| |
|
Wall Street History
https://www.gofundme.com/s3h2w8
|
04/11/2003
John Law and the Mississippi Company, Part III
**So I did a piece for 4/18 and it''s on the wrong computer! It
will be up by 4/21.
Last week we delved into John Law’s monetary theories. Today
it’s time to move on to the Mississippi Company bubble.
But first, it’s important to know that the 1713 Peace of Utrecht
marked the end of a terrible period for France, one which saw it
at war for basically 20 of 24 years, first against the League of
Augsburg and then in the War of the Spanish Succession. The
French treasury was bare and King Louis XIV had to deal with
staggering debts and a deep economic depression.
The King, now age 75, was also troubled by the line of
succession to the throne. In the span of three years leading up to
peace he saw 3 heirs die. Finally, when the King himself died in
1715, a 5-year-old grandson assumed the throne. Of course he
wasn’t really running the show, mind you, and instead a regent
was appointed, the Duc d’Orleans.
Now this was most propitious for the subject of our series, John
Law; Law having made the acquaintance of Orleans while
gambling and carousing among the glitterati of Paris. Author
Janet Gleeson (“Millionaire”) notes that the two had much in
common.
“They were of similar age…both were handsome, athletically
built, and brilliant tennis players. Both enjoyed extraordinary
success with the opposite sex. Orleans could outstrip even Law
in his sexual conquests, although power and position were on his
side. His numerous mistresses, whether stars of the opera,
actresses from the Comedie Francaise, serving girls, daughters of
diplomats, or, more rarely, aristocrats, were selected for good
humor, voracious appetites for banqueting, drinking, and
lovemaking, and lack of interest in politics.”
Huh. Actually, aside from their shared interests in
extracurricular activities, what initially attracted Law to Orleans
in those early, pre-regent days, aside from the fact he was the
King’s nephew, was the fact that Orleans had the intellect to
understand Law’s monetary theories.
But despite the connection, Law was unable to convince King
Louis XIV of the need to create a national bank. Orleans
attempted to arrange the meetings, but the King never expressed
an interest. [He was also upset that Law wasn’t a Catholic.]
Well, following Louis’s death on September 1, 1715, the Duc
took over and convinced parliament that he could handle the ship
of state until the Dauphin came of age. For his part, Law fired
off a letter to his friend.
“Your Royal Highness will have no difficulty in reaping success
from what I have the honor of proposing, the best actor is not the
one with the largest role, but the one who acts the best. I know
my strengths and I love pleasure too much to occupy myself in
affairs that I do not understand in depth.” [Gleeson]
Law earned a charter for his private bank, Banque Generale, on
May 2, 1716… “M. Law et sa Compagnie.” While the proposal
for a true royal bank was rejected, Banque Generale was in
essence the first Bank of France. Law owned about of the
stock and together with the Duc d’Orleans they owned 2/3s.
Law picked the board of directors, officers and employees.
As historian Earl J. Hamilton noted, “No other national bank in
history…has ever been so completely dominated by a single
man.”
The bank got off to a slow start, as Law and his employees just
kind of milled about, when one day the Duc pulled up in his
carriage and deposited a substantial sum. Word spread rapidly,
Banque Generale was a going concern.
For 31 months the bank prospered and Law’s operation
developed a solid reputation. Then on December 4, 1718 the
bank became Banque Royale, with the remaining shares
outstanding secretly purchased by the government.
The bank was perfectly orthodox, issuing notes and receiving
deposits. Of course Law’s monetary theories evolved around the
substitution of paper money for gold and other coin. For a long
while the notes held their value, though the money issued by
Bank Royale wasn’t backed by any real assets.
Meanwhile, as the scope of the bank’s operations spread to
include the whole of France, John Law chartered the Company of
the West in the summer of 1718. This was designed to exploit
the Louisiana territory, a region that the people of France saw as
having immense potential.
Soon, Company of the West gained a monopoly on transportation
on the Mississippi River, importation of all goods, manufacturing
and the sale of tobacco from Louisiana. Then by August 1719,
Law’s operation, formally now known as the Mississippi
Company (also ‘Company of the Indies,’ but we’ll stick with
Mississippi Co.), was given the rights to trade in the East Indies,
China, the South Seas and all possessions of French East India
Company. Law’s first stock offering in the new company was
way oversubscribed, so he issued a secondary. The attraction?
Aside from the potential for the company’s holdings, particularly
in the New World, the Mississippi Company guaranteed its
shareholders an annual dividend of 40%.
