John Law's Mississippi Bubble
John Law's scheme to refinance the French state collapsed in 1720 and set French banking back a century. Law was a Scottish gambler, economic theorist and convicted duellist who had fled England under sentence of death, and his argument was that money is a means of exchange rather than a store of value and that a country with more circulating currency will trade more. The regent Orléans, facing debts of some two billion livres, let him try it. He founded a private bank in 1716 issuing notes redeemable in coin, which worked well enough to become the state bank in 1718. He then founded the Company of the West, later the Mississippi Company, absorbed the other trading companies and the tobacco farm and the mint, and offered shares to the public — payable in state debt paper, which was trading far below its face value. The mechanism was circular. The company's shares were bought with the bank's notes, the note issue expanded to fund the buying, and the price rose from 500 livres to some 10,000 in a year, producing the word millionaire. The colony the shares represented was swamp. Confidence broke in early 1720 when large holders began converting to coin, and the attempt to stop it by decree — devaluing the shares, banning the holding of gold — destroyed what remained. Law fled to Venice and died poor. France abandoned paper money and a central bank until the Revolution, which is one reason it financed its wars so badly. The word bank acquired such a bad reputation in France that institutions avoided it in their names for a century. Law's underlying arguments about credit and the money supply were largely vindicated by later economists, which is the standard footnote to a catastrophe.
- Year: 1719 CE
- Category: Economic
