By the time Louis XIV passed away in 1715, seven decades of his absurd extravagance had nearly bankrupted France.
His reign was marked by constant warfare and the most excessive spending imaginable, from opulent palaces (including Versailles) to a costly welfare state– public hospitals, parks, monuments, museums.
Louis XIV had turned France into the world’s leading power. But it came at a heavy cost.
The national debt was nearly as large as the entire French economy itself, and the government’s annual budget deficit was appalling.
France was bleeding cash. And so in 1719, the government tried a new idea to shore up its finances.
First, they issued a formal decree granting a full monopoly over nearly all of France’s international commerce and trade to a company called Compagnie du Mississippi, i.e. the Mississippi Company.
The government gave full control of the deal to a Scottish banker named John Law; Law was to sell shares of the Mississippi company to the public, and funnel the proceeds to the government.
The initial share sale was a phenomenal success. Law promised investors that the Mississippi Company would pay an annual dividend equivalent to about 120% of the share price.
It was an extraordinary prospective return. And investors literally lined up outside of Law’s house to apply for shares.
Almost immediately a bustling secondary market for the shares emerged, and countless people of every age, gender, and social status spent their days buying and selling stock in the Mississippi Company.
The investor hysteria was so extreme that the share price of the Mississippi Company would sometimes rise 20% in the course of a few hours.
A quaint plaza near John Law’s home became the unofficial stock exchange for Mississippi Company shares, and there are legendary stories of the investor frenzy there.
In his 1841 book Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay wrote about a local cobbler who was able to rent out his stall in the plaza for an extraordinary sum of money, and about a hunchback who earned a great living charging speculators to use his hump as a writing surface to sign contracts.
EVERYONE was making money. It was commonplace that illiterate farm laborers would turn their meager savings into substantial fortunes, practically overnight.
Of course, hardly anyone knew what they were buying– whether there was an actual business plan, whether management was competent, or whether the deal could generate any profit.
Those seemed to be irrelevant details. The only two things that mattered were the fact that the share price was going up, and that the New World had enormous potential.
So the speculation persisted.
At the end of 1720, the bubble finally burst, not even two years from the time that it started.
A few people made money– those who got in early and weren’t stupidly greedy. But...