john law and the mississippi bubble -- 5/01/18
Today's selection -- from A Brief History of France by Cecil Jenkins. When Louis XIV's wars brought so much debt that the French government called on the Scotsman John Law to solve its financial problems. It ultimately resulted in the famed Mississippi Bubble, which bankrupted thousands in France and left the government in even greater debt. Law's plan was simple -- set up a commercial company for trading and other activities that the government would largely own. Profits from this company -- primarily overseas trading in the New World -- would be used to pay down the government's debt. Of course there were not enough profits and the venture soon failed. The second part of Law's plan was to start a new bank, Banque Generale Privee, which would sell shares, issue its own de novo currency, and use those proceeds to lend to the government to pay off its debt. Shares in this bank skyrocketed, but the business of the bank fell short of expectations, and as a result the public both sold shares and tried to redeem currency for gold, causing the bank to fail in 1720 -- a second, interrelated, simultaneous catastrophe. It forestalled the development of modern banking in France, and more importantly, led to the increased taxes that were ultimately a component of foment that led to the French Revolution of 1789. Law died destitute and in disgrace in 1729:
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| John Law |
"Louis XIV's extensive wars had left an enormous national debt and to deal with it the regent called in the Scottish economic theorist and adventurer John Law. Law proceeded to set up a government-backed central bank, like those already operating successfully in London and Amsterdam, which would not only move France beyond the cumbersome use of metal money, but would stimulate trade by increasing the money supply.
"The bank boomed after he set up an associated trading company which was granted a monopoly of trade with the West Indies and North America. Within a few years Law controlled not only the lucrative slave and tobacco trade, but also the printing of money and the collection of taxes -- in effect monopolizing both France's foreign trade and its finances.
"This was a bold venture in a traditionalist country which still saw wealth as residing in the possession of land and gold, but it succeeded only too well: the price of the shares soared in a classic market bubble, doubts crept in about the adequacy of the returns, the nobles sabotaged it effectively by suddenly demanding the restitution of their investments in gold, there was a classic market crash and Law had to flee the country.
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| Contemporary political cartoon of Law from Het Groote Tafereel der Dwaasheid (1720); text reads "Law loquitur. The wind is my treasure, cushion, and foundation. Master of the wind, I am master of life,and my wind monopoly becomes straightway the object of idolatry." |
"The nobles, of course, preferred the old system under which they had used their official positions to take a cut out of the hard currency transactions involved in tax collecting, army supplies and loans to government. The outcome of all this was unfortunate, not just because the bank's debt had to be taken over by the government and repaid through yet more taxes, but because the hostility to paper money which it engendered was such that it was not until the nineteenth century that France established a modern banking system."
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