Business Humbugs

In the "good old times," people were just as eager after money as they

are now; and a great deal more vulgar, unscrupulous, and foolish in

their endeavors to get it. During about two hundred years after the

discovery of America, that continent was a constant source of great and

little money humbugs. The Spaniards and Portuguese and French and

English all insisted upon thinking that America was chiefly made of

gold; per aps believing, as the man said about Colorado, that the

hardship of the place was, that you have to dig through three or four

feet of solid silver before the gold could be reached. This curious

delusion is shown by the fact that the early charters of lands in

America so uniformly reserved to the King his proportion of all gold and

silver that should be found. And if gold were not to be had, these lazy

Europeans were equally crazy about the rich merchandise which they made

sure of finding in the vast and solitary American mountains and forests.



In a previous letter, I have shown how one of those delusions, about the

unbounded wealth to be obtained from the countries on the South Sea,

caused the English South Sea bubble.



A similar belief, at the same time, in the neighboring country of

France, formed the airy basis of a similar business humbug, even more

gigantic, noxious, and destructive. This was John Law's Mississippi

scheme, of which I shall give an account in this chapter. It was, I

think, the greatest business humbug of history.



Law was a Scotchman, shrewd and able, a really good financier for those

days, but vicious, a gambler, unprincipled, and liable to wild schemes.

He had possessed a good deal of property, had traveled and gambled all

over Europe, was witty, entertaining, and capital company, and had

become a favorite with the Duke of Orleans and other French nobles. When

the Duke became Regent of France at the death of Louis XIV, in 1715,

that country was horribly in debt, and its people in much misery, owing

to the costly wars and flaying taxations of the late King. When,

therefore, Law came to Paris with a promising scheme of finance in his

hand, the Regent was particularly glad to see him, both as financier and

as friend.



The Regent quickly fell in with Law's plans; and in the spring of 1716,

the first step--not, however, so intended at the time--toward the

Mississippi Scheme was taken. This was, the establishment by royal

authority of the banking firm of Law & Co., consisting of Law and his

brother. This bank, by a judicious organization and issue of paper

money, quickly began to help the distressed finances of the kingdom, and

to invigorate trade and commerce. This success, which seems to have been

an entirely sound and legitimate business success, made one sadly

mistaken but very deep impression upon the ignorant and shallow mind of

the Regent of France, which was the foundation of all the subsequent

trouble. The Regent became firmly convinced, that if a certain quantity

of bank bills could do so much good, a hundred thousand times as many

bills would surely do a hundred thousand times as much. That is, he

thought printing and issuing the bills was creating money. He paid no

regard to the need of providing specie for them on demand, but thought

he had an unlimited money factory in the city of Paris.



So far, so good. Next, Law planned, and, with the ever ready consent of

the Regent, effected, an enlargement of the business of his bank, based

on that delusion I spoke of about America. This enlargement was the

formation of the Mississippi Company, and this was the contrivance which

swelled into so tremendous a humbug. The company was closely connected

with the banks, and received (to begin with) the monopoly of all trade

to the Mississippi River, and all the country west of it. It was

expected to obtain vast quantities of gold and silver from that region,

and thus to make immense dividends on its stock. At home, it was to have

the sole charge of collecting all the taxes and coining all the money.

Stock was issued to the amount of one hundred thousand shares, at $200

(five hundred livres) each. And Law's help to the Government funds was

continued by permitting this stock to be paid for in those funds, at

their par value, though worth in market only about a third of it.

Subscriptions came in rapidly--for the French community was far more

ignorant about commercial affairs, finances, and the real resources of

distant regions, than we can easily conceive of now-a-days; and not only

the Regent, but every man, woman, and child in France, except a very few

tough and hard-headed old skeptics, believed every word Law said, and

would have believed him if he had told stories a hundred times as

incredible.



Well, pretty soon the Regent gave the associates--the bank and the

company--two other monopolies: that of tobacco, always monstrously

profitable, and that of refining gold and silver. Pretty soon, again, he

created the bank a state institution, by the magnificent name of The

Royal Bank of France. Having done this, the Regent could control the

bank in spite of Law (or order either); for, in those days, the kings of

France were almost perfectly despotic, and the Regent was acting king. I

have mentioned the Regent's terrible delusion about paper-money. No

sooner had he the bank in his power, than he added to the reasonable and

useful total of $12,000,000 of notes already out, a monstrous issue of

$200,000,000 worth in one vast batch, with the firm conviction that he

was thus adding so much to the par currency of France.



