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May 17, 2013

Historical Echoes: The “Mississippi Bubble” – When One’s Back Could Be Rented Out as a Writing Desk

Amy Farber

In 1720, the very same year that England was experiencing
the “South Sea Bubble” (see our post),
France was experiencing a bubble as well—the “Mississippi Bubble.” France’s
bubble was brought on by government debt and the advice of the head of the
country’s finance ministry, John
(Scottish mathematician, convicted murderer [a duel], gambler, and financial
genius), to create paper money and a bank and to invest in his Mississippi
Company. (Indeed, at the height of the trading frenzy for shares of stock in
Law’s company, a hunchbacked man rented his back out as a desk in the “Street of Speculators
and earned a considerable sum.) Over a three-year period (1718-20), things went
very wrong and too much money was printed (the regent’s decision, not Law’s). The
text accompanying this portrait of Law describes
him as an:

18th century Scotsman, credited by
some historians as being “the father of inflation.” Law turned gambling IOUs
into “gold counters,” then state debts into paper money, and finally sold all
France down the river on the “Mississippi Bubble.”

In a 2008 Financial
article, “How
the French invented subprime in 1719
” (available with subscription), James
MacDonald compares the Mississippi Bubble with the 2008 financial crisis. He
cites six major similarities, including significant public debt, a charismatic
financial wizard (Law), and the power of securitization.

The full story of the bubble is complex, but an easy way to understand
it is to watch this clever and humorous 1978 animation (9.75 min.).
Or, if you want to see what the players in this drama really looked like, another
clever and wryly humorous video
(4.75 min.) tells essentially the same story with a backdrop of portraits and
landscapes and a narrator who falls just short of conveying an authentic upper-class
British accent. A third video
(12.5 min.) has wavering audio but is otherwise excellent. The first video has
Law escaping France disguised as a man with an enormous mustache and a beret, but
with his Scottish bagpipes visible; the third has him escaping dressed as a

Two American authors have addressed the topic: Washington
Irving, of Rip Van Winkle and Legend of Sleepy Hollow fame, wrote The Great Mississippi Bubble: a Time of
Unexampled Prosperity
(or read the less authentic-looking online version)
and included it in his 1825 book of essays, Crayon Papers. Could “unexampled prosperity” mean something
similar to “irrational exuberance”? The essay is rich in detail regarding
events and character traits of the players. Dallas Federal Reserve Bank
President Richard Fisher has even referred to the Irving essay in 2008
and 2010
speeches. (Follow the links and note the wonderful Irving quotations included.)
From the 2008 speech:

Irving had never heard of a subprime mortgage or an Alt-A loan, an SIV, a CDS, a CLO or a CMO. But he understood booms propelled by greed and tomfoolery and busts born of fear, and
that these underlying forces are deeply rooted in human DNA.

The American writer Emerson Hough wrote a 1902 best-selling historical
novel, The Mississippi Bubble (this chapter
is part of the serialized newspaper version), with a curious subtitle: “how the
star of good fortune rose and set and rose again, by a woman’s grace, for one
John Law of Lauriston.” What woman? Is it Lady Catharine Knollys, whom Law
married? And what does Hough mean by “grace”? Possibly, the woman forgave Law
for being a failure.

Chauncey Haines composed a “March Two Step” titled “the
Mississippi Bubble
.” (Listen to it here.) The sheet music,
also published in 1902, includes an advertisement for the Hough novel, which
quotes a review from the Boston Journal describing
it as “one of the truly great romances.”

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Amy Farber is a research librarian in the Federal Reserve
Bank of New York’s Research and Statistics Group.


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Economic growth requires investment which produces returns. Since the information flow involves time delays and hysteresis, there is usually a fair bit of over-investment. Rarely is the investment opportunity big enough to reward all takers. Was too much money printed? Sure, in the sense that the investment opportunity was much more limited than most investors thought, if they thought about it at all. Any free economic system is going to have bubbles. The alternative is to have a heavily damped system that discourages investment. If you look at the recent real estate bubble in the US, the impact was worst where there was the most economic freedom, but much less serious where free market sorts whined most loudly about government regulation. You can have bubbles in non-free market systems as well, but the impact is usually different The government takes the whole hit.

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