An Abundance Of Fictitious And Imaginary Money
A Sunday topic on this Reuters column by Edward Chancellor. “This year marks the 300th anniversary of the start of an economic project in France which posterity knows as the Mississippi Bubble. The brainchild of an expatriate Scot, John Law, this scheme has been hailed as the most ambitious economic experiment prior to the establishment of the Soviet Union in 1917. Like Lenin’s creation, the short-lived Mississippi Bubble burst in spectacular fashion. Central bankers around the world are currently embarked on a mission not altogether different from Law’s, making lessons revealed by his failure particularly relevant today.”
“At the height of what he called his ‘System,’ Law was the richest and most powerful man in Europe. His Mississippi Company incorporated all of France’s overseas trading companies – one of which claimed title to half the landmass of what is now the United States, along with monopolies for tax collection, tobacco, and coinage.”
“To understand the origins of the bubble it’s critical to grasp the Scotsman’s original purpose. As an economist, Law was a monetarist, an early forerunner of the late Milton Friedman. He believed that France suffered from a dearth of money and that an increase in its supply would boost economic activity. At the time of Louis XIV’s death in 1715, Law saw that France had two pressing problems. First, the state had too much debt – many of the royal debts were trading well below par. Secondly, interest rates were too high – in his last years, Louis XIV paid above 8 percent for his loans.”
“Law, according to his biographer Antoin Murphy, was a ‘low-interest rate advocate.’ He recommended setting up a national bank, which could issue notes to buy up the government’s debt, and thus bring about a decline in the interest rate.”
“Law was effectively suggesting that the central bank should expand its balance sheet to lower interest rates, which in turn would help over-leveraged borrowers, boost economic growth and employment and stimulate inflation, while simultaneously reducing the cost of servicing government debt.”
“The scheme commenced in May 1716 with the foundation of the Banque Générale, the forerunner of France’s first central bank. Over the next four years, Law enjoyed remarkable success – the Mississippi stock soared, the entire French national debt was absorbed by the company and interest rates fell to 2 percent. Paris bustled with newly coined (or rather, printed) millionaires. Within four years, however, Law’s System had exploded – the stock-market bubble burst, confidence in bank notes evaporated and the French currency collapsed. In late 1720, Law was forced into exile. He died nine years later and was buried in a pauper’s tomb in Venice’s San Moise.”
“The best contemporary critique of the System is provided by the banker and economist Richard Cantillon, who was based in Paris during the bubble. First, Cantillon questioned Law’s basic economic premise. Money printing brought no lasting benefits, in his view: ‘An abundance of fictitious and imaginary money causes the same disadvantage as an increase of real money in circulation, by raising the price of land and labour, or by making works and manufactures more expensive at the risk of subsequent loss. But this furtive abundance vanishes at the first sign of discredit and precipitates disorder.’”
“Devaluations of money promoted inefficiency: ‘Undertakers and merchants find it easy to borrow money, which decides the least able and least accredited to increase their enterprise,’ wrote Cantillon. Operations to reduce rates with freshly printed money also provided an opportunity for corruption, as large fortunes could easily be made. Cantillon argued that Law’s monetary experiment might temporarily reduce interest rates and incite speculation but the newly printed notes didn’t actually enter into the real economy. Similar criticisms have been made about central banks’ recent attempts to boost economic activity with quantitative easing.”
“As the effectiveness of monetary policies has come into question, central bankers in Japan and Europe have acted with a Law-like vehemence. Above all, the collapse of the Mississippi scheme shows that when central banks inflate bubbles there is no painless ‘exit’ – Law’s Banque Royale had to continue printing money to sustain the bubble.”
It’s worth reading in full.
Wow, great article, Ben! Thanks!!
Fascinating article; I knew of Law’s famously-failed experiment, but hadn’t realized the number of similarities to our current day experimentation.
