Past is Prologue

1. The War of Spanish Succession left the finances of the Louis XIV in shambles.  Louis XV inherited a badly depleted Kingdom.  He hired John Law, a Scottish math wizard and professional gambler with sophisticated theories on how to use paper currency to inflate the wealth of the sovereign by "Stimulating the Economy."  In 1716 Law established the Banque General in France, a private bank, but three-quarters of the capital consisted of government bills and government-accepted notes, effectively making it the first Central Bank of the nation.  Law proceeded to issue Paper Money backed by Theoretical Land owned by the Mississippi Company, while simultaneously issuing and controlling the shares in the Mississippi Company. For a period of three years this did indeed create a fantastic bubble that "Stimulated" the French economy.  THEN:
   
   In Dec. 1719 the share price of the Mississippi Company, which had risen in a bubble from 150 to 10,000 Livres descended to 7,500.
   
2. Law declared a dividend for shareholders of Livres 200 per share and the price recovered to 9,000.
   
3. Future markets developed at 15,000 Livres, but Law refused credit to finance futures, whereupon the price fell. He then revoked his credit ban and the price recovered.
   
4. Company sales offices were opened in Paris to try and curb “unregulated” sales and control the market.
   
5. ”Primes”, equivalent to today’s options, were launched with leverage of 10 to 1.
   
6. Investors sold shares in order to buy Primes, crashing the share price from 10,000 to 7,000 Livres.
   
7. Physical silver and gold were draining from the bank’s coffers as investors, anticipating an end to the bubble, sold shares and cashed out into physical.
   
8. By the end of 1720, some 500 million Livres in silver and gold had been taken out of the country to London and elsewhere.
   
9. Inflation in France escalated and the price of land rose 400% in some areas. The price of staples rose with bread up 500% from 1 to 5 sous within a year.
   
10. Law, although a "free marketeer" by philosophy, (sounding familiar?) decided the time had come for swift and devastating intervention.

	Law passed an edict banning the export of silver and gold coins and bullion.
	The public turned to buying diamonds, gems and jewels, in order to escape paper (Livres and shares).
	The purchase and wearing of diamonds, pearls, and other jewels was then prohibited.
	The investors turned to buying silver and gold dishes, plates, and other similar objects.
	A ban was imposed on the production and sale of all silver and gold items except religious ones.
john law with a share from the Mississippi company: as good a gold...	The prices of crosses and chalices soared, until their use was also banned.
	Law announced the Royal Bank was being taken over by the Mississippi Company at 9,000 Livres per share and closed down the company sales offices.
	The share price collapsed from 9,500 to 7,800 Livres.

• On Feb 27th measures for 'hoarders.'
  
• Informers were rewarded for any hoarding information, which included the right for the government’s agents to search any private property for silver and gold.
  
• Some 2 weeks later Law reversed his decision, re-opened the company sales offices and supported the sales price at 9,000 Livres. There was a rush to sell shares for paper Livres.
  
• Law decided to fade out silver and gold coin by reducing their value to zero over several months - turning to a total paper monetary system.
  
• Law had gone one step too far and his political support started to collapse.
  
• A huge crime wave developed simultaneously as losses led to penury, hardship and hunger.
  
• By May 1720 some 2.6 billion Livres banknotes had been printed.
  
• Law decided to reduce the price of the shares from 9,000 to 5,000 Livres.
  
• The value of Livre banknotes would also be reduced by 50%.
  
• After 3 days of riots, Law resigned, and Orleans restored the value of the shares and banknotes to their previous levels.
  
• A few days later the limits of owning gold and silver were lifted, but nobody had any left.
  
• Only 2% of the money still circulating was in silver and gold.
  
• Coins were rationed and vast public bonfires of paper shares and Livres bank notes were organized by the government to try and restore faith in paper, by demonstrating to the public that they were reducing the quantity in circulation, which needless to say did not work.
  
• On the foreign exchange market a pound sterling rose from 39 Livres to 92 Livres in 6 months.
  
• Finally vast quantities of copper coins were minted to replace the lack of coins in circulation.
  
• Banks however opened only sporadically and to huge queues of people trying to exchange paper for gold and silver.