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Louis XIV’s France was financially strapped upon his death. Due to immense political intrigue, Louis’ nephew – and son-in-law – Phillippe Duke of Orleans became Louis XV’s regent. His regency was disastrous almost from the start, but widely differing accounts shift much of the blame to Louis XIV’s lengthy expansionistic wars. What cannot, and consequently is not, debated was Phillippe’s unprecedented foolish involvement with the Scottish economist John Law.
Law was born to a Scottish goldsmith and banker in the late 1600’s. He showed mathematical genius from an early age, and tried to use that mental aptitude to get ahead while gambling. He quickly gambled the family fortune away, however, while also chasing women. Law, trying to guard his “honor”, challenged a duel over one of his many women. He killed his opponent, and was tried for murder. Law was found guilty and sent to prison – not like today’s prison; prison usually was a death sentence during Law’s day. Law escaped from his holding cell and fled to Louis XIV’s France, and for the next few years, Law would frequently travel between The Netherlands and France. While in Paris, Law became acquainted with Phillippe, Duke of Orleans, at a card game. Phillippe, soon to become the French Regent, realized Law’s “potential” after Law produced and published two economic treatises The Scarcity of Theory Value and Real Bill Doctrine, which argued for a fiat currency system.
When Phillippe became Regent, he realized the dire financial circumstances that France was experiencing. Law, using his connection with Phillippe, approached the Regent at court and advanced his theories to fix the faltering French economy. (So poor was the economy that taxes could not cover the interest on French war debts!) Law was granted a bank, Banque General, almost on the spot by Phillippe, who watched Law closely. The Bank began to print paper currency, which was in theory supported by the Bank’s assets in precious metals. Law wanted to expand (ie. Inflate) the French currency in order to increase commerce. He believed the only way to do such an operation was wean the economy off of traditional value sources, such as Gold and Silver. The French Government rallied behind Law’s scheme and further granted him a monopoly over New World trade. The Compagnie d’Occident (Company of the West) was founded to govern trade along the Mississippi River in 1717. A dual monetary system was established within the company, beaver skins in the north and precious metals in the south. To ensure the company’s success, Law was granted a charter for 25 years, in which time Law promised to populate and settle the Mississippi River basin. The French as a result began calling the company the “Mississippi Company.” Law had to finance his plan, so he put his paper currency scheme to work.
Law began selling shares to finance the Mississippi Company’s operations. He sought cash and state bonds, for which he offered extremely low interest rates. This action in theory was to bolster French finances, while funding his company. Traditional French aristocrats hoped to get rich off of Law’s scheme, but get rich in gold and silver, not cash. The common classes also saw an opportunity as cash was cheap, and credit was blindly extended to the masses. The French Government further aided Law’s ideas by granting him a monopoly over tobacco trade in Africa. The Banque General was also nationalized and renamed the Banque Royal in 1719. Law was still in charge, but now his paper money was backed by the French Crown. One final boon set Law over the top, he was granted more trade monopolies throughout the French Colonial Empire, this time in Asia. Law renamed his Mississippi Company the Compagnie des Indes, which now controlled all French trade outside of Europe.
With no ceiling to Law’s growing influence, he purchased the right to mint French coinage. These coins would have no precious metals in them, which put Law’s theories into full action. Law next assumed legal control over French taxation, as his financial power began to resemble Louis XIV’s governmental authority. By 1720 all financial institutions were under Law’s supreme command. Phillippe bestowed the title “Controller General and Superintendent General of Finance. Success seemed to breed success, but it was all a mirage. He continued to print paper money to fund his growing financial empire. That paper money was guaranteed and founded upon government debt, which grew rapidly.
Initial shares of the Mississippi Company were sold for 500 Livres (French currency at the time). The shares value quickly expanded, which brought speculators from all over France and Europe into Paris’ financial district. This became a scary sight for the Parisians, and Phillippe had to order police into the district to maintain control. Within the first year of existence the price per share had increased dramatically from 500 Livres to 10,000 Livres – 190%. Many people aristocratic and commoner alike became Millionaires, as the French termed this new wealthy class. Inflation, however, soon caught up to Law’s scheme. He continued to print more paper money, and the value of the shares, though high denominationally, became increasingly devalued monetarily. Those who realized the falling trend began trading paper money for precious metals. Law could not allow the sell off, so he issued a restriction on pay outs – no payment in gold above 100 Livres. Law further made his paper currency “legal tender”, and people began using worthless money to pay off debts and taxes. Law’s bank also offered to trade the paper currency for shares in the Mississippi Company for the 10,000 Livres standard. In one fell swoop, Law doubled French currency, and further devalued the already worthless “money.” Soon, rates of inflation were above 20% a month by January 1720. That’s right, all of this took place in under one year.
Law further compounded the increasingly dire situation when he devalued the Mississippi Company’s shares. He cut the value of bank notes by 50%, which sparked a frenzied offloading period. Investors tried to sell their declining shares to any idiot that could be found. Shares purchased at 10,000 Livres were now being sold for 2,000 Livres in September 1720, then 1,000 Livres in December 1720, and finally back to 500 Livres in January 1721. Fortunes were hastily made, then disastrously lost within the space of months. Before Law was dismissed in March 1721, he ordered the French currency to be devalued another 50%, which pushed the French back into buying precious metals. There was not enough precious metals to support the behemoth fiat structure; however, and Law outlawed any precious metals exchange. He offered paper money rewards to anyone who would expose precious metals trading. Many were found guilty and killed for this exchange, which was the last straw. Law fled France for Venice a broken and poor man. He died in Venice 8 years later in 1729 in poverty. France needed decades to overcome this economic debacle, thought it never really did overcome Law’s meteoric rise and subsequent fall.
armchaircapitalist 