John Law's Mississippi Bubble
Scottish economist John Law convinced the French Regent in May 1716 to establish the Banque Générale (later Banque Royale), which issued paper notes backed by shares in the Mississippi Company. Law promoted the notes aggressively and merged the bank with France's colonial trading enterprise. Over four years, the bank issued roughly five times more notes than it held in gold and silver. The shares of the Mississippi Company rose tenfold; then Law tried to convert shares back to specie and the whole scheme collapsed in December 1720. The French state was bankrupted. Paper money was so discredited in France that the word 'banque' remained taboo for the next 80 years.
Law's scheme introduced nearly every modern central-bank mechanism in one rolled-up package: open-market bond purchases, quantitative easing, share-price support, currency inconvertibility. It worked briefly, then failed in the way that modern versions have so far avoided — primarily because modern central banks do not claim convertibility and so cannot be caught pretending to have more reserves than they do.
03 · First Paper Bubbles
The invention of paper money in Western economies (borrowed conceptually from Song Dynasty China) introduced a new debasement mechanism: issuing more paper claims on gold or silver than the issuer actually held. The first Western paper monies were issued by the Massachusetts Bay Colony in 1690. Within 30 years, John Law's Banque Royale in France had demonstrated the catastrophic potential at industrial scale. Every paper-money experiment of the 18th century — Continentals, assignats, Bank of England wartime notes — followed the same pattern: issue, over-issue, collapse.
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