John Law fiat and France

John Law was a Scotsman who introduced the first paper money to France in 1716.

He had befriended the Duke of Orleans, who was the regent for the child king Louis XV, and convinced him that paper money was the way to get the French government out of debt.

Initially, this new paper money was limited in supply and was convertible to gold and silver.

Two years later the supply limitation was removed.

The Bank that had been set up to manage the currency printed more and more notes.

Around the same time, Law had established the Mississippi Company and had acquired a monopoly on France’s foreign trade.

In what became the famous Mississippi bubble, huge demand for the shares in the Mississippi Company drove the share price from 500 livres to 18,000 livres.

During the speculative mania the government continued to print more and more paper money.

Eventually the smart money started taking profits, which triggered a collapse in the stock price of the Mississippi Company.

Recognising the danger of fiat currency, many converted their paper profits into gold and silver.

This was a wise move as inflation had reached 23%.

But it would soon destroy the monetary system.

Law initially responded by suspending convertibility into gold and silver and devaluing the paper currency by 50%. But this could not save the system.

The collapse of both the stock price of the Mississippi Company and the paper currency created chaos in France.

Law fled the country and the government returned to a monetary system based on gold and silver.

classic fiat !