Cantillon foresaw that Law’s simultaneous attempt to keep interest rates low, control the money supply and peg the currency was doomed. The canny banker observed that the French money supply under Law had grown excessively and that this money would inevitably flow abroad. In 1720, Cantillon wagered against the French currency, which later fell by 60 percent in sterling terms.
Sounds like I need to read some Cantillon…
The canny banker observed that the French money supply under Law had grown excessively and that this money would inevitably flow abroad.
And I would add: we observed this in real-time here, back during the height of the money-printing—that it was causing inflation not here, but in developing countries.
We did see the dollar weaken, but nowhere near the degree quoted for the French currency; and moreover, the dollar reversed course once the printing slowed down, and most of the economic hit has thus far occurred in those same developing and resource-based economies.
“It’s worth reading in full.”
Indeed. It’s a one-way trip down printing press lane.
FWIW, Bernanke knew that too.
http://picpaste.com/bernanke.jpg
At the risk of sounding flippant, I rather like this idea of exile for central bankers, financial miscreants and such.
“In late 1720, Law was forced into exile. He died nine years later and was buried in a pauper’s tomb in Venice’s San Moise.”
On the not so flippant side of things, great, thank you, fine, I got all that. For years now, after mistakenly thinking that we were going to have some sort of stock market crash and/or another RTC or some such mechanism to clear the system. And here we are, years later, same sh*t, different day. Like some Groundhog Day loop, over and over. Some endless Republican convention where the rules change if the outcome isn’t desirable to a handful of people.
So what does one DO about it, as an individual? (I don’t need another stupid anarchist lecture from Dollar Bill).
All this learned reading of history is all well and good, but what does one DO, first, to end it. Second, to ensure it doesn’t happen again?
Try not to be so much a creature of the system. Needing little from it is a lot better than having a big investment portfolio and living in fear of that not being “enough”. If you are fortunate enough to once in a while have an insightful opinion, share it sparingly because the vast majority will herd the other way. Today’s lesson on the blog seems that people do the same stupid things over and over and over.
“If you are fortunate enough to once in a while have an insightful opinion, share it sparingly because the vast majority will herd the other way.”
Your friends, family and close associates are truly fortunate to have you in their orbit. I have learned a lot from your quiet wisdom.
“…half the landmass of what is now the United States”
No shortage of land then or now.
The shortage is artificial and government sponsored.
What about the land actually changed? A few maps made, fence-rows. Farmhouses. Today they build cities! And trains and highways to these cities.
I was thinking about a debate we had years ago. I and others scoffed at the idea of building cities from scratch. Some here cited a few examples when it had been done successfully in defense of the practice. That the Chinese government finally had to tell planners “STOP!” tells us who was right about that one.
Robert Crumb’s comic, A Short History of America
https://www.youtube.com/watch?v=LGJ79fd1_80
How much of the landmass mentioned in the article subsequently became part of the Louisiana Purchase?
Edward Chancellor’s book titled (every man for himself and the) Devil Take the Hindmost is also worth a read. I bought a copy in 2011 and it is lying on my desk right now.
I would argue that the so-called Missisippi Bubble is a misnomer. It should be called the The Banque Royale bubble, after the name of the central bank that was the cause of the bubble in the Missisippi Company stock. I have a feeling that it has been politically incorrect for 300 years to invoke a central bank name as the central culprit of a massive bubble, and that economists had to use an obscure name for it or else not be published.
‘it has been politically incorrect for 300 years to invoke a central bank name as the central culprit of a massive bubble’
This occurred to me: wouldn’t Law have been keen to create a new and much larger bubble in response to the collapse had he been allowed to? Or let’s say been allowed to retire and give generously paid speeches while a successor laid the path for a new and larger bubble? At the time such a thing ‘est inconcevable.’
‘Paris bustled with newly coined (or rather, printed) millionaires’
Is there any doubt that these new rich thought themselves quite the businessmen. Innovators even. Today we go much further in fancying ourselves so. Men create money losing ventures that watch puddles from afar and make the founders billionaires.
