A Tale for Our Times:
The Great Mississippi Bubble

- Introduction -

It is up to the reader to decide whether any resemblance between John Law and George Soros or Alan Greenspan--or even today's stock market gambler--is purely coincidental; or whether the situation in France in 1719 in any way resembles that of the United States in the last several years.

A Time of Unexampled Prosperity

I exulted in the beauty of the scene, and augured a prosperous voyage; but the veteran master of the ship shook his head, and pronounced this halcyon calm a ``weather-breeder.'' And so it proved. A storm burst forth in the night; the sea roared and raged; and when the day broke I beheld the late gallant convoy scattered in every direction; some dismasted, others scudding under bare poles, and many firing signals of distress.

I have since been occasionally reminded of this scene, by those calm sunny seasons in the commercial world, which are known by the name of ``times of unexampled prosperity.'' They are the sure weather-breeders of traffic. Every now and then the world is visited by one of these delusive seasons, when ``the credit system'' as it is called, expands to full luxuriance; everybody trusts everybody; a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; and men are tempted to dash forward boldly, from the facility of borrowing.

Promissory notes interchanged between scheming individuals, are liberally discounted at the banks, which become so many mints to coin words into cash; and as the supply of words is inexhaustible, it may readily be supposed what a vast amount of promissory capital is soon in circulation. Every one now talks in thousands; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises calculates the aggregate as solid capital, and falls back in amazement at the amount of public wealth, the ``unexampled state of public prosperity!''

Now is the time for speculative and dreaming or designing men. They relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them maddening after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble; every one helps with his breath to swell the windy superstructure, and admires and wonders at the magnitude of the inflation he has contributed to produce.

Speculation is the romance of trade, and casts contempt upon all its sober realities. It renders the stock-jobber a magician, and the exchange a region of enchantment. It elevates the merchant into a kind of knight-errant, or rather a commercial Quixote. The slow but sure gains of snug percentage become despicable in his eyes: no ``operation'' is thought worthy of attention that does not double or treble the investment. As he sits musing over his ledger, with pen behind his ear, he is like La Mancha's hero in his study, dreaming over his books of chivalry. His dusty counting house fades before his eyes, or changes into a Spanish mine; he gropes after diamonds, or dives after pearls. The subterranean garden of Aladdin is nothing to the realms of wealth that break upon his imagination.

Could this delusion always last, the life of a merchant would indeed be a golden dream; but it is as short as it is brilliant. Let but a doubt enter, and the ``season of unexampled prosperity'' is at an end. The coinage of words is suddenly curtailed; the promissory capital begins to vanish into smoke; a panic succedds, and the whole superstructure, built upon credit, and reared by speculation, crumbles to the ground, leaving scarce a wreck behind:

- ``It is such stuff - - as dreams are made of. -

When a man of business therefore, hears on every side rumors of fortunes suddenly acquired; when he finds banks liberal, and brokers busy; when he sees adventurers flush of paper capital, and full of scheme and enterprise; when her perceives a greater disposition to buy than to sell; when trade overflows its accustomed channels, and deluges the country; when he hears of new regions of commercial adventure; of distant marts and distant mines, swallowing merchandise and disgorging gold; when he finds joint stock companies of all kinds forming; railroads, canals, and locomotive engines, springing up on every side; when idlers suddenly become men of business, and dash into the game of commerce as they would into the hazards of the faro-table; when he beholds the streets glittering with new equipages, palaces conjured up by the magic of speculation, tradesmen flushed with sudden success, and vying with each other in ostentatious expense; in a word, when he hears the whole community joining in the theme of ``unexampled prosperity,'' let him look upon the whole as a ``weather-breeder,'' and prepare for the impending storm.

The foregoing remarks are intended merely as a prelude to a narrative I am about to lay before the public, of one of the most memorable instances of the infatuation of gain to be found in the whole history of commerce. I allude to the famous Mississippi bubble. It is a matter that has passed into a proverb, and become a phrase in every one's mouth, yet of which not one merchant in ten has probably a distinct idea. I have therefore thought that an authentic account of it would be interesting and salutary, at the present moment, when we are suffering under the effects of a severe access of the credit system, and just recovering from one of its ruinous delusions.

