The Mississippi Scheme
Inflation and Deflation
The Mississippi Bubble is partly a story about inflation and subsequent deflation (i.e., misguided monetary policy)...and about a Real Estate bubble!
At one time all France is carried away by the tremendous extravagance of the Mississippi scheme, which raised real estate to such a price that it was valued at one hundred years' purchase, that is, its rent only paid one percent of its cost. A little later and England burst out with her South Sea Bubble, creating such a hunger for special corporations that one man who advertised an unknown scheme to be revealed at the end of the month, ten dollars to be paid down for each share subscribed for, took in $10,000 the first day.
Law. John. Money and Trade Considered.
This book embodies Law's scheme to establish a State Bank that would issue paper money. Law's ideas, rejected by the Scottish Parliament, found acceptance in France. Law, the founder of the Mississippi Scheme to develop Louisiana, a company that gradually gained the whole of the overseas trade of France, was appointed controller-general of French finance. The Mississippi Company at first enjoyed a sensational boom, but in 1720 suffered an equally sensational collapse. Discredited, Law left France, declined an invitation from St. Petersburg to administer Russia's finances, and for a time took refuge in England. He died in comparative poverty in Venice in 1729.
John Law was born in Edinburgh, Scotland, in 1671. His father was a goldsmith who lent money on the side. Law learned banking principles through the family business. After killing someone in a duel and being convicted of murder, Law escaped from prison and left England to drift around the continent. His mathematical mind helped him earn substantial money through gambling, and he studied the intricacies of high finance in Venice, Genoa, and Amsterdam. In 1715, Law moved to Paris, where he befriended the Duke of Orleans, regent for the young King Louis XV.
Around 1715, France was bankrupted by wars. It had repudiated part of its debt, forced a reduction in interest payments, and fell behind on debt service. High taxes depressed economic activity.
In May 1716, a law by royal edict allowed the establishment of the Banque Générale, modeled after the successful Wisselbank of Amsterdam. The bank took deposits (gold coins) and issued banknotes. The bank raised equity by selling stock for cash (gold coins) and by converting government debt, using the same debt-equity conversion scheme used in England for the Bank of England, the East India Company, and the South Sea Company.
The Banque Générale's capital was 1200 shares of 5.000 livres each, totaling 6 million livres, to be paid in one-quarter currency (1.5 million livres) and three-quarters billets d'Etats (4.5 million livres). The State returned the billets d'Etats, extinguishing a small part of the national debt. Although the Banque Générale's banknotes were not legal tender (a status acquired later), acceptability was high, and the bank's business thrived.
Law made his banknotes payable at sight and, most importantly, in the coin current at the time they were issued (effectively an inflation-indexed note). This made the notes especially valuable amid the government's repeated currency depreciations.
When Mississippi Company share prices began to fall, the regent stepped up his use of force. He confiscated old gold and silver coins in late 1719. A month later, a decree authorized the search of all homes for concealed coins. A week later, banknotes were declared the official currency throughout the kingdom.
Those who informed on their neighbors were rewarded. "They excited, encouraged, paid informers," writes Davis. "Valets betrayed their masters. Citizens spied upon citizens."
It wasn't just coin holders who lived in fear. In February 1720, the restrictions accelerated. Philippe made the wearing of precious stones punishable by confiscation and a huge 10,000-livre fine. Futures transactions were banned. Goldsmiths were forbidden from manufacturing vessels of gold and silver. No person was allowed to have more than 500 livres worth of coin in their possession.
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