John Law and the Mississippi Bubble

The Scotsman, his paper money, and his stories brought France much prosperity, for a time

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If you enjoy the newsletter, please forward this along to one or more friends/colleagues. This article was inspired by Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds (1841).

People in Paris were getting rich — and they were getting rich fast. In fact, it was so hard to describe how rich everyone was becoming that a new word was needed and the term “millionaire” was coined in 1719.

The people of France could thank a Scotsman with a penchant for gambling, the printing of new paper money, and all the vast riches that surely would be found in the New World for their sudden wealth.

The Scotsman was John Law and his paper money and stories of the New World brought France much prosperity, for a time.

A Gambling Economist…

John Law, by Casimir Balthazar

Born in 1671, Law grew up in Edinburgh in a well-to-do family, his father being a goldsmith with enough money to buy a castle that the family would never live in just to say that he had one. His father was also a financier/private banker, and at the age of 14, Law joined his father’s business. An innate aptitude for mathematics and an interest in studying economics led to him quickly picking up the principles of banking before his father died three years later. His mother took control over the business, and being a wealthy young man…

…he withdrew entirely from the desk, which had become so irksome, and being possessed of the revenues of the paternal estate of Lauriston, he proceeded to London, to see the world…

He soon became a regular frequenter of the gaming-houses, and by pursuing a certain plan, based upon some abstruse calculation of chances, he contrived to gain considerable sums. All the gamblers envied him his luck, and many made it a point to watch his play, and stake their money on the same chances…

But all these successes only paved the way for reverses. After he had been for nine years exposed to the dangerous attractions… as his love of play increased in violence, it diminished in prudence. Great losses were only to be repaired by still greater ventures, and one unhappy day he lost more than he could repay without mortgaging his family estate.

To that step he was driven at last.

Prior to his misfortunes, his wealth and good looks attracted the company of many of the elite women in the city, and an attraction for the same woman led to Law feuding with another socialite, Beau Wilson. At the same time that he was mortgaging his family estate, the feud escalated to the point that a duel was arranged between the two.

In 1694, a duel, conducted with rapiers, was more about honor than killing your opponent — as that was illegal. Unfortunately for Law, a few seconds into the duel his sword pierced Wilson’s chest and dropped him dead. Laws was convicted of murder but managed to escape into Europe, where he would travel as a nomad for nearly two decades, continuing his studies of mathematics and economics in the morning while gambling at night.

Throughout these travels, he began to share and publish his views, picked up in Amsterdam and further developed on his own, that no country could ever hope to prosper in the modern world without a paper currency. Important to our story, while in Paris, which relied on gold and silver as currency, Law befriended the Duke of Orleans as they shared an interest in discussing economics. Through this relationship, Law became known by the Paris elite.

… Meets a Broken Financial System in France

In 1715, the king of France, Louis XIV, died. A king of controversial legacy with admirers and detractors, he left a country with its finances in disrepair following a number of wars — a national debt 20x the country’s revenues and 1,000x what was left after its expenses. Moreover, credit was tight due to a lack of gold and silver, stifling commerce. Further complicating matters was the fact that Louis XIV’s heir was only seven years old, leading to Law’s friend, the Duke of Orleans, being handed the reins of government as Regent.

As France’s government debated potential paths to solve their financial problems, Law saw an opportunity to put his learnings from Amsterdam into practice. Leveraging his relationship, Law prosed two solutions: 1) France’s gold and silver currency could be replaced with a paper currency to increase the supply of credit, and 2) France’s interests in the New World could be turned into a public company and share issuances used to pay down France’s debt. Both ideas eventually became a reality.

In 1716, Law set up a private bank for the issuance of paper money, and the bank was nationalized in 1718. Paper money was not a new concept — five other such banks existed in Europe at the time — but it was difficult to transition to the new currency as you needed to convince citizens to trade in their gold, which had a known value, for paper money, which was a promise to receive a set value of the metal in the future, meaning a holder could lose value if gold prices increased. Law got around this problem by promising that any paper money, on demand, could be traded in at the bank for a set weight of gold.

Thus the bank was quickly a success as citizens exchanged their gold for paper, the credit supply was increased, commerce began to lift its head, and taxes began rolling into the government’s coffers, which helped it finance its debt burden. Eventually, Law would be removed from managing this now-public bank, with the Regent directing its activities.

Building on this success, Law planned for the formation of the Mississippi Company (eventually known as the Company of the Indies), the ultimate goal being another avenue to addressing France’s financial burdens through selling stakes in the business to extinguish its debt. Thus, Law …

… proposed to the Regent, who could refuse him nothing, to establish a company, that should have the exclusive privilege of trading to the great river Mississippi and the province of Louisiana, on its western bank. The country was supposed to abound in the precious metals, and the company, supported by the profits of their exclusive commerce... Letters patent were issued, incorporating the company, in August 1717.

By 1719, the company had also been granted a monopoly on trading in the East Indies, China, the South Seas, and all other lands controlled by the French East India Company. Further, the company gained a monopoly on tobacco and eventually was the solo company approved to mint new coinage for the French government.

As Law began to sell shares in the company, there was general skepticism and at times the shares traded hands well below their issue price. Looking for a way to increase interest in the company, and in addition to a few other financial structuring promises, Law was able to spin wonderful tales of the riches in the New World. He exaggerated the levels of commercialization of mining activities and even went as far as creating duchies, earldoms, and marquisates in Louisiana to flatter potential investors in France.

The people of France were not so easily fooled, however, so a …

… conscription of all the poor wretches in Paris was made by order of government. Upwards of six thousand of the very refuse of the population were impressed, as if in time of war, and were provided with clothes and tools to be embarked for New Orleans, to work in the gold mines alleged to abound there. They were paraded day after day through the streets with their pikes and shovels, and then sent off in small detachments to the out-ports to be shipped for America.

Two-thirds of them never reached their destination, but dispersed themselves over the country, sold their tools for what they could get, and returned to their old course of life. In less than three weeks afterwards, one-half of them were to be found again in Paris… Many persons of superabundant gullibility believed that operations had begun.

In reality, the New World was mainly an unconquered wilderness with very few commercial activities to speak of. But that didn’t stop the French government and Law from issuing shares in the Mississippi Company in exchange for their citizen’s hard-earned silver or the extinguishment of their lender’s debt.

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Riches Easily Found…

The combination of easy-to-print paper money and a new wonderful-sounding monopoly that any citizen could own shares in set the stage for a frenzy of activity. Everyone wanted a piece of Law’s Mississippi company.

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