The Mississippi Bubble is partly a story about
inflation and subsequent deflation (i.e. misguided monetary policy)...and
about a Real Estate bubble!
At one time all France is carried away
by the tremendous extravagance of the Mississippi scheme, which raised
real estate to such a price that it was valued at one hundred years'
purchase, that is, its rent only paid one per cent. on its cost. A little
later and England burst out wither her South Sea Bubble, creating
such a hunger for special corporations that one man who advertised an
unknown scheme to be revealed at the end of the month, ten dollars to be
paid down for each share subscribed for, took in $10,000 the first day.
Law. John. Money and Trade considered.
This book embodies Law's scheme for
the establishment of a State Bank which was to issue paper money.
Law's ideas, rejected by the Scottish Parliament, found acceptance in
France. Law, the founder of the Mississippi Scheme to develop Louisiana,
a company which gradually gained the whole of the overseas trade of
France, was appointed controller-general of French finance. The
Mississippi Company at first enjoyed a sensational boom, but in 1720
suffered an equally sensational collapse. Discredited, Law left France,
declined an invitation from St. Petersburg to administer the finances of
Russia, and for a time took refuge in England. He died in
comparative poverty at Venice in 1729.
John Law was born in Edinburgh, Scotland
in 1671. His father was a goldsmith who lent money on the side. Law
learned the principles of banking in the family business. After killing
someone in a duel and being convicted of murder, Law escaped from prison
and left England to drift around the continent. His mathematical mind
allowed him to earn substantial money with gambling and he studied the
intricacies of high finance in Venice, Genoa and Amsterdam. In 1715 Law
moved to Paris where he found a friend in the Duke of Orleans, the regent
of the young king Louis XV.
Around 1715 France was bankrupted by wars.
It had repudiated part of its debt, forced a reduction in interest
payments, and was in arrears on debt service. High taxes depressed
In May 1716 Law, by royal edict, was allowed to
establish the Banque Générale, modeled after the successful
Wisselbank of Amsterdam. The business of the bank would be to take
deposits and issue banknotes. Equity for the bank came from the sale of
stock for both cash and conversion of government debt, the same
debt-equity conversion scheme as used in England for the Bank of England,
East India Company and South Sea Company. Capital of the Banque
Générale was 1200 shares of 5.000 livres each, totaling 6 mln livres, to
be paid in one-quarter currency (1.5 mln livre) and three-quarters billets
d'Etats (4.5 mln livre). Billets d'Etats were returned to the State,
extinguishing a small part of the national debt. Although the banknotes
issued by the Banque Générale were not legal tender (a status acquired
later), acceptability was high and the bank's business thrived. Law made
his bank notes payable at sight and, most importantly, in the coin current
at the time they were issued (effectively an inflation indexed note). This
made the notes especially valuable in the face of repeated depreciations
of the currency by the government.
>back to What's next?
Goldonomic, Florida, USA -