The day the share price was supported at 9,000 livres

Law's system, which began as a private bank in 1716, consolidated the national debt, tax collection, coinage, and overseas trade into a single company in 1719, increasing its share price 20-fold. After making shares exchangeable for banknotes at a fixed price of 9,000 livres per share in March 1720, the balance of banknotes doubled in three months, and confidence collapsed with the devaluation decree of May 21. With the Visa of 1721, the paper became national debt again, and the debt returned to a level not much different from what it was before the system.

Original question What did John Law try to create?

On May 2, 1716, the Scottish-born John Law and his company were granted a 20-year privilege to open a bank in Paris. The preamble to the letters patent states that Law's initial proposal for a "bank operated in the King's name with the King's funds" was rejected by the Council of Finances, and that he instead requested to open a bank with his and his company's own funds. The notes were denominated in "écus of the weight and fineness of the day," and the capital consisted of 1,200 shares of 5,000 livres each, most of which was paid in with depreciated government bonds. The initial cash requirement was met with 690 livres per share. On December 4, 1718, the King purchased the bank's shares at par and made it the Royal Bank.

The mechanism for the spread of the banknotes lay with the King as the recipient. By a decision of October 7, 1716, tax collectors were obliged to exchange banknotes for cash, and on April 10, 1717, banknotes became legal tender for tax payments. On June 1, 1718, banknotes were accepted at a rate of 6 livres per écu for old écus that had been devalued by recoinage, making it more advantageous to hold banknotes than coins. Dutot, who was the company's cashier, later called this moment when the King accepted his own securities "the beginning of the System and the banknotes."

In August 1717, letters patent in the form of an edict established the "Company of the West." Louisiana was granted to the company in perpetuity, along with a 25-year commercial monopoly and the Canadian beaver trade. The only reservations made by the King were the act of homage and a golden crown weighing 30 marcs at each succession to the throne. The capital of 100 million livres was divided into 200,000 shares of 500 livres each, payable at par with government bonds. Subscriptions were slow and closed at the end of 1718, with the King holding 40%. The company took over the tobacco monopoly in August 1718, the Senegal Company in December, and in May 1719 merged with the East India Company and the China Company to become the "Company of the Indies." It then took over minting on July 25, the general tax farm (for 52 million livres annually) on August 27, and the collection of direct taxes at the end of August.

The conversion of public debt, beginning on August 27, 1719, was the core of this system. The company lent the King 1.2 billion, later 1.6 billion, livres at 3% per year, with which the King forcibly redeemed perpetual annuities, venal offices, and government bonds. The company raised funds through 300,000 new shares at 5,000 livres each (September 12 & 26, October 2), payable in installments and also with government bond redemption certificates. The stock price rose from 500 livres on May 10 to 1,000 in mid-July, 3,600 on August 26, and 5,350 on September 9, peaking at around 10,000 livres. From October, the company supported its own stock at 5,000, opened a trading office at the end of December that posted daily prices, and on December 29, announced a dividend of 200 livres per share. On January 5, 1720, Law became Controller-General of Finances.

The issuance of banknotes increased in step with the issuance of shares. The outstanding balance, which was about 40 million livres in December 1718, grew to 769 million by the end of December 1719, 1.0697 billion by the end of February 1720, and 2.2351 billion by the end of May. Contemporary estimates put the kingdom's specie at about 1.2 billion. To replace metal with paper, payments exceeding 10 livres in silver or 300 livres in gold were banned on December 21, 1719; banknotes became legal tender nationwide on January 28, 1720; possession of more than 500 livres in specie was forbidden on February 27; and the demonetization of gold and silver was announced on March 11.

On February 22, 1720, the bank was merged into the company, and the support for the stock price was temporarily halted. The stock fell from 9,925 to 8,500 on March 1. A Council of State decision on March 5 reversed this course. Article 2 fixed the stock price at 9,000 livres per share, and Article 5 stipulated that from March 20, the bank would open a window to exchange shares for banknotes and banknotes for shares, as the owner wished. This was the moment shares became equivalent to 9,000-livre banknotes. Between March 25 and May 1, an additional 300 million, 390 million, 438 million, and 362 million livres in banknotes were issued, and from March to May, the company bought back 27% of its own shares for 1.2135 billion livres.

