Episode transcript
The Mississippi Bubble
This transcript has been lightly edited for clarity and readability.
Paris, 1720
I'm Bryan. This is Money's the Matter.
Paris, 1720. La Rue Quincampoix.
It's Paris, 1720. Rue Quincampoix is already awake.
In the narrow street, voices spill from windows and
doorways. Merchants, aristocrats, servants, and spectators
press shoulder to shoulder, waving papers in the air and
shouting prices over one another.
Somewhere in the crowd, a man has rented out his back as
a writing desk so two strangers can sign their next trade.
Everyone seems to know someone who became rich yesterday.
France, a country that only a few years earlier was drowning
in debt, has become suspiciously wealthy almost overnight.
And behind the wealth is a Scotsman named John Law:
a gambler, a mathematician, a convicted murderer, and a man
who believes he has discovered something groundbreaking
about money.
France Was Broke
To understand how a Scottish gambler came to control the
money of France, we have to go back a few years to a country
that was anything but rich.
Louis XIV, the Sun King, had spent decades building palaces
and fighting wars while projecting French power across Europe.
Versailles glittered in the sun. The treasury did not.
When Louis died in 1715, he left behind a government buried
beneath a mountain of debt. Taxes were already crushing ordinary
people. Gold and silver coins were scarce. Credit was broken.
France had all the appearance of a great and wealthy kingdom,
but underneath the silk, chandeliers, and gold leaf was a
serious problem.
France was broke.
John Law's Idea
Into this mess walked John Law. He was tall, charming, Scottish,
great with numbers, and a professional gambler who had once
killed a man in a duel in London, been sentenced to death,
escaped from prison, and spent years wandering Europe studying
the strange machinery of money.
Law had watched coins disappear during financial panics and
governments struggle when there was not enough gold or silver
moving through the economy. Somewhere between the casinos of
Amsterdam, the banking houses of Italy, and the gambling tables
of Europe, he became convinced that everyone else was thinking
about money the wrong way.
A country did not become wealthy simply because it had money.
Land, trade, labor, and commerce were the real wealth of a nation.
Money allowed that wealth to move.
What if money did not have to be limited by the amount of gold
or silver sitting in a vault? What if a bank could issue paper
notes instead notes people trusted, notes they could carry easily,
notes that could circulate through markets and workshops far
faster than heavy coins?
More money in circulation, Law believed, meant more trade.
More trade meant more employment and production, and ultimately
a more prosperous France.
La confiance. Trust.
The Bank
In 1716, Law was finally given his chance. With the approval of
Philippe d'Orléans, he established the Banque Générale in Paris.
You could bring the bank gold or silver coins and receive paper
notes in return: notes promising that the bank would redeem them
for coin when asked.
The paper was easier to carry and, importantly, more predictable
than French coins whose metallic value and official value could
be changed by the crown. Slowly, people began using Law's notes.
Merchants accepted them. Taxes could be paid with them. Business
became easier.
The experiment appeared to be working, and that success gave
John Law something dangerous: credibility.
Louisiana
The following year, Law turned his attention across the Atlantic
to an enormous stretch of French territory called Louisiana.
This was not merely the modern state. French Louisiana sprawled
across much of the Mississippi River basin, a vast interior that
Europeans still understood poorly and imagined freely.
Law took control of a struggling trading enterprise, the
Compagnie d'Occident, the Company of the West, and received a
monopoly over French trade in the territory.
Louisiana had land, timber, tobacco, furs, access to the
Mississippi, and, if you believed the stories circulating
through Paris, perhaps enormous quantities of gold and silver.
Suddenly, John Law was not merely offering France a new kind
of money. He was offering something much older: wealth and
prosperity.
The Bubble
The stories grew with every telling. Louisiana became less a
place than an idea: a distant land of fertile soil, overflowing
trade, and fortunes waiting along the Mississippi for someone
clever enough to claim them.
Law's company absorbed other trading companies and accumulated
increasingly valuable privileges from the French government.
Eventually it controlled enormous portions of French commerce.
Ordinary people could participate in that future by doing one
simple thing: buying shares.
At first, the shares were an investment in a trading company.
But as the price began to rise, people stopped asking what the
company might earn from Louisiana. They started asking how much
higher the shares might go.
And higher they went.
Shares issued around 500 livres climbed into the thousands.
The higher they rose, the more people wanted them. And the more
people wanted them, the easier it became to believe they would
keep rising.
