Scottish businessman John Law, who believes that…

Scottish businessman John Law, who believes that money is only a means of exchange that does not constitute wealth in itself, and that national wealth depends on trade, had in August 1717 acquired a controlling interest in the then derelict Mississippi Company and renamed it the Compagnie d'Occident (or Compagnie du Mississippi).

Its initial goal had been to trade and do business with the French colonies in North America, which includes much of the Mississippi River drainage basin, and the French colony of Louisiana.

As he bought control of the company he had been granted a twenty-five-year monopoly by the French government on trade with the West Indies and North America.

The company had in 1719 acquired the Compagnie des Indes Orientales, the Compagnie de Chine, and other French trading companies and became the Compagnie des Indes (or Compagnie Perpétuelle des Indes).

Law had exaggerated the wealth of Louisiana with an effective marketing scheme, which had led to wild speculation on the shares of the company in 1719.

The scheme was to have the success of the Mississippi Company combine investor fervor and the wealth of its Louisiana prospects into a sustainable joint-trading company.

The popularity of company shares were such that they sparked a need for more paper bank notes, and when shares generated profits the investors were paid out in paper bank notes.

In 1720, it acquires the Banque Royale, which Law had founded as Banque Générale in 1716.

In an attempt to replenish the French treasury, the regency has tried a number of original financial experiments, notable among which is Law’s famous financial system, and now appoints Law Controller General of Finances to attract capital.

As the creditors buy shares in the company with their Bonds and debt papers, the whole government debt becomes property of the company (debt-for-equity transaction) and the company becomes property of the former creditors, but effectively controlled by the government.

Initially, the government pays an annual three percent interest to the company, which amounts to forty-eight million livres.

Through these transactions the French government has successfully unloaded their whole gigantic debt of one thousand percent of the annual budget (perhaps two hundred percent to four hundred percent of GDP) and is now basically debt free. (Compare this with the debt acquisition by The South Sea Company of England that acquires eighty percent of the fifty million pound government debt during 1720. The South Sea Company reaches a highest share price of 1one thousand pounds in August 1720, a few months later than the Compagnie des Indes.)

Louisiana receives a large influx of French settlers, France’s colonial and national economies are stimulated, and many speculators become millionaires.

Shares have risen from five hundred to fifteen thousand livres, but by summer of 1720, there is a sudden decline in confidence.

A capital flight by French investors, similar to what is happening in London with the South Sea Company’s stock, bursts the Mississippi Bubble in October.

When by the end of 1720 opponents of the financier attempt en masse to convert their notes into specie, forcing the bank to stop payment on its paper notes, the Regent Philippe II of Orléans dismisses Law, who flees to Venice.