The shares could be purchased with bank notes, which had been
holding their value all this time, just as Law had theorized years
earlier, but by the fall of 1719 the stock began to skyrocket, often
rising 10-20% in the space of a few hours.
By January 1720 shares had risen some 50-fold and speculators
flocked to Paris from all over Europe. Many families sold their
real estate holdings to purchase stock. Of course you have to
know this all ends very badly.
Since Law’s Bank Royale was buying and selling the shares, in
essence the Mississippi Company became the monetary standard.
The stock peaked and it was as if all at once investors realized
that the returns from Louisiana and the other territories didn’t
match the promises. For example, gold was nowhere to be found
in the entire territory.
By late February sell orders outpaced buy tickets. Each share
had long been pegged to a set amount (9,000 francs) but then
Law began maneuvering the peg in an attempt to deflate the
currency. On May 21 it was announced the peg would deflate
from 9,000 francs to 5,000 by December 1720 on a sliding scale.
Well, all this did was set in place a panic as holders tried to sell
or spend before the peg set in. So on May 27 the Bank restored
the old value.
This flip-flop happened on more than one occasion so that by
mid-December all efforts had failed to keep the Mississippi
Company afloat, as Hamilton writes, “the house of paper
collapsed.”
Essentially what took place was that Law was issuing paper
currency to provide loans for the purchase of shares. Edward
Chancellor notes, “As the Mississippi shares rose in value, more
money was printed, producing an inflationary spiral which
pushed the share price from under 500 livres at the launch of the
system to over 20,000 by late 1719.”
New fortunes were created, real estate values soared, and the
term “millionaire” came into being. And with the speculative
fervor spreading across the entire continent, Europe experienced
its first international bull market.
Britain, worried about a new French supremacy, countered with
the South Sea Company, an historic bubble in its own right. [See
archives.] British citizens bought the Mississippi Company,
continentals the South Sea Company. A French banker by the
name of Martin proclaimed, “When the rest of the world are
mad, we must imitate them in some measure.” [Charles
Kindleberger]
During the peak, John Law converted to Catholicism so he could
become Controller General of France. The English ambassador
to Paris observed, “There can be no doubt of Law’s Catholicity
since he has…proved transubstantiation by changing paper into
money.” [Edward Chancellor] Law also owned 1/3 of the
buildings around the new Place Vendome and had at least a
dozen rural estates.
And Law being quite the ladies man, he became the object of
those seeking shares. Chancellor adds, “The Regent’s mother
observed lewdly that if duchesses were prepared to kiss Law’s
hand, what parts of his body might not other ladies favor?”
But after the bubble burst, thousands, if not millions, of investors
were ruined. Most received just 5% of their original investment in
the liquidation that followed. The regent, Law’s friend the Duc,
helped him flee the country, and as historian Norman Davies
notes, “France was permanently inoculated against credit
operations.” Ironically, though, the commercial aspects of the
venture began to thrive and the value of French overseas
commerce quadrupled between 1716 and 1743.
And it needs to be noted that John Law, who died broke in
Venice, 1729, was never accused of doing anything illegal,
which is why economist Joseph Schumpeter could make his
claim that Law was one of the greatest monetarists of all time.
Charles Kindleberger writes that Law’s ventures “amounted not
so much to a swindle as a mistake, based on two fallacies: (1)
that stocks and bonds were money, and (2) that issuing more
money as demand increased was not inflationary.”
Recall that France, post the War of the Spanish Succession, was
a financial basket case and Law restored confidence and business
activity across the land. The depression that resulted from the
collapse of Mississippi Company was far less severe than that
which preceded the formation of his bank. And as the later trade
figures showed, John Law and his creations played a vital role in
transforming France into a commercial power.
But for the last word we go to Charles Mackay, who in his 1841
classic “Extraordinary Popular Delusions & the Madness of
Crowds” concluded that Law was no rogue knave or madman,
rather he was “one more deceived than deceiving; more sinned
against than sinning….If his system fell with a crash so
tremendous, it was not so much his fault as that of the people
amongst whom he had erected it.”
Sources:
“Extraordinary Popular Delusions & the Madness of Crowds”
Charles Mackay
“Millionaire” Janet Gleeson
“The Political Economy of France at the Time of John Law” Earl
J. Hamilton
“An Historical Study of Law’s System” Andrew McFarland
Davis
“Devil Take the Hindmost” Edward Chancellor
“Europe: A History” Norman Davies
“25 Investment Classics” Leo Gough
Note: Some of these sources were not utilized in Parts I or II.
Wall Street History will return next week.
Brian Trumbore
|
|
|
