The case of the Mississippi company and John Law is considered to be the largest financial fraud of the 18th and the 19th century. The intriguing fact of the entire fraud was that it was based on manipulative and constructive practices of a lone man – John Law. Another reason why this financial fraud is regarded as one of the biggest scam is because this scam was able to shake an entire economy and its fundamentals.

The fraud was the result of subsequent and multiple steps that worked counter-intuitively for the entire economy of France. The basis of the entire situation was the debt crisis that rose after the death of Louis XIV. Louis XIV took loans from the public in order to raise funds for fulfilling his lavish expenses – building a new palace, maintaining his lavish lifestyle, rebuilding the ecology of France, and beautifying the city of Paris. After his death, the new king – Louis XV – was only five years old. Thus, an alternative power took over. In order to fulfill the debt crisis, he issued of IOUs, yet, people were not satisfied. John Law, an economist, came to France while touring western Europe, making people aware of the concept of ‘paper currency’. He realized that France’s financial system was poorly structured and thus, proposed the usage of paper currency and an institution called ‘bank’. Initially, it was difficult for him to explain that to the ministers at the king’s court, however, in the backdrop of the debt crisis, his solutions appeared to be the most feasible solutions.

John Law had the power and the ability to make sure that things went according to his plan and that, people won’t look at his activities suspiciously. For this, he became a bug in the ears of the ruler. He encouraged the ruler to ask its people to exchange their gold coins for currency notes. The ruler then outlawed gold coins and established the currency distributed by John Law as the ‘currency of France’.  In the said process, John started sending gold coins abroad to fill his own chests.

In spite of knowing the fact that by printing more cash, an economy tends to devalue its currency, John asked the printing agency to continue printing currency notes. When a prince went to the bank to exchange his currency notes for solid gold, it was realized that an economic disruption was on its way. John and his associates realized that he had only a fifth of gold reserves against the cash driven out. The news got out, and people became speculative of their deposits.

Things got worse when there was hyperinflation. When the ruler asked John to resolve the problem, John suggested the ruler to devalue gold and abolish exchange of gold. John then issued shares and promised a buyback at par if the shares were to fall. He glorified the state of Louisiana as a state with immense developmental growth potential and his willingness to invest in assets in Louisiana through the money he receives through share contributions. The demand for shares was immense and he purposely kept the supply low to inflate share prices. Though promised, he never purchased any assets in the state of Louisiana and instead purchased gold offshore.

Eventually, even the ruler got suspicious of his activities and further forced him to declare his bank’s financial status. Instead, he secretly fled the country with all the gold reserves. This caused a major financial crisis in France, hereby causing people to lose all their money, businesses to crash and gold to devalue.