Principles for Dealing with the Changing World Order: Why Nations Succeed or Fail

by Ray Dalio

The Company of the West, or the Mississippi Company, was a trading company with monopoly rights in French Louisiana (half of the present-day United States). Law allowed French government debt to be used to purchase shares in the Mississippi Company. With a new company that had an exciting story about exploiting the opportunities of the new frontier and a bank and government finances supporting this endeavor, all the right ingredients were in place. As the company expanded, state debt holders jumped at the ability to convert their debt into equity. This created what was perceived to be a great investment. Would you have bought in? Would I have bought in? If we didn’t would we have had regrets? The stock soared, eventually becoming a bubble in the classic ways these things happen. When it burst, both shares and bills rapidly lost their value because of the classic reason of the outstanding claims on real assets being much greater than the real assets that were backing up the claims. Naturally people in France fled from the depreciating paper money toward hard currency coinage. New laws prohibited charging interest rates above 5 percent, which meant that only the most credit-worthy borrowers and most stable investments could receive capital. As a result, it became nearly impossible for new businesses to receive funding. There wasn’t enough real money.