Law, John

WORKS BY LAW

SUPPLEMENTARY BIBLIOGRAPHY

John Law of Lauriston (1671–1729), economist, banker, merchant, and statesman, founded the first Bank of France and is generally held responsible for the Mississippi Bubble. He was born in Edinburgh, the son of a prosperous goldsmith–banker, who died when Law was only 13. However, his mother, who was distantly related to the duke of Argyll, saw to it that Law studied both theoretical and applied economics. Law was a handsome man with an engaging personality and the ability to make a favorable impression on important people. Nevertheless, he spent many years as a fugitive from British justice, having been sentenced to death in 1694 for killing a man in a duel. It was not until 1717 that he was pardoned by George I, and his extensive travels during his exile enabled him to study diverse economic institutions and conditions abroad.

Law’s early interest in money and banking may well have been intensified by the adoption of William Paterson’s plan for the Bank of England in 1694, since Paterson was a fellow Scot. Over the next 20 years Law was to spend much time and energy making proposals for the establishment of banks, both in Scotland and on the Continent, and these efforts eventually culminated in the founding of the first Bank of France.

The original proposal was outlined in twò drafts for a privately owned Bank of France, which he sent in 1702 to Madame de Maintenon, the morganatic wife of Louis xiv. In a brief theoretical introduction, Law enumerated as components of the money supply: Bank of England stock, stock in the English and Dutch East India companies, exchequer notes, and Dutch government bonds—a concept of money supply that was destined to lead to his most calamitous mistakes in monetary policy. Each province of France would have a branch of the Bank, with a fixed allotment of capital, and notes payable to bearer would be redeemed at the parent Bank in Paris or at any one of the branches. Law argued that the Bank of France, like the Bank of Amsterdam and the Bank of England, would in-crease the money supply, lower the rate of interest (thereby raising the price of land and stimulating economic activity), reduce losses from fire and theft, eliminate shipments of specie from the provinces to Paris, and, through its notes, provide a safe and convenient medium of exchange for travelers. Law’s project was not accepted: the French finance minister, Michel Chamillart, was also war minister and was preoccupied with military problems, and Madame de Maintenon’s prejudice against Protestants and foreigners did not predispose her to support Law.

But Law did not have to wait long for another opportunity to propose a banking scheme. He was in Edinburgh in the summer of 1704, when Scot-land was suffering a depression subsequent to the failure of William Paterson’s Darien expedition. The suspension of specie payments by the Bank of Scotland in December 1704 intensified the crisis, and this stimulated Law to propose to the Parliament of Scotland in 1705 that a land bank be created. The proposal was published anonymously, as Money and Trade Considered: With a Proposal for Supplying the Nation With Money. At least 15 other tracts with surprisingly similar titles appeared in the same year or early in 1706. Law and the authors of the other tracts all attributed the crisis to scarcity of money, but Law was the only one who carefully formulated the theory underlying his proposal. He explained that value is determined by supply and demand and that the value of money is only a special case in value theory. The key to his monetary thought is his assumption of a state of disequilibrium, with large masses of idle factors of production, as a starting point for analysis.

Law presented at least 24 numerical examples to show that if the money supply were increased by notes issued for productive loans, employment and output (and, implicitly, the demand for money) would rise proportionately and the value of money would remain stable. He also argued that the notes of the land bank would have other advantages over metallic money in that they would be easier to transport, store, and count, while being equally divisible without loss of value and equally capable of receiving a stamp as metallic money. Moreover, the supply of bank notes, unlike that of metallic money, would be perfectly elastic. Yet another advantage that Law attributed to his scheme was that it would prevent any adverse effect on the balance of trade. Assuming that the international demand for goods was perfectly inelastic, he argued that debasing the coinage and marking up coins would render the balance of trade unfavorable and induce an outflow of specie, while the introduction of notes would avoid this consequence. Nor would the notes, unlike debasement of the coinage, create inflation. Although Law’s scheme was favored by the duke of Argyll, the lord high commissioner, and the earl of Islay, it won active support from only two members of the Scottish Parliament.

