The Birth of “Irrational Exuberance”

the birth of Irrational Exuberance by George Fort Smith, an audiomiesis wire narrated by million quinteros. John Waugh, the early 18th century Scottish gambler in financier, thought the best way to revive an ailing economy was to remove the great scarcity of money as he wrote in a 1705 monetary tract.

A decade after its publication, he took his ideas to the continent and sold them to Philip Darlene's, the region in charge of Francis finances, who needed a scheme more sophisticated than his failed program of coin-clipping and confiscation to save the nation from bankruptcy.

In 1716, Philippe set law up as the head of the Bung Generale, the country's central bank, giving it and him monopoly control of the note issue. Having won the nation's trust with declarations of allegiance to sound money principles, he had promised his bank notes would be payable on site in unadulterated gold coin. Law proceeded to apply another element of his theory.

Because the scarcity of money he believed was the root of France's economic problems, and since banknotes backed purely by precious metals would be in short supply, he began issuing notes backed by the nation's vast land holdings. Exactly how one would redeem banknotes for acreage he neglected to explain.

Very importantly, Law and Philippe also created a trading company called The Company Des End, a vaporist entity said to have monopoly trading rights in France's Louisiana territory. Initially, shares in the company could only be purchased with government bonds still on the market, which had fallen to about one-fifth their value. To the public, The Trading Company and its investment strategy became known as the Mississippi System.

Philippe was very pleased with the results. People from all ranks were buying shares of the company at his end. Share prices began to soar. People were trading and speculating with lost paper money and France's economy was coming alive. Philippe decided John Law was correct that a shortage of money was an economic evil.

He was so pleased with the change in the economy, he brought the government closer to the action. He renamed Law's Bank the Bank Royale, and by late 1719, it had cranked out enough new bills to inflate the money supply by a factor of 16. No doubt to avert the evil of a money shortage. Will and Ariel Duran described the madness law had ignited.

The narrow, dirty, grew-ay, Quinn Campois, where the system had its offices, was for two years the Wall Street of Paris. Buyers and sellers of all classes, duchesses and prostitutes, Parisians, provincials, foreigners gathered their numbers, an excitement mounted day by day. Some were trampled to death in the crush, or were run down by the carriages of the aristocracy. Fortunes were made in a day. A banker made 100 leaver, a hotel waiter 30 million.

Now for the first time, men heard the word millionaire. In his memoirs of Louis XIV and his court and of the Regency, Saint Simone tells us, everyone was mad upon Mississippi stock. It meant fortunes were made almost in a breath. Law besieged in his house by eager applicants saw people force open his door, enter by the windows from the garden, drop into his cabinet down the chimney.

As historian Charles McKay noted, many persons in the humbler walks of life who had risen poor in the morning went to bed in affluence. Laws Coachman made enough money to buy a coach of his own, who then found law a new driver. All one had to do was buy, hold, and sell to make a killing.

Law himself became the richest man in the world, owing among other things, the central bank, the Louisiana Territory, a collection of French Chateau, and original works of masters such as Holbein, Michelangelo, Da Vinci, and Rubens. But Law was not simply a money printer gone nuts.

He anticipated Terjo by abolishing duties on the movement of food and goods within France. He organized the building or repair of roads, bridges, and canals. He brought in skilled artisans from abroad to establish new industries. He revived and multiplied the merchant marine by expanding trade with Asia, Africa, and America. Friendships engaged in foreign trade numbered 16 in March, 1719, 300 in June, 1720.

He persuaded French nobles to finance the production of coffee and tobacco in Louisiana and himself financed the development of the Arkansas River area. In 1718, New Orleans was founded and took the region's family name. He was so popular, his carriage required a large military escort to protect him from admirers. As many of those admirers were women, some found ways to meet with law despite the obstacles. Trust but verify.

One day in early 1720, a certain aristocrat whom law had offended, Prince de Contee took his bancroyal notes and presented them for redemption. The notes were reported to have filled three wagons. De Contee said something like, voila mancier, here are your notes which are payable at sight. Now do you see them? Well then, hand over the coins.

The bank complied and held its breath. On hearing about this exchange, Philippe was so angered he ordered the prince to return two-thirds of the gold. De Conti obeyed grudgingly, but in doing so triggered the first stirrings of panic. Soon, two other aristocrats motivated by distrust rather than revenge began presenting their notes in small quantities so as not to stampede the herd.

Seeing a coming crisis, they hid their coins or shipped them to other countries for safekeeping. Word got out, and laws, Bank Royale, was challenged to prove its notes were as good as gold. They weren't, of course, and laws hot-air balloon burst. Common folk began storming the bank to pull their coins out. Like the aristocrats, they hoarded their money or shipped it somewhere safe to protect it from confiscation.

With gold disappearing from the bank's faults, its notes no longer look so trustworthy and the money supply plummeted. In February 1720, in an effort to intimidate people into returning their gold to the bank, Philippe declared hoarding a crime and threatened citizens with penalties if they were found with more than a pittance in coin.

After that failed, he tried tricking them into believing gold was going back to the bunk by printing over a billion leavera worth of additional notes to pump up the money supply. As the final act of the tragic farce, law issued picks and shovels to the city's idlers and paraded them through the streets as heroes on their way to Louisiana to mine huge profits. It served only to underscore the fraud and the people's former credulousness.

Laws liquid garden of Eden evaporated into bankruptcy. Later that year, law left the country heavily in debt and died nine years later in Venice.

Is John law regarded as a charlatan today? Not whatsoever. The most influential economists of modern times regard law with sympathy and respect. One eminent economic historian places law in the front ranks of monetary theorists of all time. Others view him jealously for being the first economist to run an entire country, even if it meant running it into the ground.

Since Simone concluded, the Camara of the Mississippi with its shares its special jargon, its science, a continual juggle for drawing money from one person to give it to another, was to almost guarantee that these shares should at least end in smoke since we had neither mines nor quarries of the Philosopher's Stone, and that the few would be enriched at the expense of the many as in fact happened.

The allure of easy money drives irrational behavior then and now. End the Fed. For more content like this, visit Mises.org.