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September 10, 2020

John Law is possibly the most important man in history you’ve never heard of. He’s also the sort of character you’d find implausible if you read about him in a novel. A gambler who killed a man in a duel in Bloomsbury Square then escaped from jail and fled Britain. A Scottish economist who helped create modern finance, paved the way for Britain’s global domination and maybe even caused the French Revolution.

The story of John Law and the Mississippi Bubble is fascinating, dramatic and intriguing. It also offers a wonderful counterfactual. What if the bubble hadn’t burst? What if Law’s gamble with the finances of 1720s France had paid off? With a few tweaks in the course of events, it’s just possible to imagine a world where the French didn’t rebel against their king, where Britannia didn’t rule the waves, and where the United States of America was never founded.

Law was born in Edinburgh in 1671, the son of a banker. Having learned the family trade, like many clever, educated Scots he then left the country seeking advantage elsewhere. In the first instance, that meant London. But after a row about a woman, he fought Edward Wilson in an (illegal) duel in 1694 and killed him with a single thrust of his rapier.

Imprisoned, he escaped and fled to the Continent, where his story really begins. Flitting between Amsterdam and Paris for almost twenty years, Law established himself as an early economist and advocate of financial innovation, as well as a fixture in aristocratic circles where his charm and intellect were highly prized. His greatest argument was that states should move away from money based on precious metal and instead adopt paper currencies based on government debt. By increasing the amount of money in circulation, Law reckoned, rulers could allow traders and investors to do more business, make more money and so pay more taxes.

That was a fanciful notion until 1715. That year, King Louis XIV of France died, leaving behind a country impoverished by years of his profligate spending and foreign wars and ruled by a child, five-year-old Louis XV. His regent was the Duke of Orleans, an acquaintance of Law.

Law persuaded Orleans to let him establish the Banque Générale, which was permitted to issue paper notes backed by gold and silver. It worked, so Law upped the stakes and bet again. He convinced Orleans to let him go global, and the result was the Company of the West, France’s first joint stock company. It controlled trade between France and its holdings in North America, a huge territory along 3,000 miles of the Mississippi from New Orleans to Quebec.

This wasn’t really new, of course. Britain had established joint stock companies in the previous century and the Bank of England, set up after the Glorious Revolution, had been printing paper money for 20 years by then. Meanwhile, the British and Dutch had long-established companies controlling their foreign dominions.

So Law’s innovations allowed a poor and backward France to begin catching up with the global leaders. And for a time afterwards, it looked like it might even overtake them.

Law sold shares in the Company of the West, and the French appetite for them was insatiable. The profits of early colonial settlements, rumours of gold and silver deposits in American soil and Law’s charisma combined to create a feeding frenzy.   Demand drove prices up and up. Shares worth 500 livres at the start of 1719 were worth 10,000 by the year’s end.

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Shareholders became hugely rich, at least on paper. The word “millionaire” was coined for those who achieved great wealth from the Mississippi company.

Orleans was delighted, because Law insisted shares could only be bought with outstanding French government loan notes: people piling into the company shares were effectively helping to pay off the crippling national debt.

So delighted that he granted Law first control over all France’s foreign conquests and trade, and then effective command of the French economy. First his bank was taken over by the crown, which guaranteed its paper currency, though Law remained in control of what was effectively the country’s first central bank. Then in January 1720, Law became the Controller-General and Superintendent-General of Finance.

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.

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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?

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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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