View of the camp of John Law at Biloxi, December 1720

The "Mississippi Company" (of 1684) became the "Company of the West" (1717) and expanded as the "Company of the Indies" (1719).[1]

History

The Banque Royale

In May 1716, the Banque Générale Privée ("General Private Bank"), which developed the use of paper money, was set up by John Law.[2] It was a private bank, but three quarters of the capital consisted of government bills and government accepted notes. In August 1717, he bought the Mississippi Company to help the French colony in Louisiana. In the same year Law conceived a joint stock trading company called the Compagnie d'Occident (or, The Mississippi Company). Law was named the Chief Director of this new company, which was granted a trade monopoly of the West Indies and North America by the French government.[3]

The bank became the Banque Royale (Royal Bank) in 1718, meaning the notes were guaranteed by the king. The Company absorbed the Compagnie des Indes Orientales, Compagnie de Chine, and other rival trading companies and became the Compagnie Perpetuelle des Indes on 23 May 1719 with a monopoly of commerce on all the seas. Simultaneously, the bank began issuing more notes than it could represent in coinage; leading to an economic inflation, which was eventually followed by a bank run when the value of the new paper currency was halved.[3]

The Mississippi Bubble

Law exaggerated the wealth of Louisiana with an effective marketing scheme, which led to wild speculation on the shares of the company in 1719. The scheme was to have the success of The Mississippi company combine investor fervor and the wealth of its Louisiana prospects into a sustainable joint-trading company. The popularity of company shares were such that they sparked a need for more paper bank notes, and when shares generated profits the investors were paid out in paper bank notes.[4] In 1720, the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law's pioneering note-issuing bank was successful until the French government was forced to admit that the number of paper notes being issued by the Banque Royale were not equal to the amount of metal coinage it held.[3]

The "bubble" burst at the end of 1720, when opponents of the financier attempted en masse to convert their notes into specie, forcing the bank to stop payment on its paper notes.[5] By the end of 1720 Orleans dismissed Law, who then fled from France.[3]

References

See also

• John Law
• The South Sea Company
• Economic bubble
• Extraordinary Popular Delusions and the Madness of Crowds

External links

• "The Compagnie des Indes" (by Howard Shakespeare).
• "Famous First Bubbles - Mississippi Bubble".
• "Learning from past investment manias" (AME Info FN).