John Law and the Mississippi Company, Part 3
Brian Trumbore
President/Editor, StocksandNews.com

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 ¼ 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 in 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."

Back to : Part 1

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