How John Law turbocharged the West's malignancy
[Originally published at Alex Krainer's Substack] When Louis XIV, the Sun King died in 1715, France lay in ruins under a crushing burden of debts accumulated through decades of frequent and extensive warfare. The nation’s industry and manufacture nearly ground to a halt, commerce and navigation all but ceased and the state was on the verge of bankruptcy. France was ripe for the picking and Venetian bankers sent their hand, the Scottish adventurer John Law, to offer a "helping hand."
Bankers’ early “crisis capitalism”
In desperate straits, king Louis XV’s government was willing to experiment with some novel alchemy of finance. Namely, Law may have been history’s first Keynesian economist: in his 1705 treatise Money and Trade Considered, with a Proposal for Supplying the Nation with Money, Law hypothesized that, “A greater quantity [of money] employed more people than a lesser quantity.”
When he came to France, Law befriended the new king’s regent, duke Philippe d’Orleans and in 1716 established the Banque Générale Privéé with the duke’s backing. Law was a vocal advocate of paper money and Banque Générale became the first institution in Europe to issue paper notes as currency. Foreshadowing the “Federal Reserve” system, in 1718 Law gave the bank a veneer of officialdom by renaming it Banque Royale and secured government guarantee for its currency notes, making them effectively the kingdom’s legal tender.
The Mississippi system: world’s first unicorn stock bubble
These were the beginnings of Law’s spectacular rise to notoriety. In 1717, he also took control of the Mississippi Company which was granted the monopoly on trade with the French colonies of West Indies and Louisiana. At that time, the Louisiana territory, or Nouvelle France comprised a vast expanse of North American territory, covering most of Gulf of Mexico’s northern coast and the Mississippi river valley stretching as far north as the Great Lakes. To a varying extent, this massive expanse of land was controlled by France between 1534 and 1803, secured by a total of over 150 military outposts.
French Louisiana territory – a vast expanse of land controlled by France at one point between 1534 and 1803. The map shows some sixty (out of the total of over 150) military outposts.
With this acquisition, Law could implement his ambitious scheme known as the Mississippi System which would soon become history’s first unicorn stock bubble. In 1719 he restructured the firm as a joint stock company and renamed it as the Compagnie d’Occident. Next, Law consolidated the company’s business together with other trading enterprises including the Compagnie des Indes Orientales and the Compagnie de Chine, and in May 1719 relaunched the enterprise as the Compagnie Perpetuelle des Indes.
The new holding had the monopoly of trade with all of France’s colonial possessions. Barely three months later, in another bold arrangement with the duke d’Orleans, Law obtained for the company the lease on France’s tax revenues. Soon, the company also began to lend money to the government thereby acquiring France’s sovereign debt.
In modern parlance, John Law turned France’s state economy into a private hedge fund. The audacious scheme made it possible for investors to acquire a piece of the kingdom through stock shares in the Company of the Indies. The hyped-up promises of its immense future profits attracted investors from all over France and across Europe. Even for people of modest means, owning stock in the company seemed as a way to share in the storied bounties that merchants and adventurers had been hauling in from the new world and which were otherwise unattainable to them.
Investing in the Company of the Indies became one of the lead stories and a public obsession throughout France and Europe. By November 1719, frenzied investors who had been flocking to Paris in large numbers, bid up the company’s share price to 10,000 livres, more than sixty times its initial value.
As rose the company’s share price, so rose John Law’s star. From morning till nightfall he was in constant demand in the highest circles of French society. The alchemy of finance he introduced made him one of the most powerful men in the kingdom. In January 1720 he was named to the post of the Comptroller General of the Treasury. For all intents and purposes, Law now acted as France’s Prime Minister. He confidently boasted that he would “set France much higher than ever she was before,” and that he could ruin the “trade and credit of England and Holland whenever he pleases.”
But just at that time, the stock price of his company began its equally spectacular descent back to earth. The Company of the Indies and the Banque Royale had effectively merged and its investors started to receive their dividends in Banque Royale’s notes. The notes were convertible into gold on demand, but in January 1720, rumors began to swirl that the bank was issuing more notes than there was gold in its vaults. As nervous investors began to demand redemption of their notes in gold, there was soon a run on the Banque Royale and the stock price of the Company of the Indies cratered as stockholders rushed to dump their shares.
Next came repression to forestall the collapse of the new financial system: on 27 February 1720 Law issued an edict prohibiting individuals in France from having in their possession more than 500 livres in gold bullion. At first the edict had its desired effect as people brought their excess gold to deposit it at the bank. By this point, however, the confidence in John Law’s alchemy was irreversibly shattered and he began to lose support even among his close associates, including the duke of Orleans himself. As Law’s house of cards crashed to the ground, on 9 December 1720 the duke relieved him of his charges and he had to flee France in disgrace.
In spite of its spectacular failure, John Law’s scheme captivated the imagination of financiers and swindlers across Europe: in only a few years’ time, he achieved what no privateer or road brigand could dream of doing in a lifetime: by securitizing France’s most hyped up assets including her tax revenues and sovereign debt, and promoting these securities with alluring stories of vast future profits, he enflamed an exuberance of greed among the people and mobilized the masses to voluntarily part with their savings and deliver them to his company in exchange for the paper claims on his system’s promises. Such a scheme taught enterprising financiers a lesson that was simply too enticing to forget.
Perfecting the wealth extraction conveyor
From then on, it would be perpetrated for generations to come and recreated countless times over the ensuing centuries. With the accumulating know-how and experience it would be perfected and scaled up to industrial proportions, creating a massive conveyor belt that can turn every bit of collateral in society into negotiable securities and transfer their controlling ownership to a narrow oligarchy in charge of this novel social technology through an endless sequence of booms and busts, stock bubbles and bank runs, always accompanied with wars of conquest.
Such wars were waged under different pretexts, from spreading civilization and progress to exporting democracy and freedom, but were ultimately always aimed at controlling the world’s resource wealth. That resource wealth, plus the local labor needed to extract it, could then become secured collateral needed for the western financier oligarchy to amass vast fortunes by issuing development and trade loans thereby funding colonization and turning the burgeoning global trade in commodities into financial flows controlled by their own banks.
The system’s dying agony and humanity’s emancipation
This system turbocharged the incentives for colonization that ultimately engulfed most of the world. While it made colonial powers in the west enormously rich and powerful, the system has been grossly malignant everywhere else. Over the centuries, it has destroyed six major indigenous civilizations (India, China, Japan and the three Central and South American civilizations) along with thousands of minor cultures, kingdoms and tribes, enslaving tens of millions of human beings and depopulating large swathes of the earth.
The system may have reached the end of the road today and is struggling for its very survival. The wars in Ukraine and in the Middle East as well as the coming war on China are the symptoms of the dying agony of this malignancy which belongs in history’s dustbin. When the system falls, and fall it must, the losers will be the oligarchic dynasties of Europe and other westernized powers. Once rid of the malignancy, the whole rest of humanity will be the winners.
Alex Krainer – @NakedHedgie is the creator of I-System Trend Following and publisher of daily TrendCompass investor reports which cover over 200 financial and commodities markets. One-month test drive is always free of charge, no jumping through hoops to cancel. To start your trial subscription, drop us an email at TrendCompass@ISystem-TF.com
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