The Mississippi Bubble

The Mississippi Bubble was the rise and fall of John Law's 'System' in France between 1716 and 1720, the country's first experiment with paper money. When Louis XIV died in September 1715 he left the throne to his five-year-old great-grandson, Louis XV, the government to a regent, his nephew Philippe, duc d'Orléans, and debts of about 2.8 billion livres, roughly a year's output of the whole kingdom; the interest alone was two or three times the surplus the treasury had left after its other spending. The regent turned to John Law, a Scottish gambler and monetary theorist born in Edinburgh in 1671, who had fled England after killing a man in a duel and had settled in Paris around 1714. Law believed that money was a creative force: a bank that issued paper notes in place of scarce gold and silver would increase credit, revive trade and make the state's debts bearable.

Law built the System step by step. Letters patent of May 2, 1716 let him open a private bank in Paris, the Banque Générale, whose notes the king's tax collectors soon had to accept. In August 1717 he founded the Compagnie d'Occident, which received the monopoly of trade with Louisiana, then the whole valley of the Mississippi, and sold 200,000 shares at 500 livres, payable in the state's discounted paper debt; in 1718 it founded New Orleans, named after the regent. In December 1718 the king bought out the bank's owners and made it the Banque Royale, still run by Law. By the end of 1719 the company had taken over the tobacco monopoly, the Senegal slave-trading company, the French East India and China companies, the mints and the collection of most taxes, and as the Compagnie des Indes, the 'Mississippi Company' of popular speech, it had offered to lend the king enough to repay the whole national debt, raising the money by selling new shares that the repaid creditors could buy with what they received.

The shares became the craze of Europe. New issues were sold in instalments at 550, 1,000 and then 5,000 livres, and the bank printed notes to keep the market supplied: the notes it had issued rose from 40 million livres in December 1718 to a billion in January 1720. In the narrow rue Quincampoix, where the trading was done, the crowds grew so thick that horses and carriages were banned, and the word millionaire came into use. A share issued at 500 livres passed 10,000 in December 1719, and on January 5, 1720 Law became Controller General of Finances. Then holders began to sell to turn their gains into coin. Law answered with force: he merged the bank into the company, forbade anyone to keep more than 500 livres in gold or silver, and from March 5 had the company buy every share offered at 9,000 livres, paid in new notes. The notes in circulation doubled in less than three months, prices rose and the livre fell abroad, and on May 21 a decree cut the value of both the shares and the notes, in stages, by about half.

The outcry forced the government to revoke the decree six days later, and Law was dismissed, then recalled. Through the summer he tried to soak up the notes with bonds, bank accounts and new shares, but crowds fought at the bank to change small notes for coin, and on July 17 it stopped paying out coin altogether. In August the government decided to withdraw the notes; the large ones were burned at the Hôtel de Ville, and from November 1 none of them was money any more. By December a 100-livre note fetched about ten livres in silver, and a share, measured in silver, had lost more than nine-tenths of its spring value. Law left France that month, giving up his houses and estates to his creditors, and died poor in Venice on March 21, 1729. In 1721 the financiers known as the Paris brothers checked every paper claim in a great review, the Visa, and turned what was left into ordinary government bonds, cut on average by about a quarter; the Compagnie des Indes survived as a trading company until 1769.

The crash ran alongside the South Sea Bubble in London, which money leaving Paris had helped to inflate, and the Dutch mocked both in the satirical prints of 'The Great Mirror of Folly'. In Britain the damage soon passed; in France, the collapse of Law's System had long-lasting effects on politics. Historians judge Law more kindly than his ruined investors did. Joseph Schumpeter placed him in the front rank of monetary theorists of all time, and the economist François Velde argues that the System was a reasonable idea, swapping a crushing debt for something like shares in the kingdom's revenue, wrecked by Law's insistence on holding the share price two to five times too high. Its most lasting product is a city: New Orleans.