The Parliament of France, a body mostly of lawyers, originating in the

Middle Ages, a steady, conservative, wise, and brave assembly, was

always hostile to Law and his schemes. When this great expansion of

paper-currency began, the Parliament made a resolute fight against it,

petitioning, ordaining, threatening to hang Law, and frightening him

well, too; for the thorough enmity of an assembly of old lawyers may

well frighten anybody. At last, the Regent, by the use of the despotic

power of which the Kings of France had so much, reduced these old

fellows to silence by sticking a few of them in jail.



The cross-grained Parliament thus disposed of, everything was quickly

made to "look lovely." In the beginning of 1719, more grants were made

to Law's associated concerns. The Mississippi Company was granted the

monopoly of all trade to the East Indies, China, the South Seas, and all

the territories of the French India Company, and of the Senegal Company.

It took a new and imposing name: "The Company of the Indies." They had

already, by the way, also obtained the monopoly of the Canada

beaver-trade. Of this colossal corporation, monopolizing the whole

foreign commerce of France with two-thirds or more of the world, its

whole home finances, and other important interests besides, fifty

thousand new shares were issued, as before, at $100 each. These might be

bought as before, with Government securities at par. Law was so bold as

to promise annual dividends of $20 per share, which, as the Government

funds stood, was one hundred and twenty per cent. per annum.! Everybody

believed him. More than three hundred thousand applications were made

for the new shares. Law was besieged in his house by more than twice as

many people as General Grant had to help him take Richmond. The Great

Humbug was at last in full buzz. The street where the wonderful

Scotchman lived was busy, filled, crowded, jammed, choked. Dangerous

accidents happened in it every day, from the excessive pressure. From

the princes of the blood down to cobblers and lackeys, all men and all

women crowded and crowded to subscribe their money, and to pay their

money, and to know how many shares they had gotten. Law moved to a

roomier street, and the crazy mob crowded harder than ever; so that the

Chancellor, who held his court of law hard by, could not hear his

lawyers.



A tremendous uproar surely, that could drown the voices of those

gentlemen! And so he moved again, to the great Hotel de Soissons, a vast

palace, with a garden of some acres. Fantastic circumstances variegated

the wild rush of speculation. The haughtiest of the nobility rented mean

rooms near Law's abode, to be able to get at him. Rents in his

neighborhood rose to twelve and sixteen times their usual amount. A

cobbler, whose lines had fallen in those pleasant places, made $40 a day

by letting his stall and furnishing writing materials to speculators.

Thieves and disreputable characters of all sorts flocked to this

concourse. There were riots and quarrels all the time. They often had to

send a troop of cavalry to clear the street at night. Gamblers posted

themselves with their implements among the speculators, who gambled

harder than the gamblers, and took an occasional turn at roulette by way

of slackening the excitement; as people go to sleep, or go into the



country. A hunchback fellow made a good deal of money by letting people

write on his back. When Law had moved into the Hotel de Soissons, the

former owner, the Prince de Carignan, reserved the gardens, procured an

edict confining all stock-dealings to that place; put up five hundred

tents there, leased them at five hundred livres a month each, and thus

made money at the rate of $50,000 a month. There were just two of the

aristocracy who were sensible and resolute enough not to speculate in

the stock--the Duke de St. Simon and the old Marshal Villars.



Law became infinitely the most important person in the kingdom. Great

and small, male and female, high and low, haunted his offices and

ante-chambers, hunted him down, plagued his very life out, to get a

moment's speech with him, and get him to enter their names as buyers of

stock. The highest nobles would wait half a day for the chance. His

servants received great sums to announce some visitor's name. Ladies of

the highest rank gave him anything he would ask of them for leave to buy

stock. One of them made her coachmen upset her out of her carriage as

Law came by, to get a word with him. He helped her up; she got the word,

and bought some stock. Another lady ran into the house where he was at

dinner, and raised a cry of fire. The rest ran out, but she ran further

in to reach Law, who saw what she was at, and like a pecuniary Joseph,

ran away as fast as he could.



