>John Law’s Mississippi Bubble

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Louis XIV’s France was financially strapped upon his death. Due to immense political intrigue, Louis’ nephew – and son-in-law – Phillippe Duke of Orleans became Louis XV’s regent. His regency was disastrous almost from the start, but widely differing accounts shift much of the blame to Louis XIV’s lengthy expansionistic wars. What cannot, and consequently is not, debated was Phillippe’s unprecedented foolish involvement with the Scottish economist John Law.

Law was born to a Scottish goldsmith and banker in the late 1600’s. He showed mathematical genius from an early age, and tried to use that mental aptitude to get ahead while gambling. He quickly gambled the family fortune away, however, while also chasing women. Law, trying to guard his “honor”, challenged a duel over one of his many women. He killed his opponent, and was tried for murder. Law was found guilty and sent to prison – not like today’s prison; prison usually was a death sentence during Law’s day. Law escaped from his holding cell and fled to Louis XIV’s France, and for the next few years, Law would frequently travel between The Netherlands and France. While in Paris, Law became acquainted with Phillippe, Duke of Orleans, at a card game. Phillippe, soon to become the French Regent, realized Law’s “potential” after Law produced and published two economic treatises The Scarcity of Theory Value and Real Bill Doctrine, which argued for a fiat currency system.

When Phillippe became Regent, he realized the dire financial circumstances that France was experiencing. Law, using his connection with Phillippe, approached the Regent at court and advanced his theories to fix the faltering French economy. (So poor was the economy that taxes could not cover the interest on French war debts!) Law was granted a bank, Banque General, almost on the spot by Phillippe, who watched Law closely. The Bank began to print paper currency, which was in theory supported by the Bank’s assets in precious metals. Law wanted to expand (ie. Inflate) the French currency in order to increase commerce. He believed the only way to do such an operation was wean the economy off of traditional value sources, such as Gold and Silver. The French Government rallied behind Law’s scheme and further granted him a monopoly over New World trade. The Compagnie d’Occident (Company of the West) was founded to govern trade along the Mississippi River in 1717. A dual monetary system was established within the company, beaver skins in the north and precious metals in the south. To ensure the company’s success, Law was granted a charter for 25 years, in which time Law promised to populate and settle the Mississippi River basin. The French as a result began calling the company the “Mississippi Company.” Law had to finance his plan, so he put his paper currency scheme to work.

Law began selling shares to finance the Mississippi Company’s operations. He sought cash and state bonds, for which he offered extremely low interest rates. This action in theory was to bolster French finances, while funding his company. Traditional French aristocrats hoped to get rich off of Law’s scheme, but get rich in gold and silver, not cash. The common classes also saw an opportunity as cash was cheap, and credit was blindly extended to the masses. The French Government further aided Law’s ideas by granting him a monopoly over tobacco trade in Africa. The Banque General was also nationalized and renamed the Banque Royal in 1719. Law was still in charge, but now his paper money was backed by the French Crown. One final boon set Law over the top, he was granted more trade monopolies throughout the French Colonial Empire, this time in Asia. Law renamed his Mississippi Company the Compagnie des Indes, which now controlled all French trade outside of Europe.

With no ceiling to Law’s growing influence, he purchased the right to mint French coinage. These coins would have no precious metals in them, which put Law’s theories into full action. Law next assumed legal control over French taxation, as his financial power began to resemble Louis XIV’s governmental authority. By 1720 all financial institutions were under Law’s supreme command. Phillippe bestowed the title “Controller General and Superintendent General of Finance. Success seemed to breed success, but it was all a mirage. He continued to print paper money to fund his growing financial empire. That paper money was guaranteed and founded upon government debt, which grew rapidly.

Initial shares of the Mississippi Company were sold for 500 Livres (French currency at the time). The shares value quickly expanded, which brought speculators from all over France and Europe into Paris’ financial district. This became a scary sight for the Parisians, and Phillippe had to order police into the district to maintain control. Within the first year of existence the price per share had increased dramatically from 500 Livres to 10,000 Livres – 190%. Many people aristocratic and commoner alike became Millionaires, as the French termed this new wealthy class. Inflation, however, soon caught up to Law’s scheme. He continued to print more paper money, and the value of the shares, though high denominationally, became increasingly devalued monetarily. Those who realized the falling trend began trading paper money for precious metals. Law could not allow the sell off, so he issued a restriction on pay outs – no payment in gold above 100 Livres. Law further made his paper currency “legal tender”, and people began using worthless money to pay off debts and taxes. Law’s bank also offered to trade the paper currency for shares in the Mississippi Company for the 10,000 Livres standard. In one fell swoop, Law doubled French currency, and further devalued the already worthless “money.” Soon, rates of inflation were above 20% a month by January 1720. That’s right, all of this took place in under one year.

