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John Law a Scottish national was a master at probability and an expert gambler. He convinces the Regent Duc d' Orleans about the advantages of paper money.
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The Regent granted him permission to establish Banque Generale, which would issue paper currency. This was made convertible into gold (at a fixed ratio) at the option of the holder.
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In 1717 Law was given monopoly over all commerce between France and its territories in North America. In lieu of this the Mississippi Company issued shares to the French Govt. by accepting outstanding notes as payments for these shares.
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Since the company did not receive any cash for the equity that it issued it could not generate profits. Also the people's unwillingness to emigrate to North America was also hampering the prospects of the business.
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To counter this Law devised a novel scheme. He released the men and women prisoners on the condition that they marry and emigrate to North America.
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In spite of all these unique efforts the Mississippi shares continued to decline in 1719 from its issue price of 500 livres and hit the 300 livres mark.
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To counter the bear onslaught Law came out with an offer to buy the shares at 500 livres. This sent positive vibes amongst the investing public and they thought that the promoter was buying the shares in anticipation of some favorable developments.
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To pep up his stock Law announces a slew of new business initiatives like getting into various businesses like tobacco and coinage This was initiated by taking over the entire French National debt of 1.5 billion livres.
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The Mississippi Company was to pay the Govt. the entire amount of 1.5 billion livres, which the Govt. would repay back to its creditors. These creditors would in turn be issued with discounted shares of the Mississippi Company. The Govt. was to pay an interest of 3% to the company whereas it paid an interest of 4% to the general public.
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The idea worked as per plan. Each time the company declared a new venture the stock rose and additional shares were issued at higher prices.
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Soon Law advised the Regent that paper money had generated adequate confidence and the Banks gold reserves could be liquidated.
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As the money supply was increased backed by lowering interest rates (1% to 2%) it unleashed an era of unimaginable speculation. The share price of Mississippi Company was bid up to 20,000 livres. Remember at the beginning of the year it was at 300 livres.
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The spate of hyperinflation made the owners of paper assets nervous and they tried to switch back into gold and silver by the early part of 1720.
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The general public was restrained from making a payment in gold and silver above a certain limit. Possession of gold above 500 livres was also declared illegal and lead to severe penalties.
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To stabilize the market cap of the Mississippi Company Law merged it with Banque Royale and also offered to buy back the shares at 9000 livres.
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The open offer acted as an exit point and the general public off loaded shares as if there were no tomorrow.
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Losing on all options Law devalued the currency of the company by 50%. This met with public fury and he was banished from the kingdom.
