West Of The Mississippi

Some in clandestine companies combine/ Erect new stocks to trade beyond the line/ With air and empty names beguile the town/ And raise new credits first, then cry `em down/ Divide the nothing into shares/ And set the crowd together by the ears.

Daniel Defoe

A huge expanse of territory lay west of the Mississippi in 1716 — as it still does today. But back then, one could imagine the riches that this territory might contain — free from the reality of, say, Omaha, Nebraska or Hope, Arkansas. The sky was the limit. It was even imagined that there were gold mines in New Orleans and perhaps undiscovered civilizations, such as the Inca, rich in gold.

At one point, in 1720, the riffraff of Paris was rounded up — 6,000 of them — and forcibly marched around Paris with shovels and picks. They were displayed to show that the prospects were real — for these people were headed to New Orleans to work in the [non-existent] gold mines.

Shares in a company that had a monopoly on trade in the area might be very valuable. Like the Internet shares of today, there was no way to know what they might be worth. They had no business, no revenue, no profits…but still might be almost infinitely valuable.

Thus it was that shares in the Mississippi Company came not only to provide huge profits for speculators…but to provide a whole new currency for France…and to practically bankrupt the world’s richest nation.

The protagonist of our story is a man from Scotland, John Law. He was chased from England after killing a Mr. Wilson in a duel. Thence, he drifted from city to city in Europe — supporting himself by gambling and studying the mechanisms of finance as he went along. The history of bubbles is peopled with fools and knaves…but Mr. Law appears to have been neither. He really seems to have believed in what he was doing — and took no efforts to profit from it personally.

So curious is the story of Mr. Law, in fact, that it distracted me completely from the object of last night’s research.

Since the end of the Bubble is either at hand…or will come sooner or later, I thought it might be a good idea to find out exactly what happens when a Bubble finally collapses. At least I decided to do so when I saw the package that Lord Rees-Mogg had sent me yesterday. It was the latest books from Pickering and Chatto — a three-volume collection of “The Great Bubbles.” Hot off the press.

Not a moment too soon, I thought to myself.

But when I began to read, I discovered Charles Mackay’s history of Mr. Law — “a very tall, black, lean man; well shaped, above six feet high, with large pock-holes in his face.” Mr. Law’s misfortune, in the early 1700s, was that he was too good with a pistol. His shot Mr. Wilson dead on the spot, about which Mr. Wilson’s family objected…and got Mr. Law sentenced to death for murder.

John Law figured France was preferable to the gallows and went hitherto. As early as 1708, he was proposing a scheme of paper money to the French treasury…but was rejected because he was not a Catholic. Later, as financial troubles in France multiplied, Mr. Law came to the rescue. A royal edict in 1716 allowed him and his brother, William, to set up a bank.

Law “conceived of the idea that paper, which could so aid a metallic currency, could entirely supersede it.” The paper in question was a “currency” not unlike the Internet shares I have written about so often. Except that Law’s shares were backed not by digital space, but by the space west of the Mississippi River — the Louisiana Territory, a place as big and rich to the 18th century mind as the Internet is to those of our time.

Later, Law’s space included the East Indies, China, the South Seas and India. Buy a share in the Mississippi Company, in other words, and you got the entire world. At one point, shareholders were promised a rate of return of 120%. And why not? It was a new era…the old rules no longer applied.

Investors were so eager to buy Mr. Law’s shares that they took apartments across from his house…or arranged with their drivers to have their carriages overturn in the road in front of him. These precursors to Barbra Streisand bribed his servants for an audience with him…and waited for days outside his door.

Not everyone was bullish though. One gentleman stopped his carriage in front of Law’s house and harangued the crowd for its “disgusting avarice” but he, like today’s bears and value investors, was mocked and hissed…and was forced to drive on when “something more tangible was flying through the air in his direction.”

Like today’s Internet shares, the Mississippi stock sometimes rose as much as 10% in a single day. And the signs of easy money were all over Paris. “New houses were built in every direction,” we are told. But, “an illusory prosperity shone over the land, and so dazzled the eyes of the whole nation that none could see the dark cloud on the horizon…”

By early 1720, the clouds were overhead. Investors wished to exchange their paper for metal. Alas, there was not enough metal to go around. So the Regent forbade the exchange and prohibited people from having more than a limited amount of metallic currency. Of course, this merely confirmed suspicions that Law’s paper was worthless. “The alarm once sounded, no art could make the people feel the slightest confidence in paper which was not exchangeable into metal.”

“Coin rose in value,” says Mackay “on every fresh attempt to diminish it.”

Within weeks, Law…who had been the most popular man in France the year earlier…was attacked by mobs in the streets. He fled the country. And his currency was “put to the most ignoble use to which paper can be applied.” It was over.

Law’s fault, opines Mackay, was that “he did not calculate upon the avaricious frenzy of a whole nation; he did not see that confidence, like mistrust, could be increased, almost ad infinitum, and that hope was as extravagant as fear.”

