France in the early 18th century was a nation grappling with economic hardship. Years of royal extravagance and costly wars had left the government deeply indebted and the populace burdened by high taxes. Amidst this financial gloom, France also held claim to the vast and largely unexplored Louisiana Colony in North America, a territory rumored to be rich in precious metals. This environment of economic desperation and speculative opportunity became the stage for the ambitious and innovative, yet ultimately disastrous, financial schemes of John Law.
John Law (1671-1729), a Scottish financier, emerged as a central figure in this era. Described as charismatic and possessing a keen intellect, Law believed he held the key to revitalizing the French economy. His association with the Duke of Orleans, who became Regent of France following the death of Louis XIV in 1715, provided him with the influence to implement his radical ideas. This connection would irrevocably link John Law to a pivotal moment in economic history, forever remembered for the rise and spectacular collapse of the Mississippi Company and the infamous “Mississippi Bubble.”
Law’s initial proposition to the French government was groundbreaking for its time: the introduction of paper money. In 1716, he established the Banque Générale, a private bank authorized to issue banknotes. These notes, backed by the bank’s reserves of gold and silver, were intended to circulate as currency. This concept was revolutionary in France, where gold and silver coins were the sole accepted form of money. John Law argued that increasing the money supply through paper notes would stimulate commerce and invigorate the struggling French economy.
John Law, a Scottish financier, significantly impacted the French economy in the early 18th century with his innovative financial ideas.
Further expanding his vision, in August 1717, Law founded the Compagnie d’Occident (Company of the West), later known as the Mississippi Company. This company was granted exclusive control over trade between France and its colonies in Louisiana and Canada. Louisiana, a territory of immense size stretching from the Mississippi River delta to Canada, encompassed regions that would become present-day Louisiana, Mississippi, Arkansas, Missouri, Illinois, Iowa, Wisconsin, and Minnesota. The allure of the Mississippi River and the promise of untapped riches fueled the company’s popular name.
The Mississippi Company secured a twenty-five-year monopoly on colonial trade, empowered to govern and develop the territory. In exchange, the company committed to transporting thousands of settlers and enslaved people to Louisiana, aiming to unlock the colony’s rumored wealth and establish profitable trade routes.
To finance this ambitious venture, John Law devised a clever scheme. He offered shares in the Mississippi Company to the public, payable in cash or, crucially, in government bonds. By accepting state bonds at a low interest rate, Law ingeniously reduced the government’s debt burden while simultaneously channeling funds into his company. The promise of vast wealth from the Americas, particularly gold and silver, ignited investor frenzy for Mississippi Company shares.
Law’s ambitions extended beyond colonial trade. In a series of strategic maneuvers, he transformed the Mississippi Company into a financial behemoth. By 1720, it had absorbed monopolies over tobacco trade with Africa and trade with the East Indies and China, effectively controlling all French foreign trade outside Europe. Law’s Banque Générale also became the Banque Royale, with the French crown guaranteeing its banknotes. Furthermore, the company acquired the rights to mint French coins and collect taxes, placing John Law at the very heart of French finance. Culminating in January 1720, Law was appointed Controller General of Finances, granting him unparalleled control over France’s economy.
This expansion was financed by issuing more Mississippi Company shares, which could be purchased with banknotes from Law’s bank or with government debt. As the company’s influence grew, so did the value of its shares. Fueled by speculation and the promise of quick riches, the price of Mississippi Company stock skyrocketed. Starting at 500 livres in early 1719, shares reached an astonishing peak of 10,000 livres by December of the same year – a 1900% increase in less than a year. The allure of easy wealth drew in investors from all walks of life, creating a class of instant millionaires and transforming the financial district of Paris into a scene of frenzied activity.
However, the foundation of Law’s financial empire contained a critical weakness: the over-issuance of banknotes to fuel stock purchases. In early 1720, as some investors began converting their stock profits into gold, the share price began to decline. To halt the sell-off, Law implemented measures restricting gold payments and declared Banque Royale banknotes legal tender. The bank even offered to exchange banknotes for Mississippi Company shares at the inflated price of 10,000 livres. This attempt to prop up the stock price by essentially turning shares into money dramatically increased the money supply, triggering rapid inflation, which reached a staggering 23% monthly rate in January 1720.
The Mississippi Bubble, a rapid inflation of stock prices followed by a sharp decline, illustrates the dangers of unchecked financial speculation.
Throughout 1720, Law attempted to control the crisis by devaluing shares and banknotes. However, the measures proved futile. By September 1720, the share price had plummeted to 2,000 livres, and further to 1,000 livres by December. The collapse of the Mississippi Company, known as the Mississippi Bubble, became a symbol of financial mania and its devastating consequences. Law’s enemies seized the opportunity to dismantle his empire, confiscating shares from investors who couldn’t prove legitimate payment. By September 1721, shares had returned to their initial value of 500 livres, wiping out the fortunes of many and leaving France in economic disarray.
The Mississippi Bubble serves as a cautionary tale in financial history. A “bubble” describes an unsustainable surge in asset prices driven by speculation rather than intrinsic value, inevitably followed by a sharp crash. The dot-com bubble of the late 1990s and early 2000s is often cited as a more recent parallel to the Mississippi Bubble, demonstrating the recurring nature of such financial phenomena.
Economists hold varying perspectives on John Law’s legacy. Some, like economic historian Charles Kindleberger, argue that Law’s intentions were sound and that the Mississippi Company was conceived as a genuine enterprise. They suggest that his financial methods, while ultimately flawed, were an attempt to address real economic problems. Others acknowledge Law’s contribution to streamlining French taxation and finance, with economist Peter Garber even suggesting that Law’s system held more potential than is typically recognized.
Despite the disastrous outcome of the Mississippi Bubble, John Law remains a significant figure in economic history. He was a pioneer in the use of paper money and the development of modern financial instruments. However, his story is inextricably linked to the Mississippi Bubble, a dramatic episode that highlights the risks of unchecked speculation, inflation, and the fragility of financial systems. The Mississippi Bubble had a lasting impact on France, delaying the reintroduction of paper money for eight decades and serving as a stark reminder of the potential for financial innovation to lead to both prosperity and devastating collapse.
France’s colonial ambitions in North America also continued, albeit under different circumstances. France maintained control of Louisiana until 1763, eventually losing it to Great Britain and Spain after the Seven Years’ War. The territory west of the Mississippi, including New Orleans, was later repurchased by France under Napoleon before being sold to the United States in the Louisiana Purchase of 1803, marking another significant chapter in the complex history intertwined with John Law’s Mississippi vision.
Source: Jon Moen, Ph.D., Professor of Business Administration, University of Mississippi
