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In pursuit of wealth: Part 50… the rise of the Ponzi scheme in France and BritainIn pursuit of wealth: Part 50

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IN 1717, John Law gained an important friend in the French court, Philip, Duke of Orleans, regent for King Louis XV. 

John Law

France was in dire financial circumstances; Law convinced the Duke that the bank scheme could provide the French court with large amounts of money with which to pay its debts and Orleans and his friends would receive enough funds to keep the ship of State on an even keel. 

Law would have power and prestige while investors in the bank’s stock would receive dividends and capital gains. Prosperity restored, interest rates would decline, assisting both governmental and private enterprise.

The bank was established, and Law was soon able to take control of many companies through the use of Bills backed by bank deposits. The most important of these, the Compagnie des Indies, also known as the Mississippi Company, had been granted extensive rights in the Mississippi Valley. 

Law obtained for it the monopoly of tobacco concessions and control of trade with the French possessions in the East Indies, China as well as Senegal and issued grandiose statements about the fantastic wealth of the region.

There, one sees mountains filled with gold, silver, copper, lead, quicksilver. …! 

Since these metals are common there and the savages do not imagine their real worth, they exchange them for a swallow of brandy; Law proclaimed.

France was swept by a wave of speculation that, in some ways, resembled the tulip mania. 

The Rue de Quincampois, where stockbrokers and speculators assembled, was crowded with those hoping to double their shares quickly. Purchasers were permitted to take possession of shares with a payment of 10 percent of the price (margin), with the rest payable in instalments over 19 months. 

But, in practice, when the shares rose, the speculators would sell to another group of speculators and pocket the profits, seeking profitable investments in other companies that sprang up. 

Real estate in the area increased in value.

Soon, a financial district of sorts sprung up in Paris. 

An illusion of prosperity swathed the city as messenger boys converted tips into small purchases, then doubled and redoubled, with some even becaming wealthy. 

According to one account, a wretched hunchback was able to make a good living renting his back as a portable desk!

Expanding his influence, power and reputation, in 1718, Law obtained the right to mint coins and collect taxes for the government. 

In the autumn of 1719, Law’s plans to assume the public debt appeared on the brink of realisation. 

Under his plan, the government would pay three percent interest on the portion of the 1,5 billion livres of debt the Mississippi Company assumed. 

The company had pledged to pay dividends at the rate of 12 percent, at a time when investments considered safe paid five percent. 

To accomplish this, Law had to show an annual profit of 200 million livres on operations, which was clearly impossible for a company whose only assets were raw land and a measure of hope. Some speculators, realising this, started selling the shares short.

In order to prevent a panic and boost morale, Law paraded a few thousand criminals through the streets, with picks and shovels in hand, and announced they were on their way to New Orleans to mine gold. 

Shares shot up in value, the shorts were squeezed and confidence was restored in Law’s genius.

In accordance with his plan, the Banque Royale issued 800 million livres in notes that further stimulated speculation. 

By November that year, Mississippi Company shares that had a par value of 500 livres were selling for more than 

10 000 livres.

The fall of the Mississippi Company scheme came in 1720. 

The promises of wealth had not materialised and, after two years of illusion followed by dashed hopes, the market collapsed.

Law was discredited and the Paris market reorganised. 

In 1726, the Bourse was chartered and the appearance of a securities market provided France with a greater degree of liquidity. 

But this did not compensate for the lack of confidence in bank notes. 

The French did not have a strong central bank enjoyed by the English. 

Loan rates were invariably higher than those across the English Channel; it was an important factor in deciding which country would win the war for empire.

While the French were entranced with the Mississippi Company, the English were not spared bubbles of their own. 

They had their own version. 

The London money market had begun along the old Roman wall of Londinium. 

Merchants from Lombardy had settled in the area, giving the name of Lombard Street to what became the centre of English finance. 

By the early 18th Century, the street was teaming with brokers who traded shares of joint stock companies, some of which went back to the time of Queen Elizabeth I.

In 1711, several businessmen and nobles received a Charter for the South Sea Company, which offered to assume the entire debt of England in return for trade concessions and grants that would make the company the most powerful economic and financial entity in the nation. 

It was to be done not through payments of cash, but by an exchange of paper. 

Owners of government debt would be able to exchange their bonds for shares in the South Sea Company. 

To convince creditors of the soundness of the company, it was granted a monopoly on English trade with South America, and then another on the asiento, the African slave trade to Latin America as well. 

Finally, the government was to pay an 8 000 pound annual management fee and 586 000 pounds in annual interest on the 9,5 million pounds of debt assumed by the company.

Even as Parliament debated the proposal, shares rose from 130 to 300. 

Members of both houses participated in the dealings, and were granted favours by the directors of South Sea Company. 

Parliament agreed, and immediately shares in the company soared. 

English investors, dazzled by the French example, stampeded into the market in droves. 

The Prime Minister, Robert Walpole (pictured), later admitted to having owned shares during this period.

By mid-year, South Seas shares were selling for more than 1 000 pounds and the success spilled over into securities of other companies. 

Some of these companies, engaged in construction and fabrication, were sound. 

Others might have been well-intentioned, but were not sound.

Many were frauds. 

The bubble burst within a year, wrecking the fortunes of hundreds and discrediting a number of English politicians.

Parliament swiftly passed a law forbidding the issuance and trading of shares without legal authority. 

Another Act, passed in 1734, prevented specific abuses by stockbrokers while short-selling was forbidden 40 years later.

However, few strictures were followed either by the brokers or their customers. With or without regulations, the market thrived as both searched for wealth. 

The rise of the London markets, which took place as the Paris Bourse stagnated, was partly due to the comparative lack of royal power in England and the solidity of the Bank of England.

 Dr Michelina Andreucci is a Zimbabwean-Italian researcher, industrial design consultant and a published author in her field. For comments e-mail: linamanucci@gmail.com

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