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Talking Finance

Bubble in Paris

This article originally published in The Northern Daily Leader on 9 July 2011.

Life as a Parisian hunchback in the 18th century must have been a challenge. More likely than not the object of public disdain and ridicule, as suffered by Quasimodo, the titular protagonist in Victor Hugo’s The Hunchback of Notre Dame, it’s fair to say that there were probably few situations where being a hunchback was an advantage. However, one of the greatest financial bubbles in history provided an opportunity for one enterprising 18th century hunchback.

In 1719, an inventive Scotsman, John Law, established the Mississippi Company, which was granted exclusive trading rights to the East Indies, China and South Seas by King Louis XV (Law had fled to Paris to escape the wrath of the authorities following a fatal duel over the attractions of a young woman). Through a combination of clever marketing and royal patronage, Law was able to convince his fellow Parisians that an investment in the company was simply too good an opportunity to miss, with a promised initial income return of 120%! So enthusiastically did the citizens of Paris respond, that the street outside Law’s house became thronged with budding investors, desperate to purchase shares in the company. Day and night people gathered in the Rue de Quincampoix, frantically trading back and forth shares in the Mississippi Company, speculating that the stock price would continue to rise inexorably higher. The eagerness and desperation of the speculators provided the perfect opportunity for our enterprising hunchback, who, according to legend, earned a sizable fortune for himself by renting out his hump as a writing-desk to the would-be investors.

As it turned out, providing writing-desk services to the eager investors was probably more profitable than investing in the shares of the Mississippi Company. The promised riches failed to materialise and the company and the private bank Law had established to finance it collapsed in flurry of worthless pieces of paper. The lesson learned by those over-enthusiastic Parisians is as relevant today as it was back in 1719 – if it’s too good to be true, it usually is. Too often we see ordinary Australians being duped by the modern-day equivalent of John Law and his exciting yet ultimately worthless investment opportunity. So whenever a ‘John Law’ comes your way, be a sceptic first and a believer second. The Mississippi Company wasn’t the first speculative bubble to collapse, and it certainly won’t be the last.