The Crash

When we left of the story in January 1720 the price of Compagnie shares were falling in price. A slight ‘scandal’ occurred in May and Law decided to devalue the shares. He did this in several stages as well as devaluing the bank notes by 50%. By this stage the French realised that their supposed metal rich colonies in the Mississippi Valley actually lacked any worthwhile deposits. As you can imagine this did not go down well with the investors. Law then suspended payment in the precious metals but he promised the value of the bank notes would be upheld. This also was not well received by the French public and investors started selling their shares. By December 1720 shares had fallen to only 1000 livres, 10% of what they were only 12 months previous.

John law was now loathed by the French people, who believed they had been ‘scammed’ out of their hard earned money (remember a lot of those who became rich quickly had been very poor just a few months previously). The decrease in share price allowed Law’s rivals to swoop in and take almost two-thirds of the investor shares. By September 1721 the price of a Compagnie share was only 500 livres, not far off where they began almost two years before.

Not too long after John Law escaped France. It is said that he did so dressed as a woman for his own safety! He spent the rest of his days travelling Europe, gambling to get food where he could.

The Banque Générale was closed for a few months but reopened and believe it or still exists to this day, although it’s now called Banque de France. However it around 80 years before the French reintroduced paper notes.

The collapse of Banque Générale and the Compagnie des Indes concludes the story of the Mississippi Bubble. Adolphe Thiers wrote a book on the events of the Mississippi Bubble in 1859, entitled ‘The Mississippi Bubble: A memoir of John Law’. To read the full story in more detail you can download a copy here.

In a turn of rather bad luck Britain’s South Sea Bubble popped at around the same time. You may be interested to know that even Isaac Newton tried to ride the South Sea Bubble. Kindleberger (1978) notes that he managed to get out of the market with a profit of £3,500 but decided to re-enter and lost £20,000. "He concluded, 'I can calculate the motions of the heavenly bodies, but not the madness of people'" Kindleberger (1978).

The combination of the two sent a number of European countries, including France, into a severe depression.

Quite naturally the French did not exactly appreciate John Law, and even today the name isn’t well received in France. However were his actions really that immoral?

Below is a great video telling the story of the Mississippi Bubble if you don't have the time to read the full story!

Or if cartoons aren't your thing MacKay has written a great account of the Mississippi Bubble, you can get it here. It is quite long but definitely worth the read. However, take note, as some writters claim he is too interested in story telling and makes no real attempt to understand or analyze the true events.

In my next post I will have a look at some of the academic thinking surrounding the Mississippi Bubble.


Bibliography:

Kindleberger, C. P., (1978) Manias, Panics, and Crashes, New York: Basic Books.

Thiers, A. (1859) The Mississippi Bubble: A Memoir of John Law, New York: W.A. Townsend & Company.