‘People of Betica, I perceive that your imagination is weaker than it was a day or two ago; try to bring it up to the strength of mine: I will place before you every morning a bill, which will be the source of wealth for you: you will see only four words,4 but they will be of the highest significance, as they will settle the portions of your wives, the fortunes of your children, and the number of your domestics.'
‘People of Betica, I counselled you to imagine, but you have not done so: well then, I now command you to imagine.... I understand that some of you are odious enough to keep your gold and silver. For the silver, let it go: but the gold…the gold…Ah! That stirs my anger!…I swear, by my sacred windbags, that if you do not bring it to me, I will inflict dire punishment upon you ... Do you think it is to keep these wretched metals that I ask them from you? A proof of my good faith is, that when you brought me them some days ago, I gave you back at once one half.’
-------------
Montesquieu
Montesquieu
-------------
In The Persian Letters, Montesquieu satirizes many aspects of the society of the day. The exert aboves refers to the incredible episode of French history where a Scotsman, John Law, gained unprecedented control over the French economy and nearly brought about its ruin. Montesquieu mocks Law for the way that he tried to replace gold with paper money but in many ways Law was a remarkable man. He had a gift for analyzing complex issues of economics and elaborating them in simple terms. He was a self styled financial Copernicus, aiming to turn the economic world upside down by insisting that money wasn't valuable as it was made from silver, but silver was valuable as people choose to use it for money. He was disinterested in the material used to coin money, far more concerned with its actual function, in his own words:"Money is not the value for which Goods are exchanged, but the Value by which they are exchanged: The use of Money is to buy Goods"
Crucially, he was the son of an Edinburgh goldsmith and realized the significance of paper credit but his schemes went far further than the lending of his father's firm. He wanted to convert the whole economy to running on paper money that was produced by a national bank. First he had tried to convince the Scottish Parliament of the scheme but to no avail. He was outlawed from England as he had killed a man in due,l so he hawked his plans around the whole of Europe whilst he earned a extremely handsome living from gambling. After rejections in Holland, Austria and various states in Italy, he incredibly managed to persuade the French Regent, the Duke d'Orléans that he could revive the moribund French economy.
Initially, Law was astonishingly successful. His Banque Générale Privée, the first bank to ever issue promissory notes in France had more powers than the Bank of England, not only could it issue notes, but it also had branches all over the country. Coins could be deposited in Paris and orders sent to issue notes in Marseilles or vice versa for almost no charge. The next year, Law acquired a controlling interest in the Mississippi Company that had a monopoly on trade with France's North American colonies. his new venture began to accumulate other trading concessions. It absorbed the Compagnie des Indes Orientales, Compagnie de Chine and other rivals to form the Compagnie Perpetuelle des Indes (1719) with a monopoly of commerce on all the seas. Not only was it monopolizing foreign trade, it also assumed state functions when it took over the Royal Mint and the French Tax farms.
The Banque Générale Privée had become major commercial success, so much that the Regent wanted to turn it into a state run enterprise and wound up the private company leaving its shareholders with substantial profits. Law still controlled the Banque Royal, issuing notes with the King's seal of approval. As well as controlling these two great institutions, Law also acted in a personal capacity to raise the price of shares by offering to buy shares in the future at high price. His position was a stock jobber's dream as he controlled future injections of credit into the market.. He offered deals that looked ridiculous but his influence was so great that it was easy to stock job the prices upwards.
In 1719, he announced that the Compagnie des Indes Orientales was to engraft the whole of the French National Debt and only charge the governmente 3% interest. It was an absurdly ambitious plan but Law was certainly no fool, he realized that there was no point simply creating huge amounts of credit to inflate a bubble. He had to shake up the French economy too so there would be real growth too. He planned an ambitious programme of public works centred on canals, bridges and roads. He wished to consolidate all taxes into a single levy on property and remarkably for aristocratic France, no exemptions for privilege. In conjunction he envisioned a national network of almshouses for the poor and that clergy should give their uncultivated land to peasants. He wanted to free the grain market of restraints and reduce tolls and tariffs. His seventeenth century shock therapy was designed to sweep away the restrictions of feudalism and convert France into a nation of traders. Law's plan for France was as revolutionary as any hatched by Danton, Robespierre or Napoleon.
As the share price of the Compagnie des Indes Orientales soared, Law became the talk of Europe and thousands flocked to Paris to share in the gains. Many went home dreaming of similar schemes, the South Sea Company proposed to launch a similar operation to purchase nearly the whole of Britain's national debt. Their great rival, the Bank of England countered with a similar offer so Parliament had two proposals for engrafting £31.6 million pounds of public debt. Both schemes were based around the idea of of creating £31.6 million worth of new shares, and then boosting their price so that they could swap the shares for debt and make a profit.
