As long as the credit of this bank subsisted, it appeared to the French to be perfectly solid. The bubble no sooner burst, than the whole nation was thrown into astonishment and consternation. Nobody could conceive from whence the credit had sprung; what had created such mountains of wealth in so short a time; and by what witchcraft and fascination it had been made to disappear in an instant, in the short period of one day.
Sir James Steuart, An Inquiry into the
Principles of Political Oeconomy, Book IV (1770)
ON DECEMBER 30, 1719, IMPECCABLY CLAD AND BEWIGGED as always, Law entered the cabinet of the Mississippi Company and addressed the annual general meeting. The sense of expectation was almost palpable. Within the past month share prices had dropped from a high of over 10,000 livres to 7,500, only to recover eleven days later and reach 9,400. Even among this informed circle of codirectors few fully understood why. Was the company the thriving enterprise that the world at large believed it to be? If so, why had the price fallen? If not, how long could recovery be sustained? Law appeared oblivious to the anxieties. With his customary charm and self-assurance, he reassured them that the company was flourishing. Overseas trade was expanding and the outlook so favorable that he would pay shareholders a dividend of 200 livres. For all those present this was festive tidings of the best kind.
We do not know if anyone at the meeting had enough direct contact with the colony to have an inkling of the true situation. Nor can we tell how many, even without such knowledge, sensed that this was a smoke screen or that Law had decided the dividend not according to company profits but according to the market share price to sustain the public’s confidence in their investment—another ingenious marketing ploy. But behind closed doors, in assorted cabinets and boudoirs, a handful of cannier investors were questioning what Saint-Simon later scathingly termed “the chimera of the Mississippi, its shares, its lingo, its science . . . its hocus pocus for taking money from some and giving it to others.” Rumors relating to Louisiana added to the ripples of disquiet. “I have spoken to a Frenchman who is lately come from the Mississippi. . . . The account he gives of the French settlement in that country would not encourage me to put my money into that stock,” Pulteney reported to Whitehall. Law’s charm and the dividend announcement were not enough to stanch the niggling insinuations. Even Saint-Simon could read the writing on the wall. “As the company possessed neither mines nor philosopher’s stone it was obvious that its shares, in the long run, must decline in value.” This comment calls to mind a remark made by Warren Buffett during the 1980s stock market downturn: “In the end, alchemy, whether it is metallurgical or financial, fails.”
The climbing share price had been nourished by the injection of vast sums of paper money into the economy. Law realized the pitfalls of continuing on this route: the bank’s reserves of coin could not keep pace with such expansion. If faith in paper wavered, supplies would run out. Everything rested on the willing suspension of disbelief. The system would self-destruct if people began to doubt it. Confidence—or credulousness—was all. But confidence was increasingly fragile.
Meanwhile, in the dingy alleyways and offices of the rue Quincampoix, the bonanza continued. Dealers taking advantage of the unregulated market became greedier and more daringly unscrupulous. Shady practices proliferated and futures trades—contracts whereby an investor agreed a share price and made a down payment for delivery at some future date—were, as far as Law was concerned, a particular problem. During the autumn of 1719, shares officially trading for around 10,000 livres were being sold in various forms of forward contracts for 15,000. Law saw that investors believed that share prices would rise still further. He knew that they would have to be controlled. He himself had caused the great dip and upward turn in the market in December 1719 by refusing loans, in an attempt to curb the money supply, then realizing how quickly the tide could turn and revoking the instruction.
To curtail the dubious dealings in the rue Quincampoix, company sales offices were opened in the new year to buy and sell shares at fixed prices. To satisfy the public hunger for shares and restrict the trade in futures, a new investment opportunity, called primes, was launched. The equivalent of what traders would today term a call option, a prime allowed investors to pay a deposit of 1,000 livres for the right to buy a share priced at 10,000 livres for delivery within the next six months.
Most investors still thought that shares would go above 10,000 livres. Lured by the leverage opportunity, they scram-bled to sell their mères, filles, petites filles, and cinq-cents to increase their gearing. One share sold for 10,000 livres enabled them to multiply their future holding tenfold. Within four days of the launch of the primes, the shares plummeted from 10,000 to 7,000 livres as people sold out to reinvest in primes. Law was forced into a position where he had to pay out large sums to buy up shares for which demand had evaporated.
Aside from vacillating share prices, Law was beset with another dilemma. Silver and gold were draining from the bank’s coffers. Anticipating that an end to the boom was near, numerous shareholders were selling out and converting to coins. One of the first to sense the instability of the market was Law’s close friend and possibly the only person to comprehend the precariousness of his policies: the Irish banker Richard Cantillon. Whether in currencies, shares, futures, wine, or art, Cantillon had an unerring eye for a good deal and a ruthlessness that prevented personal loyalty from standing in the way of profit.
