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Inflation in the Roman Empire
John Law and the Hyperinflation and Speculative Bubble in France c. 1719
Banque Generale
Compagnie de la d'Occident
Compagnie de Senegal
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Inflation in the Roman Empire


The episodes of extreme inflation took a standard form. First the government started building up the army and undertaking public works projects. These projects increased expenditures drastically and the government raised tax rates. But the higher tax rates encouraged tax evasion and discouraged economic activity. The tax base diminished and soon the tax needs exceeded the tax capacity of the government. The government then resorted to debasing the coins of the realm. This took the form of replacing the gold and silver in coins with copper and other cheaper metals. Over the period 218 to 268 A.D. the silver content of Roman coins dropped to one five thousandth of its original level. Sometimes the size and weight of coins were reduced. It also meant vastly increasing the amount of coins in circulation. There was a corresponding increase in prices. The emperors usually blamed the price increases on the greed of merchants.

One famous episode occurred during the reign of the Emperor Diocletian in last part of the third century AD. Diocletian's predecessors had been issuing tin-plated copper coins for what had once been a silver coin. Diocletian tried to bring back some honesty to the coinage by issuing copper coins that were not purporting to be something they were not.

Diocletian ordered a vast increase in the armed forces to guard against further attacks by the barbarians. Taxes were increased to pay for defenses but much of the funds raised went to pay for public monuments as well as rebuilding his new capital of Nicomedia in western Anatolia. When he ran out of funds Diocletian resorted to the use of forced labor for his projects. But Diocletian had issued vast amounts of copper coins. This led to price increases. When prices rose Diocletian attributed the inflation to the greed of merchants. In 301 AD Diocletian issued an edict declaring fixed prices; i.e., price controls. His edict provided for the death penalty for anyone selling above the control prices. There was also penalties (less severe) for anyone paying more than the control price. Irate consumers sometimes destroyed the businesses of those who sold higher than the control prices.

In the short-run these draconian measures may have curbed inflation but in the long-run the results were disaster. Merchants stopped selling goods but this led to penalties against hoarding. People went out of business but Diocletian countered with laws saying that every man had to pursue the occupation of their father. The penalty for not doing so was death. This was justified on the basis that leaving the occupation of ones father was like a soldier deserting in time of war. The effect of this was to turn free men into serfs.

John Law and the Hyperinflation and Speculative Bubble in France c. 1719


The public and private extravagances of Louis XIV left France with a debt of 3 billion livres when the Regime of Louis XV came to power. Even with an excellent system of centralized administration and finance created by Colbert the new regime was finding it hard to meet the interest payments on the debt. John Law, a Scottish adventurer, was promoting policies which might help the Regime.

John Law was the son of a banker from Scotland. In London John Law was a gambler and playboy who killed a man in a duel. Law was arrested and convicted of murder but he escaped from prison and fled to the Continent. In Amsterdam he studied financial institutions and in 1705 he published a treatise entitled Money and Trade Considered in which he argued that the more money in circulation the greater the prosperity of a country. In his words,

Domestic trade depends upon money. A greater quantity employs more people than a lesser quantity. An addition to the money adds to the value of the country.

Law tried to interest the governments of several countries in his monetary schemes, but only the financially strapped regime of Louis XV gave him an opportunity to implement them. In 1716 Law was granted authority to create the Banque Generale with a capital of 6 million livres. Law raised only 25 percent of the capital in cash and covered the other 4.5 million livres with government debt (billets d'etat) which was worth only one fourth of its face value. So Law capitalization of the Banque Generale really only amounted to about 2.6 million livres.

Law's Banque Generale was authorized to issue interest-paying bank notes payable in silver on demand. It soon had 60 million livres in notes outstanding. The Regime required regional tax payments to be in the form of Banque Generale banknotes so there was a ready market for Law's banknotes. Because these banknotes paid interest and were convenient they sold at a premium over their face value.

The Regime also wanted to develop the territories of Louisiana in North America. Law was granted a charter for the Compagnie de la d'Occident and it was given a 25 year lease on the French holdings of Louisiana. In return the Compagnie was required to settle at least 6,000 French citizens and 3,000 slaves. The Compagnie was also granted a monopoly on the growing and sale of tobacco.

The Compagnie acquired the Compagnie de Senegal, which operated in West Africa, as a source of slaves. It then merged with the French East India Company and the French China Company to form Compagnie de Indes. This company had a virtual monopoly on French foreign trade.

Law's Banque Generale, under the new name of Banque Royale, was added to the combination which Law called his "System."

The Compagnie de Indes issued 200,000 shares at a price of 500 livres each. By 1718 the share price had fallen to 250 livres. In 1719 the Banque pumped up the supply of notes by 30 percent. It also acquired the right to act as the national tax collector for nine years. The Compagnie stock then doubled and redoubled in price.

Law then came with a plan to pay off the troublesome state debt. The Regime would issue notes paying 3 percent interest to its debtors. These debts could then be used to buy stock in Law's Compagnie de Indes. The Compagnie share price rose to 5,000 livres in August 1719 and 8,000 livres in October. People flooded into Paris to buy stock in Law's Compagnie. Speculation in Compagnie stock went wild. Stock was being purchased with only 10 percent downpayment. Fortunes were being made right and left. One beggar made 70 million livres.

John Law became an international celebrity. The Pope sent an envoy to the birthday party of Law's daughter. Law converted to Catholicism and was appointed Controlleur des Finances by the Regime.

Compagnie de Indes shares peaked at a price of 20,000 livres at the end of 1719. In January 1720 two royal princes decided to cash in their shares of the Compagnie. Others decided to follow their example. Law had to print 1.5 million livres in paper money. As Controlleur of Finances, John Law tried to stem the tide by making it illegal to hold more than 500 livres in gold or silver. He devalued banknotes relative to foreign currency to encourage exports and discourage imports. Nevertheless Compagnie de Indes stock fell from 9,000 livres to 5,000 livres. Law was denounced and stripped of his office of Controlleur. As head of the Compagnie de Indes and the Banque Royale he bought up stock and banknotes to try to raise their price, but by June 1720 he had to suspend payments.

John Law fled to Holland in 1720 and his properties in France were seized by the Regime. He lamented,

Last year I was the richest individual who ever lived, today I have nothing, not even enough to keep alive.

The Hyperinflation in France During the Revolution