Government Equity and Money: John Law's System in 1720 France

John Law’s “System,” carried out in France between 1716 and 1720, restructured French public finance around two linked innovations: converting most of the existing government debt into equity in a single, government-chartered trading and tax-collecting company, and replacing silver coin with paper bank notes as the primary medium of exchange. Velde traces the System’s four stages – the 1716 General Bank, whose notes gained acceptance partly because they were protected against the recurrent devaluations of the silver coinage; the 1717-1719 Company of the West, which grew by acquiring the tobacco monopoly, the General Farms tax-collection lease, the direct-tax collection offices, and the royal mints; the 1719-1720 merger of Bank and Company, in which the Company took over the entire national debt in exchange for its shares and its notes became sole legal tender; and the 1720 collapse and multi-year “Visa” liquidation that followed. Velde argues the System’s viability depended on convincing bondholders to convert voluntarily by keeping the Company’s share price high, and estimates, from the Company’s own disclosed revenue projections compared with post-System market valuations, that shares were overvalued at their January 1720 peak by a factor of roughly two to five; sustaining that price required an escalating volume of bank notes, which by spring 1720 was outrunning the demand for money and forced a sequence of increasingly coercive and self-contradictory monetary measures. Once Law’s price-support operations proved unsustainable in the spring of 1720, note issue could not be reversed in an orderly way, and the System unwound through a formal liquidation, the Visa, that converted the remaining notes, shares, and company bonds back into ordinary government annuities. The paper’s central quantitative finding is that, despite the scale and drama of the episode, France’s public debt in the mid-1720s stood at roughly the same level as in 1717, so that – unlike most French sovereign-debt episodes of the era – Law’s System was not, in net terms, a default.

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Government Equity and Money: John Law's System in 1720 France