THE CON: Eager to be free from debt, the French government took a chance on a charismatic Scotsman who promised riches through exclusive trading rights with Louisiana. Parisians snapped up Mississippi Co. stock, its hollow premise was revealed and an enormous bubble burst.
THE DAMAGE: MISC
THE OUTCOME: Thousands of Parisians lost their life savings. Law, who was once chased down the streets by people eager to buy into his scheme, fled Paris in 1720 with an angry mob at his heels.
The French people have one man to thank for introducing paper currency to their country and helping to create the word “millionaire”: a Scottish playboy named John Law. In the early 1720s, Law set off a wild speculative frenzy with his Mississippi Company. Investors gobbled up stock until rumors circulated there was nothing in Louisiana to back up the securities. Investors rushed to cash in their holdings and the bubble burst. The stock dropped from 1,800 French livres to 400 livres. Once chased down the streets of Paris by people eager to buy into his scheme, Law fled Paris in 1720 with an angry mob at his heels.
A son of the Scottish aristocracy, Law was a gambler and a ladies man in his youth. After burning through his inheritance, he left for the Continent. He roamed about, gambling and getting into trouble. Challenged to a duel for the affections of a woman, he killed his opponent and was sentenced to death. His sentence was overturned but before being released, he managed to escape prison for the next big adventure.
Over the course of the next 15 years, Law continued to gamble – but he also became an avid student of finance and trade in the countries where he temporarily hung his hat. In Paris, he befriended the Duke of Orleans, who admired his bold ideas. In 1715, King Louis XIV died and, as his heir was too young to assume the throne, the Duke of Orleans took the reins as regent.
Law saw his opportunity to try out the scheme he'd been thinking and writing about for years. Not only did he have the ear of the regent, France was in a hole created by the late king's corruption and extravagance. The country was in desperate need of a financial boost and Law knew just how to deliver it.
In 1716, he founded the Banque Royale in Paris to repay the debt resulting from the King Louis XIV wars. He convinced the Duke of Orleans of the need for paper currency and a bank to manage royal revenues; the bank would issue notes on that revenue and on landed security. The Duke of Orleans had such confidence in Law, he appointed him the Minister of Finance in 1720.
Law's bank was so successful, he was allowed to merge it with the Mississippi Company, which had exclusive trade privileges with Louisiana. By 1720, the frenzy was in full force. Law first offered 50,000 new shares but found he needed to dramatically increase that number. Desperate to buy in, people lined up at all hours hoping to secure their place. The hysteria became such a public nuisance that Law bought a hotel; a decree was issued stating that people could only buy or sell stock in the gardens of the Hotel de Soissons. There were more than 500 stalls set up in those gardens and a sort of wild, carnival atmosphere as people scrambled to get their hands on shares.
The prospects certainly appeared favorable. People saw others making their fortunes in a day; the word “millionaire” was invented to describe these newly rich Parisians. The bubble filled fast: on some days, the price of shares rose 10 or 20 percent in just a few hours. But when it burst, it costs thousands of Parisians their life savings and nearly cost Law his life.