1719 the Mississippi Bubble

June 2016 | Lessons from the past

History is full of bubbles, booms and busts, corporate After being forced into exile for killing a man in a duel in collapses and crises, which illuminate the present London in 1694, Law wandered the cities of Europe financial world. accumulating vast riches from the gambling tables of Amsterdam, The Hague, Genoa, Paris, Vienna and Venice, At Stewart Investors we believe that an appreciation before settling in France in 1714. Having made a fortune of financial history can make us more effective himself, he was determined to transform the fortunes of investors today. entire economies by breaking the link between money and The first great stock market bubble in history is a reminder precious metals (gold and silver) which he believed was of the dangers of excessive money printing and the holding back economic growth. extreme over-valuation of stock markets. France was bankrupt after the wars of Louis XIV. Following the Sun King’s death in 1715, Philippe Duc d’Orleans became Regent for the child-king Louis XV. Law impressed Orleans with the boldness of his ideas about finance, At the centre of the bubble was putting forward economic reforms which he argued would John Law, a Scot whose set France free from its vast debts. In May 1716, having adopted French nationality, Law was miraculous journey from son of given permission to establish a bank (Banque Generale) an Edinburgh goldsmith to with a charter for 20 years, followed by the Company of the West in August 1717, later known as the Mississippi Controller General of France Company, which received a monopoly on French trade with Louisiana for 25 years. A pivotal point in the development of Law’s ‘System’ was the Rue Quincampoix, Paris, 1719. The French capital was in the transformation of the Banque Generale into the Banque throes of something unprecedented in history – over the Royal in December 1718. After this, printing of money summer, the dirty, narrow street in the heart of the city began in earnest with eight printers employed round the became the epicentre of world finance, a veritable vortex of clock to print banknotes. This was a crucial moment in share trading. A new financial and cultural phenomenon had financial history – money creation on an industrial scale – a appeared on the scene – the stock market bubble. vital ingredient of the ensuing asset bubble.