As the frenzy rose toward its height, and the Regent took advantage of

it to issue stock enough to pay the whole national debt, namely, three

hundred thousand new shares, at $1,000 each, or a thousand per cent. in

the par value. They were instantly taken. Three times as many would have

been instantly taken. So violent were the changes of the market, that

shares rose or fell twenty per cent. within a few hours. A servant was

sent to sell two hundred and fifty shares of stock; found on reaching

the gardens of the Hotel de Soissons, that since he left his master's

house the price had risen from $1,600 (par value $100 remember) to

$2,000. The servant sold, gave his master the proceeds at $1,600 a

share, put the remaining $100,000 in his own pocket, and left France

that evening. Law's coachman became so rich that he left service, and

set up his own coach; and when his master asked him to find a successor,

he brought two candidates, and told Law to choose, and he would take the

other himself. There were many absurd cases of vulgarians made rich.

There were also many robberies and murders. That committed by the Count

de Horn, one of the higher nobility and two accomplices, is a famous

case. The Count, a dissipated rascal, poniarded a broker in a tavern for

the money the broker carried with him. But he was taken, and, in spite

of the utmost and most determined exertions of the nobility, the Regent

had him broken on the wheel in public, like any other murderer.



The stock of the Company of the Indies, though it dashed up and down ten

and twenty per cent. from day to day, was from the first immensely

inflated. In August 1719, it sold at 610 per cent.; in a few weeks more

it arose to 1,200 per cent. All winter it still went up until, in April

1720, it stood at 2,050 per cent. That is, one one-hundred dollar share

would sell for two thousand and fifty dollars.



At this extreme point of inflation, the bubble stood a little, shining

splendidly as bubbles do when they are nearest bursting, and then it

received two or three quiet pricks. The Prince de Conti, enraged because

Law would not send him some shares on his own terms, sent three

wagon-loads of bills to Law's bank, demanding specie. Law paid it, and

complained to the Regent, who made him put two-thirds of it back again.

A shrewd stock-gambler drew specie by small sums until he had about

$200,000 in coin, and lest he should be forced to return it, he packed

it in a cart, covered it with manure, put on a peasant's disguise, and

carted his fortune over the frontiers into Belgium. Some others quietly

realized their means in like manner by driblets and funded them abroad.



By such means coin gradually grew very scarce, and signs of a panic

appeared. The Regent tried to adjust matters by a decree that coin

should be five per cent. less than paper; as much as to say, It is

hereby enacted that there is a great deal more coin than there is!

This did not serve, and the Regent decreed again, that coin should be

worth ten per cent. less than paper. Then he decreed that the bank must

not pay more than $22 at once in specie; and, finally, by a bold stretch

of his authority, he issued an edict that no person should have over

$100 in coin, on pain of fine and confiscation. These odious laws made a

great deal of trouble, spying, and distress, and rapidly aggravated the

difficulty they were meant to cure. The price of shares in the great

company began to fall steadily and rapidly. Law and the Regent began to

be universally hated, cursed, and threatened. Various foolish and vain

attempts were made to stay the coming ruin, by renewing the stories

about Louisiana sending out a lot of conscripted laborers, ordering that

all payments must be made in paper, and printing a new batch of notes,

to the amount of another $300,000,000. Law's two corporations were also

doctored in several ways. The distress and fright grew worse. An edict

was issued that Law's notes and shares should depreciate gradually by

law for a year, and then be worth but half their face. This made such a

tumult and outcry that the Regent had to retract it in seven days. On

this seventh day, Law's bank stopped paying specie. Law was turned out

of his public employments, but still well treated by the Regent in

private. He was, however, mobbed and stoned in his coach in the street,

had to have a company of Swiss Guards in his house, and at last had to

flee to the Regent's own palace.



I have not space to describe in detail the ruin, misery, tumults, loss

and confusion which attended the speedy descent of Law's paper and

shares to entire worthlessness. Thousands of families were made paupers,

and trade and commerce destroyed by the painful process. Law himself

escaped out of France poor; and, after another obscure and disreputable

career of gambling, died in poverty at Venice, in 1729.



Thus this enormous business-humbug first raised a whole nation into a

fool's paradise of imaginary wealth, and then exploded, leaving its

projector and many thousands of victims ruined, the country disturbed

and distressed, long-enduring consequences, in vicious and lawless and

unsteady habits, contracted while the delusion lasted, and no single

benefit except one more most dearly-bought lesson of the wicked folly of

mere speculation without a real business basis and a real business

method. Let not this lesson be lost on the rampant and half-crazed

speculators of the present day. Those who buy gold or flour, leather,

butter, dry goods, groceries, hardware, or anything else on speculation,

when prices are inflated far beyond the ordinary standard, are taking

upon themselves great risks, for the bubble must eventually be pricked;

and whoever is the "holder" when that time comes, must necessarily be

the loser.