This company would cause Law’s wealth and influence to skyrocket as it was used to finance the French government and make speculators rich over the next few years. It was left to John Law’s judgment as to the amount of banknotes to be in circulation.”Īlso in 1717, Banque General bought the Mississippi Company. There was no limit placed on the number of banknotes that could be issued by the bank. However, the bank was not to engage in trade, maritime insurance, or commission business. Bills and letters of exchange could be discounted by the Bank. The Bank could open deposit accounts, which could be withdrawn, or through which an amount could be transferred to another party, similar to today’s check writing. Depositors would receive banknotes on sight for their coin. The Bank was not subject to taxation, nor were foreigners’ deposits subject to confiscation, in the case of war. “In the beginning, banknotes were to be payable in specie of the weight and standard of the date. The economist Doug French writes in his book, Early Speculative Bubbles and the Increase in the Money Supply, His bank grew wealthy and in April 1717, the banknotes could legally be used to pay taxes, giving them more value. In this way, he collected deposits of gold and silver and issued paper money to people looking for a safe-haven asset to protect from inflation. Law promised to redeem his banknotes with the coins that were deposited, as opposed to using any of the debased coins in the future. Initially, the French public feared that the Banque General’s paper money would lose value like their debased gold and silver coins. However, it ultimately led to price inflation for the public. They could do this because the police were not going to arrest the King nor his regent. They did this to have more money to pay their bills at face value without needing to pay with the same weight of gold or silver. Prior to this, the French government had debased the gold and silver money in 1713 by mixing in base metals of lesser value into the coins. On May 5, 1716, John Law was allowed to open the Banque General and started printing paper money. The paper currency of Britain referenced above led to the South Sea Bubble, which also burst in 1720. He recommended the addition of a paper currency, such as that in Britain and Holland, and its use to extend credit.” He diagnosed France’s problem as there being insufficient money in circulation, restricted by it being only gold and silver. “At about this time, Law presented himself at court and offered his considered solution to the Regent. The Duke, looking to save his government from bankruptcy and chaos, heard the advice of his Scottish friend, John Law. His 5 year old son became King Louis XV and the Duke of Orleans, Phillipe II, became the regent until the boy was old enough to rule. That meant only three million livres were available to pay the 220 million interest on the debt, and consequently the debt, mostlybillets d’etat (the equivalent of modern treasury bills) and billets de monaie (floating and war debt) traded at a discount of as 1 much as 80% of face value.” The royal debts were three billion livres, annual income 145 million, and expenditure 142 million. “The death of Louis XIV in 1715 left France’s state finances (which were the royal finances) in a state of bankruptcy. In the early 18th century, the French Monarchy was broke from foreign wars (War of Spanish Succession 1701-1713/1714) and domestic largess when King Louis XIV died in 1715.Īccording to Alasdair Macleod writing for , The Mississippi Bubble was a result of desperation. The French were impoverished for the same reasons that the USA are being impoverished today: Speculators thought that someone would buy their shares at a higher price, because stocks always go up when the government prints money to buy stocks. In 1720, John Law had his government bank, the Banque Royale, print money, inflate the value of the Mississippi Company (Mississippi Bubble), accept French government debt at face value in exchange for stock in the company, and when enough people tried to trade their bank notes and shares for gold and silver, the value of the Mississippi Company collapsed along with the value of the bank notes and government debt. Friday, June 11th, US Treasury Secretary Mnuchin announced that there would be an additional $1 trillion of stimulus money coming from the government to keep markets inflated once the Federal Reserve bank prints and loans the Federal government the money since the taxpayers are broke.Ī similar thing happened in France in the early 1700’s.
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