Paper Printed Beyond Its Promise

Banknotes Backed by the Nation's Credit

John Law, a native of Scotland, issued banknotes under the authority of the regent, the Duke of Orléans. He was a gambler well-versed in probability who, after killing a man in a duel in London and being sentenced to death, had fled to the continent. He argued that increasing the money supply would stimulate the economy.

In 1716, the Banque Générale was established. When gold coins were deposited, banknotes were issued as receipts. Two years later, this bank gained state backing and became the Banque Royale. The notes could also be used to pay taxes, and Law's personal credit became linked to the credit of the nation.

A Scheme to Control the Colonies and the Nation's Finances

Law's scheme extended beyond the bank. In 1717, he founded the Company of the West, which aimed to monopolize the Louisiana territory along the Mississippi River. The heart of this system was the conversion of debt into equity, allowing company shares to be purchased with government bonds that were nearly worthless. It was a grand circuit: converting national debt into shares, which were then supported by banknotes.

The company absorbed the tobacco monopoly, the mint, and even tax collection, gaining control over both colonial trade and the nation's finances. However, the foundation of its wealth was not the colonies, but loans to the king and taxes. By the end of 1718, only twelve ships had set sail. The gap between this reality and the marshy lands of Louisiana only widened.

Wealth Born on Paper

The buying and selling of shares took place on the Rue Quincampoix in Paris. In 1719, this narrow lane became the center of a frenzy. A share with a face value of 500 livres soared to 5,350 by September, eventually peaking at around 10,000 livres.

It is said that the word "millionaire" was coined to describe those who became rich overnight, but its first appearance has not been confirmed. Stories of servants and coachmen rising to wealth originate from a book published in 1841, which lacks sources, and no such examples are found in contemporary diaries. This wealth was a wealth counted on paper.

When the Promise Unravels

The logic of the collapse was simple: far more paper was printed than the metal available for conversion. At the end of May 1720, the outstanding value of the notes was 2,235,100,000 livres. Meanwhile, contemporary estimates placed the total specie in the country at around 1.2 billion.

On May 21 of that year, the state issued a decree to devalue the notes and shares on a monthly basis. This was tantamount to the state itself admitting the depreciation of its paper, and confidence collapsed. People rushed to the banks demanding gold coins, and some were crushed in the crowds. At the beginning of December, Law fled the country, leaving his fortune behind in France.

However, later assessments reject a simple narrative. Claims of 500 livres or less were not reduced, accounting for half of the people and forty percent of the total amount.