John Law

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John Law
John Law, by Casimir Balthazar
Born	1671(1671-Expression error: Unrecognised punctuation character "?"-00) Edinburgh Scotland
Died	21 March 1729 (aged 57) Venice Italy
Occupation	Economist, Banker, Financier, Author.
Signature

John Law (usually pronounced Jean Lass by contemporary French people) (baptised 21 April 1671 – died 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade. He was responsible for the Mississippi Bubble and a chaotic economic collapse in France.

Law was a gambler and a brilliant mental calculator and was known to win card games by mentally calculating the odds. He originated economic ideas such as "The Scarcity Theory of Value" and the "Real bills doctrine."

Biography

Law was born into a family of bankers and goldsmiths from Fife; his father had purchased a landed estate at Cramond on the Firth of Forth and was known as Law of Lauriston. Law joined the family business aged fourteen and studied the banking business until his father died in 1688. Law subsequently neglected the firm in favour of more extravagant pursuits and travelled to London where he lost large sums of money in gambling.

On 9 April 1694, John Law fought a duel with Edward Wilson. Wilson had challenged Law over the affections of Elizabeth Villiers. Wilson was killed, and Law was tried and found guilty of murder and sentenced to death. His sentence was commuted to a fine, upon the ground that the offence only amounted to manslaughter. Wilson's brother appealed and had Law imprisoned, but he managed to escape to Amsterdam, in the Netherlands.

Paper Money endorsed by John Law, 1718

Law urged the establishment of a national bank to create and increase instruments of credit and the issue of banknotes backed by land, gold, or silver. The first manifestation of Law's system came when he had returned to his homeland and contributed to the debates leading to the Treaty of Union 1707 with a text entitled Money and Trade Consider'd with a Proposal for Supplying the Nation with Money (1705). After the Union of the Scottish and English parliaments, Law's legal situation obliged him to go into exile again.

He spent ten years moving between France and the Netherlands, dealing in financial speculations, before the problems of the French economy presented the opportunity to put his system into practice.

He had the idea of abolishing minor monopolies and private farming of taxes and creating a bank for national finance and a state company for commerce and ultimately exclude all private revenue. This would create a huge monopoly of finance and trade run by the state, and its profits would pay off the national debt. The French Conseil des Finances, merchants, and financiers objected to this plan.

The wars waged by Louis XIV left the country completely wasted, both economically and financially. And the resultant shortage of precious metals led to a shortage of coins in circulation, which in turn limited the production of new coins. It was in this context that the regent, Philippe d'Orléans, appointed John Law, as Controller General of Finances.

As Controller General, Law instituted many beneficial reforms (some of which had lasting effect, others of which were soon abolished). He tried to break up large land-holdings to benefit the peasants; he abolished internal road and canal tolls; he encouraged the building of new roads, the starting of new industries (even importing artisans but mostly by offering low-interest loans), and the revival of overseas commerce—and indeed industry increased 60% in two years, and French ships engaged in export went from sixteen to three hundred. ^[1]

Since, following the devastating War of the Spanish Succession, France's economy was stagnant and her national debt was crippling, Law proposed to stimulate industry by replacing gold with paper credit and then increasing the supply of credit, and to reduce the national debt by replacing it with shares in economic ventures.^[2] Though they ultimately failed, his theories were 300 years ahead of their time and "captured many key conceptual points which are very much a part of modern monetary theorizing".^[3]

Contemporary political cartoon of Law from Het Groote Tafereel der Dwaasheid (1720); text reads "Law loquitur. The wind is my treasure, cushion, and foundation. Master of the wind, I am master of life, and my wind monopoly becomes straightway the object of idolatry. Less rapidly turn the sails of the windmill on my head than the price of shares in my foolish enterprises."

Mississippi Company

View of the camp of John Law at Biloxi, December 1720

In May 1716 the Banque Générale Privée ("General Private Bank"), which developed the use of paper money, was set up by Law. It was a private bank, but three quarters of the capital consisted of government bills and government accepted notes. In August 1717, he bought the Mississippi Company, to help the French colony in Louisiana. In 1717 he also brokered the sale of Thomas Pitt's diamond to the regent, Philippe d'Orléans. In the same year Law floated the Mississippi Company as a joint stock trading company called the Compagnie d'Occident (of which Law was named as Chief Director) which was granted a trade monopoly of the West Indies and North America. The bank became the Banque Royale (Royal Bank) in 1718, meaning the notes were guaranteed by the king. The Company absorbed the Compagnie des Indes Orientales, Compagnie de Chine, and other rival trading companies and became the Compagnie Perpetuelle des Indes on 23 May 1719 with a monopoly of commerce on all the seas. The system however encouraged speculation in shares in 'The Company of the Indies' (the shares becoming a sort of paper currency) and inflation. The system was based on Law trading shares in the Mississippi Company in return for government debt. The Banque Royale was created by default as a result of Law attaining the majority of the government issued notes (debt). It effectively became the Central bank of France. In 1720 the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law's pioneering note-issuing bank was extremely successful until it collapsed and caused an economic crisis in France and across Europe. The collapse was staved off by a constant trading off between national debt and shares of the Mississippi company. New shares were issued to dilute the value of each share, and the new capital was used to purchase more government notes. The speculation continued to build, and the company's two branches, the trading arm and the bank arm, collapsed simultaneously.

Law exaggerated the wealth of Louisiana with an effective marketing scheme, which led to wild speculation on the shares of the company in 1719. In February 1720 it was valued for a very high future cash flow at 10,000 livres. Shares rose from 500 livres in 1719 to as much as 18,000 livres in the first half of 1720, but by the summer of 1720, there was a sudden decline in confidence, leading to a 97 per cent decline in market capitalization by 1721. Predictably, the 'bubble' burst at the end of 1720, when opponents of the financier attempted en masse to convert their notes into specie. By the end of 1720 Orleans dismissed Law, who then fled from France.

Later Years

Law initially moved to Brussels in impoverished circumstances. He spent the next few years gambling in Rome, Copenhagen and Venice but never regained his former prosperity. Law realised he would never return to France when Orleans died suddenly in 1723 and was granted permission to return to London having received a pardon in 1719. He lived in London for four years and then moved to Venice where he contracted pneumonia and died a poor man in 1729.

Books

• John Law: Economic Theorist and Policy-Maker by Antoin E. Murphy (Oxford University Press, 1997) is the most extensive account of Law's writings. It is given credit for completing the transformation of opinion about Law from a con man (see Mackay below) to an important economic theorist and successful financial leader.
• Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance by Janet Gleeson (2000). (ISBN 0-684-87295-1) is a straightforward biography.
• The Poker Face of Wall Street by Aaron Brown (John Wiley & Sons, 2006) credits Law for the inspiration of the modern futures exchange and also the game of Poker.
• John Law - The History of an Honest Adventurer by H. Montgomery Hyde (W. H. Allen, 1969) is one of the earliest favorable accounts of Law's ideas.
• John Law, the father of paper money by Robert Minton (Association Press, 1975) treats Law's financial innovations that led to modern paper money.
• Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay is a colorful negative account of Law's financial activities in France. First published 1841, and still available.

Films

Richard Condie's 1978 National Film Board of Canada animated short John Law and the Mississippi Bubble is a humorous interpretation.^[4]

References

External links

Wikimedia Commons has media related to: John Law

• John Law
• Project Gutenberg Edition of Fiat Money Inflation in France: How ...
•  "Law, John". Encyclopædia Britannica (11th ed.). 1911.