John Law. He rescued France from ruin, then ruined her again by basing prosperity on credit with the famous Mississippi bubble. He showed us how the future could not work: today’s examples would be the tech bubble of 2000, the mortgage crisis, currency devaluations, The banking crisis etc, margin trading, …
In lieu of progeny John Law left behind him a remarkable record of achievement. He defined the modern concept of a bank, with its employment of credit, its free circulation of checks, and its bank notes as legal tender under state supervision. He recognized the essential nature of money; this back at the dawn of the eighteenth-century when he was the first to articulate the relationship between money, trade and employment; where money could represent wealth and be manipulated to make wealth with banks imparting a real value to paper which would replace gold and silver for common exchange. The problem of course is what Greenspan famously referred to as “irrational exuberance” ,the frenzy of the frothy market and the instability or dubious value or insufficient value of the underlying assets as a floor on the value of the paper empires. Law started the first wave of paper millionaires who hadn’t a centime to buy food after the wealthy insiders cashed in carrying off coaches of gold. Buying frenzies, selling frenzies and crash and burns in the stock swindles and ponzi schemes of the day.
As Montesquieu said of Law, “he was more in love with ideas than money.” Law forecast many modern politico-economic theories, including the managed economy of Keynes and its neo-Keynsian variations through others such as Samuelson, Stieglitz, Krugman et al. And within his theory, “the system” he called it, was the powerful idea that company and enterprise formation was a powerful economic stimulus and wealth creator; so Law also touched on the concept economic structuralism as well.
Specifically, Law halved the French debt and permitted the monarchy to stagger on towards the Deluge. His principles encouraged the industrial development of eighteenth-century France. His Compagnie des Indes prospered for years after his death. His colony in Louisiana struggled, sickly indeed, toward its great destiny. The Mississippi Bubble exploded in glory; but the idea of the at the time forlorn land as an asset was well founded, albeit the sales pitch of mountains flowered with gold and precious metals and welcoming natives was a fish story that would be oft-repeated.
So, Law’s errors were many: his failure to provide an industrial basis for profit making, his surrender and inability to deal with inflatonary pressures, his restrictive decrees; and the gambler and speculator in him too often made the financier’s decisions. John Law was more right than wrong. But one might just as well be wrong as be right too soon.
from the Economist ( see link at end):…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.
So a vicious circle was created, in which a growing money supply was needed to bolster the share price of the Mississippi company and a rising share price was needed to maintain confidence in the system of paper money. You can see parallels with recent times, in which money was lent on the back of rising asset prices, and higher prices gave banks the confidence to lend more money.
When the scheme faltered Law resorted to a number of rescue packages, many of which have their echoes 300 years later. One was for the bank to guarantee to buy shares in the Mississippi company at a set price (think of the various government asset-purchase schemes today). Then the company took over the bank (a rescue along the lines of Fannie Mae and Freddie Mac). Finally there were restrictions on the amount of gold and silver that could be owned (something America tried in the 1930s).
All these rules failed and the scheme collapsed. Law was exiled and died in poverty. The French state’s finances stayed wea
elping trigger the 1789 revolution. The idea of a “fiat” currency was perceived to be the essence of recklessness for another two centuries and the link between money and gold was not fully abandoned until the 1970s, when the Bretton Woods system expired. Read More:http://www.economist.com/node/14215012
( see link at end) ….Confident that Law was a magician who would make them all rich, citizens clamored to get their hands on each successive bank note issue. In Paris’ Rue Quincampoix and the Rue de Venise, where stock trading was carried on, wild scenes were everyday occurrences. The streets were crowded with people seeking to buy shares. Brokers madly signaled from nearby windows as shares and bank notes worth millions changed hands. The market became so seductive that even the working classes sought a part in the prosperity. Since money was easy to borrow and you only needed to put down a ten percent deposit to enter the market, people from all walks of life flocked to the Rue Qincampoix to seek their fortune. Often all it took was to sell a cow or some extra crop to get the deposit money together. The Parisian aristocracy was startled by
the number of lower class people who grew rich from Mississippi speculation. These mercantile and peasant classes invested whatever small sums they could scrape together, some becoming extremely wealthy. Read More:http://www.thecurrencycollector.com/pdfs/John_Laws_Banque_Royale.pdf