- The Great Mississippi Bubble -

In 1694, he appeared in London, where a handsome person and an easy and insinuating address gained him currency in the first circles, and the nickname of ``Beau Law.'' ... He returned to Edinburgh in 1700, and remained there several years; during which time he first broached his great credit system, offering to supply the deficiency of coin by the establishment of a bank, which, according to his views, might emit a paper currency equivalent to the whole landed estate of the kingdom.... Scottish caution and suspicion served in place of wisdom, and the project was rejected. Law met with no better success with the English parliament ... [then] went to France.

The financial affairs of France were at this time in a deplorable condition. The wars, the pomp, and profusion of Louis XIV, and his religious persecutions ... had exhausted his treasury, and overwhelmed the nation with debt. The old monarch clung to his selfish magnificence, and could not be induced to diminish his enormous expenditure....

In this state of things Law ventured to bring forward his financial project. It was founded on the plan of the Bank of England, which had already been in successful operation several years.... Louis XIV detested all innovations, ... the project of a bank therefore, was utterly rejected....

The shifting, adventurous life of Law, and the equivocal means by which he appeared to live, playing high, and always with great success, threw a cloud of suspicion over him wherever he went, and caused him to be expelled by the magistracy from the semi-commercial, semi-aristocratical cities of Venice and Genoa.

The events of 1715 brought Law back again to Paris. Louis XIV was dead. Louis XV was a mere child, and during his minority the Duke of Orleans held the reins of government as Regent. Law had at length found his man.

The Duke of Orleans has been differently represented by different contemporaries. He appears to have had excellent natural qualities, perverted by a bad education..... Under proper tuition, the duke might have risen to real greatness; but in his early years he was put under the tutelage of the Abbe@aa Dubois, one of the subtlest and basest spirits that ever intrigued its way into eminent place and power....

[The Regent] surrounded himself with a set of dissolute men like himself, who, let loose from the restraints under which they had been held during the latter hypocritical days of Louis XIV, now gave way to every kind of debauchery. With these men the Regent used to shut himself up, after the hours of business, and excluding all graver persons and graver concerns, celebrate the most drunken and disgusting orgies, where obscenity and blasphemy formed the seasoning of conversation....

Such was the man that now ruled the destinies of France. Law found him full of perplexities from the disastrous state of the finances. He had already tampered with the coinage, calling it the coin of the nation, restamping it, and issuing it at a nominal increase of one fifth, thus defrauding the nation out of 20 percent of its capital. He was not likely, therefore, to be scrupulous about any means likely to relieve him from financial difficulties; he had even been led to listen to the cruel alternative of a national bankruptcy.

Under these circumstances Law confidently brought forward his scheme of a bank that was to pay off the national debt, increase the revenue, and at the same time diminish the taxes. The following is stated as the theory by which he recommended his system to the Regent. The credit enjoyed by a banker or a merchant, he observed, increases his capital tenfold; that is to say, he who has a capital of 100,000 livres, may, if he possess sufficient credit, extend his operations to a million, and reap profits to that amount. In like manner, a state that can collect into a bank all the current coin of the kingdom, would be as powerful as if its capital were increased tenfold. The specie must be drawn into the bank, not by way of loan, or by taxations, but in the way of deposit. This might be effected in different modes, either by inspiring confidence, or by exerting authority. One mode, he observed had already been in use. Each time that a state makes a recoinage, it becomes momentarily the depository of all the money called in belonging to the subjects of that state. His bank was to effect the same purpose; that is to say, to receive in deposit all the coin of the kingdom, but to give in exchange its bills, which, being of an invariable value, bearing an interest, and being payable on demand, would not only supply the place of coin, but prove a better and more profitable currency.

