The "Mississippi Company" (of 1684) became the "Company of the West" (1717) and expanded as the "Company of the Indies" (1719).

The Banque Royale

In May 1716, the Banque Générale Privée ("General Private Bank"), which developed the use of paper money, was set up by John Law

John Law (economist)

John Law was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade...

. It was a private bank

Bank

A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

, but three quarters of the capital consisted of government bill

Banknote

A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...

s and government accepted notes. In August 1717, he bought the Mississippi Company to help the French colony in Louisiana

Louisiana (New France)

Louisiana or French Louisiana was an administrative district of New France. Under French control from 1682–1763 and 1800–03, the area was named in honor of Louis XIV, by French explorer René-Robert Cavelier, Sieur de la Salle...

. In the same year Law conceived a joint stock

Joint stock company

A joint-stock company is a type of corporation or partnership involving two or more individuals that own shares of stock in the company...

 trading company called the Compagnie d'Occident (or, The Mississippi Company). Law was named the Chief Director of this new company, which was granted a trade monopoly of the West Indies and North America

North America

North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...

 by the French government.

The bank became the Banque Royale (Royal Bank

Royal Bank

The terms Royal Bank, Banque Royale, Banco Real can connote several different things,* Royal Bank * Royal Bank of Canada** Royal Bank of Trinidad and Tobago, a subsidiary of RBC* Royal Bank of Scotland...

) in 1718, meaning the notes were guaranteed by the king, Louis XV of France

Louis XV of France

Louis XV was a Bourbon monarch who ruled as King of France and of Navarre from 1 September 1715 until his death. He succeeded his great-grandfather at the age of five, his first cousin Philippe II, Duke of Orléans, served as Regent of the kingdom until Louis's majority in 1723...

. The Company absorbed the Compagnie des Indes Orientales, Compagnie de Chine

Compagnie de Chine

The Compagnie de Chine was a French trading company established in 1660 by the Catholic society Compagnie du Saint-Sacrement, in order to dispatch missionaries to Asia...

, and other rival trading companies and became the Compagnie Perpetuelle des Indes on 23 May 1719 with a monopoly of commerce on all the seas. Simultaneously, the bank began issuing more notes than it could represent in coinage; this led to an economic inflation, which was eventually followed by a bank run when the value of the new paper currency was halved.

The Mississippi Bubble

Law exaggerated the wealth of Louisiana with an effective marketing scheme, which 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, the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law's pioneering note-issuing bank was successful until the French government was forced to admit that the number of paper notes being issued by the Banque Royale were not equal to the amount of metal coinage it held.

The "bubble" burst at the end of 1720, when opponents of the financier attempted en masse to convert their notes into specie

Coin

A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....

, forcing the bank to stop payment on its paper notes. By the end of 1720, Law was dismissed from his positions by Philippe d'Orléans, regent of France for Louis XV. Law then fled France for Venice.

See also

• John Law
  John Law (economist)
  John Law was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade...
  
  
• South Sea Company
• Economic bubble
  Economic bubble
  An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...
  
  
• Extraordinary Popular Delusions and the Madness of Crowds
  Extraordinary Popular Delusions and the Madness of Crowds
  Extraordinary Popular Delusions and the Madness of Crowds is a history of popular folly by Scottish journalist Charles Mackay, first published in 1841. The book chronicles its subjects in three parts: "National Delusions", "Peculiar Follies", and "Philosophical Delusions"...
  
  

External links

• "Learning from past investment manias" (AME Info FN).