Until tomorrow…

Bill Bonner

Ouzilly, France April 5, 2000

*** Oh! may some Western Tempest sweep These Locusts, whom our Fruits have fed That plague, Directors, to the Deep, Driven from the South Sea to the Red

May He, whom Nature’s Laws obey, Who lifts the Poor, and sinks the Proud, Quiet the Raging of the Sea, And still the Madness of the Crowd

Jonathan Swift “The Bubble””

*** On the biggest trading volume day in history…it appeared, around about midday, that the Madness of the Crowd might soon be stilled. The Dow was down as much as 500 points. The Nasdaq was down a similar amount.

*** As anticipated here yesterday, a lot of investors had margin calls to meet. The morning was a tough time for Wall Street — with prices collapsing just about everywhere.

*** “This was a classic selling panic,” said Tony Dwyer, market strategist for one of the brokerage firms, “when you get no bids and everyone wants to sell out.” Then, Mr. Dwyer added an insight remarkable only because it is obvious to everyone: “This has a lot to do with a Nasdaq market that investor euphoria sent to unsustainable levels.”

*** Money did not move from the Old Economy to the new one…or vice versa. Money just disappeared. At noon yesterday, the value of America’s publicly traded companies was more than $1 trillion less than it was 18 hours prior. But anything can happen. And anything did. In the last few hours of trading, the dip buyers came back and the Dow and the Nasdaq came back with them. The Dow closed, as you surely know by now, down 46 points. The Nasdaq closed down 74. So it was a losing day, but not quite The End.

*** In fact, the headlines in today’s papers are looking on the bright side. They are telling the story of a stock market correction that bottomed out and came roaring back. Of course, you never know, but it is more likely that what we saw yesterday was a herald of what is to come.

*** All the world’s major markets went down yesterday — London, Paris, Frankfurt, Hong Kong, Tokyo.

*** Also, the trend of the last few days reversed. The average stock went decisively down. Breadth worsened again, in other words. There were nearly twice as many stocks declining as advancing – 2,026 to 1,053. And the number of new highs was considerably lower than the number of new lows — 47 to 77.

*** Which makes me think that the action of the last couple of weeks has just been a smokescreen, a diversion, a feint. All the major sectors and indexes may now be in bear market trends. Of course, we’ll have to wait to find out. But now, even the Nasdaq, the final bullish holdout, appears to have topped out on the ides of March at 5048.62.

*** Oil fell 98 cents. Bonds rose. And June gold went up $6.20. No pattern there. The Fed has raised rates five times since last June, promising more to come — and bonds go up? Doesn’t make sense. But a lot doesn’t make sense about this market. You have to take this kind of “information” as noise…and keep listening until you hear a pattern.

*** That’s what information really is — just noise, until it is given structure by language, context or harmonic structure. This is what Kant told us in his “Critique of Pure Reason.” Information without interpretation has no value or meaning whatsover.

*** I doubt this point will come up at the big powwow on the New Economy organized by Bill Clinton. Gates, Greenspan and even Abby Cohen will be there. “I not sure that you’ve repealed the laws of supply and demand,” said the president, referring to the New Economy and proving that scoundrels are not always wrong about economics.

*** Al Gore’s mother had Clinton figured out many years ago. According to a new book on Gore by Bill Turque, the VP’s mother warned him to avoid Clinton. He’s “not a nice person,” she said.

*** An unintentionally amusing story in the news today says that Clinton’s invitation of Bill Gates “raised some eyebrows” because Gates “committed serious violations of U.S. anti-trust laws.” Are they kidding? When it comes to criminal behavior, the Bill from Seattle is no match for the one from Little Rock.

*** Personal income rose .4% in February. Consumption rose 2 1/2 times as fast. And savings slumped to the lowest level ever — 0.8% of income. Meanwhile, M3 is growing at an annual rate of 9.8% — a figure roughly in line with the increase in consumption, but far more than the increase in income. And the current account deficit is equal to a whopping 7.4% of GDP.

*** As if to illustrate the lack of integrity of the information you find on the Internet, it now appears that the column I quoted from TheStreet.com was an April Fool’s message. But who’s to know?

*** The Cato Institute in Washington tells us that the United States now trails three other nations for the title of the World’s Freest Economy. Singapore, Hong Kong and New Zealand all have less restrictive, less regulated economies than the United States.

*** A DR reader wrote to say, “imagine how you would have felt if you had been a D-Day veteran…and had your car broken into while visiting the American Cemetery.”

Good point. But that must be exactly what happens from time to time. The local gendarme — an attractive blonde woman with a sense of humor — told me that a lot of people are robbed in the Omaha Beach parking lot. “Well…why the hell don’t you do something about it?” I wanted to ask. A sad situation — 10,000 soldiers died…to make it safe for petty thieves.