The Bank of England had a particular incentive for a massive expansion. . Under its charter, note issue was only restricted by the amount of its capital. The economist H.D. Macleod later questioned the sense of this arrangement.;
"If for every debt the Government incurs an equal amount of money is to be created, why, here we have the philosopher's stone at once. What is the long sought Eldorado compared to this? Even there the gold required to be picked up and fashioned into coin."
Undoubtedly, if the South Sea Company were to win, they would have used their influence to usurp the Bank's position. Why sail the South Seas for gold to coin into money, when it could be created by the movement of pen upon paper? The stakes were high and a bidding war started to see who could provide the government with the highest sweetener for the deal. The South Sea Company had originally proposed a one off payment to the government of £3.5 million, the Bank countered by upping the ante by two million, the Company responded by matching that and adding another two million to make an offer of £7.5 million.
The South Sea Company also outbid the bank in bribery. The company's cashier Robert Knight began selling shares from an issue that was yet to occur to people who had no money to pay for them. He simply entered the names of MPs into a green book along with number of shares and an agreed price. All the recepients of this benevolence had to do was wait until the price had risen, then sell them back to the company and receive the increase as profit. Unsurpisingly, they won Parliament around to their plans and equally unsurpisingly the price of their stock started to rise.
The bill's path through Parliament was rapid. It was first read on March 23rd and passed for the third time by 172 to 55 votes on April 2nd. It was left to the Lords to point out the flaws in the scheme. Lord North and Grey articulated familiar fears about perfidious stock jobbers diverting the 'the genius of the people' from honest labour. Lord Cowper termed the scheme a Trojan horse that was not fit for purpose as the company's profits would add to the national debt. The Duke of Wharton aired concerns that its power "might endanger the liberties of the nation".
There were few other voices of opposition but Knight had many Lords registered in his green book and the bill passed by 83 votes to 17. When the King, who was the Governor of the South Sea Company, signed the act on the 7th April, the stock had nearly trebled in just three months. The company argued that the unsold stock had trebled in valued too, so the initial £31.6 million worth of shares was now worth around one hundred million. Accordingly, they proposed to swap 100 shares for every £375 of government debt. Initially most holders were not impressed by the offer, but Blunt had another cunning move to shift the market. He offered to sell shares to allcomers on very easy credit terms even before debt holders had a chance to exchange. Knight's trick worked a treat within a week the price had risen to £495, the offer to bond holders began to look generous and large amounts of them began to accept .
As the South Sea Bubble rose, across the channel, the Mississippi bubble was about to burst. Law had underestimated his ability to control the price of stock. He believed that he could take it to where he needed it to be then steady it. Instead, it vastly overshot and stock holders had to decide whether they shared Law's vision of brave new world or make a quick killing. Early in 1720, the Prince de Conti, demanded payment for his notes and sent three wagons to collect his silver and gold. The Regent persuaded him to re-invest a considerable proportion; others less connected with the future of France were getting into gold and getting it into England. As his system collapsed around him, the great liberal reformer called for draconian actions. He talked the Regent into declaring a law against carrying more than five hundred livres in silver, worse still informers were allowed hefty share of the hoards. Law tried more and more desperate measure to avert disaster but to no avail.
At the end of the fiasco, the bank had been merged with the company so in effect people were borrowing from the same institution that created it in order to purchase its shares. Millions of French were confused by the events. Later at the end of the century, Sir Steuart Denham succinctly summarized the whole sorry episode
"As long as the credit of this bank subsisted, it appeared to the French to be perfectly solid. The
bubble no sooner burst, than the whole nation was thrown into astonishment and consternation. Nobody could conceive from whence the credit had sprung; what had created such mountains of wealth in so short a time; and by what witchcraft and fascination it had. been made to appear in an instant"
Like Law, Blunt had achieved his aims but couldn't control what happened next, speculative fever was out of hand and more money was flowing in from France. The South Sea was not the only company on the stock market thats value was increasing rapidly. Joint stocks became fashionable, popular at the time were packs of playing cards, each depicting a different bubble with an appropriate verse underneath. One of the most notorious bubbles was "Puckle's Machine Company, "for discharging round and square cannon-balls and bullets, and making a total revolution in the art of war.
Its pretensions were summed up on the eight of spades:
A rare invention to destroy the crowd
Of fools at home, instead of fools abroad.
