Bubbles…sending economies up the (Mississippi) River since 1720

We are familiar with the dotcom and US housing bubbles of recent memory, but in the early 1700s (1716 – 1720) two of the largest economic bubbles in history arose and burst at more or less the same time in different parts of Europe.

The South Sea Bubble was a speculative stock bubble in Britain, which was centred on the shares of the South Sea Company, an international trading company that was granted special trading rights in the South Seas (now called South America) by the British government. South Sea Company executives spread rumors that greatly embellished upon the commercial value of the company’s trading rights, which caused its shares and the shares of similar companies to soar.

Shortly after the stock speculation mania swept throughout Britain, with scientist Isaac Newton and author Jonathan Swift among the investors, the South Sea Bubble popped and caused a very severe economic crisis. When Newton lost a fortune in the crash, he famously remarked, “I can calculate the movement of the stars, but not the madness of men.”

The Mississippi Bubble was a speculative stock bubble in France that occurred at the same time as Britain’s South Sea Bubble. The seeds of the bubble were sown in 1715, when France was nearly insolvent from war and sought the help of Scottish economic theorist John Law. Law decided to create a national bank that would accept deposits of gold and silver currency and issue “paper” money or bank notes in return. Very soon, Law’s national bank began to issue much more paper currency than it received in gold and silver currency deposits, which created an inflationary economic “bubble boom”. 

One of Law’s international trading companies, the Compagnie des Indes, became one of the prime beneficiaries of the inflationary boom as its shares skyrocketed and created many millionaires (this is how the French word millionaire came about), based on the supposedly immense bounty of resources in the Mississippi Territory, including gold and silver. 

For a time, it seemed as if France’s financial problems were over, until the Mississippi Bubble burst (when it turned out that France’s North American colonies along the Mississippi River were not as rich in resources as previously thought). Law’s trading company shares and paper bank notes plunged in value and threw France into an even greater economic crisis than it had before the bubble.

Law himself was an interesting character: a financier, gambler and philanderer who escaped to continental Europe to avoid imprisonment after shooting a man in a duel, he found himself on the run again after the bubble burst. He escaped France, disguised as a woman for his own safety, and spent the rest of his life as an impoverished gambler in various parts of Europe.

Although traditionally considered a bubble, if we’re going to be technical about it, the South Sea Bubble wasn’t actually a bubble. A bubble is primarily caused by widespread mania and speculation, followed by a brutal collapse in asset values. In contrast, the Mississippi Bubble was the result of failed monetary policies that caused excessive money supply growth and inflation.

Still not something you’d want exploding in your face though.

Read more Lighter Side articles by Pamela Hellig here.

Pamela Hellig