Law’s Mississippi System
It was not till the death of Louis XIV and the arrival of Philippe, duc d’Orleans, as regent of France during the minority of the future Louis XV, that Law’s money and banking proposals were accepted.
France faced two crises, a monetary crisis, caused by a shortage of money, and a financial crisis, in the form of a high level of state indebtedness due to the late king’s over-spending and over-borrowing. Law suggested to the regent that the first crisis could be addressed by the substitution of paper money for gold and silver coins. To achieve this he set up the General Bank in 1716 which was later converted into the Royal Bank. As a quasi-state institution the Royal Bank’s paper was made legal tender for the payment and receipt of taxes and its paper banknotes soon became the dominant means of payment. Law addressed the financial crisis by taking over the Company of the West, a company controlling the trading concessions of French Louisiana - a vast area embracing all the land from the Gulf of Mexico to Canada, bordered by the British Carolinas in the east and the Spanish-held Texas in the west. The Company’s shares were initially acquired with short-term French government debt (billets d’etat) thereby helping to alleviate some of the French national debt problem. As this French debt stood at a hefty discount, the shares could be initially purchased for around 170 French livres. Law then used the Company of the West, which would become known as the Mississippi Company, to take over the other French trading companies, the tobacco monopoly, the mint, the tax farms, and so on, turning it into a giant conglomerate. Further issues of shares were made at 550 livres, 1000 livres and 5000 livres. The main objective of the 5000 livres share issue was to take over the totality of the French national debt.Through the expansion of the paper note issue and the creation of the Mississippi Company - which issued 624 000 shares - Law appeared to have transformed the French economy.
The share price peaked in January 1720 at over 10000 livres and to honour his achievements John Law was made Controlleur General des Finances, a position equivalent to that of Prime Minister. Unfortunately for Law, he had pushed the System too far and was using the banknote issue of the Royal Bank to support the Mississippi Company’s share price. In February 1720 he guaranteed the share price at 9000 livres but this monetization of the shares caused the System to start cracking. In May 1720 he attempted to bring some balance to the financial position by implementing an edict to have staggered monthly reductions in the value of banknotes and shares. The public reacted strongly against this edict. Law was demoted and though he carried out a rearguard action trying to re-structure the System, his efforts failed and he was forced to leave France at the end of 1720.Antoin E. Murphy
See also:
Richard Cantillon (I); French Enlightenment (II); David Hume (I); Mercantilism and the science of trade (II); Money and banking (III).