Gross: Neptune & the South Sea Bubble
anticipates what we learn in the aftermath of the bubble, it nearly brings down the government and Crown.
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HE MISSISSIPPI BUBBLE France sought relief from their deepening deficit by embracing the ideas of a Scottish financial genius by the name of John Law. Law had fled England following his conviction for murder during a duel over a woman. As he traveled around the continent he flourished as a professional gambler with his grasp of the new theories of probability. In time, growing tired of womanizing and having already made a fortune through gambling, he sought the opportunity to apply his economic theories for the good of some deserving nation. He finally got a chance to put his ideas to work in a monetary reform for France. John Law’s economic insight was that credit was identical to money. Paper currency, bonds, credit notes and company shares were just as much part of the money supply as coin. The amount of money in circulation, he realized, should pace the demand of the productive economy, not the haphazard supply of precious metal. He noticed how well the Bank of Amsterdam oiled the wheels of commerce by replacing impractical coinage with its own script, a concept he began to implement on April 16, 1716 when he underwrote the Banque Generale. With the blessings of the French regent, the Duke of Orleans, he began to issue a national currency. Later he would absorb the major trading companies in France to form the Mississippi Company which had a monopoly on trade to France’s North American colony, Louisiana. To the virtues of Dutch banking, Law added the English idea of exchanging government debt obligations for shares in a joint stock company, only he would do so on a gigantic scale. He reasoned that the monetary stimulus of paper currency and stock in a productive enterprise would stimulate the economy, pay down the debt and lift all ships. The plan demanded rising share prices of Mississippi Company stock which he encouraged by means of easy payment incentives and loans on stock purchases. He understood the proper ratios to maintain between paper and assets, but his was not the only hand on the printing presses, other politicians shared control. As he overplayed his hand near the end of 1719 he triggered a speculative bubble and general inflation in France.8 John Law meant well, but the collapse of his system in France left that nation bitter about economic innovation for a long, long time. All this was foreshadowed in the y A u chart. Referring back to that chart, note how the symbolism explicitly suggests John Law’s attempt to 8
John Carswell. The South Sea Bubble. Gloucestershire, England: Sutton Publishing, 2001, p. 69.
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