Perhaps with the benefit of inside information gleaned over several good bottles of burgundy shared with Law, he was one of the few to anticipate the sudden upturn in share prices and begin buying Mississippi stock at the low of 150 livres. By August, when the share price rose to over 2,000 livres, remembering what his brother in Arkansas had told him, Cantillon realized that the bull market was based on little more than smoke and mirrors and ever-increasing quantities of paper money. Feeling that a crash was both inevitable and imminent, he cashed in. His profit from these few weeks’ exposure was reputed to be $80,000. He left Paris with his winnings and went on a tour of Italy to enjoy the sights and invest in art.
Cantillon was the first to turn his back on Law, but he was not alone. Several more major shareholders followed his example throughout the autumn, and by December the trickle had become a stream that seriously threatened the bank’s reserves. Most investors converted banknotes from share sales into coins and either hoarded or exported them. The stock dealers Bourdon and La Richardière did it quietly, changing notes for coin and jewels and dispatching them abroad. The most notorious seller was the Prince de Conti. Furious with Law for refusing him further handouts, Conti took some 4.5 million livres in notes to the bank and demanded coins. As in the bank’s earliest days, Law had no alternative but to comply. Conti needed three wagons to carry away the coins.
By the end of 1720 some 500 million livres in silver and gold had been taken out of the country, and the trend showed no sign of diminishing. Market vendors and merchants, aware of mounting unease, took paper with marked reluctance, often only at a discount, or spurned it altogether. In February, livestock sellers bringing their animals to market at Poissy refused to accept anything but gold and silver. Their customers, the butchers of Paris, were forced to hire a carriage to return to the city and collect the required coins.
Much of the money taken out by investors was dispatched to London, where the South Sea Company was now starting to gather its own momentum. It was one of several British chartered stock companies, and like the East India Company and the Bank of England, it had been granted a privilege in return for lending the government money. In 1711 the company lent $15.2 million to the government to pay off its floating debt and was granted a monopoly of trade with the South Seas and South America. Unlike Law’s Mississippi Company, however, revenue was not expected from the profits of colonization. The vast income generated by the company, investors were told, would be made by an agreement with Spain that allowed the company’s ships free trade with ports in Peru, Chile, and Mexico. In reality the only rights the company held with Spain enabled them to supply slaves and allowed for one ship a year to trade with the region.
Those who wisely chose to ignore British South Sea stock looked for more tangible repositories for their wealth in France. Many, including the wily widow Chaumont, invested in property, and within a few months the vast pool of paper money available had multiplied the price of land three- or four-fold. Inflation in other areas had also escalated. The recently arrived British diplomat Daniel Pulteney found difficulty in making ends meet and had to ask for an increase in his allowance. “I am told that most things are considerably dearer than they were when Mr. Bladen [his predecessor] came here. I find it so in the instance of a berlin [a carriage]. He paid 34 pistoles a month for his and I cannot have one under 50; the prices of things seem to rise as fast as the clocks do.” More serious than this was the fact that the cost of staples was rising similarly and causing the poor increasing hardship. In the two months between December and January alone, prices rose by 25 percent. The cost of some foods rose even more steeply; a loaf of bread costing one sou before the boom cost four or five times that by December, noted the diarist Buvat.
In a foreshadowing of the laissez-faire economic policies of Coolidge, Harding, and Hoover in the 1920s, Law had always held that markets should be allowed to develop freely, with a minimum of bureaucratic intervention. “Constraint is contrary to the principles upon which credit must be built,” he had once written. In other words, bureaucratic restrictions only hinder public confidence in credit economies. Now the tune changed. “Despotic power, to which we are beholden for it [the system], will also sustain it,” he decided. The time had come for intervention. Turning to strong-arm legislation, he moved swiftly and devastatingly.
To curtail the export of coins and to discourage hoarders, on January 28, a little over three weeks after assuming his office, he passed an edict banning the export of coins and bullion. But again the theory was flawed: faced with unpopular regulations, humankind tends to seek an escape route. Prevented from salting away coins in Amsterdam or England, the public looked for alternatives or defied the ruling altogether. The wiliest turned to diamonds and other jewels, which they hastily sent abroad. Others, more daringly, smuggled money over the border. Vermalet, a prosperous stock dealer, was said to have placed his stash of a million livres in coins in a farmer’s cart and covered it with manure. Then he donned a peasant’s smock and drove himself to Belgium, from where he sent his money on to Amsterdam.
Law retaliated even more dramatically than anyone expected. On February 4, the purchase and wearing of diamonds, pearls, and other precious gems, emblem of every Mississippi millionaire, were prohibited. But the ban did not succeed in halting the stampede away from paper. In place of diamonds, pearls, and rubies, investors turned instead to silver and gold: candelabra, tureens, dishes, plates, even furniture made from precious metal, were hunted out and bought for vastly inflated sums. Two weeks later this escape route was also blocked: a new law prohibited the production and sale of all gold or silver artifacts with the exception of religious paraphernalia. Within days the price of crosses and chalices soared.
