Throughout history, economies have been periodically subject to asset price bubbles. These bubbles can be defined as, “pronounced increases in asset prices that depart from fundamental values and eventually crash resoundingly” (Mishkin). One of the most prominent examples of such bubble is John Law’s Mississippi Company in 1715. Essentially this was an experiment in fiat money done by John Law on behalf of the Regent of France. The parallels between the recent financial crisis of 2008 along with the impending events and John Law’s bubble are remarkably similar. Ben Bernanke is only the latest in a long line of economists to believe in Law’s solution to a broken economy- just print more money. I. John …show more content…
Law realized that paper money was preferable to the common coinage of the time; it was much more portable and convenient to use. Law originally published a proposal for a paper currency in the early 1700’s but did not find a willing supporter until the death of Louis XIV in 1715 (Marietta). Law was successful in convincing the regent of the advantages of paper money and credit. To the Regent of France, who was left with a country deeply in debt due to war and extravagant spending, Law’s theories seemed like the perfect solutions to stimulate France’s economy. Law was granted permission to open a bank (Banque Generale) along with the right to issue paper money (Maloney). Establishing confidence in a new monetary system was the hardest part. Lucky for Law, he had the benefit of working for an absolute monarchy which could declare that taxes had to be paid in the form of notes issued by the new …show more content…
The system evolved from a paper system backed by a gold standard to paper system by Mississippi shares which were in turn ‘backed’ by land in Louisiana” (Sizemore). As inflation continued to rise holders of shares in the Mississippi Company and of paper money became nervous. At the beginning of 1720, a number of large speculators decided to cash out their shares in the company and switch their funds to something more tangible. This move drove the prices of the shares down and caused confidence in paper currency to decline. As more and more investors decided to cash out it quickly became apparent that there was not enough metal coinage to back the notes in circulation. People were paid in gold, and then silver when that ran out, and then eventually in copper when the silver ran out. “The only thing more painful than hyperinflation is the inevitable deflation that follows” (Sizemore). France and her middle and upper classes were ruined, the Monarchy was discredited, and a strong distaste for banking and capital markets was left to