Trade The Journey

Trade The Journey

The idea of paper money

Have you ever heard of this man? Or seen this man in your history books? Mostly likely not, in fact it wasn’t until recently that his name became familiar to me. His name is John Law and he was a master conman/financier/historian. He studied finance religiously and meandered between different careers that made quick money. I am not a historian but would like to convey a couple of facts about what transpired and how history can often be your best financial adviser.

John Law was the first to introduce the idea of paper money. He also convinced France to allow him to open a bank in France and to allow him to issue paper money redeemable as gold and silver. People at that time thought that gold and silver were money and were not use to trading pieces of paper.

France in those times were suffering from near default on its bonds that it used to issue to fund its war. Its financial picture was worsening by the day. Law spotted an opportunity, and whether or not his intentions were sincere is a matter of opinion. France conceded to Laws request and allowed him to open the Bank of Generale. He proceeded to gain trading privileges in Louisiana, as the French owned a large part of the area.

He begin to dream of a bigger company which you probably have heard of which is, “The Mississippi Company”, which influenced “The Mississippi Bubble”. France as I mentioned was suffering significantly from its debt problem and no one suffered more than its citizens. Eager to unload their debt and Law eager to create his company, made an invisible deal. For your “greed” for a better deal and a chance to become instantly rich and most importantly have the chance to exchange your bond for shares, I will make an exchange. Your debt for my stocks.

What an opportunity for the French to rescue its debt and to create a steady money flow for the economy. The issue with doing this is that the debt was never completely erased it was merely transferred. If we look at the full picture, no “real value” was created. The only person who truly benefited from the position of financial controller and financier to France was John Law himself. He was able to influence consumer confidence/trust and build a company/empire that monopolized trade and other industries.  The Mississippi Company mainly invested in the potential of the Mississippi Delta and were early venture Capitalist. The only problem was, that there was no potential in the Delta. People that tried to live there, mostly died there. They also could not afford to redeem the shares or the debts if need be.

At a hint of trouble, the crowd panics and like dominoes each negative opinion about the company influences the next persons influence of the company. Normally, we would attempt to identify the leak in public opinion and assess its validity before making a decision. Or maybe we would not be involved in such a scheme because we complete due diligence (research) .

“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).” – The Economist

The citizens of France were in a tough position. The bonds in which they held might not be redeemable and they saw an opportunity to exchange their bond for shares in which they had the opportunity to make even more. If they had made the unlikely trip to Missipi, where “The Mississippi Company” was, they would have seen the potential they were truly investing in.

The Missipi bubble burst, Law was outcasted. I guess the current events are not so current after all, they have happened before and will continue to happen.

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