The Regent caught with avidity at the scheme. It suited his bold, reckless spirit and his grasping extravagance.... Law enlisted the vanity of the Regent in his cause. He persuaded him that he saw more clearly than others into sublime theories of finance, which were quite above the ordinary apprehension.... It is certain that it met with strong opposition from the Regent's ministers, the Duke de Noailles and the Chancellor d'Anguesseau, and it was no less strenuously opposed by the parliament of Paris. Law, however, had a potent though secret coadjutor in the Abbe@aa Dubois, ... who retained a baleful influence over the mind of the Regent....

Accordingly, on the 2d of May, 1716, letters patent were granted to Law to establish a bank of deposit, discount, and circulation, under the firm of ``Law and Company,'' to continue for 20 years. The capital was fixed at 6 millions of livres, divided into shares of 500 livres each, which were to be sold for 25 percent of the Regent's debased coin, and 75 percent of the public securities, which were then at a great reduction from their nominal value, and which then amounted to 1,900 millions. The ostensible object of the bank ... was to encourage the commerce and manufactures of France. The louis-d'ors and crowns of the bank were always to retain the same standard of value, and its bills to be payable in them on demand.

At the outset, while the bank was limited in its operations, and while its paper really represented the specie in its vaults, it seemed to realize all that had been promised from it.... Everybody hastened to the bank to exchange gold and silver for paper. So great became the throng of depositors, and so intense their eagerness, that there was quite a press and struggle at the back door....

In a little while the bank shares rose enormously, and the amount of its notes in circulation exceeded 110 millions of livres. A subtle stroke of policy had rendered it popular with the aristocracy. Louis XIV had, several years previously, imposed an income tax of a tenth, giving his royal word that it should cease in 1717. This tax had been exceedingly irksome to the privileged orders; and, in the present disastrous times, they had dreaded an augmentation of it. In consequence of the successful operation of Law's scheme, however, the tax was abolished, and now nothing was to be heard among the nobility and clergy but praises of the Regent and the bank.

Hitherto all had gone well, and all might have continued to go well, had not the paper system been farther expanded. But Law had yet the grandest part of his scheme to develop. He had to open his ideal world of speculation, his El Dorado of unbounded wealth....

It was called the Western, but became better known as the Mississippi Company. The capital was fixed at 100 millions of livres, divided into shares, bearing an interest of 4 percent, which was subscribed for in the public securities. As the bank was to cooperate with the company, the Regent ordered that its bills should be received the same as coin, all in payments of the public revenue. Law was appointed chief director of this company, which was an exact copy of the Earl of Oxford's South Sea Company, set on foot in 1711, and which distracted all England with the frenzy of speculation. In like manner with the delusive picturings given in that memorable scheme of the sources of rich trade to be opened in the South Sea countries, Law held forth magnificent prospects of the fortunes to be made in colonizing Louisiana, which was represented as a veritable land of promise, capable of yielding every variety of the most precious produce.... Extraordinary measures were adopted to force a colonization. An edict was issued to collect and transport settlers to the Mississippi....

D'Anguesseau, the chancellor, a man of probity and integrity, still lifted his voice against the paper system of Law, and his project of colonization, and was eloquent and prophetic in picturing the evils they were calculated to produce; the private distress and public degradation; the corruption of morals and manners; the triumph of knaves and schemers; the ruin of fortunes, and the downfall of families....

The system now went on with flowing sail. The Western, or Mississippi Company, being identified with the bank, rapidly increased in power and privileges. One monopoly after another was granted to it--the trade of the Indian Seas, the slave-trade with Senegal and Guinea, the farming of tobacco, the national coinage, etc. Each new privilege was made a pretext for issuing more bills, and caused an immense advance in the price of stock. At length, on the 4th of December, 1718, the Regent gave the establishment the imposing title of the Royal Bank, and proclaimed that he had effected the purchase of all the shares, the proceeds of which he had added to its capital. This measure seemed to shock the public feeling more than any other connected with the system, and roused the indignation of parliament....

