Best Practices For BIS II Implementation
The French Mississippi bubble is comparable to the South Sea bubble. It also occurred at the same time. The company was founded in 1684. However the scandal began when the company was taken over by John Law. A Scottish businessman who bought a controlling interest in the company in 1717 and renamed it Compagnie d'Occident. The purpose of the company was to trade between the French colonies in North America and France. In 1716 John Law had already founded Banque Générale. This bank was bought by the Mississippi Company in 1720 and renamed Banque Royale. The bank had a mandate to create un-backed (not backed by gold or assets) currency.
Though the official business case was trading, the actual business case was equal to the South Sea Company. In 1720 the entire French government debt was bought by the Mississippi Company. It funded this purchase with the stocks which it had issued. In order to attract the most profitable share price, John Law had greatly exaggerated the potential wealth from trade with the American colonies. Together with the marketing efforts of the company, the bank issued more note’s (paper currency). His efforts to create a perception of value and the ample availability of money (note’s) caused a frenzy among investors. The stock rose from 500 to 15,000 livres in 1719, just to drop back again to 500 livres in 1720. Like the South Sea Company an excessive amount of money was poured into the stock of the company, only spurring more investments. Such a rise can never be sustained and as it started to fall all the investors who invested in herds, sold in herds. As a result the stock dropped dramatically.