The root of Mississippi Bubble lay in the insolvent French economy which was bankrupt due to war in 1715. France, at that period, lacked a structured financial system and had begun to default on its outstanding debt while the value of its gold and silver currency faced a whipsaw. High taxes were also depressing the economy of a country which lacked a Central Bank. The cornered government turned to the exiled Scottish economist John Law for a solution. Law held the belief that printing money drives the economy as a creative force and paper currency is preferable to gold or other metallic coins. He recommended that France should switch to printing paper currency to ensure a more stable supply of money in the market. A royal edict was passed …show more content…
In 1717, all the public funds were ordered to be deposited in that bank too. Law's idea was to create a bank that would work as state company for national finance and commerce. This would create a huge monopoly of finance and trade run by the state. Its profits would then pay off the national debt. Law firmly believed by increasing the quantity of paper money in circulation, GNP would escalate. He looked upon a central bank as an agency for creating money in the form of bank notes which was a radical concept for France, a country to have never before had a paper …show more content…
When in early 1720, two influential shareholders, the Prince de Conti and the Prince de Conde, asked to have their shares converted into gold, causing major problems due to the lack of specie reserves in the Banque Royale, the others followed suit. This can be attributed to the “Herding” tendency from Behavioral Finance which played a big part in the bursting of the bubble. The downward spiral had begun because of this tendency. Confidence had started to decline and cased the share prices to take a plunge. Law had to print 1,500,000 Livres in paper money to try to stem the