The decision of May 21 was an attempt to undo this peg. Shares were to be reduced to 8,000 on the day of promulgation, then lowered monthly to 5,000 by December 1. Banknotes were also to be accepted at a reduced rate—a 10,000-livre note for 8,000—and fixed at 5,000 on December 1. Only tax payments were to be accepted at face value until January 1, 1721. The next day, the 22nd, the bank paid out banknotes at the reduced value. On the 25th, a crowd threw stones due to payment delays, and on the 27th, the Parlement convened an emergency session. On the same day, the King revoked the decision, decreeing that banknotes would circulate at their former value. Law was dismissed on May 28 (or resigned on the night of the 29th, according to Buvat's journal). On June 1, the holding of specie was made free again, and on June 2, a decision was issued to refund the difference for banknotes received at the reduced value. In early June, Law returned to the Council.

Nevertheless, confidence in the banknotes did not return. In June, 1 billion livres in 2.5% annuities were made available for purchase with banknotes. On July 13, special bank accounts for large transactions were created, and banknotes were absorbed into annuities, accounts, and shares. The bank's windows saw people crushed to death on June 3, July 5, and July 12-13. On July 17, between 12 and 15 people were crushed, and on the same day, payments were halted. On August 15, a demonetization schedule was announced (October 1 for large-denomination notes, May 1 of the following year for small-denomination notes), which was then moved up to November 1 on October 10. Law left France in early December.

In January 1721, the "Visa" was ordered, requiring the submission of all paper from the System. The 2.2112 billion livres submitted were reduced to 1.7 billion in principal and 47 million in annual annuities, and the certificates were traded at 25% of their face value in 1722. Claims of 500 livres or less were not reduced, accounting for half of the people and 40% of the total amount. The remaining 60% of the amount was reduced by an average of 39%. The number of shares was reduced from 125,000 to 55,735. In 1724, the King's debt stood at 2.5414 billion in principal and 86.7 million in interest payments, not significantly different from the 1717 levels before the System (2.3217 billion and 93.7 million, respectively).

What changed was the national debt. The debt left by Louis XIV amounted to 2.8 billion livres in 1715, and interest payments exceeded 86.5 million against revenues of 166 million. The Western Company of 1717 was a vehicle for converting depreciated government bonds into shares at par value. From the owner's perspective, a 4% bond was exchanged for shares in a company whose assets were the same bonds and Louisiana. From the state's perspective, the debt remained the same; it had only given up a colony that had previously produced nothing.

From August 1719, this extended to the entire national debt. The Company became the King's creditor. The annual payment of 48 million to the King was deducted from the payments of the General Tax Farm, and the Company collected the taxes and distributed the remainder as dividends. Velde calls this an operation that "transforms public debt into something like government equity." Former creditors exchanged their fixed-interest bonds for shares with variable dividends. The higher the share price, the more favorable the refinancing was for the state; conversely, if the share price fell, subscribers paying in installments could stop their payments and withdraw. Therefore, maintaining a high share price was a condition of the system.

Support buying began in October 1719 at 5,000 livres. At the end of December, 800 million livres worth of shares (16% of issued shares) were bought at the counter, and from March 5, they were exchanged for banknotes at 9,000. Shares became banknotes, banknotes were legal tender, and specie was forbidden. The outstanding balance of banknotes doubled in three months, from 1.0899 billion on March 5 to 2.2351 billion at the end of May.

Prices did not move at the same speed. The Paris commodity price index (Hamilton) rose from 116.1 in July 1719 to 203.7 in September 1720, increasing by 25% in January 1720 alone. The exchange rate moved faster: by the end of January 1720, the livre against London fell below silver parity, and the devaluations of specie in March, April, and July followed the decline of the paper livre.

After the collapse, the flow reversed. Banknotes were absorbed into annuities, bank accounts, and shares, and the remainder was converted back into government bonds through the *visa*. Of the 2.8 billion in banknotes, 2.2 billion were submitted and replaced with 1.7 billion in debt. According to Velde's calculations, what banknote holders received in March 1722 was about 20% of the face value, a level equivalent to the market price at the beginning of November 1720. As for who ultimately paid, it was first the holders of banknotes and shares over 500 livres, then the 200 people who profited in 1719 and 1720 (taxed 190 million), and finally those who had exchanged specie for banknotes.

