The year is 1714. France is in deep trouble. Decades of war had it drowning in debt. The treasury was empty. Government bonds were selling at over 50% discount. No one trusted that the government would fully pay back what it had borrowed. 

The economy had slowed down to a snail’s pace. The government tried to change the metal content of the coins. But this backfired as people hoarded the old coins. It worsened liquidity. Coin shortage in the market froze trade.

The only way out seemed to be was with a new tax. Which made the masses furious. 

At such a time, the Regent of France heard John Law’s idea. Of how France could get out of its hole.

John Law was an economist and a gambler. 

He understood that “money” was just a tool, it wasn’t wealth itself. The more money that is circulated, the more the economy would be stimulated. Because more money would mean more people employed. Circulation of money would dig France out of its hole.

• A traveller stops at a small town inn and places a single silver coin on the counter to rent a room.
• The innkeeper uses the coin to pay the butcher.
• The butcher uses the same coin to pay the farmer.
• The farmer pays the bartender for his pending bar tab.
• The bartender returns the coin to the innkeeper to settle his previous debt.
• The traveller, not having liked the room, decides not to stay and takes his coin back.
• No money stayed in town, but all debts were paid.

John Law had a 2 pronged idea.

1. Allow people to deposit their gold and their land. And get paper money in return. Because good money is hoarded, bad money circulates. Only a form of money that is not good would circulate.
   
2. Allow people to swap their government bonds for equity in a government company. Because public debt slows the economy by trapping money. So get rid of the debt and people will circulate more money.

So Law proposed 2 ideas to the Regent of France. Let him open the Banque General that would take in gold deposits and issue paper money. And fill the government treasury back with gold.

And create the Mississippi Company. A company that would have monopoly on French colonial trade. Allow people to swap their government debt for equity in the French monopoly! Get rid of France’s debt completely!

And oh boy did it work! France started coming out of their depression and had a golden run.

And John Law became the richest man on the planet!

At its height, John Law became richer than any monarch. He bought 21 palaces. He had the Midas touch.

But then something weird happened. People could not get enough of the Mississippi Company shares! They would take their shares and deposit in the Banque General. They would use this as collateral and take a loan and get more paper money out. And buy more shares with this paper money!

A tremendous bubble formed because of this borrowing and buying! The price of Mississippi Company went so high that there was no way the profits from the company would ever pay the investors back. 

And when the bubble inevitably crashed, it brought the whole of France down! Law tried to stop the ruin by using the gold deposits to keep the prices stable. But it just depleted the gold. Everyone wanted to sell their Mississippi Company shares at the same time.

There was no end in sight when people lost confidence. 

Eventually, John Law ran away from France. His property was sold. The fall was faster than his rise! And a few years later, he died penniless!

What can we learn from the rise and fall of John Law?

John Law is correct. Things in motion create value. Money sitting still is useless. Movement is important. Circulation builds economies.

But if movement feeds itself without creating anything real, it becomes a recursive loop. Recursive movement is a cycle of doom. Flowing water creates life. But recursive flow of water creates a whirlpool.

A practical way to avoid recursive movement is to find things that are in motion but with a purpose. Activity needs to create value, not just more activity.

The second mistake John Law made was trying to put in good money after bad. Using gold reserves to keep the prices up is what ultimately doomed him. 

Action Summary:

• Money chasing itself is gambling. Money chasing value is investing. Motion with purpose is the key to creating value and wealth.

• Pull the exit chord. Don’t invest good money after bad.