The principle was simple: you exchanged your worthless government bonds for shares in the company – and hoped for a big profit
Nevertheless: John Law had kept his word and in a short time breathed new life into the French economy. In the meantime, he had not lost sight of his even greater goal of reducing government debt. The economist was particularly inspired by the large English trading companies such as the East India Company or the South Sea Company, founded in 1711. These were profit-oriented and mostly privately held stock corporations, which, however, had state privileges and were closely linked to the state apparatus. The South Sea Company in particular had relieved the British state of part of its debt years earlier. A model to imitate? France also had territories in North America and it had a trading company. Louisiana, the name of the overseas territory, stretched almost 5000 kilometers along the Mississippi from the Gulf of Mexico to today’s Canada.
Law was a gold mine, the sheer inexhaustible resources and potential of which only had to be promoted. In 1717 the French West India Company was re-established as the Compagnie d’Occident (Company of the West). To date, it is also known as the Mississippi Company. It had two goals: to develop trade with Louisiana and make a profit. Above all, however, it should help, along the lines of the South Sea Company, to clear the state mountain of debt.
Bonds become company shares
The principle was very simple: the creditors could exchange their government papers for shares in the company. In this way the state lost its debts, while with rising share prices and high dividends the shareholders were able to speculate on even greater profits than they had hitherto had the prospect of through interest. The higher the interest in the shares of the Compagnie d’Occident, the more debts could be converted. And the interest, in turn, was tied to the belief that the trading company was actually able to make enormous profits from the French areas on the Mississippi. An idea that Law was constantly nurturing.
Until now, following on from Karl Marx, the Scots still had the prophetic dominance, now the swindler came to the fore. The economist used his political influence to inflate the Mississippi company into a monstrous conglomerate in the next three years. The monopoly on trade in Louisiana was quickly expanded to all French colonies. Society soon had the royal privilege of minting coins and collecting taxes. Such an abundance of power alone would have been enough to drive the share price up. There was also targeted manipulation by the media. From the ranks of the company, numerous newspaper reports were launched in which Louisiana was praised as a promised land with a mild climate and as rich in game as gold, silver, copper and even emerald deposits. In truth there was very little there that could be translated into good money. To attract more settlers to the New World and sell them expensive land, the city of La Nouvelle Orléans, named after Law’s royal patron, was founded in 1718. Just a year later, you could read in the newspaper “Nouveau Mercure” that there were 800 houses in New Orleans, each of which included an impressive 120 acres of land. A few years later, a traveler described the town as a poor cluster of a few wooden huts.
Since Law was not only the head of the trading company now renamed “Compagnie des Indes” (company of both India), but also director of the Banque royale, he was able to easily open the money gates to provide the company’s shareholders with even more capital. “The more value a shareholder owned, the more credit he got,” writes Swiss economist Mathias Binswanger. »The rise in share prices thus led to further money creation, which in turn led to further share purchases and thus to a further increase in share prices. These were really optimal conditions for the development of a speculative bubble. «
A return of almost 2000 percent – within one year
It is therefore not surprising that the Mississippi Company’s share price soon soared to fantastic heights, fueled by ever new share issues and insane dividend announcements. If you could still buy a security for 500 livres in January 1719, the price in December was almost 10,000, a twenty-fold increase within a year. The epicenter of the equity mania was on Rue Quincampoix in Paris, where the company’s offices were located. There was a tumultuous hustle and bustle here. While some were sacking away the money they had received from selling their shares, people from across Europe and from all walks of life crowded the narrow alley to somehow get hold of some securities. A member of the British Embassy told of princes and dukes who sold their estates and jewels to buy shares with the proceeds.
In general, on the other side of the English Channel, you could only rub your eyes in amazement at what the escaping convict law was doing in the neighboring country. The fear of being economically left behind by France was great. And so, with the British South Sea Company, which had once been the model of Law, they copied his system and began in early 1720 to convert the entire national debt into company shares, the company using the same questionable methods to attract interest in its shares increase. With success: The price of the South Sea Company was 130 in February; by August 1720 it will peak at over £ 900.
Law’s power and reputation increase with the share price
On January 8th, John Law was at the height of his fame. On that day the price had risen to an all-time high of 10,100 livres. Law was director of the French central bank, head of the first diversified mega-corporation in history with a value of more than six billion livres, and for three days he had also been France’s finance minister. And he was downright incredibly rich. All of Europe saw Scots as the greatest living financial genius.
Then something strange happened.
The share price of the Compagnie des Indes did not rise any further, it stagnated. Presumably, many investors thought the time was right to sell their stocks and reap the profits. Perhaps the idea crept into her that the company value could no longer in any way reflect the actual economic activities of the trading company. In order to overcome the fear of even more overheating, John Law had the course fixed at 9,000 livres in March. But then the Scot made a capital mistake: To counter the rampant inflation, he decided on May 21st to halve the value of the shares and banknotes. His hope was that the course would level off at around 5000 livres. He did the opposite. Angry people threw the windows of the Banque Royale and demanded that their paper money be exchanged for coins. In one fell swoop, confidence in the Law system had been lost in France. After a few days, the bulkhead gave in to the pressure and took the halving back, but it did not change anything: the bubble had burst.
The stock market is running out of air
In a very short time, the stock plunged from 9,000 to about 4,000 livres and fell continuously from then on. In December 1720, the course reached the mark of 1000 livres, when the Mississippi company had been insolvent for months. Law had since lost his office and had been placed under house arrest. In September 1721, the shares of the Compagnie des Indes had returned to their starting value of 500 livres. The banque royale had already been settled by this time.
The events in France and England trigger a financial quake across Europe
The South Sea Company, which officially existed until 1853, fared somewhat better, but the British speculative bubble also burst. The rapid rise in company prices had led to a general boom in stocks in England and the establishment of countless small stock corporations. When the British Parliament wanted to put an end to this development by law, many investors fearfully pulled their capital out of the stock market; they also caused the price crash of the South Sea Company, which by the end of 1720 had already reached its value at the beginning of the year.
The events that played out in France and England sparked a financial quake that was felt across Europe. There were massive price drops on the stock exchanges from Lisbon to Amsterdam and Hamburg, and a banking crisis broke out in Switzerland. The French people were so traumatized by John Law’s reforms that they turned back the wheel of time and abolished paper money for several decades.
There are not all losers
The speculative bubbles that shook Europe 300 years ago produced innumerable losers, but just as many profiteers. Isaac Newton, who in the spring of 1720 had mocked the stock mania by saying that he could calculate the course of the heavenly stars, but not the madness of people, was soon blinded by the prospect of astronomical profits as many others – and lost a huge fortune. The bookseller Thomas Guy, in turn, sold his securities on time and got rich in one fell swoop. From the prize he donated to a hospital in London that still bears his name. The French king, whose 20 percent stake in the Compagnie des Indes was sold at almost the highest price, was also one of the big speculative winners. Ultimately, both the Mississippi Company and its English equivalent failed because they offered investors the prospect of an economic success for the company that was completely unrealistic from the start.
John Law and the directors of the South Sea Company had built a fabric of lies and deceptions to achieve their goal. In the end, France and England were rid of their debts. But the trust of many citizens in the still young financial market was shaken and the success was paid for with the ruin of countless economic livelihoods – all over Europe.
And law? He escaped arrest again and secretly left France to avoid prosecution. He soon got back to his old nomadic life. In 1729 the Scot, who had been one of the most powerful men in France, died in humble circumstances in Venice.