Paper Printed Beyond Its Promise

Banknotes Backed by the Nation's Credit

John Law, a native of Scotland, issued banknotes under the authority of the regent, the Duke of Orléans. He was a gambler well-versed in probability who, after killing a man in a duel in London and being sentenced to death, had fled to the continent. He argued that increasing the money supply would stimulate the economy.

In 1716, the Banque Générale was established. When gold coins were deposited, banknotes were issued as receipts. Two years later, this bank gained state backing and became the Banque Royale. The notes could also be used to pay taxes, and Law's personal credit became linked to the credit of the nation.

A Scheme to Control the Colonies and the Nation's Finances

Law's scheme extended beyond the bank. In 1717, he founded the Company of the West, which aimed to monopolize the Louisiana territory along the Mississippi River. The heart of this system was the conversion of debt into equity, allowing company shares to be purchased with government bonds that were nearly worthless. It was a grand circuit: converting national debt into shares, which were then supported by banknotes.

The company absorbed the tobacco monopoly, the mint, and even tax collection, gaining control over both colonial trade and the nation's finances. However, the foundation of its wealth was not the colonies, but loans to the king and taxes. By the end of 1718, only twelve ships had set sail. The gap between this reality and the marshy lands of Louisiana only widened.

Wealth Born on Paper

The buying and selling of shares took place on the Rue Quincampoix in Paris. In 1719, this narrow lane became the center of a frenzy. A share with a face value of 500 livres soared to 5,350 by September, eventually peaking at around 10,000 livres.

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. This wealth was a wealth counted on paper.

When the Promise Unravels

What turned the promise around? 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.

On May 21 of that year, the state issued a decree to devalue the notes and shares on a monthly basis. This was tantamount to the state itself admitting the depreciation of its paper, and confidence collapsed. People rushed to the banks demanding gold coins, and some were crushed in the crowds. At the beginning of December, Law fled the country, leaving his fortune behind in France.

However, later assessments reject a simple narrative. Claims of 500 livres or less were not reduced, accounting for half of the people and forty percent of the total amount.