Two Bubbles and a Plague
The adage goes that history repeats itself. Today we are witnesses to a global pandemic that has caused a near asphyxiation of economic activity, killed many thousands and made financial markets highly volatile. This year is the ter-centenary of a somewhat similar scenario which may be categorised as two bubbles and a plague. The bubbles were those of the Mississippi System in France and the South Sea Bubble in Great Britain. The plague was that which devastated the population of Marseille and its surrounding areas in the second half of 1720. The plague, which accentuated the bursting of the Mississippi System bubble, also had an adverse effect on the South Sea Bubble as, through the Autumn of 1720, the fear grew in London that it would spread into England. Such was the fear of it that a Royal Proclamation was issued for a ‘Public Fast’ in England and Wales on December 16, 1720, along with prayers composed by the Archbishops and Bishops of England. Perhaps the Queen might have been well advised recently to incorporate such a fast into her television address to the British nation.
By the end of 1720 the bubbles had burst and left in their wake a destroyed financial system in France, a near broken financial structure in London and one hundred thousand dead from plague in Marseille and Provence. The stories of these bursting bubbles and the plague bring together a cast of characters that Hollywood would envy. They include a convicted Scottish murderer who became Prime Minister of France, an English lord, who became Prime Minister of Great Britain, and who may have been the instigator behind the murder, a wide range of corrupt British ministers, a group of merchant administrators more concerned with profit than plague, and a young hero who metamorphosed from being a horseman to an extraordinary undertaker. Behind these stories there are many modern day parallels on the financial front in the form of issues relating to debt management, quantitative easing, and stock market manipulation along with even deeper moral issues as to how commercial interests trumped health and safety regulations in facilitating the arrival of the last Bubonic Plague into Europe. There are also some highly bizarre episodes characterised by the emergence of very strange bubble companies. But the most notable of these bizarre episodes was a bidding war by two of the biggest companies in Great Britain, including the Bank of England, to take over the national debt. Imagine the Governor of the Bank of England, Mr. Andrew Bailey, making such a bid today?
The Mississippi Bubble
The Mississippi Bubble of 1720 was choreographed and developed by an extraordinary Scotsman, John Law, a man who, despite facing a death sentence by the British courts for killing a man in a duel, became Prime Minister of France in 1720. What a headline for the tabloids! ‘Convicted Scottish murderer becomes Prime Minister of France and causes the World’s first stock market booms and collapses’!
Law, born in Edinburgh in 1671, had indeed killed a certain Edward Wilson in a duel on Bloomsbury Heath in 1694. One of the reasons for this duel, later advanced in a pamphlet Love Letters Between a Certain Late Nobleman and the Famous Mr. Wilson: Discovering the True History of the Rise and Surprising Grandeur of that Celebrate Beau (1723) was that Law had been employed as a type of hit-man to rid the ‘Nobleman’ of his homosexual lover, Wilson. The Love Letters have become a cause celèbre for historians of early gay literature with some writers, such as Rictor Norton, suggesting that the nobleman in question was Charles Spencer, 3rd Earl of Sunderland (1675-1722), a direct ancestor of Winston Churchill and Princess Diana amongst others. If this hypothesis is correct, and the evidence for it is still somewhat circumstantial, then it would have meant that the two men most directly involved in the killing of Wilson on Bloomsbury Heath were John Law and Charles Spencer. Twenty six years later, at the height of the stock market bubbles, Charles Spencer was the equivalent of Prime Minister of Great Britain (First Lord of the Treasury) and John Law was the Prime Minister of France.
Law’s innovative ideas on monetary economics and the need for expansionary monetary policy may be found in two works, John Law’s Essay on a Land Bank (posthumously published in 1994) and Money and Trade with a Proposal for Supplying the Nation with Money (1705). In these books, Law transcended contemporary pamphleteers by writing in a very modernist style. Law was effectively the first economic writer to understand and use the economic concept of ‘demand’ in English. Building on this, he introduced the concept of the demand for money and showed how inflation could arise when the money supply was out of line with the demand for money. But he was also fully conscious of the problems created by a shortage of money. In Money and Trade, he advanced the view that money drives trade. When trade, a synonym for economic activity, was weak, as manifested by unemployment and under-utilization of resources, then Law recommended expansionary monetary policy. From this perspective Law may be regarded as the spiritual father of today’s monetary policy of quantitative easing.
