Economist, gambler and ladies’ man John Law (1671–1729), was the architect of the Mississippi Bubble that scandalized France in 1720. Let’s take a look at how his life became a rags-to-riches story and the role played by the Mississippi Bubble.
Truth be told, Mr. Law started worse off than a person in rags, then went on to become the richest man in Europe – until his wealth vanished during a vicious plague in France.
When Mr. Law was a teen in the 1680s and apprenticed to be a banker in Scotland, his father died and left a sizable inheritance. He quit his training and departed for amusements in London.
By the age of 23, Mr. Law had frittered away his inheritance on gambling and women. Even worse than being reduced to rags, he was locked up in a London prison, sentenced to death for killing a man in a duel over a woman.
Just days before going to the gallows, some friends helped him escape to Europe.
At first, he earned a living at the gambling tables of continental salons. This time the gambling went better because of his study of treatises on probability and mastery of methods for calculating odds during card play, as Janet Gleeson notes in her book, Millionaire (1999).
By his mid-thirties, he was married with children and had a net worth of about $200,000, in today’s money. However, greater ambitions called.
From his banking apprenticeship and readings in economics, Mr. Law had hatched some ideas for bringing prosperity to a stagnant and war-torn Europe. They were published in Money and Trade Considered: with a Proposal for Supplying the Nation with Money (1705).
Mr. Law pitched his proposals to heads of state. Rejections piled up. Then a gambling buddy, the Duke of Orleans, was put in charge of France until a 5-year-old King became an adult.
Mr. Law was duly appointed minister of finance. In 1716, he established a bank where people deposited their gold and silver coins for safekeeping and were given receipts, called banknotes. The latter could be used to reclaim coin deposits or to buy goods and services.
Since only a fraction of the depositors’ banknotes were likely to be redeemed at any one time, the bank could print extra banknotes. It could use them (to oversimplify somewhat here) to buy assets or lend to businesses and consumers, thus stimulating national commerce.
Mr. Law also wanted to boost the French economy by developing trade with its resource-rich colonies in North America, so the Mississippi Co. was floated as a trading monopoly in 1717.
In 1718, his bank was nationalized, placing the printing of banknotes under government control.
The Mississippi Co.’s growth potential was promoted and its shares were made purchasable in easy instalments with the help of bank loans. The price of its shares soared from 500 livres to 10,000 livres between April, 1719 and February, 1720 – a twentyfold gain within 10 months.
Hundreds of French citizens became millionaires. Mr. Law’s large stake made him the richest person in Europe, outside of royalty.
During the mania, there were several new issues of Mississippi shares to finance acquisitions. One was particularly monumental: purchasing the government’s debt for its interest payments.
A writer around this time observed that eight printers were employed around the clock to churn out banknotes to finance the uptake of new stock issues and other expenditures.
Inflation started to take off. So did the flight from paper currency into hard assets. Citizens flocked to the bank to reclaim their gold and silver. Long queues formed and riots broke out.
To slow down the printing presses and inflation, Mr. Law stopped supporting Mississippi stock for a time. But the modest price depreciation unnerved investors and turned into a free fall.
He had some remedies for restoring order – until a plague broke out. In his Oeuvres completes (1934 edition), Mr. Law writes that the consequent standstill in commerce, especially in the French ports used by the Mississippi Co., blocked any chance of implementing his rescue plan.
As the crisis unfolded and calls arose in the French parliament to carry Mr. Law off to the gallows, he hastily fled France, his fortune in tatters. For the next 9 years, he wandered Europe, playing at gambling tables, until his death in 1729.
Larry MacDonald is an author, journalist and economist at email@example.com