John Law (economist)
John Law (pronounced [lɑs] in French in the traditional approximation of Laws, the colloquial Scottish form of the name;[1][2] 21 April 1671 – 21 March 1729) was a Scottish-French[3] economist who distinguished money, a means of exchange, from national wealth dependent on trade. He served as Controller General of Finances under the Duke of Orleans, who was regent for the juvenile Louis XV of France. In 1716, Law set up a private Banque Générale in France. A year later it was nationalised at his request and renamed as Banque Royale. The private bank had been funded mainly by John Law and Louis XV; three-quarters of its capital consisted of government bills and government-accepted notes, effectively making it the nation's first central bank. Backed only partially by silver, it was a fractional reserve bank. Law also set up and directed the Mississippi Company, funded by the Banque Royale. Its chaotic collapse has been compared to the 17th-century tulip mania parable in Holland.[4] The Mississippi bubble coincided with the South Sea bubble in England, which allegedly took ideas from it. Law was a gambler who would win card games by mentally calculating odds. He propounded ideas such as the scarcity theory of value[5] and the real bills doctrine.[6] He held that money creation stimulated an economy, paper money was preferable to metal, and dividend-paying shares a superior form of money.[7] The term "millionaire" was coined for beneficiaries of Law's scheme.[8][9]
John Law
21 April 1671
Edinburgh, Kingdom of Scotland
21 March 1729 (aged 57)
Venice, Republic of Venice
Economist, banker, financier, author, controller-general of finances
Career[edit]
Economic theory and practice[edit]
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 Scotland and contributed to the debates leading to the Treaty of Union 1707. He wrote a pamphlet entitled Two Overtures Humbly Offered to His Grace John Duke of Argyll, Her Majesties High Commissioner, and the Right Honourable the Estates of Parliament (1705)[12][13] which foreshadowed the ideas he would propose for establishing new systems of finance, paper money and refinancing the national debt in a subsequent tract entitled Money and Trade Considered: with a Proposal for Supplying the Nation with Money (1705).[14][15]: 136 Law's propositions of creating a national bank in Scotland were ultimately rejected, and he left to pursue his ambitions abroad.[16]
He spent ten years moving between France and the Netherlands, dealing in financial speculations. Problems with 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. He would create a bank for national finance and a state company for commerce, ultimately to 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 council called to consider Law's proposal, including financiers such as Samuel Bernard, rejected the proposition on 24 October 1715.[15]: 141
Law made his home in Place Louis-le-Grand, a royal square where he hosted and entertained various Parisian nobles. Gaining the attention of such notable people as the Duke of Orleans, Law quickly found himself a regular in high-stakes gambling parties attended by only the most affluent of Paris. His tall stature and elegant dress allowed Law to charm his way across Europe's financial hubs, from Amsterdam to Venice. These travels heavily influenced Law's theories on monetary policy and the importance of paper money as credit. Law's idea of a centralised bank which would deal in a new form of paper money was years ahead of its time. Despite this forward concept, Law still championed mercantilist beliefs with the promotion of monopolistic companies through government charters.[17]
Centralised bank, Paris[edit]
The wars waged by Louis XIV left the country completely wasted, both economically and financially. The resultant shortage of precious metals led to a shortage of coins in circulation, which in turn limited the production of new coins. With the death of Louis XIV seventeen months after Law's arrival, the Duke of Orleans finally presented Law with the opportunity to display his ingenuity. 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.[18] On 1 May 1716, Law presented a modified version of his centralised bank plan to the Banque Générale which approved a private bank that allowed investors to supply one-fourth of an investment in currency and the other parts in defunct government bonds. The second key feature of the proposal centred on the premise that this private bank was able to issue its own currency backed by Louis d'or. This enabled the currency to be redeemed by the weight of silver from the original deposit instead of the fluctuating value of the livre, which had been devaluing rapidly.[19]: 277
In May 1716 Law set up the Banque Générale Privée ("General Private Bank") in the rue Quincampoix in Paris, which developed the use of paper money.[20]
It was one of only six such banks to have issued paper money in Europe, joining Sweden, England, Holland, Venice, and Genoa.[4] The bank was nationalised in December 1718 at Law's request.[19]: 277
From this new banking platform, Law was able to pursue the monopoly companies he envisioned by having France bankroll the endeavour with 100 million livres in the form of company stock. The founding of the Mississippi Company, later renamed the Occident Company and eventually part of the Company of the Indies, was financed in the same way as the bank.
In this context the regent, Philippe d'Orléans, appointed Law as Controller General of Finances in 1720, effectively giving him control over external and internal commerce. The rapid ascension of this new global monopoly led to massive speculation and stock prices ballooned to over sixty times their original value.
As Controller General, Law instituted many beneficial reforms, some of which had lasting effect, while others 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 by 60 per cent in two years, and the number of French ships engaged in export went from 16 to 300.[21]
Law helped in 1719 to refinance the French Indies companies. His nephew, Jean Law de Lauriston, was later Governor-General of Pondicherry.[22]
Later years[edit]
Law moved to Brussels on 22 December 1720 in impoverished circumstances when his properties in France were voluntarily confiscated.[15]: 148 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 Orléans died suddenly in 1723 and Law was granted permission to return to London, having been pardoned in 1719. He lived in London for four years and then moved to Venice, where he contracted pneumonia and died poor in 1729.[15]: 150 His gravestone is in the San Moisè, Venice.
Cultural references[edit]
Sharon Condie and Richard Condie's 1978 National Film Board of Canada (NFB) animated short John Law and the Mississippi Bubble is a humorous interpretation. The film was produced by the NFB at its newly opened Winnipeg studio. It opened in Canadian cinemas starting in September 1979 and was sold to international broadcasters. The film received an award at the Tampere Film Festival.[32]
In 1864 William Harrison Ainsworth published the novel John Law based on his career.[33]
John Law is the focus of Rafael Sabatini’s 1949 novel The Gamester.[34]
John Law is referenced in Voltaire’s 'Dictionnaire Philosophique', as part of the entry on reason.[35]
John Law is the subject of the section entitled "Fragment d'un ancien mythologiste" in "Lettre CXLII" of Montesquieu’s epistolary novel "Lettres Persanes" published in 1721.