Many of the Mississippi anecdotes were collected in Chapter 1 of Mackay's "Extraordinary Popular Delusions and the Madness of Crowds" (1841). A hunchback who made money by renting out his back as a writing desk, a lady who deliberately overturned her carriage to meet Law, a doctor who, while taking a patient's pulse, blurted out "It's falling, it's falling" about the stock. Mackay claims to have taken these from contemporary memoirs but does not cite sources for many of them.

"Servants and coachmen became rich from stocks." The source is page 34 of Mackay. Mackay tells, as separate anecdotes, of a servant who went to sell shares for his master, pocketed the rise in price and left the country, and of Law's coachman, who made enough to own a carriage and retire; he adds that cooks and footmen sometimes had the same good fortune. The servant's story is not one of success with his own shares. None of these is given a source. In the contemporary diaries I read for this, there are no articles about newly rich individuals with specified occupations.

“The word 'millionaire' was born at this time.” The source is not specified. The contemporary historical sources and research I read for this article did not contain this word. In dictionaries, the dictionary of the Académie Française (9th edition) gives the origin as the 18th century, and the Usito dictionary from a university in Quebec gives it as 1721. This alone does not confirm that the word was first created by someone in Law's time. The year of its first appearance and its creator are still unknown.

"People were crushed to death in the rush on the bank." This can be confirmed in contemporary diaries. Buvat records that two men and two women were crushed to death on June 3, three women and two men on July 5, several people from July 12 to 13, and 12 to 15 people on July 17, adding that he himself was in danger on the 17th. Mackay's "15 people" refers to the same event on July 17.

"Printed three times the amount of notes they could pay." The source is unidentified. Mackay writes that at a meeting in early May 1720, there was "less than half" the amount of domestic specie for 2.6 billion in notes, which is a factor of two. In Velde's table, for a note balance of 2,235.1 million on 31 May (notes issued, less those burned), the contemporary estimate of specie was about 1.2 billion. The figures for the bank's actual reserves have not survived.

“For 100 years, France did not trust banknotes and avoided the word 'bank'.” Velde writes that the replacement of specie with banknotes “remained in disrepute for a long time thereafter,” and that Law's reputation was not restored until the 1930s. He calls the Assignats of 1790 a “second experiment.” It is also true that the legal price of silver remained unchanged from 1726 to 1795. However, the source for “100 years” and “the word 'bank'” is unknown, and it is presented here only as a commonly held theory.

"The world's first paper money and bubble collapse." Velde cites earlier experiments with fiat money. We do not use superlatives without a denominator.

"Law was a swindler who deceived the state." A contemporary satirical song called him the "eldest son of Satan," and Mackay quotes the lyrics from a letter of the Duchess of Orléans. Mackay himself writes that Law was "neither a villain nor a madman, but more deceived than deceiving," while Velde points out that the company was engaged in real business and that Law had invested over 9.5 million livres in French real estate before leaving the country. Opinions remain divided.

What remains from this event today is its structure, rather than the monetary amounts. The design of bundling public debt, tax collection, and banknotes into a single company; a window to exchange shares for legal tender at the owner's request; and measures legally prohibiting the holding of specie. When these three elements acted in concert, the value of shares and banknotes became one, and the fall of one brought down the other.

We do not equate “increased banknote issuance” with “quantitative easing” here. If a comparison is to be made, it is limited to the structure of what backed the promise of convertibility and what the collateral was. That is the task of the page on recurring structures and the subject of modern money.

Contemporaries and later generations often spoke of it in the same breath as Tulip Mania. The similarity lies in how contracts and shares acquired value detached from any underlying substance. The difference is that the forward contracts for bulbs existed in an external market of taverns and notaries, whereas Law's system was integrated with the state's debt, taxation, and banknotes at the very core of the state. The scale and consequences were of a different order of magnitude; even when compared, the "similarity" remains superficial to the narrative.

This can be linked to the Kipper- und Wipperzeit (1619-23) in that the state manipulated the value of money for its own payments. The former was a debasement of metal, while the latter was a manipulation of credit through banknotes and shares. The comparison is limited to the type of mechanism.

The South Sea Bubble of the same year, 1720, followed the same model of public debt conversion, and Garber titles that section "The Shadow of Law." The Assignats of 1790 were fiat money that Velde calls "the second experiment." Both are only in the registry; there is no main text yet.