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1720Reputable source · 2 sourcesWell documented

The Mississippi and South Sea Bubbles Collapse Within Months of Each Other

France and Britain each try to erase national debt with stock schemes, and both markets crash the same year

On the timeline · around 1720 · Modern FinanceModern FinanceThe Mississippi and South Sea Bubbles Collapse Within Months of Each Other160016501700175018001850

Quick facts

Mississippi Company share rise
500 to 10,000 livres, Jan-Dec 1719
South Sea Company founded
1711
Sword Blade Bank closure
24 September 1720
Regulatory response
Bubble Act of 1720 (Britain)

What happened

In France, the Scottish financier John Law had founded the Banque Generale in 1716, converted it into the state-owned Banque Royale in 1718, and built the Compagnie d'Occident, later the Mississippi Company, around exclusive trading rights to French Louisiana. Law's plan let the French crown retire its public debt by having investors swap government bonds for company shares; the shares rose from about 500 livres in January 1719 to 10,000 livres by December, a rise of some 1,900 percent, before the whole structure collapsed in 1720 as note issuance outran the company's real earnings and inflation set in. In Britain that same year, the South Sea Company, formed in 1711 around a monopoly contract to supply enslaved people to Spanish America, made a similar offer to absorb the national debt in exchange for company shares paying dividends from trade profits. According to the Federal Reserve Bank of New York's account, the arrangement had 'repackaged' a burdensome public debt 'into a valuable commodity,' and speculative buying pushed the stock price into the hundreds of pounds before it collapsed that autumn, with panic spreading to other London banks including the Sword Blade Bank, which closed its doors in September 1720. Parliament responded with the Bubble Act, restricting the formation of new joint-stock companies without a royal charter.

Why it matters

Both bubbles show how governments, once they discover that stock markets can be used to convert unpopular public debt into popular private speculation, can trigger financial crises on a national scale when the underlying business cannot support the price investors have bid it up to. The South Sea Bubble in particular helped shape English financial regulation for a century, and both episodes remain reference points for every speculative bubble studied since.

How we know

Share price records for both the Mississippi Company and the South Sea Company survive in contemporary financial records and were tracked in real time by observers including Isaac Newton, who reportedly lost money in the South Sea crash; modern reconstructions by the Federal Reserve Bank of New York and other financial historians document the timeline of both collapses in detail.

Sources

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