Under a royal edict of the second of May, 1716, [John] Law, with his brother, was given the right to establish a bank with capital of six million livres, about 250,000 English pounds. The bank was authorized to issue notes. This it did in the form of loans, and, as might be imagined, the principal borrower was the state. The government used the notes in turn to pay its expenses and pay off its creditors. The notes were declared legal tender for payment of taxes.
Initially the notes were eminently acceptable not only for taxes but for all purposes. This was because Law, apart from holding that any banker who did not keep a sufficient reserve in good coin to redeem his paper was deserving of death, promised redemption in the currency of the weight of metal it contained at the date of issue of the paper. The kings of France, in accordance with long-establish practice, had been steadily reducing the weight of the metal in the French currency, hoping as always that less gold or silver would do the work of more. Accordingly, Law seemed to be providing security against royal malversation. For a while, as compared with the coins of the same denominated value, Law's notes commanded a premium.
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Law opened branches of his bank in Lyons, La Rochelle, Tours, Amiens and Orléans; presently, in the approximate modern language, he went public. His bank became a publicly chartered company, the Banque Royale. Had Law stopped at this point, he would be remembered for a modest contribution to the history of banking. The capital in hard cash subscribed by the stockholders would have sufficed to satisy any holders of notes who sought to have them redeemed. Redemption being assured, not many sought it. It is possible that no man, having made such a promising start, could have stopped.
The first loans and the resulting note issue having been visibly beneficial -- and also a source of much personal relief -- the Regent proposed an additional issue. If something does good, more must do better. Law acquiesced. Sensing the need, he also devised a way of replenishing the reserves with which the Banque Royale backed up its growing volume of notes. His idea was to create the Mississippi Company to exploit and bring to France the very large gold deposits which Louisiana was thought to have as subsoil. To the metal so obtained were also to be added the gains of trade. Early in 1719, the Mississippi Company (Compagnie d'Occident), later the company of the Indies, was given exclusive trading privileges in India, China and the South Seas. Soon thereafter, as further sources of revenue, it received the tobacco monopoly, the right to coin money and the tax farm.
The next step was to place on the market the stock in what was now a primeval conglomerate. In 1719, this was done with a more visible, audible and at times violent response than ever bbefore or possibly since. The jam of people seeking to buy the stock was dense; the din of the sale was deafening. Transactions were in the old bourse in the Rue Quincampoix. (Later they were moved to the Place Vendôme and finally to the grounds of the Hôtel Soissons.) The value of adjacent property rose sharply from the demand of people seeking to be close to the action. The shares rose phenomenally in value. Men who had invested a few thousands early in the year were worth millions in a matter of weeks or months. Those so transformed were called millionaires; it is to that year, evidently, that we owe this useful French word. As the year passed, more and more stock in the conglomerate was fed out to the investors.
Meanwhile the Banque Royale was also steadily increasing its loans and therewith the notes in which they were taken away. In the spring of 1719, it had some 100 million livres in notes outstanding; by midsummer there were 300 million more. In the last six months of 1719, another 800 million were issued.
The sale of stock, it might be assumed, was creating a vast fund for the development of the Louisiana wilderness. Alas, it was not. By a beneficial arrangement with the Regent, the proceeds of the sale of the Mississippi stock went not to the Mississippi but as loans to pay the expenses of the government of France. Only the interest on the loans was available for colonial development and to mine the gold that would go into the Banque Royale reserves. To simplify slightly, Law was lending notes of the Banque Royale to the government (or to private borrowers) which then passed them on to people in payment of government debts or expenses. These notes were then used by the recipients to buy stock in the Mississippi Company, the proceeds from which went to the government to pay expenses and pay off creditors who then used the notes to buy more stock, the proceeds from which were used to meet more government expenditures and pay off more public creditors. And so it continued, each cycle being larger than the one before.
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The notes, needless to say, were the problem. Early in 1720, the Prince de Conti, offended it is said by his inability to buy stock at a price he considered right, sent a bunch of the notes to the Banque Royale to be redeemed in hard currency. They were a sizable package; three wagons were sent to carry back the gold and silver. Law appealed to the Regent, who ordered the Prince to turn back a considerable share of the metal he had thus received in exchange. But others, acting out of a deeper insight, were busy getting Law's paper into metal and the metal into England and Holland. One, a jobber named Vermalet, "procured gold and silver coin to the amount of nearly a million livres, which he packed in a farmer's cart, and covered with hay and cow-dung. He then disguised himself in the dirty smock-frock, or 'blouse', of a peasant and drove his precious load in safety into Belgium."
Presently it was neccessary to restrict the payment of specie in return for the notes -- the enduring signal that the boom was over. Later Law took a further and far stronger step -- in his new official capacity he forbade, except in small quantities, the possession of gold and silver and extended the prohibition to jewelry. Informers were invited to share in any hoards they might report. Meanwhile at the Banque Royale in Paris there was now an even greater jam of people, these wanting not securities or notes but hard money; on one day in July 1720 so great was the crowd that fifteen people were squeezed to death. Or so it was said. Law was no longer a financial genius; exposed to the paris mob, it was now known, no sizable fragment of him would have remained. Accordingly, the Regent kept him out of sight, then got him out of France.
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