The Mississippi Bubble: France’s financial folly

By the early 18th century, France, under King Louis XIV, had endured nearly 35 years of war. These wars were extremely costly to fund, requiring substantial tax hikes and straining the nation’s resources to the breaking point.  

Ultimately, France was crippled by unprecedented levels of debt, equal to the size of its entire economy, paralysing government and private credit alike. The Crown owed vast sums to creditors and struggled to pay interest. Much of this debt was in the form of government bonds, which frequently defaulted, leading to a collapse of the bond market. 

Furthermore, the French financial system was outdated. Its currency was tied to limited supplies of gold and silver coins, which further restricted the country’s ability to pay creditors or stimulate trade. Into this crisis stepped John Law, a Scottish economist-adventurer with a colourful past as a gambler and duellist, entered the scene. 

Law was seen as a visionary, obsessed with the mechanics of money, which he argued need not rely on gold reserves, but could instead be expanded through banks issuing paper notes. Law believed that “Money is not the Value for which Goods are exchanged, but the Value by which they are exchanged.” Law was convinced that money lacked inherent value, meaning that it didn’t need to be backed by gold. His scheme was to be backed by credit, rather than by metal. His radical plan appeared to offer salvation. 

What began as a stroke of genius rapidly descended into chaos

Law’s logic was bold: paper money would enable low interest rates, which would in turn stimulate investment and trade. If successful, the system would modernise France’s economy, tap into colonial wealth, and restore state credit. In 1716, he secured royal approval from King Louis XIV to establish a private bank, named the Banque Générale, which issued banknotes exchangeable for coins. Confidence in these notes encouraged more extensive printing, far beyond previous limits. 

By 1717, Law had also created the Mississippi Company, which was granted a monopoly over French trade with Louisiana and other colonies. Investors were captivated by rumours of vast wealth in Louisiana, despite the colony being scarcely developed. Law urged holders to participate in the bond-for-share scheme, allowing them to swap their near-worthless government bonds for shares in the Mississippi Company. 

This scheme would transform shaky state IOUs into tangible equity, promising dividends from future colonial profits. In doing so, the government effectively transferred its liabilities from its own books and consolidated them within the company. As it was backed by Law’s Banque Générale, which was renamed “Banque Royale” after nationalisation in 1718, it seemed both liquid and profitable. 

However, what began as a stroke of genius rapidly descended into chaos. Initially, the experiment was spectacularly successful. Confidence surged, trade grew, and Mississippi Company shares soared from 500 livres to nearly 10,000 in 1719. Paris buzzed with optimism, as investors appeared to be making fortunes overnight. But Law lost control of his system. 

The excess of paper money shattered trust in both the bank and the company

To sustain the boom, the Banque Royale issued more paper notes, more than twice France’s gold and silver reserves. Investors bought Mississippi shares for speculation rather than genuine trade or value, forming a bubble. Louisiana failed to deliver the promised riches. The profits were meagre. Expectations were inflated. And the bubble burst. 

As doubts spread, confidence unravelled. The excess of paper money shattered trust in both the bank and the company. Prices plummeted, riots erupted in Paris, and Law, once France’s most powerful man, fled in disgrace. 

Looking back at recent history, during the 2008 financial crisis, central banks employed quantitative easing (QE), which involved buying government and mortgage bonds to pump money into the economy, lowering interest rates, and encouraging lending. Many criticised this move, drawing parallels to John Law’s early experiment. Like Law’s policy, QE recognised that liquidity must sometimes expand when traditional finance falters. Both aimed to ease debt burdens and stabilise confidence. 

Yet, the differences were significant. QE was gradual, rules-bound, and overseen by independent central banks. The assets purchased had genuine value and were not speculative bubbles. QE also included exit strategies to prevent runaway inflation.  

By contrast, Law’s issuance of banknotes was unchecked, his Mississippi shares were inflated by illusion, and his role blurred the line between government and central bank. QE succeeded precisely because modern policymakers learned from his mistakes. 

From John Law’s story, we learn valuable lessons about monetary policy: 

1. Trust is the foundation of money; once French investors lost faith in his notes, panic spread.

2. Speculation without real value is destructive, as seen not only in Mississippi Company shares but also in the Great Depression and the dot-com bubble.

3. His key innovation, paper money, only works under strict limits and regulations.

4. Debt cannot be wished away: France’s liabilities persisted even when converted into shares.

5. Above all, central banks must remain independent; the Law’s dual role as banker and minister concentrated excessive power, turning monetary policy into a tool of political desperation. 

John Law’s monetary revolution revealed both the brilliance and danger of financial innovation. He demonstrated that economies could escape dependence on gold and silver, but also that without limits, transparency, and trust, new systems can collapse under their own excesses. The Mississippi Bubble was France’s great financial folly, but also the first rehearsal for the world of modern money.