Law was also quite conscious of the need to keep interest rates low, an issue that he attempted to solve in France between 1716 and 1720. Louis XIV, who died in 1715, had left France bankrupt as a result of his continuing bellicosity and his edifice complex in building extravagant palaces such as the Chateau de Versailles. France, according to Law, had two problems. The first was a shortage of money and the second was an excessive level of public sector debt which had produced very high interest rates. Law attempted to address the monetary shortage by replacing metallic money with newly issued paper money. His efforts to address the debt management problem resulted in him issuing shares in the Mississippi Company, a company which, inter alia, owned the trading rights of half of the land mass of today’s United States (excluding Alaska), in return for public debt. Thus transactors acquired shares in the Company in return for government securities.
By 1720, Law’s policies were so successful that he had replaced gold and silver with banknotes and the public’s demand for Mississippi shares was booming. A grateful French regent, Philippe duc d’Orléans – Law had earlier named a newly emerging town in Louisiana as New Orleans (La Nouvelle Orléans) after his mentor - appointed him Controller General of Finances, effectively the position of Prime Minister of France. In Paris, shares of the Mississippi Company had risen from a price of around 160 livres in 1717 to over 10,000 livres in January 1720. Stock market euphoria reigned and for a few short weeks in January 1720, newly created Mississippi options (les primes) priced at 10,000 went to a 100% premium as shareholders attempted to further leverage their positions in Mississippi stock. One of Law’s contemporaries, Nicolas Dutot, in a retrospective assessment wrote ‘It was a type of miracle which posterity will not believe.’
Law’s System came under increasing pressure in the Spring of 1720. Quite simply he had expanded the financial sector, comprising of banknotes and shares, out of line with the real economy. He realised that he had gone too far and too fast. On May 21, 1720 he was responsible for a Royal decree that stipulated the lowering of the price of shares and banknotes. Law wanted to deflate the System but the measures caused a massive loss of confidence and Law himself was sacked as Prime Minister and put under house arrest for a number of days. The System would not recover from this collapse in confidence and right up to December Law fought a losing battle to re-structure the System. Four days after the May 21 decree a boat, the Grand St. Antoine, berthed in Marseille. Historians believe that it was carrying the plague virus that would soon destroy Marseille and its unsuspecting population. Paradoxically, just as the Mississippi System went into decline, the South Sea Company’s share price, which stood at £128 in early January 1720, went from strength to strength and, by the end of June, reached a high of £1,050.
The South Sea Bubble
The British witnessing the Lazarus resurrection of the French economy had decided to follow suit in January, 1720. Like Law they wanted to provide a solution to the national debt and the South Sea Company entered the picture by offering to purchase the national debt by offering shares in return for government securities. The Bank of England, fearing that this would turn the South Sea Company into a far bigger financial entity than the Bank, countered with a more competitive bid to take over the national debt offering to pay £5.6 million just for the take-over right. Ultimately, and fortunately for the Bank, the South Sea Company outbid the Bank in the take-over of the national debt thus starting the second bubble of 1720.
The South Sea Company had been founded in 1711 to assist in an earlier form of debt management, but, also to generate an income by selling slaves to the Spanish on the South American coastline (hence the name South Seas). Little income was derived from this slave trade and, in 1720, it was restructured by the plan of its directors, led by Sir John Blunt, to take over the bulk of the national debt held outside the control of the East India Company and the Bank of England. Similar to Law’s Mississippi Company, it had the objective of reducing the burden of the national debt. However, unlike the Mississippi Company it did not have the wide range of assets in the form of trading companies, tax farms, the mint, etc. that were controlled by Law’s huge conglomerate. Nor indeed did it have the equivalent of a quasi-central Bank, the Royal Bank, which Law used for share support operations.
Instead the South Sea Company (SSC) pursued a policy of selling its shares at prices significantly above its par price of £100. By doing so it was hoped that by maximizing the difference between the issued share price and the par price of South Sea (£100) to create a giant fund of credit which would permit the South Sea Company to buy up eligible assets that would create an income for its shareholders. It meant that a large amount of the energy of the SSC’s directors was devoted to puffing up its share price. To assist in popularising the shares sizeable quantities were given to the King, his mistresses, Lord Sunderland, the prime minister, the Chancellor of the Exchequer, John Aislabie, the Postmaster General, James Craggs, members of the cabinet, and members of parliament. Corruption was endemic as would be borne out by a subsequent House of Commons Committee investigating the widespread bribery by the Company.
