A Kingdom That Created Wealth with Paper, and Was Burned by Paper

The Frenzy of Rue Quincampoix

Paris's Rue Quincampoix was originally an open-air market in a narrow alley where discounted government bonds were traded. In 1719, it became the center of a frenzy. A share with a face value of 500 livres soared to 1,000 in July, 3,600 in August, and 5,350 in September. The peak was approximately 10,000 livres—a twentyfold increase.

The word "millionaire", too, is French of the eighteenth century. Mackay's book of 1841 tells, as separate anecdotes, of a servant who went to sell shares for his master, pocketed the rise in price and left the country, and of Law's coachman, who earned enough to set up a carriage of his own and left his service. For neither does it give a source. Nevertheless, the wealth that existed there was certainly a wealth counted in paper.

The Gambler's Grand Scheme

The mastermind was the Scottish-born John Law. A skilled gambler well-versed in probability, he had a past in London where he stabbed a man in a duel, was sentenced to death, and fled to the continent. He argued that paper money was superior to metal and that increasing its supply would stimulate the economy.

In a France whose finances were ruined by war expenses, the Regent, the Duke of Orléans, placed his bet on Law. In 1716, the Banque Générale was established, and two years later it became the Banque Royale with state backing. The banknotes could also be used to pay taxes. Law went further in 1717, founding the Western Company, which aimed to monopolize the Mississippi River basin. The heart of this scheme was a debt-for-equity swap, allowing the company's shares to be purchased with nearly worthless government bonds. He converted the national debt into shares and supported it with banknotes. The company swallowed everything from the tobacco monopoly to tax collection, taking control of both colonial trade and the nation's finances.

Paper Wealth Detached from Reality

The foundation of the company's wealth was not the colonies. By the end of 1718, only twelve ships had set sail. The source of its wealth was loans to the king and taxes. The gap between the reality of a swampy Louisiana and the wealth on paper only widened.

So why did it collapse? Law tried to hold the company's share price at a high level, and more and more banknotes were printed to do it. By the end of May 1720, notes outstanding had reached 2,235,100,000 livres. The economic historian François Velde concludes that supporting the shares at so high a level led to uncontrolled money creation.

Collapsed Confidence, and What Remained

On May 21, 1720, the state issued a decree to devalue the notes and shares monthly. This was tantamount to the state itself admitting the depreciation of its paper, and confidence collapsed. People rushed to the bank demanding gold coins, and some were crushed in the stampede. Law, who had been appointed Controller-General of Finances in January of that year, fled the country in early December.

After Law's bubble burst, France was left with long-lasting after-effects. The attempt to replace specie with paper was long held in disrepute. In 1726, the currency returned to metal. The weights of the Louis d'or and the écu were firmly fixed, and this stability lasted for about sixty to seventy years, until the Revolution.