The bloated share price and overexpanded money supply still awaited Law’s remedial scalpel. He called an extraordinary meeting of shareholders. Some two hundred of the wealthiest Mississippi millionaires attended, clad, according to one account, in such finery that they completely outshone the regent, the Duc de Bourbon, and the Prince de Conti, who were also there. Law announced that the royal bank was being taken over by the Mississippi Company. This apparent formality—he already directed both institutions—facilitated a further significant change. The royal holding of 100,000 Mississippi shares would be bought back by the company for 300 million livres—the entire sum recently raised from the sale of primes—with a guaranteed additional payment of 5 million livres a month over the next ten years.
Law justified this acquisition by arguing that reducing the number of shares on which he would have to pay a dividend would help the company’s balance sheet and curb the money supply. But some wondered whether in attempting to stop the flood of departing investors Law was not quietly encouraging the Crown to follow suit. Having paid the equivalent of 9,000 livres a share into the royal coffers, Law closed down the company sales offices and withdrew official support of the share price.
This was bad news for investors. Within a week shares plunged 26 percent, from around 9,500 to 7,800 livres, a sudden downslide that mirrored the 1929 Wall Street crash, when between September 3 and mid-November shares halved in value. The public was incandescent with fury. “The rage of the people is so violent and so universal against Law that I think it is above twenty to one, that, in the course of one month, he will be pulled to pieces; or that his master will deliver him up to the rage of the people,” Stair wrote gleefully.
Cornered between public distress and inexorably ebbing reserves, Law could see no alternative but to take even more despotic action. On February 27 he issued an edict that outlawed the possession of more than 500 livres’ worth of silver or gold and stipulated that in future all payments of more than 100 livres were to be made in banknotes. All surplus gold was to be brought to the bank and exchanged for paper. Transgressors could expect to be severely punished, and informers were encouraged with the promise of generous rewards. The slightest suspicion that gold was being concealed illegally would be enough for any house, whether palace or hovel, to be searched. The dreaded methods of the Visa, which Law had once scorned, now returned at his instigation. Servants were tempted to turn on their employers, children on their parents. Seething distrust made the crowds who took their silver and gold to the bank feel relieved of a burden when they returned with paper.
Predictably, however, not all complied. The most notable transgressor was the horse-loving Duc de Bourbon, who, getting wind of the new regulation, exchanged a reported 25 million livres for coins just before it came into effect. He was summoned by the regent to explain why he had “destroyed in a moment what we have struggled to establish over several days.” Both Bourbon and Conti, who had cashed in earlier, were ordered to comply with the recent measures immediately, and return the gold, or risk having their property searched by the authorities and the gold confiscated. When both refused, investigators, who had doubtless been bribed, made cursory searches of their châteaux and, predictably, discovered nothing.
Law was condemned mercilessly for his actions. Ambassador Stair commented sarcastically that it was impossible now to doubt his sincerity in converting to Catholicism, since he had established the Inquisition after having revealed his faith in transubstantiation by turning so much gold to paper. Public opprobrium extended also to his supporters. Bourbon was heckled in the street, and his manservant was pelted with stones when he attempted to remonstrate. Even the usually aloof Saint-Simon was aghast: “Never was sovereign power soviolently attempted; never did it meddle with any matter so sensitively felt or so vitally connected with the temporal well-being of the community.”
At the Palais Royal the unfolding turmoil was monitored anxiously by the regent. Always inclined to take the route of least resistance, Orléans feared that widespread hatred of Law would affect his own standing. When he sensed that his mentor’s faith was wavering, Law’s self-confidence slipped. Humiliating tales circulated by his opponents added to his distress. According to Stair, when Law arrived at the Palais Royal for an audience, the regent admitted him while relieving himself “upon his close stool.” Orléans was, said Stair, “in such a passion, that he run to Law with his breeches about his heels” and threatened him with the Bastille if matters did not quickly improve. Even if Stair fabricated this crude incident, it seems certain that the worry of losing Orléans’s favor, upon which Law’s political survival and his family’s future depended, had a profoundly adverse effect on Law. Under the barrage of reproach his nerve failed, and the combined reports of servants, enemies, and friends suggest that he had a nervous breakdown. His servants reported that he suffered from insomnia and anxiety at-tacks, that he was prone to sudden angry outbursts, and that his mood, even with his close family, became volatile and unreasonable. “He gets out of bed almost every night, and runs, stark staring mad, about the room making a terrible noise, sometimes singing and dancing, at other times swearing, staring and stamping, quite out of himself,” said Stair, who had heard the account from one of Law’s footmen. “Some nights ago, his wife, who had come into the room upon the noise he made, was forced to ring the bell for people to come to her assistance. The officer of Law’s guard was the first that came, who found Law in his shirt, who had set two chairs in the middle of the room and was dancing round them, quite out of his wits.” The usually poised Katherine must have been alarmed.
The burdens on Law’s shoulders were great indeed. Pressured by the regent and debilitated by his failing stamina, his resolve faltered. He backtracked.