The worst effect of this illusive system was the mania for gain, or rather for gambling in stocks, that now seized upon the whole nation.... The shares of the company went on rising in value, until they reached 1,300 percent. Nothing was now spoken of but the price of shares, and the immense fortunes suddenly made by lucky speculators. Those whom Law had deluded used every means to delude others.... Nothing as yet had been realized, nor could in some time be realized, from these distant sources, even if productive; but the imaginations of speculators are ever in the advance, and their conjectures are immediately converted into facts....

Fortunes were made in a moment, as if by magic.... The fever went on, increasing in intensity as the day declined.... To ingulf all classes in this ruinous vortex, Law now split the shares of 50 millions of stock each into 100 shares; thus, as in the splitting of lottery tickets, accommodating the venture to the humblest purse. Society was thus stirred up to its very dregs, and adventurers of the lowest order hurried to the stock market. All honest, industrious pursuits and modest gains were now despised. Wealth was to be obtained instantly, without labor and without stint. The upper classes were as base in their venality as the lower. The highest and most powerful nobles, abandoning all generous pursuits and lofty aims, engaged in the vile scuffle for gain. They were even baser than the lower classes; for some of them, who were members of the council of the regency, abused their station and their influence, and promoted measures by which shares rose while in their hands, and they made immense profits....

Luxury and extravagance kept pace with this sudden inflation of fancied wealth. The hereditary palaces of nobles were pulled down, and rebuilt on a scale of augmented splendor. Entertainments were given, of incredible cost and magnificence. Never before had been such display in houses, furniture, equipages, and amusements. This was particularly the case among persons of the lower ranks, who had suddenly become possessed of millions....

The wealth of Law rapidly increased with the expansion of the bubble. In the course of a few months he purchased 14 titled estates, paying for them in paper; and the public hailed these sudden and vast acquisitions of landed property, as so many proofs of the soundness of his system.... The course of illusory credit went on triumphantly for 18 months. Law had nearly fulfilled one of his promises, for the greater part of the public debt had been paid off; but how paid? In bank shares, which had been trumped up several hundred percent above their value, and which were to vanish like smoke in the hands of the holders.... The shares of the bank and of the company began to decline in value. Wary men took the alarm, and began to realize, a word now first brought into use, to express the conversion of {ideal} property into something {real.} ...

The English and Dutch merchants, who had purchased a great amount of bank paper at low prices, cashed them at the bank, and carried the money out of the country. Other strangers did the like, thus draining the kingdom of its specie, and leaving paper in its place....

In February, 1720, ... a decree came out uniting the bank to the India Company, by which last name the whole establishment was now known. The decree stated, that, as the bank was royal, the king was bound to make good the value of its bills.... The bank, it was said, had by this time issued notes to the amount of 1,000 millions, being more paper than all the banks of Europe were able to circulate.... In his thousand expedients to amass capital, Law had sold parcels of land in Mississippi, at the rate of 3,000 livres for a league square. Many capitalists had purchased estates large enough to constitute almost a principality; the only evil was, Law had sold a property which he could not deliver....

With all these props and stays, the system continued to totter. How could it be otherwise, under a despotic government that could alter the value of property at every moment? ... An edict of the king, dated the 22d of May ... under pretense of having reduced the value of his coin ... declared [it] necessary to reduce the value of his banknotes one half, and of the India shares from 9,000 to 5,000 livres! This decree came like a clap of thunder upon shareholders. They found one half of the pretended value of the paper in their hands annihilated in an instant; and what certainty had they with respect to the other half? The rich considered themselves ruined; those in humbler circumstances looked forward to abject beggary....

On the 27th of May the edict was revoked, and bank-bills were restored to their previous value. But the fatal blow had been struck; the delusion was at an end. Government itself had lost all public confidence equally with the bank it had engendered, and which its own arbitrary acts had brought into discredit....

