Setting the Scene: The French Economy in 1715 and an Introduction to John Law

The story of the Mississippi Bubble begins in 1715. At this time the French economy was a complete shambles. It was suffering from the actions of Louis XIV, who apparently didn’t have any control when it came to spending. The country’s economy was also crippled by the huge debts incurred during the War of Spanish Succession. It was never going to work out and soon after the government started defaulting on a portion of its debts. They tried a number of solutions including lowering interest payments and raising taxes to extremely high levels. However these rash actions lead to a depressed French economy and as a result the value of its currency, which was backed by gold and silver, started to fluctuate violently.

Another slight problem the French were experiencing at the time was the fact that their King Louis XV was only five-years old. In a sensible move they appointed a group of regents to act on his behalf. These regents desperately tried to find a solution to the nation’s fiscal and economic misery. The leader of the group of regents was the Duke of Orléans, and it was he who introduced the significant man in this tale, John Law. Law was a close friend of the duke, who decided to seek his advice on France’s problems. John Law was a Scottish financier and an early theorist of monetary economics and the duke though this financial expertise could help straighten out France's financial mess.

Our key man John Law was born in Fife, Scotland to a wealthy family of bankers. He showed mathematical genius from an early age and when he turned fourteen he became his father’s apprentice and studied banking. Law travelled to London where he used his mathematical abilities to earn a living as a gambler. He was quite the ‘womaniser’ and got himself into a duel over a certain lady and decided they best way to win was just to kill his opponent. He was charged with murder and sent to prison, but managed to escape to mainland Europe, where he studied finance in a number of cities. In 1705, Law published an academic paper in which he argued against the use of precious-metal backed currency. He claimed that instead we should be using "paper" or fiat currency as this would stimulate commerce.

In 1716 when the duke came looking for Law, he decided he would use this as an opportunity to test out this theory. He managed, almost immediately, to convince the French government to let him open a bank, the Bank Générale . This bank took in deposits of gold and silver and issued paper bank notes in return which would circulate as a medium of exchange. Law alleged that these paper notes would increase the money in circulation and increase commerce, and so would recover the state of the French government finances. Below is a scan of one of the notes from Bank Générale  that still exits. This was taken from an auction site and you can purchase one of your own for $1000-$2000.

 Source: icollector.com

I will pick up the story from this point in my next post and explain the significance of the "Compagnie d’Occident" to the Mississippi Bubble story.