The Mississippi Bubble Flashcards
Which were four important instruments/institutions during the Mississippi Bubble?
- Money
- Credit
3.Banking
4.Government debt
How did the goverment debt initially trade in france?
Through financiers, which in the Frances public eye, seen as profiters who exploited the state bad situation. They acted as in intermediary between the public and the state.
How developed were the financial system (early 18th century) in France, in comparison to the Dutch and UK systems?
France were behind both the Dutch and UK systems, with a primitive financial system with shortage of money and credit, which affected the efficiency of production in agriculture, manufacturing and commerce.
What were John Laws initial plan with the French financial system?
He wanted to extend and develop the credit system with note-issuing banks, which could stimulate the underperforming sectors of agriculture, manufacturing and commerce. Second, he wanted to restructure French public debt with and debt-to-equity swap through a joint-stock company, later called the Mississippi Company.
What were the first step in Law’s attempt to lubricate the credit system?
He, with the help of the regent, started the general bank. The bank IPO:ed and started the debt-to-equity swap, where buyers traded both specie and government debt in return for shares. The bank could stimulate the credit system through note issuing – and the General Bank were later nationalized and renamed to the Royal Bank.
The second step in Law’s plan?
It was to establish the Mississippi Company. Bought a defunct company with colonial rights by the Mississippi River. Issued stock, which were traded similar to the general bank shares. Started merging companies into the holdco, which later became one of largest conglomerates, the Mississippi Company. He financed the M&A through share issues, where buyers of shares were expecting future dividend and capital gains, more exiting than owing government debt. Also, buyers could pay in installments and therefore leverage their investments, but it also created a sort of options market.
Describe how swap functioned, as in which institutions and instruments were used to execute the debt-to-equity swap?
See picture on s.45
Describe the boom of the share price.
As the share price rose sharply, more and more people started to buy the shares, trying to become rich of the quick capital gains. Trying to hold up the share price, Law announced a dividend with 12% yield, increased installments, and share buybacks supporting the price. He had problems with keeping the share price up by maintaining investors interest. Also, the note issuing from Royal bank became increasingly big, which resulted in low reserves. Stoping to support the share price, the price started tumbling, resulting in price guarantees. Also, M.Company started using banknotes to buy government debt, resulting in big expansion f the money supply.
Describe the bust and aftermath.
Trying to deflate the share price and lower the circulation of notes, the share price went tumbling. Opposition and frustration grew and the regent eventually had to fire Law , which got the share tumbling even more. News started spreading that the bank had trouble to convert notes to specie, and Law later had to be put in office again. In the later half of 1720 the implementation of trying to reduce notes resulted in a bank run, which eventually led to the suspension of converting notes to specie. All existing banknotes were converted to annuities and the Mississippi Company were put into receivership.
The aftermath resulted in low confidence of the financial system, and preference for specie. Also, the state were the beneficiary because of the transfered debt to equity, which eventually became worthless for the shareholders, who clearly were the losers in the crisis. Law also became vilified in France, and early in the bust fled the country.
