Robert Prechter, the iconoclastic Atlanta market analyst (publisher of the Elliott Wave Theorist), says the world remains in a bear market of "supercycle" degree - meaning that the world's current economic troubles will be "the deepest and longest since the 1700s." Assume for a disturbing moment that he is right. What went wrong in the 18th century? In what way are we replicating the wrong? What consequences should we anticipate?
Here is an instructive guide to the early 1700s: English author Janet Gleeson's Millionaire: The Philanderer, Gambler and Duelist Who Invented Modern Finance, a prescient 1999 book aptly reissued in paperback last year by Simon & Shuster.
Writing in fine narrative style, Ms. Gleeson tells the tale of John Law, the charismatic Scottish gambler who became the central banker of France and, for all practical purposes, of Europe - taking control of a bankrupt country after the death of Louis XIV in 1715, radically replacing gold coins with paper currency, and setting off one of the greatest spurts of economic expansion in history.
Ms. Gleeson tells more sobering tales as well - of John Law's infamous Mississippi Company, of government-decreed credit at 2 per cent, of banks without reserves, of the inevitable Great Crash when the irrational exuberance abruptly ended in 1720. Of extraordinary distress and profound want. "Thus ends the system of paper money," a contemporary wrote, "which has enriched a thousand beggars and impoverished a hundred thousand honest men."
So obvious are the parallels to the modern world, Ms. Gleeson observes, "Law's story holds uncanny relevance" for the 21st century.
The stock market gains of the 20th century pale in comparison to John Law's brief era of central bank innovation. "Law sparked the world's first major stock market boom," Ms. Gleeson writes. "So many people made so many vast fortunes that the word millionaire was coined to describe them. Almost overnight, [Law]became a heroic figure, feted throughout Europe and promoted [to]the most powerful public position in the world's most powerful nation."
Investors from England, Germany, Holland, Italy and Switzerland "stampeded" to Paris to play the markets, driving the share price of the Mississippi Company (which held monopoly trading rights in the French territories of the New World) from 150 livres to 18,000 livres in a matter of months. In comparison, Ms. Gleeson says, the best bull market of the 20th century occurred between 1990 and 1999 when the Dow rose by 380 per cent and Nasdaq by 790 per cent. Next to Law's stock play, she says, these excesses were paltry.
Beyond doubt a financial genius, Law anticipated - indeed, largely invented - the paper currency of modern times along with the central banks that control it. When Law established his own private bank in 1716, he improvised a paper currency and backed it with gold reserves equal to 25 per cent of the paper in circulation. It was highly successful. When nationalized in 1718, it became the Banque Royale, the State bank, and Law became its sole director. The State, though, was less patient. It dictated progressively more currency and progressively fewer reserves.
The Great Crash, when it came, was cataclysmic. Stock market prices collapsed; the Mississippi Company lost 98 per cent of its capitalization. Thousands of people, high and low, fell from riches to poverty. In Paris, mob violence ensued - with unprecedented numbers of robberies and killings. Law himself narrowly escaped death. Obsessed again by gold, France banned paper money and sought a royal monopoly on gold and silver. Naturally, it prohibited private ownership of jewellery and gold crucifixes.
Speculators exited France with whatever wealth they could salvage - and moved across the Channel to London where they proceeded to re-invest in already inflated South Sea shares, driving England toward a Great Crash of its own. Shares that traded for £130 in January changed hands for £1,050 in June. Everyone participated - "country parsons, impoverished widows, kings, princes, courtesans, yeoman farmers, eminent scientists, philosophers, writers, artists - all caught the contagion."
In Paris, the burning of paper currency became public spectacles, the bonfires witnessed by throngs of thousands. The poor scavenged for survival - even as the rich (the lucky gamblers who took their profits early) "danced on," as Ms. Gleeson puts it, putting in place the necessary conditions for the French Revolution. There is always, in hard times, wealth enough for decadence. "During the Great Depression of the 1930s," Ms. Gleeson notes, "[New York's]Waldorf Astoria was fully booked."
The checklist from 1720 remains relevant: a central bank and a brilliant central banker, easy credit and novel financial investments, high taxes and expansive State debt to appease the populace. Was 1720 a unique calamity? Perhaps. As Ms. Gleeson says, though, these same forces have since then combined repeatedly to produce economic disasters. They appear "little altered," she says, "in 300 years."Report Typo/Error
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