Fear not, my friends, this terrible machine,
They're only wounded who have shares therein.
The nine of hearts was a caricature of the English Copper and Brass Company, with the following verse:
The headlong fool that wants to be a swopper
Of gold and silver coin for English copper,
May, in Change Alley, prove himself an ass,
And give rich metal for adulterate brass.
A hand bill was even circulated "For carrying-on an undertaking of great advantage but no-one to know what it is!!" that was probably satire but it was difficult to tell. More seriously, the total money proposed for all of the bubble projects was more than £300 million, more than the value of all the land in England and far more than the amount of cash circulating. As joint stocks mimicked the South Sea Company, private banks mimicked the Sword Blade. They issued promissory notes, lent them to customers to buy stock that instantly produced enough profit to cover the cost of the loan. As long as they were willing to do this then bubble swould keep rising, as long as the bubble kept rising the illusion of profit maintained. It was stockjobbers economy, the South Sea and other bubbles had become pyramid schemes that constantly needed new buyers of stock.
The South Sea Company saw the other bubbles as rivals for funds and pulled in a few favours to dampen them. On June 9th, Parliament passed the Royal Exchange and London Assurance Corporation Act, ever after known as the Bubble Act that required all joint stock companies to have a Royal Charter. It also required that companies stick rigidly to their declared purposes, a ruling that was not rigidly applied to the Company that was meant to be trading in the South Seas. The immediate impact was to suppress rival bubbles to the South Sea and its shares leapt even higher to £890 in early June.
On the 15th June another tranche of shares was issued with a staggering 80% of the issue reserved for exclusive customers. The list contained the entire board of the East India Company, half the House of Lords, over half the House of Commons, numerous foreign dignitaries and many members of the royal family. King George who was believe to be subscribing under a disguised name honoured Blunt as a Baronet for his "extraordinary services in raising public credit to a height not known before". Over the summer there were no official sales but in the cafes of exchange alley the price was slowly slipping from its peak of over one thousand pounds.. The Company had little funds to attempt further manipulations and payment was due on stock bought on credit. Stock holders could not pay for their shares other than by selling them and the smart money was moving abroad to Amsterdam and Hamburg. Charles Stanhope, Secretary to the Treasury and one of the first names in the green Book, collected Sword Blade notes totally almost a quarter of million pounds, there were even rumours that Blunt and other company directors had sold out.
In September, the Sword Blade Bank was having difficulty honouring payments on its notes and a run started on the nineteenth and customers were slowly paid in small change. This only served to unease nerves, the panic was contagious and customers of other private bank began to demand cahs for their notes. The run even hit the Bank of England who resorted to the tactic of planting employees in the queues who were paid in sixpences that they returned through the back door. The Sword Blade collapsed on the 24th other banks followed although the Bank of England managed to stay solvent. Once there was no more credit available, the share price of the South Sea Company utterly collapsed.
Speaking of the collapse of credit in the House of Commons, Thomas Broderick M.P.declared ” They have stretched credit so far beyond what it would bear, that specie proves insufficient to support it. Their most considerable men have drawn out, securing themselves by the losses of the deluded, thoughtless numbers, whose understandings have been overruled by avarice and the hopes of making mountains out of molehills. Thousands of families will be reduced to beggary ... A great many goldsmiths have already run off, and more will daily. I question whether one-third, nay one-fourth, of them can stand it. From the beginning, I founded my judgement of the whole affair upon the questionable maxim, that ten millions (which is more than our running cash) could not circulate two hundred millions, beyond which our paper credit extended."
In the boom there had been credit for every kind of silliness, suddenly there was none for essential trade, houses were left half built, ships empty and livestock strnaded. There was also an immense political scandal. The King had been the Governor of the bank, hundreds of MPs had been in Knight's green book, and nearly the whole political elite were culpable. Nearly all were saved as Knight took responsibility for the dubious methods used to obtain the support of politicians but refused to name them. In a tit for tat deal, officaldom turned a blind eye as he fled to the Antwerp.
Although a resolution was proposed in parliament that bankers be tied up in sacks filled with snakes and hurled into the Thames, the Government had enough problems without embarassing recriminations. Robert Walpole who had became Chancellor of Exchequer divided the stock of the South Sea Company between the Bank of England and the East India Company and created a sinking fund to repay debt. He also arranged that no single institution would ever again hold the whole of the national debt. The Bank of England continued to hold some debt but its main role was an agent that brokered sales meaning that The British Government would enjoy a far wider base of creditors.
No comments:
Post a Comment