Mississippi Scheme

Mississippi Scheme

Mississippi Scheme, plan formulated by John Law for the colonization and commercial exploitation of the Mississippi valley and other French colonial areas. In 1717 the French merchant Antoine Crozat transferred his monopoly of commercial privileges in Louisiana to Law, who, with the sanction of the French regent, Philippe II, duc d'Orléans, organized the Compagnie d'Occident. Its shares first depreciated in value but rose rapidly when Law, director of the new royal bank, promised to take over the stock at par at an early date.

In 1719 the company absorbed several other organizations for the development of the Indies, China, and Africa, and Law thus controlled French colonial trade. The consolidated company, renamed the Compagnie des Indes (but commonly known as the Mississippi Company), was given, among other privileges, the right of farming the taxes. It then assumed the state debt and finally was officially amalgamated (1720) with the royal bank. Public confidence was such that a wild orgy of speculation in its shares had set in. The speculation received a strong impetus from Law's advertising, which described Louisiana as a land full of mountains of gold and silver. One story told of a fabulous emerald rock on the Arkansas River, and an expedition promptly set out to find it.

Overexpansion of the company's activities, the almost complete lack of any real assets in the colonial areas, and the haste with which Law proceeded soon brought an end to his scheme. A few speculators sold their shares in time to make huge profits, but most were ruined when the "Mississippi Bubble" burst in Oct., 1720. In the governmental crisis that followed, Law's financial system was abolished, and he fled the country (Dec., 1720). Although a failure in its financial aspects, the Mississippi Scheme was responsible for the largest influx of settlers into Louisiana up to that time.

In August 1717 Scottish businessman John Law acquired a controlling interest in the then derelict Mississippi Company and renamed it the Compagnie d'Occident (or Compagnie du Mississippi). Its initial goal was to trade and do business with the French colonies in North America, which included much of the Mississippi River drainage basin, and the French colony of Louisiana.

As he bought control of the company he was granted a 25-year monopoly by the French government on trade with the West Indies and North America. In 1719 the company acquired the Compagnie des Indes Orientales, the Compagnie de Chine, and other French trading companies and became the Compagnie des Indes (or Compagnie Perpétuelle des Indes). In 1720 it acquired the Banque Royale, which was founded by John Law as Banque Générale in 1716.

Law exaggerated the wealth of Louisiana with an effective marketing scheme, which led to wild speculation on the shares of the company in 1719. Shares rose from 500 to 15,000 livres, but by summer of 1720, there was a sudden decline in confidence, and the price was back to 500 livres in 1721. By the end of 1720 the Regent Philippe II of Orléans dismissed Law, who then fled from France.

Debt conversion

The number of outstanding shares of the company was probably around 500,000 in 1720. A stock price of 15,000 livres would have given the company a market capitalization of 7.5 billion livres. After the share price collapsed to 500 livres in September 1721, the company was valued at only 250 million livres. As a comparison, the French government expenses was 150 million livres in 1700, while their debt in 1719 was 1.6 billion livres.

With the demand for company shares being high, the government and John Law set out to buy back the whole 1.6 billion livres government debt for shares in the company. The plan was successful and in 1720 the whole government debt was acquired by the company, before the company's market capitalization began to collapse during 1720 and 1721. Compare this with the debt acquisition by The South Sea Company of England that acquired 80% of the 50 million pound government debt during 1720. The South Sea Company reached a highest share price of 1,000 pounds in August 1720, a few months later than the Compagnie des Indes.

As the creditors bought shares in the company with their Bonds and debt papers, the whole government debt became property of the company (debt-for-equity transaction). And the company became property of the former creditors, but effectively controlled by the government. Primarily the government paid an annual 3% interest to the company, which amounted to 48 million livres. Through these transactions the French government had successfully unloaded their whole gigantic debt of 1,000% the annual budget (perhaps 200% - 400% of GDP) and was basically debt free.

Reopened in 1722

The company sought bankruptcy protection in 1721. It was reorganized and open for business in 1722. In 1723 it was granted fresh privileges by Louis XV. Among these were the monopoly of sale of tobacco and coffee, and the right to organise national lotteries. It could again tap the capital markets and raise capital by issue of shares and bonds.

From 1726 to 1746 the company flourished from its overseas trade and domestic business. It brought wealth to the port cities it was operating from: in Bordeaux, Nantes, Marseille, and, in particular, its home port of Lorient (initially called L'Orient). During this period it lost its trading rights for the western hemisphere but it kept trading with the east and could prosper from that business. Its main goods of trade during the period were porcelain, wallpapers, lacquer and tea from China, cotton and silk cloth from China and India, coffee from Mocha (Yemen), pepper from Mahé (South India), gold, ivory and slaves from West Africa.

After 1746 the spendthrift policies of the French Government began to hurt the Company, and the Seven Years' War (1756–1763) brought severe losses. In February 1770 an edict required the Company to transfer to the state all its properties, assets and rights, then valued to just 30 million livres, while the King accepted to pay all the Company's debts and annuity (rente) obligations. The company was officially dissolved in 1770, although its Affaire sur la liquidation de la Compagnie des Indes dragged on into the 1790s.

Compagnie des Indes share price

  • 1719 May: 500 livres
  • 1720 February: 10,000 livres
  • 1721 September: 500 livres

Financials

When the whole debt was converted at the end of 1719 their 1720 financials may have looked like this: ()

Income Statement (in livres)
Period Ending 31-Dec-1720
Revenue
Collection of indirect taxes 15,000,000
Collection of other taxes 1,500,000
Tobacco 2,000,000
The mint 4,000,000
Trading 10,000,000
Interest income 48,000,000
Total 80,500,000
Expenses
? ?
Net Income
? ?

Balance Sheet (in livres)
Period Ending 31-Dec-1720
Assets
Government bonds 1,600,000,000
Liabilities
? ?

See also

External links

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