In 1720, John Law was lucky to escape Paris with his life. His investment scheme had made him one of the richest men in France. But it collapsed and when it did, it ruined the entire nation. With a mob behind him baying for blood, he stole away to Brussels with one exquisite diamond - the last remnant of his enormous fortune.
It wasn't the first time that Law had been forced to run for his life. In 1697, aged 26, he had fled London. At the gaming tables of society London, he had flirted with the future Countess of Orkney. Her husband challenged him to a duel. Law won, killing the husband, but earning himself a death sentence. He sprung jail and stole off to the continent. There, his attention was drawn to mathematics, banking and gambling.
Law hit Europe's gaming tables. He understood the new science of probability and he used it to his advantage - among his tricks, for example, he would offer wealthy gamblers tempting prizes at vanishingly small probabilities.
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He was a skillful gambler - but he was still a gambler, and he suffered some drastic losses. Years earlier in London, he had been forced to mortgage his family estate in Scotland to repay his gambling debts. In Europe he made enemies of the sheriffs of Venice, Genoa and Paris, and was expelled from each of those cities. But before he was ejected from Paris, he made one important friendship - with the Duke of Orleans, a young royal who was destined to rule France.
As well as gambling, Law was preoccupied with abstract questions of money and banking. He wrote a series of books and pamphlets to promote his radical ideas on how to organise the nation's money.
In Essay on a Land Bank and Money and Trade Considered, Law broke new ground in economic theory. Indeed, the books put him in the front rank of the great economists. Among other things, he defined for the first time the functions of money.
He also used supply and demand analysis to explain the paradox of value' in other words, why water is cheap and diamonds are expensive. He also advanced understanding of how changes in the money supply could drive real changes in the economy (although he neglected some key aspects of this theory, as we shall see shortly).
When paper money was better than metal money
In 1715, Louis XIV died. Known as the 'Sun King', he built the lavish palace at Versailles, he believed his reign was ordained by God - and he left France on the verge of bankruptcy. His government owedthree billionlivres, but only took in 142 million in taxes.
The Duke of Orleans assumed the reins of government after Louis died. Remembering his old friend Law's ambitious ideas for transforming the monetary system, he summoned him to Paris.
First in Scotland, then in Saxony, Law had tried to convince the government to issue new paper money backed by the nation's land, with no success. But France's new ruler was desperate, and so more receptive.
Law convinced him that France's metallic money supply was restrictive, and that expanding the money supply with new paper currency would stimulate trade and employment. The regent allowed Law to try his scheme on a small scale.
He and his brother established the Banque Generale and issuedsix millionlivres' worth of bank notes, partially backed by specie. Because the authorities continually clipped and debased French coinage, Law's currency was sought after. Soon it traded at a 16% premium over face value.
The bank opened branches throughout France and Law's paper credit system was extended around the nation. Trade and employment picked up. The ruler was impressed.
Flush with success, Law proposed a more ambitious scheme. At the time, France controlled the Mississippi river territories - which included the present states of Louisiana, Mississippi, Arkansas, Missouri, Illinois, Iowa, Wisconsin and Minnesota. The area was sparsely populated.
Law proposed establishing a company and granting it a monopoly over trade in the new territory. His plan was endorsed by the regent, and in 1717, the Compagnie du Mississippi was born.
Law was growing in power and influence. The Duke of Orleans appointed him Controller General of Finance, making him the second most powerful man in France and its de facto ruler. He consolidated the East India, Canada and China trading corporations into his Mississippi Company, so that the new entity monopolised all French trade outside of Europe.
By 1720, he had assembled and fused together all of the French trading companies, the tobacco farm, the mint, the tax firms, the French national debt and a quasi-central bank under a giant conglomerate known as the Mississippi Company.
The bubble to end all bubbles
Remember that France was close to bankruptcy. Using audacious financial engineering, Law swapped all of France's high-yielding government debt for equity in the Mississippi Company. Nothing similar had ever been attempted on this scale. The seemingly limitless resources of France's new empire fired demand for shares in the company in France and across Europe.
The first share issue, at 550 livres per share, was over subscribed, and was soon trading at twice the price. Subsequent shares were issued at 1,000 and then at 5,000 livres.
Trading in Mississippi Company shares led to one of the biggest speculative manias in history. Enormous fortunes were made overnight - the word millionaire originated from Mississippi Company traders. Almost every single member of the French aristocracy was engaged in buying or selling Mississippi stock.
And it wasn't just wealthy investors who were caught up in the scheme. People from every class of French society rushed to get involved. Coachmen and cooks made millions in days. Trading was centred on the tiny street in Paris where Law lived, the Rue Quincampoix, and crowds gathered every day to shout and scrap for Mississippi shares. It seemed that Law's paper wealth had obliterated the normal rules of economic life.
But Law's theory of money was incomplete. He neglected the impact that the issuing of millions of shares would have on the money supply, and on inflation. Notes and coins in circulation went up by 186% after the company floated. By January 1720, prices were rising by 23% per month.
Law was losing control of his scheme. He proposed that shares in the Compagnie be gradually deflated by 50% over a period of months - and this is where the story ends.
The penny was beginning to drop that the Mississippi delta was less a bountiful verdant garden and more a malarial swamp. There was a run on the shares, the banks, and on paper money. Metallic specie was reintroduced. Law was sacked from the ministry.
There were ugly scenes on the streets of Paris where dozens were crushed in the crowds, desperate to withdraw coin from the remaining banks. France would take generations to recover from the collapse.
"My shares which on Monday I bought,Were worth millions on Tuesday, I thought,So on Wednesday I chose my abode;In my carriage on Thursday I rode;To the ball-room on Friday I went;To the workhouse next day I was sent."
An innocent merchant barely escaped alive and his carriage was ripped to pieces when the mob mistook him for Law. France's former de facto ruler had no choice but to flee. He abandoned his fortune and his adopted country and moved to Venice, where he died in poverty nine years later.
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