He was brilliant. But he was something of a scoundrel. Some of the ideas were there that bore resemblance to John Maynard Keynes. Some of the ideas were there that resembled the classic stock swindle and Ponzi scheme, mortgage backed securities and the same zeal for excess that nearly destroyed the financial system in 2008. John Law based “the system” on the concept of prosperity being based on credit. In his scheme it didn’t work and the Mississippi bubble became one of the most comprehensive stories of crash and burn in human history, nearly ruining France. John Law made Bernard Madoff look pitifully small time….
William Hogarth. The Invasion. ---Law’s insight was that economic activity could be boosted by the use of paper money that was not backed by gold and silver. He was well ahead of his time. Establishing confidence in a new monetary system was the trickiest part. Law had the benefit of working for an absolute monarchy which could decree that taxes should be paid in the form of notes issued by his new bank, Banque Générale. He also believed, having observed the success of the Dutch in exploiting the spice trade in the East Indies, that France could use paper money to develop its colonial possessions. --- Read More:http://www.economist.com/node/14215012
In Paris, speculation in company shares rose to a frenzy. Money was lent by the half hour at high rates; fortunes were made during “le dejeuner.” By December, 1719, shares were selling at forty times their face value. The circulation of bank notes rose to well over two billion francs. The noblest fought for Law’s attention. One great lady had her coach wrecked at his door to draw him to the window. His son played with the young king; his eight-year-old daughter gave a ball attended by the highest nobility and the papal nuncio.
In the spring of 1720, Law, who was now controleur-general des finances of France, tried to apply deflationary pressures, but it was too late. The noble insiders cashed in, carrying off cartloads of gold. The outsiders followed in the classic pattern: the buying frenzy was followed by a selling panic. The regent, Philippe d’Orleans turned against Law and undermined confidence in the paper currency. On November 1 paper money was outlawed. There were many suicides of paper millionaires who hadn’t a penny to buy food. The Mississippi became the Mississippi bubble.
Watteau. fete Venetian.---Turn this into modern economic jargon and Law could be described as creating a stimulus package for French economic activity. But rather than rescuing sunset industries such as carmaking, Law was an early venture capitalist, financing the dynamic potential of the Mississippi delta. The problem was that the delta was a mosquito-infested swamp. According to Niall Ferguson, a historian, 80% of the early colonists died from starvation or disease. Even though the company had monopolies over things like tobacco, it had little chance of generating enough income to fund the dividends Law had promised. --- Read More:http://www.economist.com/node/14215012
The end came soon. In December Law fled with his young son to Brussels. He carried with him only sixteen hundred francs- almost like Parkinson’s law where an individual rises to his level of incompetence- and a handsome diamond. He had spent all his vast wealth in the service of ideas, disdaining to deposit gold outside France. Lady Catherine Senor, his companion and sister of Lord Banbury, remained in Paris by choice; the two never met again.
( see link at end):…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. Read More:http://armchaircapitalist.wordpress.com/category/europe/
Law was still a notable figure in the great world. The czar invited him to Russia to advise on state finances, but he demurred. He traveled from Copenhagen to London on the English admiral’s flagship and King George received him cordially and quashed a thirty year old condemnation for murder ( a duel with an elderly man, over a love rivalry) Law drifted finally to Venice, where Montesquieu interviewed him and reported that he “was more in love with his ideas than with money.”
At nightfall in the sumptuous Ridotto now, Law reversed his previous strategy and now played against the bank. In his last sitting in the Ridotto on February 25th, 1729, he was triumphant; he won enough to pay
his debts and redeem a great diamond he had left as pawn. He left the halls in a fever and took to his bed. The French ambassador visited him, not so much out of sympathy, as to scout, in vain, for hidden wealth. He died on march 21, almost fifty-nine.
Lady Catherine lived on. Voltaire saw her in Brussels, destitute. She died in 1747. Her son by John Law joined the Austrian army and died of smallpox.
COMMENTS