‘Devaluations of money promoted inefficiency: ‘Undertakers and merchants find it easy to borrow money, which decides the least able and least accredited to increase their enterprise,’ wrote Cantillon.’
Sounds like the dry cleaner effect.
‘Operations to reduce rates with freshly printed money also provided an opportunity for corruption, as large fortunes could easily be made.’
Doesn’t the media marvel at all the billionaires springing up in China and elsewhere?
Thanks for the book mention, I’ll have to pick one up.
“Doesn’t the media marvel at all the billionaires springing up in China and elsewhere?”
Realtors certainly do. “Don’t you guys need a house or something?”
It should be noted that The South Sea Bubble burst in 1720 as well.
We don’t seem to do well economically in the second and third decades of past centuries.
“We don’t seem to do well economically in the second and third decades of past centuries.”
A most interesting observation, at least as regards the last two centuries.
The 16th century gave us money-based economies. The following four centuries gave us crises in their second and third decades.
This is good to note. So, may I infer from this that an economy based on money is the problem and that perhaps an economy based on something else might be preferable?
I’m not being sarcastic here. In fact I think this is quite intriguing. Very radical.
What kind of “something else” do you have in mind?
It reminds me of Sir Winston Churchill’s famous comment about democracy:
The following four centuries gave us crises in their second and third decades.
Boy, I sure hope that that doesn’t mean we’re in for another whole decade of insanity before pricing returns to something more sensible…
South Sea bubble: British
Mississippi Bubble: French
In economic terms they rhyme.
US bubble, followed by the China “miracle”.
Mississippi Bubble, followed by the South Sea Bubble.
“Central bankers around the world are currently embarked on a mission not altogether different from Law’s,
makingignoring lessons revealed by his failure…”“Law was effectively suggesting that the central bank should expand its balance sheet to lower interest rates, which in turn would help over-leveraged borrowers, boost economic growth and employment and stimulate inflation, while simultaneously reducing the cost of servicing government debt.”
That plan sounds vaguely familiar.
Really? What would you know about it, Captain Obvious?
To put it directly, if you replace “Law” with “Bernanke” in the above statement, it reads like an account of the post-2008 episode.
Is that a fact? Bernanke. Pfft. Like Greenspan had nothing to do with it.
Greenspan expanded the Fed’s balance sheet and nobody reported it? Hmmmm…
how much would interest rates climb if fed sold off say, 3 trillion in 3 years?
Not enough.
Agree with your analogies and remarks above, Ben and Alphonso. I would point out that The South Sea Bubble (another misnomer, IMO) yet again was a bubble of a European company, this one with stock trading in London, namely the South Sea Company. The SSC was somewhat the British equivalent of the Mississippi Company. And another note: Ben’s article from yesterday was discussing copycat bubble-creating behavior. It appears that copycat competitive bubble-blowing indeed was in full effect also in 1716, between England and France.
The 1840 book below cover several bubbles, including the famous Dutch tulip bubble.
https://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds
BTW, the article below on the tulip mania has some most amusing paintings of the speculators of the day, well worth a look
https://en.wikipedia.org/wiki/Tulip_mania
Now that is awesome! I wonder if anyone can did up contemporary artwork that similarly depicts today’s bubble-brained real estate speculators?
This kind of convuluted involvement in quagmires abroad is how empires collapse. Another neocon success story.
http://www.latimes.com/world/middleeast/la-fg-cia-pentagon-isis-20160327-story.html
I am about to continue to beat to death my proposal that if markets were attached to fundamentals then they couldn’t become run-away markets unless the fundamentals themselves began to run away, which is not likely to happen because in most markets the force that drives fundamentals do not change all that much.
But when markets get detached from fundamentals - when the prices that are a measurement of a market get detached from fundamentals - then the prices themselves become the market and these prices themselves give value to the market instead of the fundamentals.
