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When the stock market was
on a tear after hitting bottom in March, there was no talk of another
stimulus plan. Now, suddenly, with stock prices melting in the summer heat,
discussion of a second stimulus plan has Washington buzzing. Nobel laureate
Paul Krugman believes that "[t]he bad employment report for June made it
clear that the stimulus was, indeed, too small." Obama supporter and
Wall Street wise man Warren Buffett says that the first stimulus "was
sort of like taking a half a tablet of Viagra … It doesn't have really
quite the wallop that might have been anticipated." The
soon-to-be-79-year-old investor is all for a second stimulus — and
presumably full doses of Viagra.
Even economists who don't
favor another stimulus package are counting on the first one to finally kick
in, as well as for the Federal Reserve's massive monetary stimulus to show
results. After all, the federal response to the current downturn (so far) is
twelve times greater than that to the Great Depression. Allen Sinai says that
"lags in monetary and fiscal policy actions" should be allowed to
"work through the system," and ex-Fed governor Wayne Angell claims,
"monetary policy always works!"
Of course, nothing could
be further from the truth. "Often after time the message in past events
is more easily read," writes Janet Gleeson in Millionaire: The Philanderer, Gambler, and
Duelist Who Invented Modern Finance. "Unraveling Law's story three
centuries on, one cannot help but feel a sense of plus ça change
plus c'est la même chose — nothing really has changed."
John Law may have died in
disgrace after his Mississippi System failed in 1720, but government and its
cheerleaders in the economics profession continue to embrace his ideas,
believing that the printing of money can lift an economy from the doldrums.
They believe enlightened central bankers know just how much money an economy
requires, or just how high or low interest rates must be to ensure
prosperity.
"But time's passage
has seemingly brought little in the way of additional invulnerability to the
giant institutions public investment has created," Gleeson points out.
"In the world of banking and finance the specter of financial calamity
looms as intimidatingly as ever it did to investors in Regency Paris or in Georgian
London."
Just as the Treasury, the
Federal Reserve, and all of Washington attempt to throw the weight of
government power and largesse behind restoring our bubble economy, John Law
tried every trick he knew to keep his Mississippi Company shares afloat, the
French economy humming along, and the French citizens from cashing in their
paper for silver and gold.
In Millionaire,
Gleeson paints the most complete picture of John Law to date — and does
so beautifully. The book is written for a general audience and has been
culled of the complex financial details and numbers that would put off the
average reader. But her bibliography is first-rate and leans on scholar
Antoin Murphy for what financial details she does provide.
In Gleeson's hands, Law's
story reads like an action novel with the ending of a Greek tragedy. Law is
James Bond-like — a suave, debonair, womanizing gambler who always
seems to come out on top. He has plenty of friends in high places and works
the party circuit throughout Europe. All the while, he has a skeleton in his
closet in the form of Edward Wilson, whom he killed in a duel for which
details remain sketchy. (Did the two men duel over Elizabeth Villiers,
"the king's boss-eyed, unattractive mistress," or a certain Mrs.
Lawrence, or money Wilson had received from a homosexual lover?)
But the sturdy Scotsman
was a monetary playboy. "He had not only pondered mathematical and
financial conundrums," writes Gleeson, "in his idle hours he had
continued to gamble and philander." In 1715 a heavily indebted France
was in a depression, and the government was nearly bankrupt. Law thought the
only thing France needed was more money, and if there was a shortage of gold
and silver, "the answer was to establish a national bank and issue money
made of paper."
Law got his chance to
print France to prosperity when his friend Philippe, Duc d' Orléans,
came to power. Law and Orléans were each athletic, handsome, and
brilliant tennis players, according to Gleeson, and "[b]oth enjoyed
extraordinary success with the opposite sex," she writes.
"Orléans could outstrip even Law in his sexual conquests,
although power and position were on his side."
Law's financial scheme
started small with Banque Générale, but within a year
Orléans helped the bank by requiring that tax collectors remit
payments to the Treasury in Law's banknotes. But Law had enemies, and they
tested him early on by demanding silver for five million livres in notes. Of
course, Law couldn't satisfy this bank run on the spot, but he promised to
pay a day later. As much as the finance minister disliked Law, because of
Law's cozy relationship with Orléans, he felt that he had to bail him
out and provided the silver to satisfy the redemption demand.
When Law's system ramped
up, everyone succumbed to speculative fever. And Law made it easy, with the
masses being able to buy shares with little money down and also to speculate
in what were essentially options on Mississippi Company shares. "The
wider general public had never before taken part [in buying shares], nor had
such rapid rises on such a scale ever been witnessed," Gleeson explains.
"Like gluttons at a Mississippi banquet, most investors ingenuously
accepted the opportunity to gorge themselves and never considered the
consequence."
Just as Keynesians and
financial commentators bemoan the fact that people are reacting to the
current downturn and stock market crash by saving instead of spending and
investing, Law did all he could to keep investors from fleeing his crashing
Mississippi Company shares and battered currency. Among the first to cash in
was Law's friend the Irish banker Richard Cantillon. Gleeson suspects that
Cantillon had inside information when he bought his shares cheap, and later
benefited again from information that his brother provided: Bernard Cantillon
had supervised the prospecting party that sailed to Louisiana, finding not
the treasure that Law's propaganda claimed, but instead disease and hostile
natives.
"Cantillon realized
that the bull market was based on little more than smoke and mirrors and
ever-increasing quantities of paper money," Gleeson writes. Many others
ran for the cover of silver as well. Vendors were not interested in taking
paper and did so only at a discount, while livestock sellers would only
accept silver and gold. Price inflation was rampant, with prices rising 25
percent in just two months' time, while the prices of some food items (like
bread) soared 300 to 400 percent.
Law then resorted to
despotic power, banning the export of coins and bullion. Next he prohibited
the purchase or wearing of diamonds and other jewels. When this didn't stop
the exit from paper, Law outlawed the production and sale of all gold and
silver artifacts with the exception of religious paraphernalia, resulting in
soaring prices in crosses and chalices. Within a month Law banned the
possession of more than 500 livres' worth of silver or gold and required that
all payments of more than 100 livres be made in banknotes. People were
promised generous rewards if they informed on their neighbors. "The
slightest suspicion that gold was being concealed illegally would be enough
for any house, whether palace or hovel, to be searched," Gleeson writes.
We can only imagine what
draconian currency and financial controls will come out of the current meltdown.
In no way is Millionaire
written from an Austrian point of view. Gleeson refers to the return to
coinage after Law's fiasco as "draconian." She writes that Law's
inflation, although rampant, was "beneficial inflation," and that
it "relieved the need for high taxation," not realizing that
inflation is itself a diabolically sinister form of taxation.
But these are slight
quibbles with an otherwise outstanding book, which was published ten years
ago to no fanfare that I can find. Books about old financial bubbles and
busts just don't capture the public's imagination like high-flying stock and
real estate opportunities. Those who ignore history — or learn the
wrong lessons from it — are doomed to repeat it.
Doug French
Mises.org
Douglas French is
president of the Mises Institute and author of Early
Speculative Bubbles & Increases in the Money Supply. See his tribute to Murray Rothbard.
Also by Doug French
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