John Law ran France for three years and broke it

John Law is the most important economist almost nobody reads. He invented modern central banking. He issued Europe's first paper currency at national scale. He built and then destroyed the largest stock-market bubble of the 18th century, in a pattern so complete it reads as a parody of every crash that has happened since. His defenders call him a misunderstood pioneer. His critics call him a charlatan. Both are correct.

The gambler

Law was born in Edinburgh in 1671, the son of a goldsmith. He made his early money at cards, worked out the mathematics of probability in the London coffee houses, and in 1694 killed a man named Edward Wilson in a duel over a woman. He was convicted of murder, escaped prison, and spent the next two decades on the continent. He played for a living from Amsterdam to Venice. In 1705 he published 'Money and Trade Considered', which argued that Scotland could break its chronic cash shortage by issuing paper money backed by land. No government took him up on it until 1715, when the French Regent, Philippe II d'Orléans, needed a miracle to manage the debt Louis XIV had left behind.

The system

In 1716 Law received royal authorisation to open the Banque Générale, a private bank that issued paper notes redeemable for coin. In August 1717 he founded the Compagnie d'Occident, a trading company with monopoly rights over French Louisiana. In December 1718 the bank was nationalised and renamed the Banque Royale. In May 1719 the company absorbed the East and West India companies and became the Compagnie des Indes. Over the same year Law added monopolies on tobacco, trade with Senegal, and eventually the right to collect most French taxes. By January 1720 he was Controller General of Finances, functionally running the French economy.

The architecture was elegant and self-referential. The bank printed notes. The notes bought shares in the company. The company collected taxes, and the taxes were paid back in bank notes. Shares rose because investors expected the company to grow. The company grew because new investors bought shares. For a while, everyone got richer.

The bubble

Between 1717 and early 1720, shares of the Compagnie des Indes rose from an offering price of 500 livres to a peak reported above 10,000 livres. The word 'millionnaire' entered the French language in this period to describe people whose paper wealth, on any given day, had crossed the million mark. Speculators from across Europe travelled to the rue Quincampoix, where the shares traded from hastily built booths. The British ambassador wrote home that Paris had gone insane.

The problem was that the underlying business was mostly fictional. Louisiana produced very little. Tax collection was real, but not growing the way share prices implied. In January 1720 the first investors noticed the gap and began exchanging shares and notes for gold. The run began quietly.

The crash

In February 1720 the Mississippi Company and the Banque Royale were formally merged to try to stop the drain. In March, payments in gold and silver above small sums were made illegal to force holders back into paper. In May, Law announced that both shares and notes had been overvalued and devalued each by 50 percent in a single edict. Public outrage was immediate. Crowds gathered in the rue Quincampoix, several people were trampled to death, and the Regent reversed the devaluation within days. The reversal did not restore confidence. Over the rest of 1720 shares fell back toward their pre-bubble price. By December Law had been stripped of his offices and fled France.

He spent the last nine years of his life in Venice, earning a living again at cards. He died there in March 1729.

What survived

Two things outlived the crash. The first was modern central banking. Law had demonstrated, if nothing else, that a sovereign backed by a monopoly note-issuing bank could fund operations faster and at lower cost than a sovereign dependent on raising taxes. England had been doing something similar since 1694 through the Bank of England, but it was the French wreckage that taught every other European state to pay attention. Every central bank that exists today sits downstream of Law's experiment, including the ones whose founding charters exist specifically to avoid his mistakes.

The second was a two-century French allergy to paper money. France refused to issue paper currency on any serious scale again until the Revolution, and even then the assignats of the 1790s collapsed in an almost identical run. It took until the founding of the Banque de France in 1800 for the country to have a functioning note-issuing central bank again. The collective memory of 1720 held for four generations.

Every serious financial crash since has reproduced at least two of Law's features: a self-referential asset, a public willing to take the story on faith, and a government that profits while the music plays. Newton lost his retirement on the parallel bubble in London the same year. Read any account of 1929, 2008, or 2022 with Law in mind. The cast changes. The plot does not.