for a share in a company that had just decided to found a port called New Orleans, named for the Regent, Britannica notes.
On 4 December 1718 the Regent bought out the bank and renamed it the Banque Royale. Then the company grew by acquisition. On 25 July 1719 it bought the mint for 50 million livres, financed by 50,000 new shares at 1,000 livres, Peter Garber writes in the Journal of Economic Perspectives. On 27 August 1719 it leased the General Farms, the kingdom's tax collection, for 52 million livres a year. Between August and October 1719 it offered the Crown a perpetual loan of 1,200 million livres, raised to 1,600 million, at 3%, so that annuities could be retired and replaced with shares. Three sales, on 12 September, 28 September and 2 October 1719, each placed 100,000 shares at 5,000 livres. Britannica counts about 625,000 shares outstanding by the end of 1719.
May 1716
Banque Générale
John Law's note-issuing bank opens with 6 million livres of capital, a quarter paid up.
14 September 1717
Compagnie d'Occident
Subscription opens for 500-livre shares payable in discounted state paper at face value. 29 million livres in two weeks.
4 December 1718
Banque Royale
The Crown buys out the bank. Notes outstanding: 40 million livres.
25 July to 27 August 1719
Mint and tax farms
The company buys the mint for 50 million livres and leases the General Farms for 52 million a year.
12 September to 2 October 1719
300,000 shares at 5,000 livres
Three sales fund a 1,600 million livre loan to the Crown at 3%. The share trades at 5,350 on 9 September.
Turn of 1720
Peak near 10,000 livres
Law becomes Controller General of Finances on 5 January 1720. The bank and the company merge in February.
27 February 1720
The 500-livre rule
It becomes illegal to hold more than 500 livres in gold or silver coin. On 5 March the share is pegged at 9,000.
21 May 1720
The decree
Shares to be cut from 9,000 to 5,000 livres and notes to half their face value by 1 December. Panic. Revoked within days; Law dismissed on 28 May and reinstated.
17 July 1720
The bank closes its window
Crowds trying to redeem notes turn into melees. Redemption is suspended indefinitely.
December 1720
1,000 livres, Law leaves France
The share is at 2,000 in September and 1,000 in December. Law leaves in early December.
1721 to 1722
The Visa
2,211.2 million livres of claims are written down to 1,700 million, a 23.5% average cut. The share is at 500 livres by September 1721.
What caused the Mississippi Bubble?
Three things, in sequence: a swap, a monopoly and a printing press.
The swap came first. Because shares could be paid in billets d'État at face value, every holder of discounted state paper had a reason to buy. Velde notes that the share traded at 250 livres in May 1718 and 237.5 livres on 6 February 1719, below its 500-livre par, and reached par on 10 May 1719. It was not a mania yet. It was an arbitrage on the price of French debt.
The monopoly came second. In May 1719 the company absorbed the East India and China companies and became the Compagnie des Indes, which Britannica describes as holding a complete monopoly of France's colonial trade, on top of tobacco, the mint and the taxes. Law sold the story as well as the shares: the Library of Congress records that he displayed ingots of gold in Paris shop windows, advertised as coming from the mines of Louisiana. Garber argues that investors were pricing a plausible plan and that the episode was not a bubble in the modern sense. Velde's estimate is more severe: at the peak the shares were overvalued by a factor of 2 to 5.
The printing press came third. Velde's series for notes outstanding reads 40 million livres in December 1718, 400 million in July 1719, 1,262 million on 31 March 1720 and 2,235 million on 31 May 1720. Garber puts the peak circulation at 2.7 billion livres. The notes bought shares, the share price rose, and the higher price justified more notes. Inflation reached a monthly rate of 23% in January 1720, the Mississippi Department of Archives and History records.
Compagnie des Indes share price, 1718 to 1721
Livres tournois per share, selected dates
Source: Velde, Federal Reserve Bank of Chicago (2003); Mississippi Department of Archives and History
Who set the price, and what was the 9,000-livre peg?
The market did, for a while. Velde's quotations run from 500 livres on 10 May 1719 to 3,600 on 26 August and 5,350 on 9 September, and his series peaks near 10,000 at the beginning of 1720. Britannica gives a higher print of 18,000 livres; which contracts each figure counts is to be confirmed. Trading took place in the rue Quincampoix, before the company's offices, a street the Library of Congress calls the Street of Speculators. Frehen, Goetzmann and Rouwenhorst, in a National Bureau of Economic Research study, found the shares quoted frequently in the Leydse Courant, a Dutch newspaper, from November 1719.
