How the Mississippi Delta swamped John Law’s economic theory and contributed to the French RevolutionThursday, August 13th, 2009
Long blog post title, but that is the gist of this piece at Economist.com: “Law of easy money - A 300-year-old example of quantitative easing.”
Basically, John Law, economic advisor to French King Louis XV, created a paper based money plan not backed by gold and silver as an economic stimulus package for France based on investing in the development of French colonies including the Mississippi Delta.
Here is an excerpt:
The money raised from these share issues was used to repay the government’s debts; on occasion, Law’s bank lent investors the money to buy shares….The problem was that the delta was a mosquito-infested swamp….So a vicious circle was created, in which a growing money supply was needed to bolster the share price of the Mississippi company and a rising share price was needed to maintain confidence in the system of paper money. You can see parallels with recent times, in which money was lent on the back of rising asset prices, and higher prices gave banks the confidence to lend more money.
When the scheme faltered Law resorted to a number of rescue packages, many of which have their echoes 300 years later. One was for the bank to guarantee to buy shares in the Mississippi company at a set price (think of the various government asset-purchase schemes today). Then the company took over the bank (a rescue along the lines of Fannie Mae and Freddie Mac). Finally there were restrictions on the amount of gold and silver that could be owned (something America tried in the 1930s).
All these rules failed and the scheme collapsed. Law was exiled and died in poverty. The French state’s finances stayed weak, helping trigger the 1789 revolution….Of course, the parallels with today are not exact….But one lesson from Law’s sorry tale endures: attempts to maintain asset prices above their fundamental value are eventually doomed to failure.
You can read the full article online at the Economist: Law of easy money - A 300-year-old example of quantitative easing