Midterm Identifications-7 A Tale of Two Bubbles, Part II: The 1720 Mississippi Bubble

Question 1

John Law

Answer 1

John Law was the most interesting man in the world. He was born in Scotland in 1671. A prodigious gambler, mathematician, and womanizer, he fled the country after he killed a man in a duel. After earning a fortune gambling, Law turned to political economics. He wrote a book, traveled to France in 1714, became Finance Minister, presided over the Mississippi boom and bust, and fled.

Question 2

<i>Money and Trade Considered: With a Proposal for Supplying the Nation with Money</i>

Answer 2

Written by John Law in 1705, aimed to solve the money scarcity problem in Scotland, argued an increase in money supply would raise output, proposed a national paper currency backed by land.

Question 3

John Law’s System (three parts)

Answer 3

1. The General Bank (1716)- Joint Stock company, shares could be bought for gov’t debt. Issued banknotes denominated in gold and silver. Improved money supply, lowered interest rates, improved commerce
2. The Company of the West (The Mississippi Company) (1717)- Modeled on the British South Seas Company, joint-stock, goal was to use potential profits of French colonial holdings as a foundation for public credit. Monopolized trade on North American and Caribbean trade
3. Taking over public finances (1719) Mississippi Co took over the General Farms, began to refinance the national debt, made creditors into stockholders

Question 4

The General Bank

Answer 4

Formed in 1716. Joint Stock company, shares could be bought for gov’t debt. Issued banknotes denominated in gold and silver. Improved money supply, lowered interest rates, improved commerce

Question 5

legal tender

Answer 5

medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Typically used to pay all

Question 6

The “Mississippi Company”

Answer 6

The Company of the West (The Mississippi Company) (1717)- Modeled on the British South Seas Company, joint-stock, goal was to use potential profits of French colonial holdings as a foundation for public credit. Monopolized trade on North American and Caribbean trade

Question 7

The General Farms

Answer 7

French Private contractors who who collected taxes prior to 1719

Question 8

Millionaire

Answer 8

Term first used in the Mississippi boom to describe the newly rich in 1720 France

Question 9

“Pegging” the price of Mississippi stock

Answer 9

Law tried to prop up the stock price of the Mississippi company by pegging it to 9,000 L in Banque notes

Question 10

The Visa

Answer 10

1721-1723 tribunal to sort out the claims of people holding paper from Law’s system

Question 11

Consequences of the 1720 Bubble in France

Answer 11

“enriched a thousand beggars and impoverished a hundred thousand honest men.” massive financial crisis- led to private finance led by notaries, resorted to tax farming

Question 12

Differences between the 1720 bubbles in Britain and France

Answer 12

Much was political. Britain was approved by Parlament. France was largely one wealthy man with the support of the crown (a foreigner!). Britain was able to investigate the failures and fix things without overhauling. France threw out all of Law’s reforms and returned to “crony” finance.

Question 13

Paris notaries

Answer 13

Became the main source of credit in the aftermath of 1720. They legally registered real estate transactions, became mortgage matchmakers, planned finance for public works, etc.

Question 14

Compte Rendu

Answer 14

1781- Finance Minister Jaques Necker publishes first account of French gov’t finances