How Mississippi John Laws innovation made Millionaires

Addison Wiggin - Thu 01 Sep, 2005

"...John Law tried to keep up his paper money scam a little longer, rounding up all the beggars, bums and thieves in Paris, furnishing them with picks and shovels, and marching them through town... ostensibly on their way to New Orleans and the gold mines of Mississippi..."

At the height of the bubble, just when the wheels started to come off, Mississippi John Law came up with a brilliant plan to save his company and the Banque Royale.

The year was 1720. Paris, over the previous three years and by virtue of Law's financial innovations, had become the largest and richest city in Europe.

Law's innovation was paper money. Apart from a several hundred-year stretch in China ending in 910, the world had never seen or used paper money. At the outset of The Mississippi Scheme, Law had demanded, on pain of death, that his banker's not print more money than could be redeemed in gold from their own reserves. The strict backing of the currency – what was essentially the world's first gold standard – gave investors of the day such confidence that the currency actually traded at a premium.

But there was a problem. Law's bank existed by virtue of a deal with the Regent of France, the Duc d'Orleans. The finances of the government in France following the reign of Louis XIV, his wars and the building of Versailles, were a mess. Seeing how much value was being placed in the new bank notes of the Banque Royale, the Regent set another precedent modern readers will recognise: he decided to print his way out of debt.

He suggested Law issue currency up to 80 times what the bank held in redeemable gold reserves. Law, being rather preoccupied with the power and prestige the Scheme had bestowed on him, ignored his previous warnings, and let the printing begin.

The new notes flooded into the market. For a while they held that value they had gained with solid gold backing. So many people got rich, the Aristocracy of the time coined a new term to describe them:

"Millionaires"...

Stories of commoners making so much money fired the imaginations of thousands more investors and the frenzy got out of hand.

New Orleans, the site of this week's investment conference [in November 2002 when Addison wrote this essay], was founded at the time, named after the Regent, and meant to become the Paris of the New World. The jumping off point for those who would mine all the gold and silver soon to be discovered in Mississippi. Or such was the plan.

When people started getting wind of the fact there was nothing backing Law's currency but rumours of future profits to be reaped in the New World, they started losing confidence in his new currency. Law tried to keep up appearances just a little longer, rounding up all the beggars, bums and thieves in Paris, furnishing them with picks and shovels, and marching them through Paris ostensibly on their way to New Orleans...and the mines of Mississippi.

But the quiet hiss of air leaking out of the bubble accelerated into a screeching "whoosh!" when the same old dirty faces began appearing in the same old dirty doorways and alleys.

In 1971, the modern world's own bubble currency, the almighty US dollar, was the last modern currency to be officially removed from the gold standard. Ironically, or not, the move was precipitated by the French government. At the time, de Gaulle realised that the US had built up immense debts to governments around the world. If the US wanted to pay the debts back, all we had to do was fire up the printing press, and the world was forced to accept our paper in lieu of these debts.

How Mississippi John Law’s innovation made Millionaires

Since that day, no one – not you, me, or the president of France – can redeem their paper money for gold. And the value of the dollar is largely determined by the confidence investors around the world foresee in future success of US economy.

Doing his part this week to keep up appearances just a little longer, Alan Greenspan lowered the Fed funds rate another 50 basis points. If there's no gold behind them thar pieces of paper, maybe a boatload of credit will do the trick, eh?
Regards,

Addison Wiggin
The Daily Reckoning

P.S: They really couldn't have picked a worse spot to build a city. As you know, New Orleans is about 100 miles away from the mouth of the great Mississippi river. It's a great location for trade, but rivers of this size, well...they move a lot.

In order to keep the city in one piece, the people of New Orleans have had to build an extensive levee system. Today, the French quarter sits eight feet below sea level, and is sinking. If the levee were to break, the city would flood...and stay flooded.

Now they've built a sophisticated satellite system to track the movements of the river and break the levee at strategic points north and south of the city.

Intervention and improvisation...it's the human way, isn't it?

In the meantime, it's hard to say what's better about this town, the food or the music. Both are excellent. And unique. After the conference had wound down a bit last night, I went with some of our British colleagues to a jazz club over by the French Market called 'Snug Harbor'. We ate seafood and listened to a band called The New Orleans Jazz Vipers...good ol' time Dixieland.

At one point we struck up a conversation with a rather audacious gentleman who grew up in the area. He was pudgy, balding slightly, wore outsized sunglasses in the bar (at night) and loudly supported "Hillary for President" without being pressed for his political views.

Oh, he was an attorney, too. (You like the guy already, don't you?)

When he discovered we were in town for an investment conference he was aghast. "You poor sons of b*@$#es! Did any of you call that bubble we just went through!?" he asked with the air of a Senator sitting on a joint investigation panel of Congress.

"He did," one of my colleagues said, pointing to me without interest.

"Ohhh...he's a rich man!...he is one rich mother*@$#^*!; the man screeched over the din of the bar...louder, even than The New Orleans Jazz Vipers.

Maybe, maybe not. But as Bill is wont to say from time to time: "There's more to life than money."