The first chapter of Mackay’s book concerns John Law’s Mississippi Scheme. For a quick summary of the scheme, Wikipedia does a reasonable job. Instead of summarizing the chapter, I’m going to tie together some of the notes I’ve made. Unfortunately, this will likely end up a disjointed mess but hopefully it will still be interesting.
Law could count on a couple of factors in having the French hear out his scheme. The most important one was that France was practically bankrupt. Their national debt was 3 billion livres with yearly governmental revenues 145 million and expenses 142 million, leaving 3 million livres to pay interest. Given that nobody would charge a rate of 0.01% interest (certainly not back in the 1700s, before modern capital markets and our vast increase in wealth), the French national debt was doomed to grow yearly. Some within the French government wished to declare bankruptcy and write off the debts, but the regent refused and instead the French ordered a depreciation of coinage. The net result of this was a one-time seignoriage gain of 72 million livres followed by an unknown but very large loss of tax revenue due to trade disruption brought about by debasing the official coin of the realm followed by a small tax decrease to mollify the crowds. Other, more drastic measures occurred (ridiculous tax collection schemes), but corruption took away a great deal of any revenue. The government, desperate, was willing to hear out Law, whose scheme took off instantly.
Later on, Law’s stocks basically had the value of paper currency. Like all currencies in government hands, the desire for seignoriage led to a currency depreciation. Given that there were two basic types of currency in France at the time (Law’s papers and precious metals), Gresham’s Law would indicate to us that the more valuable currency will be driven out of the market, and this turned out to be exactly the case. In fact, the currency not only left the market; it left the country! During the height of the madness, far-seeing people smuggled out gold and silver coins to England and Holland, knowing that the coming collapse would be brutal.
The final straw for the French populace regarding the Law scheme was when the French banned the holding of coin with a value over 500 livres. While the government was causing a great deal of inflation, business effectively shut down. “Nobody,” Mackay writes, “would take paper if he could help it. No one knew to-day what his notes would be worth to-morrow.” Although the French were unable to revolt or even riot, they lost all faith in Law’s scheme and share prices came tumbling down.
It’s also interesting to note that Franklin Roosevelt’s ban on the possession of gold bullion fit in remarkably well with 18th-century French royal sentiments, except that the French royalists went a step further: instead of merely charging a fine to those who attempted to dump currency and buy more fixed assets (jewelry, precious stones, etc.), they paid informants half the value of any raids, guaranteeing a lucrative outcome for all sides…well, except for the side getting screwed, but hey, nobody cares about that fellow…
After the collapse of stock prices, the French governmental debt was in even worse condition, as they dependend upon the Company of the Indies (Law had, during the boom, bought up several companies and re-named the whole shebang) for a great deal of debt financing. Naturally, with the stock price collapse, this company couldn’t pay the government back, so the French government gave the re-formed Company of the Indies monopoly rights, this still being the age of mercantilism.
In the end, though, Mackay argues that Law was a fool rather than a con man. When he left France, he left impoverished. Instead of buying precious metals, skimming money off the top of his business, or some other way of enriching himself, he had bought land in France and put his earnings back into the company, expecting it to grow continuously. Instead, he was a man with a wacky idea in a country which desired wacky ideas, and most of the businessmen, noblemen, and stock-jobbers were more interested in trying to score huge gains than realizing the fundamental problem with his business plan.