The Mississippi Scheme 1720: John Law and the first central bank in history
How a Scottish adventurer convinced France to experiment with the first fiat currency — with catastrophic results
John Law convinced the French Regency to abandon gold and use paper banknotes. In 1720, his system collapsed, wiping out the savings of thousands of French citizens and delaying French banking development by 100 years.
The visionary theorist
John Law was a Scotsman who had killed a man in a duel and wandered Europe as a professional gambler. He was also a brilliant economic theorist: he understood before anyone else that money was an instrument that could be separated from physical gold.
The system
In 1716, Law convinced the regent Philippe d'Orléans to let him found the Banque Générale — the first central bank in history — which issued paper banknotes. He then obtained the trade monopoly on Louisiana through the Mississippi Company.
Company shares rose 6000% in two years. Everyone in France bought shares and became a "millionaire" — Law literally invented the word "millionaire".
The collapse
The problem: the Mississippi Company had almost nothing in Louisiana. When the truth emerged, everyone wanted to sell shares and convert banknotes to gold. The bank didn't have enough gold. Inflation exploded. The system collapsed in 1720 in the same year as the British South Sea Bubble.
- Fiat currency works only with institutional trust: Law had the right theory but the wrong institutions.
- State commercial monopoly doesn't create real value: Mississippi Company shares were worth nothing because Louisiana was empty.
- Distrust of paper money lasts generations: Law's disaster delayed French banking development by a century.