In the cases of the South Sea Bubble and the Mississippi Bubble there were no fundamentals available to give value to prices other than to say “therein lie the opportunities” so it ended up that the price itself is what gave value to the price and when these prices went up out of sight then this action is what created the demand, demand which in turn created a further rise in prices.
All powered by conjured up money, of course; after all, the money had to come from somewhere.
“I am about to continue to beat to death my proposal that if markets were attached to fundamentals then they couldn’t become run-away markets unless the fundamentals themselves began to run away, which is not likely to happen because in most markets the force that drives fundamentals do not change all that much.”
Good, I’m glad somebody has an idea for some action. Now, how do we make that come about?
Bloody revolution?
I think there’s gonna be a military coup in the US. Why not? The rule of law has pretty much been erased, so anything goes. That’s what eventually happens when you start down that road. And that’s when you see some boo-boo faces among the oligarchy. Especially when the heads end up on pikes, for real.
The fish rots from the head first.
http://www.breitbart.com/national-security/2016/03/25/money-sex-for-secrets-highest-ranking-navy-officer-so-far-sentenced-to-nearly-4-years-in-prison/
OK, since you went off topic first, I have a question: Has anyone ever noticed the Madeleine Albright bears a really strong resemblance to George Soros? Have they ever been seen in the same room together?
Don’t mess with the UCMJ. Hehe.
This guy should have worked at the GSA where cake-poppers are standard issue.
Especially if you are an enlisted man, that is one of the things they drilled into us in Navy boot camp. Was on a carrier, at that time (70’s) they still put people on bread and water and on a ship that size the brig was run by Marines.
Sunday funnies.
http://www.theburningplatform.com/2016/03/27/sunday-funnies-106/
How many billions of dollars have US taxpayers spent training and equipping “allies” who have no stomach for the fights in Syria and Iraq and leave their weapons for ISIS to pick up?
http://www.thedailybeast.com/articles/2016/03/26/iraqi-soldiers-flee-again-in-iraq-army-s-first-mosul-operation.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+thedailybeast%2Farticles+%28The+Daily+Beast+-+Latest+Articles%29
Our national descent into IDIOCRACY is accelerating, it seems.
http://www.dailymail.co.uk/news/article-3511343/Marauding-parents-Easter-Egg-hunt-rampage-control-adults-push-children-ground-steal-buckets-leave-one-four-year-old-bloody-chaotic-free-event.html
How long before social unrest in China causes the elites there to engage in military adventurism abroad to rally the masses around the flag?
http://www.businessinsider.com/china-searches-for-anti-xi-writers-2016-3
Just as Obama has been Gun Salesman of the Century with his clumsy attempts at gun control, Soros seems poised to be Recruiter of the Century for far-right groups in Europe.
http://www.telegraph.co.uk/news/worldnews/europe/belgium/12205225/Brussels-terror-attacks-nuclear-arrests-suspects-isil-latest.html
“There was a conceptual flaw at the heart of Law’s scheme. He believed that money and financial assets were freely interchangeable – and that he could set the price of stocks and bonds in terms of money.”
Good thing that today’s central bankers have learned their lesson and would never attempt to set the prices of financial assets!
The coming crash is going to be epic. At the cost of millions of American’s being financially wiped out, We the People might finally demand systemic changes such as the creation of a true central bank instead of a private banking cartel, the Federal Reserve, run for the exclusive enrichment of a corrupt and venal .1% in the financial sector.
http://markstcyr.com/2016/03/27/has-the-biggest-of-all-bubbles-popped-central-bank-omnipotence/
I’m planning to not be among those who get wiped out due to piling on excessive leverage in a historic mania.
Yeah there is going to be a reckoning. For many it will be a positive way forward. A new beginning presenting real bonafide opportunities. For some, it’s going to be the end.
Deleveraging is soooooo 2009. And it’s too bad because had we stayed on that track after 2008 we might have been able to get out of this thing. We may be beyond the point of no return.