A general confusion now took place in the financial world. Families who had lived in opulence found themselves suddenly reduced to indigence. Schemers who had been reveling in the delusion of princely fortunes found their estates vanishing into thin air. Those who had any property remaining sought to secure it against reverses. Cautious persons found there was no safety for property in a country where the coin was continually shifting in value, and where a despotism was exercised over public securities, and even over the private purses of individuals....

About the middle of July, the last grand attempt was made by Law and the Regent to keep up the system and provide for the immense emission of paper. A decree was fabricated, giving the India Company the entire monopoly of commerce, on condition that it would, in the course of a year, reimburse 600 millions of livres of its bills, at the rate of 50 millions per month.

On the 17th this decree was sent to parliament to be registered. It at once raised a storm of opposition in that assembly, and a vehement discussion took place. While that was going on, a disastrous scene was passing out of doors.

The calamitous effects of the system had reached the humblest concerns of human life. Provisions had risen to an enormous price; paper money was refused at all the shops; the people had not wherewithal to buy bread. It had been found absolutely indispensable to relax a little from the suspension of specie payments, and to allow small sums to be scantily exchanged for paper. The doors of the bank and the neighboring street were immediately thronged with a famishing multitude seeking cash for banknotes of 10 livres....

The continued and vehement opposition of parliament to the whole delusive system of finance had been a constant source of annoyance to the Regent.... He determined to punish that intractable body. The Abbe@aa Dubois and Law suggested a simple mode; it was to suppress the parliament altogether.... As to the exiled parliament, it lived gaily and luxuriously at Pontoise, at the public expense; for the Regent had furnished funds, as usual, with a lavish hand. The first president had the mansion of the Duke de Bouillon put at his disposal, all ready furnished, with a vast and delightful garden on the borders of the river. There he kept open house to all the members of parliament. Several tables were spread every day, all furnished luxuriously and splendidly; the most exquisite wines and liquors, the choicest fruits and refreshments of all kinds, abounded....

The mania for gain, however, was not at an end. A universal panic succeeded.... Every one was anxious to exchange falling paper for something of intrinsic and permanent value. Since money was not to be had, jewels, precious stones, plate, porcelain, trinkets of gold and silver, all commanded any price, in paper.... Foreign exchanges were almost impracticable. The debts of Dutch and English merchants were paid in this fictitious money, all the relations of debtor and creditor were confounded....

Law ... took refuge in the palace of the Regent [who] determined at once to get Law out of the way, and then to charge him with the whole tissue of delusions of this paper alchemy.... Two days before the return of parliament, [Law] took his sudden and secret departure....

The vital principle of a bank is security in the regularity of its operations, and the immediate convertibility of its paper into coin; and what confidence could be reposed in an institution, or its paper promises, when the sovereign could at any moment centuple those promises in the market, and seize upon all the money in the bank? ... Credit must be free and uncontrolled as the common air.... Law was but like a poor conjurer in the hands of a potent spirit that he has evoked, and that obliges him to go on, desperately and ruinously, with his conjurations....

The weight of the evil, however, fell on more valuable classes of society--honest tradesman and artisans, who had been seduced away from the slow accumulations of industry, to the specious chances of speculation. Thousands of meritorious families, also, once opulent, had been reduced to indigence by a too great confidence in government. There was a general derangement in the finances, that long exerted a baneful influence over the national prosperity; but the most disastrous effects of the system were upon the morals and manners of the nation. The faith of engagements, the sanctity of promises in affairs of business, were at an end. Every expedient to grasp present profit, or to evade present difficulty, was tolerated. While such deplorable laxity of principle was generated in the busy classes, the chivalry of France had soiled their pennons; and honor and glory, so long the idols of the Gallic nobility, had been tumbled to the earth, and trampled in the dirt of the stock market.

As to Law, the originator of the system, he appears eventually to have profited but little by his schemes.... His landed estates were confiscated. He carried away with him barely enough to maintain himself, his wife, and daughter with decency.... His wife and daughter, accustomed to live with the prodigality of princesses, could not conform to their altered fortunes, but dissipated the scanty means left to them, and sank into abject poverty....