Early 18th-century France was in the economic doldrums. The government was drowning in debt and the Regent, the Duke d’Orleans, enlisted the aid of Scots adventurer John Law (1671-1729). Law was a financial wizard, a gambling man with grandiose ambitions. He had fled from Scotland after killing a duelling opponent and now sought to make a name for himself by putting his economic theories into practice in France. Having persuaded the Duke that he could get the government back into the black, he was made Controller General of Finance and given carte blanche to turn round the French economy.
Law’s first move was to set up the Banque Generale, which accepted deposits in coin and issued credit notes in return. Law believed that by replacing coin with credit he could control money supply and kick-start the economy. He was right. His bank notes were a huge success. Then, in 1717, he established a trading venture, the Mississippi Company, to exploit the rumored gold and silver deposits of the French-owned colony of Louisiana. Investors were gradually seduced into this scheme and throughout 1719 the share price rose rapidly as speculators fuelled demand. Shares bought for 500 livres soared to 10,000 livres, creating instant paper millionaires.
The fatal flaw in Law’s economic theory was that the Mississippi Company had no assets. Law was simply increasing money supply by issuing bank credit notes to fund share purchases. Eventually the bubble had to burst. In 1720 the Mississippi Company began to unravel. Law attempted to control the falling market but his desperate measures only panicked investors even more. By September 1721 shares were back where they started, at 500 livres. His disastrous experiment in monetary control unstuck, Law was forced to flee a country for the second time in his life. He died in Venice, a poor man.
When was The Mississippi Bubble: 1717-1721
Where was The Mississippi Bubble: France
What was The Mississippi Bubble toll: Thousands of small investors were bankrupted and the French economy spiraled into hyperinflation. It was another 80 years before the French dared to re-introduce paper money.
You should know: Despite his disastrous mishandling of the French economy, John Law had monetarist ideas that were way ahead of his time and many of his theories are standard practice today. He was in large part responsible for the introduction of paper money.
