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.

The public enthusiasm… could not resist a vision so splendid. At least three hundred thousand applications were made for the fifty thousand new shares… As it was impossible to satisfy them all… Dukes, marquises, counts, with their duchesses, marchionesses, and countesses, waited in the streets for hours every day before Mr. Law's door to know the result….

Every day the value of the old shares increased, and the fresh applications, induced by the golden dreams of the whole nation, became so numerous that it was deemed advisable to create no less than three hundred thousand new shares, at five thousand livres each, in order that the Regent might take advantage of the popular enthusiasm to pay off the national debt…

People of every age and sex, and condition of life, speculated in the rise and fall…

Eventually, shares in the company that had been issued at 500 livres were trading hands at 10,000 livres. The enthusiasm for the company’s stock continued unabated for some time and “many persons in the humbler walks of life, who has risen poor in the morning, went to bed in affluence.” Law himself, naturally, also shared in these newfound fortunes, as did many of those already wealthy.

These new fortunes were being supported by an easy-credit environment as the money printing machine that the Regent now controlled aggressively kept pace with the demand for Mississippi Company stock speculation. In 1720, for example, the paper money supply in France increased by nearly 100%, and inflation in living costs across the country was starting to be felt.

… Can Be Easily Lost

The first public hint of trouble came in 1720 when a local nobleman was offended by Law preventing him from purchasing more shares in the Mississippi Company. This nobleman decided to sell a huge chunk of his existing shares and then demand from the bank gold in exchange for the paper money, as had always been promised. This was a nearly impossible task for the local bank branch and depleted a chunk of France’s gold reserves — so Law and the Regent forcibly took back a portion of the gold from the nobleman through legal threats.

A subset of educated but smaller shareholders saw these actions as indicative of problems to come. These slightly more prudent speculators…

… quietly and in small quantities at a time, converted their notes into specie [gold], and sent it away to foreign countries. They also bought as much as they could conveniently carry of plate and expensive jewellery, and sent it secretly away to England or to Holland.

Vermalet, a jobber, who sniffed the coming storm, procured gold and silver coin to the amount of nearly a million of livres, which he packed in a farmer's cart, and covered over with hay and cowdung. He then disguised himself in the dirty smock-frock, or blouse, of a peasant, and drove his precious load in safety into Belgium. From thence he soon found means to transport it to Amsterdam.

Soon, France noticed that the amount of gold in its coffers was declining at an alarming rate. “It was then computed that the total amount of notes in circulation was 2,600 livre, while the coin in the country was not equal to half that amount.”

Meanwhile, the market prices of Mississippi Company shares were in free fall as people looked for a way to exchange paper money for hard currency, and the tales of immense wealth in the New World suddenly fell on deaf ears.

This fall in prices disappeared the fortunes of many of the population. For example…

M. de Chirac, a celebrated physician, had bought stock at an unlucky period, and was very anxious to sell out. Stock, however continued to fall for two or three days, much to his alarm. His mind was filled with the subject, when he was suddenly called upon to attend a lady, who imagined herself unwell.

He arrived, was shown up stairs, and felt the lady's pulse. "It falls! it falls! good God! it falls continually!" said he, musingly, while the lady looked up in his face, all anxiety for his opinion.

"Oh! M. de Chirac," said she, starting to her feet, and ringing the bell for assistance; "I am dying! I am dying! it falls! it falls! it falls!" "

What falls?" inquired the doctor, in amazement.

"My pulse! my pulse!" said the lady; "I must be dying."

"Calm your apprehensions, my dear Madam," said M. de Chirac; "I was speaking of the stocks. The truth is, I have been a great loser, and my mind is so disturbed, I hardly know what I have been saying."

With all this going on, the general public had also started to understand what was happening with the country’s finances and the paper money that had been so happily handled previously was no longer accepted by many merchants. No one wanted to hold the paper currency. This meant that everyone was trying to convert their paper currency into the gold that had been promised them.

All the population of Paris hastened to the bank, to get coin for their small notes; and silver becoming scarce, they were paid in copper. Very few complained that this was too heavy… The crowds around the bank were so great, that hardly a day passed that some one was not pressed to death.

On the 9th of July, the multitude was so dense and clamorous that the guards… closed the gate, and refused to admit any more. The crowd became incensed, and flung stones through the railings upon the soldiers. The latter, incensed in their turn, threatened to fire upon the people. At that instant one of them was hit by a stone, and, taking up his piece, he fired into the crowd. One man fell dead immediately, and another was severely wounded…

Eight days afterwards the concourse of people was so tremendous, that fifteen persons were squeezed to death at the doors of the bank.

The government took quick action, legally limiting the amount of gold that any one person could hold — conducting raids to confiscate gold from those that happened to have it. When these actions failed to arrest demands for hard currency, the government made it illegal to settle debts in anything other than paper currency. Finally, it decreased the exchange ratio of paper money to gold, which was the final straw for the population, which revolted through continued runs on the bank and a refusal to use paper money.

Realizing that the paper money was only going to continue being a problem, over a few months France again allowed transactions to be conducted in metal currency. Further, it limited the uses for paper money to buying government debt issuances, in this way, taking on debt from its citizens in order to prevent the financial system from collapsing completely. Through these actions, by the end of 1720, Law’s original money-printing bank shut its doors, with the Mississippi Company dwindling towards the same by the end of 1721.

And what of Jon Law? In December 1720, the French government confiscated most of his possessions and he took what he could carry of the remainder to his native country of England. He resumed his gambling activities to support himself, never again regaining the status he had as a young man or in France. He later moved to Venice, where he passed away in 1729 from pneumonia.

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Take care and have a great rest of the week,

— EJ

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