A second important difference was that Law’s Mississippi Company was essentially a monopoly trading company that had acquired all the other trading companies. There was no opposition by other companies to it and so it reigned supreme. This was not the case in Britain where the very success of the South Sea encouraged the growth of a multiplicity of new ‘bubble’ companies offering initial public offerings, ranging from the serious in the form of the launching of insurance companies (London Assurance and the Royal Exchange Assurance Companies), to mind boggling swindles for companies such as those projected to manufacture square canon balls or to deliver ‘a project to be announced at a later date.’ Such was the pace and intensity of launching these smaller bubble companies – there were nearly 200 companies launched of which only 4 survived - that the South Sea Company took the view that their competition was reducing liquidity in the stock market and affecting the price of SSC. This competition caused its directors to force the British Parliament to introduce the Bubble Acts aimed at stopping any further bubble IPOs.
Here the law of unforeseen consequences arose as stock market activity in the bubble companies fell, causing their prices to move downwards and for their shareholders to rush for liquidity. In this rush they sold South Sea Company shares so that very suddenly the share price had fallen to £175 in September. This rush for liquidity was further strengthened by French and Dutch investors, facing heavy losses on Mississippi and other shares, who cut back on their British investments to replenish their liquidity. Additionally, alarming news from France on the intensity of the plague in Marseille and how it had spread into other French towns such as Aix-en-Provence and Toulon deepened the sense of gloom in London to the extent that George 1 proclaimed a fast, along with prayers, for December 16, 1720 in asking divine assistance to help stop the spread of plague to Britain.
Plague was not a new phenomenon to Marseille. Already it had experienced seventeen plagues since the time of Julius Caesar. The very real and continuing fear of plague produced a raft of legislation and institutions in order to protect the city from a re-occurrence of the disease. Chief amongst these was a Health Board (Bureau de la Santé) which had introduced a graduated range of time quarantines for passengers, crew and cargoes coming from areas that had the potential to be affected by plague. Depending on the rating given to the ports of disembarkation, passengers, crews and cargoes could be kept in quarantine in specially prepared docking facilities outside the port of Marseille for up to three months. Such delays in entering Marseille were costly and bribery was used to expedite the clearance of cargoes and passengers.
According to local historians this was the case of the Grand St Antoine which was responsible for the introduction of the plague virus, yersinia pestis, into the port of Marseille. It had a cargo of cotton bales and fabrics worth an estimated 300,000 to 400,000 livres. Part of the cargo was owned by Jean-Baptiste Estelle, the first alderman of the city, who was naturally concerned to have the cargo docked. Other prominent burghers of the city were also part owners of the cargo and would have supported Estelle’s lobbying to expedite the premature discharge of the cargo from quarantine. Adding to the false disclosures, the captain of the Grand Saint-Antoine, Jean-Baptiste Chataud, was aware of the strong possibility that plague was aboard the ship because, by the time of docking, eight people on the ship had died and been buried at sea. Chataud would later contend that the deaths were due to bad food rather than plague. The merchant burghers did not want to hear the word plague mentioned in the city and it was only due to the intervention of Dr Peysonnel and his son who insisted that plague was in the city and killing people that the populace became aware of its plight. Thus, despite all the quarantine regulations, commercial interests rather than health safety measures dominated so as to permit the premature unloading of the pestilential cargo. This has echoes of recent attempts by commercial interests to stop or delay Coronavirus related work stoppages and home confinements on the basis that they were bad for trade.
A contemporary French chronicler, Mathieu Marais, wrote that a false declaration had been made to avoid quarantine restrictions for the boat. Even then the authorities should have realised very quickly that something serious was amiss as the dockers, who handled the cotton bales, succumbed and died very quickly after removing the cargo from the ship. Within days of the unloading of the cargo the plague had broken out in the city. Again, analogously to modern times, many of the wealthy populace of Marseille fled to their country bastides before a cordon sanitaire was thrown around the city. Their mot d’ordre was ‘pars vite, loin et longtemps’ (flee faraway for a long time). Braziers containing sulphur were set on fire all over the city in the false belief that smoke could kill the virus. Such quackery has recently been surpassed by some Indian experts recommending cow’s urine, or, the Belarussian President suggesting the more palatable vodka, as effective antidotes to Coronavirus.
The death rate due to plague accelerated and at its height the plague killed 1,000 inhabitants a day. A highly evocative painting by J.B. Troy, ‘Scène de la Peste à la Tourette’ shows one of the heroes of the period, the Chevalier Nicolas Roze (1675-1733), directing one hundred galley convicts to gather up one thousand corpses in the neighbourhood of La Tourette and then to throw them into two strongholds where they were covered in quicklime. One estimate indicated that only five of the hundred convicts survived this burial operation. Roze survived and may be classified as one of the greatest undertakers of all time. Marseille with a population of 90,000 inhabitants at the start of 1720 witnessed the death of half of them due to the plague.