Investors flooded into the city from all over France and The mighty Mississippi Company other countries across Europe, appetites whetted by stories of unbelievable wealth creation. The term ‘millionaire’ Law gradually transformed the Mississippi Company into a appeared in print for the first time in a Paris lawyer’s journal sprawling conglomerate through a series of corporate deals, in 1720 to describe the lucky individuals who were literally which fused together all the French trading companies, tax making millions of ‘livres’ (French currency at the time) in apparatus, tobacco monopoly, mint, national debt and the the frenzy. Banque Royal into one giant entity which dominated the French economy. A Scot on the make In Law’s System the bank increased the money supply, just At the centre of the bubble was John Law, a Scot whose as central banks have used quantitative easing (QE) in miraculous journey from son of an Edinburgh goldsmith to recent years. Interest rates declined, stimulating demand Controller General of France matched the stratospheric rise and the economy expanded. Law also controlled the supply of the share price of the Mississippi Company which he of shares in the Company, and by financial engineering, in established in Paris in 1717. particular the use of partly-paid shares, manufactured a boom in the share price and a surge of activity in the stock market on the Rue Quincampoix. The ensuing financial mania became known as the punishments threatened as government policy shifted Mississippi Bubble. towards despotism. Unsurprisingly, Law’s popularity among the people of France plummeted. The summer of 1719 was to be remembered across Europe for decades – a glorious few months when anything seemed Miraculously, an escape route was provided for investors possible. The demand for luxury goods exploded as investors wise enough to sell their shares; the Company paying a fixed made fortunes, while Paris was brought to a stand-still by the amount to buy them back. This was viewed by some as a long traffic jams caused by crowds of investors and the mechanism to allow Law’s cronies to get out at a reasonable coaches built for the newly rich. The optimism spilled over price and was funded by more money printing by the bank. into the stock markets of other countries, unleashing the As a result, the French money supply exploded, the South Sea Bubble in London in 1720. currency collapsed and the economy crashed into recession. In the Rue Quincampoix, frantic share trading continued over Death in Venice the autumn and into the winter of 1719. Apocryphal stories emerged, characteristic of financial manias or bubbles, which The joy of the summer months was soon forgotten as a intensified the frenzy. A woman called ‘the Dame Chaumont’ political storm swept through Paris in response to the arrived in Paris with only a few banknotes before amassing a collapsing share price and Law’s policies. The mob attacked fortune of millions. A hunchback rented out his back as a the Company’s offices, hoping to lynch Law, whose fall from writing desk - this was surely just a yarn, but tall tales like this grace was even more rapid than his rise. In late 1720, he was are often a feature of financial bubbles! forced to resign from office and flee into exile, becoming a wanderer again and finally settling in Venice, a city he knew One of the key aims of Law’s System was announced in well and where he was very much at home. There he sought August 1719. He proposed that the Company lend the refuge at the gambling tables and invested his winnings in French government 1.2 billion livres at an interest rate of another asset class. Over a few years he built up a huge only 3% so that all of France’s long-term debt might be collection of Old Master paintings, numbering 488 by the repaid. The money would be provided by issuing more time of his death, and including works by Holbein, Leonardo shares in the Company. This was to be the crowning glory of da Vinci, Michelangelo, Poussin, Raphael, Rubens, Titian and the System, aimed at solving the French government’s debt Tintoretto. He was criticised at the time for paying too crisis at one stroke. Meanwhile the Company share price much for these works, but he clearly had an eye for long- continued to rise. term value! On 5 January 1720, following his conversion to the Catholic During his final years in Venice, Law was visited by the French faith, Law was appointed Controller General of France in philosopher Montesquieu, one of the major thinkers of the recognition of his success in transforming the fortunes of Enlightenment. Montesquieu was delighted to have the the nation. The share price of the Mississippi Company opportunity to quiz Law about the intricacies of his System. peaked a few days later. In terms of his personal fortune, He believed Law was not motivated by making money but Law was probably the richest private individual in the world instead he was in love with ideas about money. Nonetheless, (excluding monarchs) at the top of the market. Law was also ‘one of the greatest promoters of despotism ever seen in Europe’. His plan to free the French economy Peak of the Market from the chains of the past, paradoxically resulted in a huge However, his System began to falter in the early months of centralisation of economic and political power. 1720 as the share price became increasingly volatile. It then Law’s System exhibited many of the characteristics of began to fall. Credit markets tightened and interest rates today’s financial world: company creation, leveraged climbed. Investors began to shift out of banknotes and buy-outs, marketing, public relations, huge trading volumes shares into traditional stores of value, like gold and silver. In and the creation of money in vast quantities. The modern modern financial jargon ‘risk aversion’ rose steeply. financial world was probably Law’s creation more than any Law fought against the tide by attempting to force investors other individual. to keep hold of their banknotes and shares rather than In exile he remained convinced that his System could have switching into ‘real’ assets like gold, silver or jewels. A worked and dreamed of returning to France to revive it. number of bizarre policies were unleashed. On 4 February However, he died in Venice in 1729, without returning. His 1720 an edict prohibited the wearing of diamonds and book Money & Trade Considered, a short philosophical precious jewels, while on 11 March provisions were study of money, which was published in Edinburgh in 1705, extended for demonetizing gold and silver. Law wanted to is now considered a key text in monetary theory. The break the relationship between paper money and precious goldsmith’s son from Edinburgh is viewed, by some, as a key metals which he believed was holding back the economy. It thinker of the Enlightenment. He was also the father of the was a revolutionary step, one which was too large for stock market bubble. people to take at the time, but was finally realised by President Richard Nixon when he took the US dollar off the Lessons for investors link to gold in 1971. At Stewart Investors we stress the importance of Law’s measures were becoming increasingly desperate and identifying extreme over-valuation in stock markets to suggested the System was close to collapse. The bank’s preserve client wealth and we remain focused on the inspectors were authorized to search private houses, even potential downside of any investment as much as the royal palaces, to confiscate gold and silver. There were strict upside. The Mississippi Bubble is a reminder of the dangers orders against hoarding precious metals and dire for investors of excessive money creation. Important information This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document. References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

Hong Kong and Singapore In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).

Australia In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.

United Kingdom This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

European Economic Area (“EEA”) In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.

Middle East In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto. In the Middle East, this material is communicated by First Sentier Investors (Singapore).

Kuwait If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.

UAE - Dubai International Financial Centre (DIFC) Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook. UAE (ex-DIFC) By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.

United States of America In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors.

Other jurisdictions In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063. Contact details

Edinburgh London Singapore Sydney 23 St Andrew Square Finsbury Circus House 58 Duxton Road Suite 10, Level 3 Edinburgh EH2 1BB 15 Finsbury Circus 2nd & 3rd Floor 13 Hickson Road United Kingdom London EC2M 7EB Singapore 089522 Dawes Point t. +44 (0) 131 473 2900 United Kingdom t. +65 680 59670 Sydney NSW 2000 t. +44 (0) 207 332 6500 t. +61 2 8274 8000 [email protected] stewartinvestors.com