Then the issuer took over. Law became Controller General of Finances on 5 January 1720. On 22 February the company took direct control of the Banque Royale and its notes were made legal tender, Garber records. On 27 February it became illegal to own more than 500 livres in gold or silver coin, and on 1 April gold and silver clauses in contracts were voided, Velde notes. On 5 March the share was pegged at 9,000 livres, payable in notes.
Read those measures as a trader. The exit into coin was capped at 500 livres and the exit from shares fixed at 9,000, so the only thing that could still move was the quantity of notes, which nearly doubled between the end of March and the end of May. The 1,213.5 million livres spent on buybacks is the cost of holding a price the market no longer wanted to pay.
Why did the decree of 21 May 1720 break the System?
Because it told everyone the size of their loss in advance. The decree of 21 May 1720 announced that the share would be reduced from 9,000 to 5,000 livres in seven stages ending on 1 December, and that notes would be cut to 50% of their face value over the same period, Garber writes. The decree was an attempt at arithmetic: 2,235 million livres of notes stood behind a 9,000-livre share, and the company chose to shrink both. But a scheduled 44% cut in the share and a 50% cut in the money is an invitation to sell today rather than wait.
The reaction forced a revocation within days. On 28 May Law was dismissed and placed under house arrest, and within days he was freed and back in the cabinet, Velde records. Holders queued at the bank to redeem notes, and Velde notes that the ensuing melees led to an indefinite suspension of redemption on 17 July 1720. By 10 October about 700 million livres of notes had been retired and burned. Garber puts the notes still in circulation in October at 1.2 billion livres.
The share followed the money down: 2,000 livres in September 1720, 1,000 in December. Law left France in early December 1720, according to Velde, and died in Venice on 21 March 1729. The Visa of 1721 to 1722 then sorted the claims: 2,211.2 million livres submitted, reduced to 1,700 million, a 23.5% average reduction, Velde records. The state took over the debts of the company and the bank, Britannica notes.
+1,900%
Share price, Jan to Dec 1719
500 to 10,000 livres (Mississippi Department of Archives and History)
2.7bn
Peak notes in circulation, livres
From 40 million in December 1718 (Garber 1990; Velde 2003)
1,213.5m
Livres spent buying back 27% of the stock
March to late May 1720, in the bank's own notes (Velde 2003)
-95%
Share price, peak to September 1721
10,000 to 500 livres; a 1,900% gain is needed to recover a 95% loss
Mississippi Bubble vs South Sea Bubble: what was the difference?
The mechanism was the same and the sponsor was different. Frehen, Goetzmann and Rouwenhorst call 1720 the first global bubble in stock prices, with linked episodes in Paris, London and the Netherlands, and note that both companies issued equity in exchange for government debt, in effect converting the national debt into corporate stock. The South Sea Bubble took its shares from £128 in January 1720 to about £1,050 in June and £124 in December.
The difference is who printed the money. The South Sea Company lent to buyers against the shares they bought, so its bubble was leveraged by the issuer. The Compagnie des Indes owned the bank that issued the currency, so its bubble was leveraged by the state. London's crash cost investors. Paris's crash cost the currency: the 500-livre coin limit and the 50% note devaluation fell on people who had never bought a share.
Paris peaked at the turn of 1720 and London in June, so the same investors could lose twice in one year.
How long did it take to recover from the Mississippi Bubble?
The share never did. It went back to where it started, 500 livres, by September 1721. Measured from the 10,000-livre peak, that is a 95% drawdown. A 95% loss needs a 1,900% gain to return to break-even, the same 1,900% the share had gained on the way up. That symmetry is the lesson of drawdown arithmetic, and the 1929 stock market crash, with its 89% fall and 25-year recovery, repeats it two centuries later.
What your journal would have shown
The following figures are illustrative demo data, not a historical account.
Take a demo account that bought one share at 500 livres on 10 May 1719 with a defined risk of 100 livres, so 1R equals 100 livres. At 5,350 livres on 9 September the open trade shows +48.5R. At 10,000 at the turn of the year it shows +95R. Any journal would flag this as an outlier.
Now the peg. From 5 March 1720 the demo account can sell at 9,000 livres, in notes. The journal records the exit as +85R. What it cannot record is that the notes lose 50% of their face value by decree on 21 May, that coin above 500 livres is illegal, and that the bank stops redeeming on 17 July. The trade closed at +85R. The account closed much lower. A journal that only counts the trade misses the currency it is counted in.
The trader who held through the peg has a different line: 2,000 livres in September 1720 is still +15R from entry, and 500 livres in September 1721 is the full round trip, 0R on a position that once showed +95R. Anyone who has watched an open profit go back to zero knows that 0R is not how it feels. The R-multiple is how it is.
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“The Mississippi Bubble did not run out of buyers. It ran out of a currency to pay them in.”
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