THE MISSISSIPPI SCHEME 1716-1721

CHAPTER THREE – DISILLUSION

Following early success with his paper money policy, John Law’s economic and business plans begin to unravel. Stockholders are beginning to worry and some early signs of selling shares begin to appear. [Chapter 1]     [Chapter 2]

Trouble in Paradise

Prince de Conti had tried to liquidate his stock. Others soon followed his example. Seasoned stockbrokers saw that prices could not rise forever. Two of them, very astute, quietly and in small lots, converted their stock to coins and sent them to foreign countries. They also bought gold and silver plate and expensive jewelry and secretly sent it to England and Holland.  Another broker, sniffing the coming storm, bought a million livres of gold and silver coin, packed it in a farmer’s cart, and covered it with hay and cow-dung. Disguised as a peasant, he drove his cart to Belgium.[i]

To this point, everyone could get coinage, but it was becoming scarce. People began to complain, but the bank limited cash withdrawals to preserve its creditworthiness. Precious metals continued to leave France despite every effort to prevent it. People hid their remaining coin. Finally, coin was so scarce that its trade came to a halt. In this emergency, Law then forbade all use of coins.

Currency Controls

In February 1720, an edict, intended to restore paper credit, destroyed it and drove the country nearly to revolution., The edict forbade any person to have more than 500 livres of coin or to buy jewelry and precious plate or stones. Informers were promised half the amount they reported. Violators got a heavy fine, and their coins confiscated.

This tyranny distressed the whole country. Servants betrayed their masters; neighbors spied on each other, causing people to mistrust one another.  Informers and their agents violated privacy. Arrests multiplied. Courts were jammed. An informer had only to say that he suspected someone of hiding money, and the court issued a search warrant. The English ambassador, sarcastically said, “It is now impossible to doubt Law’s conversion to Catholicism; he has established the inquisition and performed transubstantiation, turning so much gold into paper.”

The public cursed the regent and Law. Coin was now nearly illegal, yet nobody would take paper if he could help it, not knowing what it would be worth tomorrow.  Many thought that a revolution would erupt, with Law and the regent executed. Lucky for the two of them, people were frozen with horror. In May 1720, people were instructed to stay home on Saturday and Sunday. Beyond some small disturbances, the peace held.

Disillusion and Discord

The Indies shares plummeted, and few believed the tales of wealth in Louisiana. In a last effort to restore public confidence, the government conscripted 6,000 poor wretches in Paris. They were given clothes and tools and prepared to sail for New Orleans’ alleged gold mines. They paraded daily through the streets with their shovels, and then left in small detachments to sail for America. Two-thirds of them never embarked. Instead, they spread over the country, sold their tools, and returned to their old life.

The disparity between coins and paper widened. Coin rose in value with every new attempt to depreciate it. In February, parliament merged the Royal Bank with the Company of the Indies. No more paper would be issued. The regent gave all the banks’ profits to the Company of the Indies. This temporarily raised the price of the Indies shares.

In early May, total notes in circulation were 2.6 billion livres, while coin was less than half that. Law and the ministers attended a council of state. The majority knew they had to equalize the two currencies. Some proposed that the paper be reduced to the value of the coins. Others proposed that the value of the coins be raised to equal the paper. Law opposed both these solutions but failed to offer another. They finally decreed by edict that the shares of the Indies Company and the bank currency should gradually diminish in value, so that at year end they would be half their nominal worth. But parliament refused to register the edict. The country became so alarmed that, to keep peace, the council had to nullify its own decree.

It published a new edict, restoring the bank notes to their original value. That day, the bank stopped payment in coin. Law was dismissed from the ministry. The cowardly regent threw all the blame on Law. On presenting himself at the Palais Royal, Law was refused entrance. That night however, he was admitted by a secret door. The regent tried to console him and made excuses for his severe treatment of Law. To make amends, two days later he took Law to the opera, where they sat in the royal box. But Law was so hated that this nearly proved fatal.

A mob attacked his carriage with stones as he arrived home. The coachman moved quickly, and the domestics closed the gate immediately. Else, Law would probably have been dragged out and torn to pieces. On the following day, his wife and daughter were attacked as they returned home. When the regent heard this, he stationed Swiss guards permanently in the Laws’ courtyard. Public hatred was so great that Law, fearing his house, even with the guards, was unsafe, took refuge in the Palais Royal.

Chancellor, D’Aguesseau had been dismissed in 1718 for opposing Law’s projects. He was recalled to replace Chancellor D’Argenson and to restore credit. The regent acknowledged too late, that he had been unjustifiably harsh to one of the ablest and most honest men in this corrupt episode. After his disgrace, D’Aguesseau had retired to his country house and emersed himself in philosophic studies, putting aside the court intrigues. The regent sent Law and a gentleman of the regent’s household to bring the ex-chancellor to Paris. He agreed to assist the court, against his friends’ advice ; they did not want him to accept any recall that involved Law.   

[i] Little has changed in 300 years.  In 1981, France elected Francois Mitterrand their President. The nation feared that his new Socialist government would devalue the Franc. This fear led to currency controls to prevent the flight of francs to foreign banks for conversion into other investments. Stiff penalties were threatened for those caught taking money across borders. A few days later, I made my first trip to Europe, meeting with bankers in London and Paris on behalf of RJR, my employer. At a meeting with a major U.S. bank in Geneva, the manager told me that shortly before, a high profile French official came for an appointment at the bank. The Frenchman and his mistress had just driven across the border into Switzerland. He wanted to deposit several million francs into a private Swiss account.  The banker asked how the money would be transferred, and the couple answered that they had the money with them. The young lady had a large teddy bear.  She screwed the head off the bear and began pulling money out.  The bear was stuffed with French currency. The banker said if they had been apprehended at the border with the money, he would have been arrested and it would have been front page news in France. (Fortunately, the worst fears for currency devaluation, inflation, and economic collapse in France never came true.)