Monetary Expansion, Liquidity Shocks, and Systemic Collapse: A Re-examination of John Law’s Mississippi System (1716–1720)

This paper analyzes the structural architecture and subsequent collapse of John Law’s Mississippi System in Absolutist France. It explores the interplay between unbacked monetary expansion, asset price bubbles, sudden endogenous liquidity shocks, and the mechanics of panic selling through the lens of behavioral economics, mathematical market microstructure, and the framework of adaptive capitalism (Ludewig, 2026a). We argue that the Mississippi Bubble (1718–1720) was a predictable consequence of an early experiment in fiat currency where top-down monetary intervention systematically distorted investor psychology and blocked natural catallactic adjustments. By formalizing a mathematical model of threshold panic selling and cross-era behavior (the 2008 collapse, Quantitative Easing, and the projected 2027 AI compute liquidity trap), this study maps the invariant psychological transitions from herd behavior to hyper-loss aversion. It offers enduring lessons for macroeconomics regarding the boundaries of central bank price targeting and the necessity of dynamic, bottom-up resilience over rigid price-floor optimization.