Last week we took you through John Law's journey to France. This week we are talking about his new life and the economy of France.
He reached France, renewing his acquaintance with the Duke of Orleans who was the nephew of King Louis XIV, presenting himself at court. Now here’s where the paths of John Law and the economy of France intersect. The Duke of Orleans became the regent when the King of France passed away, holding the throne while the actual heir Louis V, who was still a minor, grew to adulthood.
His first attempts as regent were to try and bail the economy. He tried in 1713 by re-coining the currency, depreciating it by one-fifth. This led to a short-term gain in the state revenue but caused price inflation. To add to this the Controller General of Finances announced plans to further devalue the coinage, as a misplaced attempt to stimulate the economy, but instead this resulted in a hoarding of the existing coinage.
The Duke had seen Law’s financial acumen in London, and called him for advice to sort out the financial chaos France had descended into. This was Law’s chance to reclaim his life and make his place in the annals of history. His solution to the Regent was recommending the addition of paper currency, as then existed in Britain and Holland, extending its use for credit. He asked the Regent for permission to establish a bank to manage royal revenues as well as issue banknotes secured by them, backed by assets.
In 1716, Law persuaded the French Government to allow him to found a bank, which was called the Bank Generale, in order to issue paper money. These bank notes would be based on the actual physical assets of the bank, namely gold and silver. These notes could be used as a loan from the bank to the king at a three per cent interest rate instead of the existing seven and a half per cent interest. These notes were easy to transport and hence would be circulate amongst the lay public as a medium of commerce.
This was a completely new concept for the times. The idea was to increase the money in circulation, and help bolster the finances of the beleaguered French government. He then organised the Compagnie d’Occident or the Company of the West to control the trade between France and its colonies on the North American continent, in Louisiana and the Canadian colonies.
Beaver skins were the commodity of trade in Canada and in Louisiana they traded precious metals and tobacco. It was quite a huge colony, stretching 3,000 miles from parts of Canada right down to the mouth of the Mississippi river. This gave it the name it was more popularly known by, the Mississippi Company.
The French Government gave Law exclusive trading privileges in the company for 25 years, along with the freedom to appoint a governor and officers in the colony, and to grant land to potential developers. The company had to settle 6,000 settlers and 3,000 slaves to the colony as part of its contract.
The plan was that the initial operations of the Mississippi Company would raise funds for operations by selling the shares in the company for cash and state bonds. The bonds had a low rate of interest, helping the French finances, while creating a secure cash flow. This was a great scheme to bring in a big business scheme. His plan got many people to invest in the Mississippi Company.
(To be continued in the next column.)
- Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, 1841
- John Law and the Mississippi Bubble – 300 Years Later: Mises Wire, Mises Institute. Mises.org
- History of Hard Money: The Mississippi Bubble, Vaulted.com
Kirit Manral is a professional trader, and has been running a mentorship program in trading since 2019, with mentees from around the globe. He can be found on Twitter at @KiritManral