Law further compounded the increasingly dire situation when he devalued the Mississippi Company’s shares. He cut the value of bank notes by 50%, which sparked a frenzied offloading period. Investors tried to sell their declining shares to any idiot that could be found. Shares purchased at 10,000 Livres were now being sold for 2,000 Livres in September 1720, then 1,000 Livres in December 1720, and finally back to 500 Livres in January 1721. Fortunes were hastily made, then disastrously lost within the space of months. Before Law was dismissed in March 1721, he ordered the French currency to be devalued another 50%, which pushed the French back into buying precious metals. There was not enough precious metals to support the behemoth fiat structure; however, and Law outlawed any precious metals exchange. He offered paper money rewards to anyone who would expose precious metals trading. Many were found guilty and killed for this exchange, which was the last straw. Law fled France for Venice a broken and poor man. He died in Venice 8 years later in 1729 in poverty. France needed decades to overcome this economic debacle, thought it never really did overcome Law’s meteoric rise and subsequent fall.

 

>Louis’ Economist, Jean Baptiste Colbert

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Louis XIV revolutionized European government, economics, art, and military. For the first 19 years of Louis’ life, France was at war. When Louis left his minority behind and assumed the throne in 1661, He had already claimed victories over Spain and two Frondes. France shed feudalism with Louis. Louis continued to centralize even more power around himself, beginning with the French economy.

Years of war had severely strained the French. Louis’ keen sense of character made him realize personnel changes were needed. Louis’ current finance minister, Nicolas Fouquet had political ambitions. He had hoped, and even undertook plans, to succeed Mazarin’s high post. Fouquet’s arrogant plan doomed him. Louis was shamed when Fouquet had built an opulent mansion at Vaux-le-Vicomte, and invited Louis for entertainment. Louis felt poorer than Fouquet, which Louis was poorer at the time. Changes had to be made, because Louis, in his own pride, could not be poorer than one of his ministers. Embezzlement charges were fabricated to condemn Fouquet. French courts found Fouquet guilty, and sentenced him to exile. Louis lessened the sentence to life imprisonment, but the deed was done. No one could be greater than the King! Louis had already lined up Fouquet’s replacement, Jean-Baptiste Colbert.

As the new Comptroller General of Finances, Colbert created a wildly successful economy. He did continue much of Richelieu, Mazarin, and Fouquet’s taxation policies; however, Colbert’s mercantilism rapidly reduced French debt, while making the country immensely prosperous. After Henry IV solidified Protestant freedom with the Edict of Nantes, French Protestants established an extensive manufacturing system. Huguenots especially drove French industry to newer heights. Colbert encouraged newer trades, as well as invited foreigners to practice their crafts in France. Dutch, Swedish, Belgian, and Italian artisans flooded into France for new opportunities. Colbert was more than happy to accept immigrants, because those immigrants would create products within France. France could then boast of Dutch ships, Swedish iron, Belgian lace, etc…. But the key to this, the greatest of Colbert’s policies, was that he did not have to pay foreign tariffs. Instead, Colbert was competing with foreign trade by using foreign immigrants. Other nations would then pay France for Dutch ships created in France, instead of paying a higher price in the Netherlands for the same product. Tariffs were paid in gold (Adam Smith illustrated that banks only traded with gold. Silver was used for more common daily purchases). Gold was the key to Mercantilism. The more gold a nation had, the more wealthy and powerful – so the argument went. More nations buying from France, meant more gold for France. Fewer foreign imports meant that less gold left France. France was bound to become extravagantly rich, and it did.

Colbert’s domestic policy was outstanding, but he did not stop at the French borders. He oversaw the beginnings of French Colonialism. Colonialism was a vital aid to all mercantilist economies. Most mercantilist colonial programs were centered upon obtaining more precious metals. Spain, Portugal, and England notably used their early colonies as gold mines. The Dutch colonies, however, changed economic perception. The Netherlands did obtain precious metals from colonies; however, the creation of the VOC (East India Company – trust me, that’s what it stands for in Dutch) brought a flood of foreign gold into Dutch banks. This early stock market had a profound financial effect, as the Netherlands became the world’s banker. France tried its hand with stocks during the 18^th century, which will be illustrated later. France, gleaning knowledge from the Dutch model, would begin to use its colonies less as gold mines per se, and more for natural resources. Fur trading especially dominated French colonial expeditions. Furs would come into France, which then established a monopoly of sorts. France marketed Fur as the style of the day. Because France had a monopoly, and other nations wanted fur, France traded that fur for…. Gold. Brilliant.

Though Colbert was a certain economic genius, he could not fund Louis’ ambitious desires. Louis wanted newer, grander palaces – Versailles for example. Louis wanted extravagant foods. Louis wanted, and did, to stimulate French arts. Above all Louis wanted more France, and he could only get more France through war. Colbert made France a gigantic wealth, but Louis spent all of it, and more. After Louis died in 1714, France was much worse economically than before Louis acceded to the throne, due in no part to Jean Baptiste Colbert. Louis’ single greatest contribution to French economic disaster was a religious decision, which will be discussed next.

