Law, John

Name: John Law

Achievements: Responsible for the creation of the first state bank in France. Introduced paper money to France

Born: Baptised April 21, 1671; Edinburgh, Scotland

Died: March 21, 1729; San Gimigniano, Italy (Aged 58)

Field & Discipline: Economics; Economist

Language: English

Father: William Law

Mother: Janet Campbell

Siblings: 4

Spouse: Catherine Lloyd (common law wife)

Children: William; Mary

Education: Edinburgh High School; Eaglesham boarding school, Renfreshire

Major Work:

“Money and Trade considered with a proposal for supplying the Nation with Money” (1704)

Life & Times:

On attaining his majority in 1692 Law received a comfortable inheritance. By day he had taken to studying finance,  interested by the scheme put forward by [influenced by] Paterson* for the creation of a national bank.

Law was convicted  of murder in April 1694 after killing someone in a duel,  and sentenced to death. While waiting for his appeal hearing, he was held in the notorious King’s Bench prison at Southwark near London bridge which was surrounded by a thirty foot high wall.  On l January 1695 Law leaped from the top of the prison wall and survived with only a sprained ankle. His friends were waiting with a coach and he was driven to the Sussex coast and smuggled across the channel. During the next ten years, Law traveled on the continent, making a living through gambling and financial deals, and working out various monetary and economic systems for the management of national finances.

In Venice, Law dealt regularly in foreign exchange and securities on the Rialto and again observed the usefulness of paper credit.  He returned to Scotland in 1703 and in 1705 wrote a proposal for the revival of Scotland’s economy. When the Union with England was declared in 1705, Law became liable for re-arrest and departed for the continent again.  In 1712-13 he was in The Hague where he made another fortune out of lotteries.

In 1713 he moved to France, taking most of his fortune with him. He was anxious to put his ideas on banking and credit into practice and but his scheme for the creation of a state bank came to nothing when Louis XIV found out the Law was not a Catholic. When Louis died in 1715, the French government was nearly bankrupt. Economic activity was depressed by the system of high taxes combined with numerous exemptions and privileges.  In 1716 Law obtained permission from the regent, the Duke of Orleans, to open the Banque Generale, a note-issuing bank.

In 1717 he organized the “Compagnie d’Occident”  (the “Mississippi Company”) to take over the exclusive monopoly on trade in the American territory in the Mississippi opened up by [work related to] Rene-Robert La Salle* at the end of the seventeenth century.  Law was managing director and the company was granted monopoly on trade with Louisiana and on trade in Canadian beaver skins.  To finance the company,  Law set up a scheme for subscriptions on shares (public securities) issued by the government.

When a new finance minister, Marc Rene d’Argenson, devalued the currency in an effort to liquidate the whole of the national debt in one go, Law was held to blame but was saved by the intervention of the Regent, the Duke of Orleans, but d’Argenson then joined with the [rival was] Paris-Duvernay* brothers, private bankers who were jealous of Law’s success, to set up a rival scheme.

Law took novel and daring action by undertaking to pay holders of shares in the “Compagnie” the par value of shares within six months, even though their market value was only half that amount. He deposited a large amount of his own money which would be forfeited if necessary. He had thus instigated the concept of futures trading and promoted speculative dealings in the company’s shares.

Shares rose spectacularly and Law was seen as a financial wizard. In April 1719 a government decree stated that  paper money credit would always be paid in full and that paper money was not subject to the same debasement as coinage.  The demand for paper money rose and the government printed more and more of it which people used to buy shares in the company.

By September 1719, there was ten times more paper money around than the amount of gold and silver bullion in the bank. Law tried to check the frenzy of speculation, and he boosted the value of the company with the acquisition of further monopolies and with the incorporation of the French East India Company and the China Company. What became known as the “Mississippi Bubble” was the greatest speculative mania of its time. The word “millionaire” was coined and its usage became common – it was mostly  used to describe a “Mississippian.”

[a fan was] Lady Mary Wortley Montagu* who was visiting Paris wrote home of her pleasure at seeing Law esteemed above his French counterparts, and the writer [a pal of] Steele*, an old friend of Law’s, wrote to him asking him to join in a piece of speculation which was losing Steele money.

At the end of 1719 the more prudent began to sell out and exchange public securities for land and diamonds. In 1720, Law adopted the Catholic religion and was appointed Controller General of finance but the government then declared they would accept no more payments in paper and the bubble started to burst. There was a run on the bank and the government had to acknowledge itself as debtor to the creditors of the company and public debt rose.

Law was lucky to leave Paris with his life and in December 1720 he fled to one of his many estates. He had not been dishonest and his administration had been fair but he was perceived as a villain and had to leave France.  In 1721 Paris-Duvernay was given the task of producing the accounts of the affair and Law was debited with large amounts which he had already discharged.

Law was given a diplomatic mission by [appointed by] Robert Walpole* and accredited to the republic of Venice. He took up his old life in Venice where he was visited in 1728 by [visited by] Montesquieu*.

Assessment: The bank he created became prototype of the Bank of France and he introduced bank notes and the idea of futures-trading into French commercial life.

Oneliner: John Law, eighteenth-century speculator

Bibliography:

• Garber, Peter M., Famous First Bubbles, MIT Press, Cambridge, Mass., and London, England, 2000.
• Hyde, H Montgomery, John Law, The History of an Honest Adventurer, W H Allen, London, 1969.