A Scotsman Crashed the French Economy With Paper Money

John Law arrived in Paris in 1715 as a fugitive. A Scottish gambler with a head for arithmetic, he had killed a man in a London duel a decade earlier and was on the run. The death of Louis XIV that year gave him an opening. The new regent, Philippe II, needed to refloat a state nearly bankrupted by Louis's wars and was willing to listen to almost anything.

Law's pitch was that money did not need to be silver. A currency backed by trade and trust — paper notes from a chartered bank — would expand to fit a growing economy in a way that bullion could not. In 1716 he was allowed to start the Banque Générale, which issued such notes. By 1718 it was the Banque Royale and his notes were legal tender.

Next he merged the bank with the Compagnie d'Occident, which held the trade monopoly for France's vast Louisiana territory. The combined entity, the Mississippi Company, sold shares whose value Law could prop up by printing more banknotes to buy them with. In 1719 the share price rose from 500 livres to 18,000.

In early 1720, holders began converting paper into specie. The bank could not honour the demand. In May Law suspended convertibility, slashed share values, and within months had fled Paris. Investors who had been paper millionaires — including Law's coachman — were ruined.

The damage outlived the man. France, having watched its currency evaporate, did not establish a true central bank until 1800 and remained suspicious of paper money into the 19th century. The English, in the same years, founded the South Sea Company.