The Rue Quincampoix Printing Press
John Law's Debt-for-Equity Swap and the Day Paper Pegged to Stock Collapsed
Along the Rue Quincampoix, a narrow medieval lane in Paris barely fifteen feet wide and closed at both ends by iron grates, thousands of nobles and shopkeepers crushed together every morning during the autumn of 1719. Inside the packed courtyards and cafés, a humpbacked cobbler earned 150,000 livres simply by bending over. Speculators used his spine as a portable writing desk to sign share transfers. Every person in the street was trading paper issued by one man. Scottish mathematician and exiled gambler John Law had persuaded the French Regent, Philippe II, Duke of Orléans, to attempt a daring experiment. Law promised that France could erase the two-billion-livre war debt left by Louis XIV through a single grand swap of sovereign bonds into colonial equity.
Law began with sound banking mechanics. When he opened the Banque Générale in May 1716, its notes were payable on demand in coin of fixed silver weight. That guarantee made them safer than royal coins that the crown repeatedly debased. Law argued that replacing hoarded metal with circulating paper would revive frozen trade, claiming that his bank was superior to a gold mine because the rapid circulation of credit multiplied the wealth of the kingdom tenfold. Between 1717 and 1719, Law assembled the Compagnie des Indes, known across Europe as the Mississippi Company. It absorbed the royal tobacco monopoly, the East India trade, the French mint, and the collection of all royal taxes.
To extinguish the royal debt, Law offered holders of depreciated government bonds the right to convert their state IOUs into new shares of the Mississippi Company. For the swap to succeed, the share price had to climb continuously. Law engineered the rise by turning the newly nationalized Banque Royale into a margin lender for his own stock. Anyone could buy new 500-livre shares in ten monthly installments while borrowing banknotes directly against existing shares at two percent interest. As newly printed banknotes flooded the Rue Quincampoix, Mississippi shares surged from 500 livres in May 1719 to 10,000 livres by December, minting the new French word millionnaire.
At that peak, the entire company carried a paper valuation of 6.2 billion livres. Paying a four percent dividend on that sum required more silver than the entire French tax revenue could supply. Insiders began quietly converting paper profits into gold coins, diamonds, and country estates. To stop the stock from falling in early 1720, Law committed a fatal error. He merged the Banque Royale with the Mississippi Company and pegged the share price by decree at 9,000 livres in banknotes.
Pegging a central bank's currency directly to an overvalued stock destroyed the money supply. Every time a shareholder sold one share at the official window, the Banque Royale had to print 9,000 livres of fresh banknotes. Within twelve weeks, the supply of paper money more than doubled from 1.2 billion to 2.6 billion livres. Realizing that paper notes were losing purchasing power weekly, Law issued an edict on May 21, 1720, slashing the official value of both shares and banknotes by half. Public fury forced the Regent to revoke the decree six days later, but confidence in the paper was dead. After the Prince de Conti sent three wagons to the Banque Royale in May 1720 to redeem paper notes for silver coin, French food prices doubled in six months and John Law fled Paris with only eight hundred louis d'or in his pocket.