Law’s historic error was to use his bank — renamed the Banque Royale — to create too much new paper money to allow people to buy yet more shares in the Company of the West. The paper gains created by ever-rising share prices naturally persuaded some investors to seek to cash in by selling shares and convert their gains into gold.
As share prices began to fall in early 1721, the sell-off accelerated. Neither Law’s bank nor the French crown had enough gold to cover the sales, of course, so Law doubled down again. He banned payments in gold of more than 100 livres and made the paper notes issued by his bank legal tender; his hope was to persuade the French to accept paper instead of gold and it was briefly successful as shareholders did indeed exchange notes for shares.
What followed, of course, was rampant inflation. Law’s last gamble was to devalue his notes by 50%, a policy that saw him dismissed from his post and eventually forced to flee France. Shares in what was generally known as the Mississippi Company, meanwhile, fell back to their original value of 500 livres, wiping out the wealth of the millionaires and many others.
The consequences of the Mississippi Bubble were vast. The financial pain experienced by many of the French helped turn the country firmly against paper money and other suspiciously complex financial novelties: it would be 80 years before the country accepted another paper currency.
Notably, the French response to a bursting bubble was very different to the British reaction to similar events. For, at around the same time as Law was at work in France, Britain was experiencing the better-known South Sea Bubble, a scheme partly inspired by Law’s apparent early success.
However that financial disaster persuaded the British to strengthen the Bank of England to control the money supply and allow the country to use paper money with confidence. The BoE’s new power helped Britain to borrow at low rates and finance both global military expansion and domestic industry: Rule, Britannia! was written in 1745, celebrating imperial power based on sound finance. These are the foundations of London as a global financial centre.
France, by contrast, stuck to gold and stagnated. Unable to raise capital, French industry struggled and the economy failed to develop. The monarchy was likewise short of cash, able to raise money only by imposing ever higher taxes on people ever less able to pay. The national trauma of the Mississippi Bubble also shattered public trust and confidence in the crown; bursting the bubble cost French rulers not just money but authority.
In 1763, the Seven Years War ended with France humiliated and broke. Louisiana east of the Mississippi river went to Great Britain; Louisiana west of the Mississippi and the Isle of Orleans went to Spain. Defeated on land by Robert Clive and its navy shattered, France abandoned any claim to India, clearing the way for what would become the British Raj.
The following decade, France backed the American revolutionaries challenging British rule in America, in the hope of denting its rival’s global domination. But the cost of that successful effort was the final straw for the Ancien Régime, helping to bring about revolution in 1789. In due course, French leadership fell to Napoleon Bonaparte, who ended French claims in North America by agreeing the Louisiana Land Purchase with Thomas Jefferson.
All of this, the founding of our modern world, can be partly traced back to that bitter French experience of financial engineering. So what if Law had avoided inflating and bursting his bubble? What if he had resisted the temptation to print more money to fund more share purchases? There’s an important distinction to be drawn between Mississippi and the South Sea Bubble. The British scheme was fraudulent but Law was genuinely trying to improve France’s finances and economy. His failure was not inevitable.
Let’s say Law had found a way to stabilise the Mississippi share price without disaster. France in the 1720s would have had the basic elements of a modern capitalist economy: paper money and joint-stock companies. Such a nation would very likely have been a more effective rival to Great Britain during the 18th Century. A better-equipped and funded French military might well have secured a stalemate in India; Britain’s empire would have been a very different, and smaller, affair.
A more even outcome to the Seven Years War might well have seen France keep at least some of its Louisiana territories. Perhaps the same forces that brought about the American War of Independence against Britain would also have triggered an uprising against France there too. But with the two countries united by the desire to maintain control over their American colonies, would the rebels have succeeded?
In our universe, French support for the revolution helped bring about the birth of the USA. In the world where John Law’s gamble paid off, the French would have been colonial powers in North America alongside the British, and unlikely to support revolutionary forces there. Similarly, while the removal of the French threat in 1763 fed support for American independence, in a world where the hated rival still fields troops across the frontier the colonists’ desire for separaton would is far more limited.
It seems likely that both the British and French American colonies would still eventually gain their independence, but not as a single, continent-straddling republic and eventual superpower.
Meanwhile, a French domestic population enjoying greater economic growth and international success would have less reason to rise up against the monarchy in 1789, though doubtless the idea of absolute monarchy would still have crumbled eventually. A French revolution in the mid 19th Century, perhaps in 1848?
And in this alternative history, Napoleon Boneparte would still rise to prominence, albeit as the general commanding Royal French forces in a prolonged war with Britain in the early 19th Century. Who would have won those wars? If John Law’s gamble had paid off, it would be hard to bet against France.
If the Mississippi Bubble had not burst, today half the world would speak French, Paris would be a financial powerhouse, and the Gare du Nord would be the Gare du Waterloo, named in honour of the military victory that secured France’s place as the world’s first superpower.
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