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John Law (economist)
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John Law (usually pronounced Jean Lass by contemporary French) (bap. 21 April 1671 – 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. At one time he was considered little more than a colorful con man, responsible for the Mississippi Bubble and a chaotic economic collapse in France.
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John Law (usually pronounced Jean Lass by contemporary French) (bap. 21 April 1671 – 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. At one time he was considered little more than a colorful con man, responsible for the Mississippi Bubble and a chaotic economic collapse in France. Beginning in the 1960s his reputation has improved, to the point he is now considered by some to be one of the most important pre-Adam Smith economic thinkers and a successful economic policymaker whose work was undone by corruption and reactionism of the House of Bourbon.
Law was a gambler and a brilliant mental calculator and was known to win card games by mentally calculating the odds. An expert in statistics, he was the originator of economic theories, including two major ideas: '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.
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.
Mississippi Company
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.
- 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.
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