There was another piece to Law's machine. His bank was issuing
more paper money, putting more livres into circulation at
precisely the moment France became obsessed with buying shares
in his company.
Paper notes could buy shares. Rising shares created fortunes.
Those fortunes encouraged more buying, and more money flowed
back into the same system.
For a while, it almost seemed self-sustaining. Usually, bubbles do.
Rue Quincampoix
Rue Quincampoix became the center of it all: a narrow, crooked
street transformed into something resembling a stock exchange,
a casino, and a carnival all at once.
Carriages clogged the surrounding roads. Fortunes were made
between conversations. People who had never thought of themselves
as investors suddenly watched their wealth multiply on paper.
Law's bank became the Banque Royale, its notes guaranteed by
the king. Before long, Law became France's Controller General
of Finances. The foreign gambler who had once escaped an English
prison was now helping control the finances of one of Europe's
most powerful kingdoms.
And perhaps that was the most dangerous moment of all, because
when something works long enough, skepticism begins to look
like stupidity.
What Happens If Everyone Wants Their Money Back?
People sold land, jewelry, and possessions to buy shares.
Nobles mixed with merchants and servants in the same crowded
street, all chasing the same rising number. Stories of sudden
wealth traveled faster than any warning that could follow.
This is how bubbles begin. The fear of missing out sets in.
And somewhere beneath the noise of Rue Quincampoix, beneath the
paper fortunes and the cries of achetez, achetez,
another question was looming:
What would happen if everyone decided they wanted their money back?
At first, only a few people tried. Some of the earliest investors
had accumulated fortunes and eventually began doing what
successful investors and successful gamblers have always done:
taking some of the chips off the table.
Shares were sold. Banknotes were carried to the Banque Royale.
Those notes came with a promise that they represented real value,
redeemable in gold and silver.
One person asking for coins was no problem. A hundred might be
manageable. But Law's system had grown far beyond the metal
sitting in France's vaults. Vast quantities of paper money were
circulating through the economy, supporting vast paper fortunes
in the Mississippi Company.
The system worked beautifully as long as people preferred the
promise to the thing it promised.
Then people began preferring the thing the notes promised:
gold, silver, something they could hold that did not depend on
John Law, the Mississippi Company, or the confidence of the
person standing next to them.
The Run
Law tried to stop the bleeding. Restrictions were placed on
payments and precious metal. The value of coins was changed.
The value of shares was changed. New rules followed old rules,
each intended to restore confidence and each quietly revealing
just how fragile confidence had become.
You can order someone to accept a banknote. You cannot order them to believe it.
Once that belief began to disappear, the machine ran even more
powerfully in reverse. Shares fell. People rushed to sell.
Banknotes were exchanged as quickly as people could get rid of
them. Fortunes created on Rue Quincampoix began evaporating.
John Law, once celebrated as the financial genius who had rescued
France, became the man blamed for its ruin. By the end of 1720,
he fled Paris. He spent much of the rest of his life wandering
Europe and gambling to support himself. He died in Venice less
than a decade later.
The Part Law Got Right
It would be easy to end the story there and say John Law was
simply a con man who printed too much money and created a bubble.
But that is not the full story.
Some of Law's ideas were remarkably modern. Much of the financial
world we live in today would have been recognizable to him in
principle, if not in scale.
His mistake was discovering something true and then pushing it
until it became dangerous.
Money, banks, and markets can run on trust. Much of modern finance
works because millions of strangers agree to accept promises from
people they will never meet.
But bubbles reveal the other side of trust. When prices rise long
enough, the rising price itself begins to feel like evidence.
Skepticism looks foolish. Caution feels expensive. Eventually
people stop buying something because they believe in what it will
produce and start buying it because they believe someone else will
pay more for it tomorrow.
That's speculation.
Back to Rue Quincampoix
Return for a moment to Rue Quincampoix in Paris—the same narrow
street where servants stood beside aristocrats, where strangers
signed trades on another man's back, where yesterday's fortunes
were measured in pieces of paper.
The shouting is quieter now. The crowds are thinning. Somewhere,
someone is holding shares in a satchel that once made him rich,
wondering what happened to all that money.
He was literally holding the bag.
But this is not really just a story about money. It is a story
about people.
La confiance. Trust.
John Law discovered that trust could turn paper into money,
money into fortunes, and an impoverished kingdom into what
appeared, at least for one moment, to be the richest place on earth.
He also discovered what happens when everyone stops believing
at once.
Thanks for listening. I'm Bryan. This is Money's the Matter.
