John Law (1671 – 1729) and the Mississippi Bubble
Fife born, John Law was a bit of a rake. Gifted with mathematical abilities, the son of a Scottish financier moved to London in his early twenties and made his mark as a gambler. When he was 23 he fought a duel over a lady friend (natch), killing his opponent, for which misdemeanour he served some time in chokey. He managed to escape and spent some time on the continent studying the financial systems of cities such as Amsterdam, genoa and Venice, publishing a paper in 1705 in which he argued that paper currency should be adopted instead of gold and silver backed coins.
In 1715 the French economy was on the verge of insolvency, the government defaulting on its debts and the value of its gold and silver-backed currency fluctuating wildly. Louis XV was only five at the time and control of the country’s affairs was in the hands of a group of regents led by the Duke of Orleans. Law was a mate of the Duke and saw an opportunity to put his economic theories into practice. By 1716 Law had permission to open a national bank, Banque Generale, which inn return for deposits of gold and silver issued paper bank notes. Although not legal tender, they were redeemable in French currency.. The bank was a success, building up its reserves from the issuance of stock and the profits gained from managing the French finances.
The French at the time had sizeable swathes of land in North America and in 1717 Law acquired the Compagnie d’Occident and with it monopoly trading and development rights for land under French control stretching from Louisiana to Canada. In 1719 the Compagnie, now rebranded as Compagnie des Indes and with rights over all French trade outside of Europe, purchased the rights to mint coinage and to collect indirect and direct taxes. Law effectively controlled France’s finances and foreign trade.
Shares in the company were offered to the public in January 1719 for 500 livres a time payable with Banque Generale notes. Law had stoked up demand by promulgating stories – false, of course – of the untold wealth lying dormant in the territories. It was too good an opportunity to miss and people from all social classes invested, making substantial paper profits – the French word millionaire was coined to describe someone who had made a substantial fortune through holding Compagnie shares – as the price reached 10,000 livres at the end of the year.
Law’s big problem, though was that the bank had issued vast amounts of notes without the currency to back them up if anyone sought to cash them in, a problem compounded by the lack of gold and silver from the French territories in North America. Inevitably, some tried to realise their profits by selling their shares, causing the prices to fall in early 1720. Law tried to avert a stampede by devaluing the share price by 50% and limiting payments in gold to 100 livres. This caused outrage and although the notes’ value was restored, but not the pay-out limit, many investors now realised that the shares they had in the Compagnie were effectively worthless – paper millionaires were now real-time paupers.
By early 1721 shares were back to the original offer price. Law, realising the game was up, fled, dressed as a woman, and spent the rest of his life as an itinerant gambler. The Bank and company collapsed, around the same time as the South Sea bubble came to its natural conclusion, and France was plunged into a severe economic depression.