The great Mississippi Bubble - Part 2

  • December 12, 2016
  • By shantanu paranjpe

Continued from first Part!!

Mississippi Bubble

       In the earlier part, we stopped at the general introduction of what is this Mississippi series. In this part we will again see some basic information and few terminologies which were famous at time. 

 Start of the first speculative boom
     Financial bubble of Mississippi, the South Sea bubble in England and some other related bubbles in Holland were the start of the speculative boom in the international stock market. This was all started in the early decade of the 18th Century, i.e. In 1719-1720 period. In fact, the bubble of Mississippi was responsible for two things. The word ‘bubble’ was started to use as a synonym to ‘Speculative boom’ and a hesitation to use word ‘bank’ for next 150 years due to John Law and his 'Banque General'.  
       If we check the dictionary meaning of the financial bubble, then it shows that bubble means, “any unsound commercial undertaking accompanied by a high degree of speculation", and the same thing happened in these bubbles.   

A comparison of share prices of Mississippi Company. We will read the detailed explanation in the next parts.

Insiders and outsiders

         Let’s assume that the whole bubble thing was a game which was played by two important persons, Insiders and outsiders. Insiders were having superior position than outsiders due to knowledge of the actual prospectus of the company, they were having information about the changes in the authorized capital of the company as well as the number of shares issued to general public i.e. outsiders in this case. Well, no doubt later they disclosed this information to outsiders but still their hands were tied due to the commitments given to their supporters as well as political leaders of the time.
        On the opposite side, there were outsiders who again got divided into two types. 1. “Speculators” and 2. “suckers”. If we see from the economic point of, not in this case but in any case, “Speculators” are responsible for the sudden ups and downs of the share price of the company. They usually react very fast and expect more profit. Hence they buy shares in lot during the bubble period and sell their just before the collapse of the share price which in turns reduce the market price of the share. The exact same case happened during the Mississippi Bubble. Mississippi bubble was an example of ‘rational bubble’ [1]
[1] Rational Bubble – In these types of bubbles, speculators usually buy shares when the prices of shares and sell when the prices are falling i.e. first to make share prices rising and then sell at one point when price reaches at the highest level to earn huge profits.   

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