Mississippi Scheme

• In 1705, John Law, a Scottish economist, came up with a plan to change the banking system in Scotland in a big way to reduce public debt and boost the economy.

• One of these was that paper money was used instead of gold.

• Law's theory was turned down, but in 1716, the Duke of Orléans, who was in charge of the young King Louis XV, asked him to try it out in France, which was on the verge of going bankrupt.

• Law started a national bank that took deposits of gold and silver and gave out banknotes in exchange.

• In 1717, he started a company that had the exclusive right to develop France's US territories in the Mississippi River valley.

• By 1719, the company controlled all of the country's colonial trade.

  • He then did a major reorganization of France's debt.

  • He came up with the "Mississippi Scheme."

• In exchange for state-issued public securities, he sold shares in his company whose value he had inflated by a lot.

  • Investors rushed to buy shares, and their prices went up quickly.

  • When they were first sold, each share was worth 500 livres tournois, which is about £2,000 today.

  • A year later, each share was worth 20 times as much. The securities' worth also went up.

  • The plan led to a lot of wild guessing, and stock markets all over Europe did very well.

  • The French government tried to solve the problem by printing more money.

  • However, this led to a lot of inflation and a drop in the value of money and securities.

• In 1720, the price of Mississippi stock fell sharply, which led to a big financial crash.

  • Law ran away to Venice, where he lived for nine years and died poor.

  • The scheme caused a great economic boom in France, but it eventually led to an economic collapse in 1720.

• The collapse of the scheme resulted in the bankruptcy of many investors, as well as massive inflation and a devaluation of the French currency.

• The effects of the Mississippi Scheme were felt throughout Europe, resulting in a recession across the continent.

• This led to increased political and economic instability, and caused a great deal of hardship for the citizens of France.

• The consequences of the scheme were so severe that it would take years for France to recover from the economic disaster.

Related Crimes

• 1630s: Speculators exchange tulip bulbs for enormous quantities of money at the Dutch Republic's "tulip mania" peak, until the market collapses over night.

• 1720: The British South Sea Company, which does business with Spanish America, assumes responsibility for the country's debt.

  • However, it and its shares fall, ruining thousands of individuals from all socioeconomic strata.

• 1849: William Thompson defrauds strangers on New York City's streets in a number of different ways.

  • Because of his accomplishments, a newspaper editor came up with the moniker "Confidence Man," or simply "con man."

The Black Friday Gold Scandal

• America's financial markets were uncontrolled in the late 19th century, and certain individuals known as "robber barons" used unscrupulous tactics to amass enormous fortunes.

• James Fisk and Jay Gould, two businessmen who wanted to control the market, hid enormous sums of gold in 1869.

  • In order to sell for a huge profit, they intended to raise the price.

  • However, there was a problem.

  • The Union government printed a sizable number of banknotes during the Civil War (1861–1865) but did not have the gold reserves to support them.

  • In order to successfully purchase back the money, Ulysses S. Grant's administration donated the gold in 1869.

  • This allowed the Treasury to control the price of gold: when it sold its reserves, the price fell; when it held onto them, the price increased.

  • The government may conduct similar actions if traders attempted to influence the gold market.

• By using their political connections and bribes, Fisk and Gould were able to guarantee that government gold was held off the market.

  • Because of their purchases, the price of gold increased.

  • However, after Grant learned of the strategy, he released $4 million (£60 million today) in Treasury gold.

  • The market plummeted as a result of the deflated gold price on September 24, 1869, often known as "Black Friday."

  • Prior to the price of gold dropping, Gould had surreptitiously sold his gold.

• Several prominent Wall Street bankers were ruined as a result of the scandal

• The scandal caused widespread distrust of the stock market and shook public confidence in the financial system

• The resulting public outrage prompted the US government to pass the Gold Reserve Act of 1934

  • This legislation was designed to protect the US gold supply and prevent a similar scheme from occurring again

• The scandal also led to the passage of the Securities Exchange Act of 1934, which established the Securities and Exchange Commission (SEC) and provided more oversight of the stock market.

  • The SEC was charged with ensuring that investors received accurate and timely information about the stocks they invested in.

  • It also established rules for fair and open trading on the stock market.

  • The SEC continues to monitor the stock market and protect investors today.

Related Crimes

• 1821–37: Gregor MacGregor, a con artist from Scotland, creates a "established colony" in Central America and recruits investors to purchase shares in it. When settlers arrive, they discover a narrow area of unspoiled bush.

• 1986: Ivan Boesky, a Wall Street trader, admitted in front of a US court that he used insider trading and criminal market manipulation to amass his $200 million personal fortune.

• 1992: Harshad Mehta guarantees loans totaling $740 million on the Bombay Stock Exchange using forgeries of bank receipts. Then, in an effort to avoid being charged, he buys politicians.