Urban Trade Breakdowns: Richard Cantillon Trades The World’s First Government Sponsored Stock Bubbles

In 1715, John Law, a drunkard Scottish playboy gambler economist, escaped from death row in a London prison where he awaited execution for murder, and fled to Paris. There he drank and fucked his way through town, and somewhere along the way, he developed a friendship with the Regent of France, whose official title was the Duke of Orleans, but at the time was serving his country as the royal babysitter of the French King, Louie XV, who was 5-years old. Being 5-years old and all, Louis was not yet very good with money and laws and shit, which meant the Regent had to run the day-to-day shit in France, and that was a thankless job because France was drowning in war debt and the economy was fucked.

So one night, while sipping cognac in front of the fireplace in some big-ass room full of silk curtains and paintings and shit, Law pitches the Regent on an idea: grant me the exclusive right to start a bank and print shitloads of paper money in France (which was a new thing at the time), and I will relieve France of its national debt, stimulate the shitty economy, and cheer you the fuck up. And the Regent was like, cool, knock yourself out.

And so law starts his bank and does his thing and in no time, with all the new paper money flooding the French economy in search of shit to buy and places to invest, things are looking tres bon. Which was cool and all, but Law knew that the money printing hustle was unsustainable if he couldn’t also control demand, so he pitches the Regent on a new company, the Comagnie Occident (Company of the West), which would be given exclusive trading rights to the French Louisiana Territory (basically all of the Atlantic Ocean) in exchange for taking over France’s national debt, which he would use to fund his company and pay dividends on the stock he would sell to sop up all the money he was printing.

And thats what he did, and the stock went ape-shit. Between January and December of 1719, shares in Law’s company, now called Compagne des Indes (aka The Mississippi Company in English), went from 500 Livres (old French money) to 10,000 Livres. That’s a 1900% gain in 11 months. By that point, the Regent and the rest of the French peacocks sign over the whole fucking show to Law, and granting him exclusive rights to all of France’s global trade, coin minting, and tax collecting.

So begins the Mississippi bubble.

Meanwhile across the Channel, the English were dealing with the same kinda shit. Their economy also sucked and they were also drowning in war debt while frantically racing to out-plunder the rest of Europe in the New World. So one day in 1711, Thomas Harley, a wig-wearing career politician and the Chancellor of the Exchequer in England (the government money guy) reads about Law and thinks, fuck, we need to do that too. But Harley didn’t know anything about stocks (which, at the time, was commoner shit you did if you didn’t own land). But he vaguely remembered one dude from some committee testimony or something a few years back, a guy by the name of John Blunt who seemed to understand the shit. So he orders people around and arranged meetings and in time, John Blunt and Thomas Harley scheme up the South Seas Company, a straight up government sponsored publically traded financial fraud, with a few derelict ships that rarely left port, but an exclusive right to the boundless potential of New World riches and a government guaranteed shareholder dividend which they would sell as stock.

But there was one problem, by 1720, crazy-ass stock schemes like this became a thing in the UK, with shitloads of these fraudulent “bubble” companies created to cash in on the trend. And that created competition for South Seas stock, which was not cool. So in 1720, the English parliament passed the Bubble Act which outlawed any stock scheme not ran by the English government. Problem solved.

And with no competition, South Seas Company stock goes ballistic. In the six months from January to June, 1720, the shit goes from 128GBP to 1000GBP for an 842% gain. By contrast, Amazon grew 188% during the dotcom bubble.

And so began the South Seas Bubble.

Enter Richard Cantillon. Sometime in the early 1700s, Cantillon, an Irish banker and financial savant, moved to Paris where he met Law and helped him finance his businesses. Not a lot is known about the dude. He wrote one influential economic paper and then at the age of 34, he either burned to death in his London home, murdered by arson in a fire set by his French chef, or he disappeared to South America.

But Cantillon was the world’s OG first and greatest trader of state-sponsored government asset bubble schemes. Like Law, Cantillon believed that flooding the market with paper money could boost a shitty, indebted European economy, but Cantillon was convinced that no amount of financial engineering could make it last. Only “entrepreneurs” (a term he coined) created real economic value. Everything else was dumb money, which he could trade.

So in 1716 he goes all-in on Mississippi Company stock (Law’s shit), buying at 160 and selling at 2000, for a gain of over 1200 percent. And then he retires to Italy. But in Italy, Cantillon gets the French newspapers and sees the Mississippi Company stock go to 3000, and then 5000, and eventually 10,000. Fuck, he thinks, and returns to Paris to see this shit for himself. And what he finds is a booming economy and a strong currency and investor enthusiasm for the untapped potential of boundless New World riches. But Cantillon calls bullshit and goes short, and uses investor money to leverage his trades, making a fortune on the simple premise that asset prices should increase roughly proportionate to value created in the economy. As ridiculous as this sounds today, Cantillon believed you cant fake shit with stock schemes and financial engineering. If asset prices outpace value creation, the shit would correct.

So after making his second bubble fortune when the Mississippi bubble collapses, Cantillon eventually finds his way to London, just as the South Seas Company was near the peak. There he goes all-in short, but this time with puts, not just on the stock, but anything he could find that tracked the stock. And when shit starts to tank, deep in the money but nowhere near the bottom, he exits.

How fucking cool is it that 300 years later, in the era of light-speed digital algos and one-less-car hippy S&P indexing and dark web bad-bank derivative bail-outs, the OG shit — money printing, stock bubbles, government sponsored financial schemes — remain timeless.