Modern finance expanded the taste for individualistic economic freedom, provided the means for growth, and attempted to set uniform rules and expectations for all members of society. Unfortunately, it also made everyone subject to a mathematical absurdity. Like an addiction, no matter how much you have, it is never enough. After the pleasure of self-determination, the second most common experience has been panic and addiction withdrawal. Inflation ensures that people will get less, when they want more.
Modern finance broke the social bonds between the individual and the group. It was every man for himself, whether he owned shares of stock or not. The pace of inflation, which was always present, increased significantly. Fear and illogical choices define the history of modern finance. Society migrated from a caste system to one of greater social mobility combined with fiscal instability, forming a twisted meritocracy based on the thrill of gambling with your life. Win or lose, the process demands more gambling. The addiction won.
The Origin of Modern Finance
The architect of modern finance was John Law (1671-1729) of Scotland. He was born to a family of goldsmiths and bankers. He was an avid and successful gambler because of an ability to count cards and quickly calculate the odds. Law drew on his artisan and financial background and argued in favor of a new financial system: a national bank and a paper money supply. His outlook was infused with the habits of a gambler.
Coining money with the face of government had been common since Caesar. Credit and debt had been around as long, too. The new system would replace colored dirt (gold), which was in limited supply, with printed paper, of which there was a more flexible supply. The government would issue banknotes backed by precious metals. Using paper would allegedly solve many problems. Britain rejected his proposals. His having killed a rival, allegedly in self-defense, did not help his cause.
He moved to France, and the government there was receptive to his ideas. He was appointed Controller General of Finances in 1716. This was a time of crisis in France. Louis XIV had recently died, as well as many others in the line of succession. King Louis XV was only four-years old. The country was governed by what might be considered to be the platonic ideal: a board of regents. The regents essentially abdicated control of the economy to John Law. He came to be in charge of the bank, the currency, the stock market and the largest corporation simultaneously! There may have never been a more powerful individual. He was an extraordinary exchequer.
This period presents a fascinating historical timeline. Louis XIV had built The Paris Opera (1675), and recently expanded Versailles (1688-1697). Peter the Great was building St. Petersburg (1703). In 1729, a 23 year old Benjamin Franklin would write an essay advocating the need for a paper currency in Philadelphia, which was adopted. The history of each nation is both common and dramatically different. On three continents the seeds of revolution were planted. They all revolve around money. We will explore the beginning of modern finance in France, and the twists and turns of American history.
France
Before his death, Louis XIV was deeply involved in a lifestyle of art. One's social standing was based on how well one could perform the ballet. The nobles were busy dancing, gossiping, and gambling. King Louis XIV was an accomplished dancer, and the sets for performances became increasingly complex. He was a King of self-indulgent luxury, not the Chief Executive Officer of a country.
The Mississippi Company was a French joint-stock company. This settlement would come to be known as The Louisiana Purchase (1803) by Thomas Jefferson. France eventually abandoned the property it could no longer support, the same as a business closing. The Mississippi Company got its start before John Law came on the scene, but he transformed that outpost into the world's first stock bubble and bust. It is a pattern that continues to this day. He was the world's first millionaire, and the world's first bankrupt millionaire. Many others rose and fell with him.
On paper, the Mississippi Company made many people rich. Being new, the system was significantly less regulated than today. A noble would give his coachman shares to sell at 20 Livre, on what was essentially a street corner that served as their Wall Street. When he arrived, the coachman might actually sell the shares at 24 Livre, and he would pocket the difference and buy shares for himself. There was a tremendous amount of upward mobility generated by unearned income. Former coachmen were hiring their own coachman. Profits were used to buy more stocks to generate more profits. Like a ponzi scheme, it works easily at the beginning. The stock keeps rising and new money keeps pouring in. People were willing to pay more and more for the same sheet of paper. New investors were drawn in by the success of others, and the avarice of the original players kept them involved.
An editorial drawing from the time shows people pouring gold, silver and jewels into the open mouth of a crouching John Law, while from his exposed rear-end he excretes paper notes. The future losers were warned, but they choose to believe the impossible, rather than commonsense. If someone had a piece a silver, or a dollar bill, and was told it weighed more than what it was stamped, or was worth ten times its face amount as printed, then nobody would believe it. With stocks, having no value printed on its face, people accept that it can have any value. Money is an intellectual agreement, but stocks seem to be based solely on the gullibility of a child.
Next Page 1 | 2 | 3 | 4 | 5 | 6 | 7
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