 

>Irrational Exuberance

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Mankind is typically irrational. One person has no problem spending 500,000 dollars for a car, another would think this is foolish. Many spend 100 dollars for one meal, while most would spend much less than this for an entire family to eat out. History is certainly filled with outrageous stories illustrating absurd, and in some cases aberrant purchases. In contemporary times people paid millions for website stocks, that soared dizzyingly, and plummeted even faster. It is certain, humanity is constantly duped into believing it can get rich at any turn. Economist Ben Stein often writes in his columns that the best way to get rich is painfully and over time. Get rich quick schemes are just that, schemes. The Dutch famously learned this truth in the late 1630’s with… tulips.

This odd chapter during the Dutch Golden Age reaches a few centuries back into the Medieval Crusades. When crusaders returned from the Holy Land an economic explosion occurred that helped pay for the Renaissance among other things. It made many rich, and brought the peasant from the farm into the newly forming burgs throughout Europe. Trade guilds and leagues formed, as well as banks to fund various ventures. Mercantilism was giving way for Capitalism. Such a transition was not always smooth, and the powers that were did not relish the fact that their feudal controls were slipping.

Iberian nations Spain and especially Portugal, ruled by the Habsburg family, established some of the earliest trade routes to the Ottoman held Holy Land. Spices, gold, silk, jewels, exotic animals, and exotic flowers soon appeared in Europe. Only the rich could afford such opulence at first, however, a rising merchant class soon arrived with its own self-made wealth. Riches were now being measured in golden units called florins due to their being created in Florence, Italy. Medici banks were established throughout major trade centers to store ever increasing wealth. Other rival banks were also formed, some by the returning Templar Crusaders, and others by the European Jewish population.

Spain and Portugal had a well established Jewish population. These Jews became the backbone of the Iberian economy, funding navigation and exploration ventures for decades. The subsequent reconquest of Iberia from Islam brought with it the now infamous Inquisition. Catholicism would not tolerate heretics, and part of the Reconquista, as the Spanish term it, was a forced conversion, or death sentence. Accounts show that many were tortured, and many more died. Jewish fortunes were absconded and lands were stolen. Such putrefying actions forced a large Jewish population to emigrate northward to the tolerant Netherlands.

The Jews settled in Amsterdam, at the time a backwater provincial capital, still owned by the Spanish Habsburg dynasty. Trade was about to change all of this. No change would have been possible without the two previous connections. The Netherlands needed the Jews, as well as the new goods flooding Europe from the Crusades. Together, Amsterdam wrested control of world trade by the late 1500’s. Amsterdam quickly became the main port of call for all aspiring and established merchants. Interestingly enough, after the Jews fled Iberia, Dutch forces took most of Portugal’s overseas empire, which included South Africa, Indonesia, portions of India, and Japan. Spain also fell from it’s zenith, eventually losing a number of wars, including the Dutch War for Independence. Both nations were bankrupt without Jewish capital. Effectively, Catholicism’s Inquisition destroyed both proud nations.

With a newfound economic hotbed, the world watched in wonder as the little swampy region ruled supreme. While the rest of Europe was embroiled in the Thirty Years’ War, the Dutch produced Rembrandt, Vermeer, the VOC (the world’s first stock market of sorts), and obscene wealth. By the 1630’s the strictly Calvinist Dutch were now paying for a new fad, the Tulip.

Tulips are, surprisingly, not native to the region. The first tulips were imported from Turkey, and quickly became fashionable accessories in France. Once French aristocrats were wearing these amazing flowers, Dutch entrepreneurs saw a chance to make money. A market was quickly set up and bulbs were traded. At first bulbs were sold slightly above reason, but within a few months one bulb was sold for 5,200 guilders, about 20 years salary for the average Dutchman! Some merchants sold completely stocked ships and houses for a few of these overly priced flowers. One doctor, who Rembrandt famously painted, even changed his name to Dr. Tulp, Dutch for Tulip.

Then it all came crashing down, to use a trite phrase. People came to their senses one morning in the 1640’s and stopped bulb trading. Huge sums were left on the table with no buyers. The flower lost it’s societal status for the Hyacinth. Merchants were broken, fortunes were lost, and hysteria did show briefly. Stunningly, the panic did not ruin Dutch ventures. That ruin would come later as a faulty diplomacy saw the Dutch trade Manhattan to the English for three spice islands in the East Indies.

Since then, Tulipomania has held a fascination with economic students for it’s implausible stupidity. Funny enough, society still purchases the “next best thing” for ridiculous sums only soon to find out it was all a sham, as fortunes are vainly spent. It is as Mr. Greenspan once called, Irrational Exuberance.