The plague was not confined to Marseille but spread around to neighbouring areas in Aix-en-Provence, Arles, Apt, and Toulon. The plague hit Aix-en-Provence in August. A hospital there ‘treated’ 8,000 patients but only 466 survived. In October it devastated Toulon, killing over a third of its population of 26,000 people. All travel outside the affected plague areas was banned. A wall, the mur de la peste, was built to a height of two metres and a thickness of 70 centimetres, to keep people from leaving the affected areas and spreading the disease further into France.
By August 15, 1720 Marais reported that famine had emerged to compound the devastating effects of the plague ‘they have neither goods nor money…all that they have are banknotes’. The doctors of the period, if they may be called such, had no effective solutions to the plague. Marais reported that the doctors had found worms in the bodies of plague victims. They had attempted to kill these worms with vinegar, wine and alcohol but with no success. Then, by mixing a compound of lemon and oil together they succeeded in killing the worms; this led them to believe that they had found the antidote to the plague. It was not to be. On September 2, Dr. Chicoineau, a son-in-law of the Regent’s physician, Pierre Chirac, who had been sent specially to review the situation in Marseille reported that he had found a hospital with 500 dying patients who had been abandoned without having access even to drinking water.
Despite a report that the plague had ended in Marseille in September 1720, further news came through on September 28, indicating that it was worse than ever and that another 1,400 people had died. By early 1721 daily mortality had fallen to one or two inhabitants, but, then in April 1722, there was a further vicious relapse and it was not till May 25, 1722 that it could be announced that the plague had finished. The plague not only killed a sizeable section of the population of Marseille and its surrounding areas, but also badly affected France’s Mediterranean trade, through the closure of the important ports of Marseille and Toulon.
John Law reflected on the economic consequences of the plague in 1723 when he wrote that the plague had played a key role in destroying the Mississippi System by causing the public to shift away from paper money to gold and silver because such intrinsically valuable coins were regarded as a better means of payment for the purchase of goods and necessities in a plague-stricken environment. In a fascinating addendum he asked the question as to what might have happened to Britain if the plague had spread there. He wrote that in such an instance the public would have attempted to build up its holdings of specie in order to have funds to purchase food. This would have created an extraordinary demand for specie which would have provoked a run on the banking system. He then extrapolated on further economic consequences that a plague in Britain would have created – a breakdown of trade, ships remaining in port, unemployed workers, a fall in taxes, an inability of the state to service its debt, and so on. He ended by remarking that if France had been exempt from the plague ‘it would have been possible to sustain Mr Law’s system’. This final comment was somewhat exaggerated in that the May 21, 1720 measures that he had attempted to introduce in France had destroyed a considerable amount of confidence in his System.
The dramatis personae of two bubbles and a plague had various endings. Law fled from France in December 1720 but came back to London in 1721 where, intriguingly, with the assistance of Charles Spencer, Lord Sunderland, he received a full pardon from George 1 over the killing of Edward Wilson. He would subsequently die in Venice in 1729.
Charles Spencer was brought before the House of Commons in 1721 and charged with the corrupt transfer of free shares of the South Sea Company to various politicians and members of George I’s entourage including the Royal mistresses. If he, the former Prime Minister, had been found guilty – already Aislabie, the Chancellor of the Exchequer and James Craggs the Postmaster General had been convicted - the Hanoverian monarchy would have been in danger. This possibility may have encouraged some MPs to vote in Spencer’s favour and he was acquitted by the House of Commons. He died shortly after this verdict.
Jean-Baptiste Estelle, responsible for facilitating the docking of the Grand St Antoine in Marseille, worked valiantly to counter the plague in Marseille and was subsequently ennobled for his efforts. There is even a street in Marseille named after him. Captain Jean-Baptiste Chataud deemed to be primarily responsible for introducing the plague to Marseille was sentenced to three years imprisonment, but continued to plead his innocence. The Chevalier Roze lived through the plague and is celebrated in J.B. Troy’s painting of him at the Place de la Tourette.
The longer term financial legacy was that France returned to its old financial system and eschewed any financial innovation right up to the French Revolution. Words such as paper money, banks, credit, shares, became taboo. Great Britain survived the South Sea Bubble in part due to the fact that the Bank of England, despite itself, did not become a major victim of the crash. While the Bubble Acts effectively stopped the creation of publicly quoted companies for another century, Britain’s financial system, through its banks, was able to prosper greatly relative to France. The legacy of the Marseille plague is one showing the danger of commercial interests countermanding health and safety regulations – a legacy that world leaders should keep in mind in the highly unstable environment of Covid 19 and its volatile transmission tentacles.