Back in France, in 1706 Law submitted to Chamillart his “Treatise on Money and Commerce” (“Mémoire touchant les monnoies et le commerce”). It was dated November 18, 1706, and has remained not only unpublished but unused even by scholars; yet it is the best single presentation of Law’s monetary theory. A most interesting aspect of the document is Chamillart’s extensive and often shrewd commentary in the margins; these comments are noteworthy because they show that Chamillart detected the error in Law’s argument that debasing or marking up the coinage would render the balance of trade unfavorable. Law’s proposals that France adopt paper money, as superior to gold and silver, led to his expulsion from that country. Allegations that he was banished be-cause of his success as a gambler are unfounded.

In the winter of 1712 Law was in Turin and presented several tracts on money and banking to Vittorio Amadeo n, duke of Savoy, who was deeply impressed by Law’s intellectual power and monetary knowledge but who decided against a bank. Later the duke urged Law to return to Turin, presumably to establish a bank, but Law declined.

In December 1713 Law returned to Paris and was soon again plying the French government with proposals for a bank. In July 1715 he came very close to convincing Desmarets, then finance minister, who rejected his project only because he could not stomach a bank that would be as completely dominated by one man as, he sensed, the proposed one would be dominated by Law. After the death of Louis xiv, Law convinced the duke of Orleans, the regent, of the desirability of a royal bank, and encountered his last defeat when the proposal was rejected by the Council of Finance on October 24, 1715. Shifting to the concept of a privately owned institution, Law obtained a charter for the General Bank, on May 2, 1716. It was the first Bank of France and the opening wedge for his System. The charter for the Bank was granted to “Mr. Law and his Company.” Law drafted the charter and subscribed for one-fourth of the stock. As Desmarets had anticipated, the bank was completely dominated by Law—more so than any other national or central bank has ever been dominated by one man.

From the outset the General Bank was conservatively managed. There is no evidence that it ever failed to meet an obligation. During the 31 months of its operation its notes raised the money supply only about 3 per cent, and its deposits were infinitesimal. The General Bank discounted accepted bills of exchange drawn on Paris at 6 per cent from June 1716 through March 1718, when the rate was reduced to 4 per cent. While the Bank’s discount rate was 6 per cent, the modal market rate on secured loans at Paris was 5 per cent, and the average rate was a trifle lower. From April to December 1718 the market rate moved irregularly downward but did not reach 4 per cent. The General Bank may have exerted some slight downward pressure on the rate of interest, but it did not end “usury.”

In the beginning the business of the Bank was confined to Paris; but in the summer of 1716 custodians of public revenue in the provinces were instructed to accept and redeem Bank notes, and on October 7 they were ordered to remit to Paris exclusively in these notes. Consequently, even in the Bank’s first year, notes were circulating in distant provinces, and the Bank achieved a national circulation far more quickly than did any other public bank in Europe before the nineteenth century.

It was early in 1717 that Law first became involved in the financial scheme eventually known as the Mississippi Bubble (Louisiana being commonly called Mississippi then). The financier Antoine Crozat, a neighbor and friend of Law’s, decided to give up his Louisiana concession, having lost 1.25 million livres in four years. Convinced that only a company could raise the necessary capital, the government made no effort to dissuade Crozat. It was attempting to withdraw paper money from circulation; since this currency lessened confidence in Bank notes, Law favored deflating it. He thereupon devised a scheme to solve the government’s financial problem and at the same time promote colonial trade—he proposed to establish a company to take over Louisiana and sell its stock for government paper money, to be converted into rentes and destroyed.

In August 1717 his Company of the West was chartered. Its shares were in denominations of 500 livres, and the capital was ultimately fixed at 100 million livres, payable in government paper money depreciated by about 60 per cent. Business was far better than in 1716, when the General Bank had been chartered, and many people believed that Louisiana offered possibilities of rich rewards. But they also knew that West India companies chartered under Richelieu and Colbert had failed miserably and that Crozat, one of the ablest and richest financiers in France, had just relinquished his Louisiana concession. Hence the stock was not fully subscribed until July 1718.

Thereafter the company’s fortunes rose. In September 1718 it outbid all rivals for the lucrative monopoly on the importation, manufacture, and sale of tobacco, and in November it purchased the property and privileges of the Senegalese Company. Law was on his way. On May 26, 1719, the Company of the West absorbed the French East India Company and the China Company, thereby forming the Company of the Indies. In June the Africa Company was acquired.

Meanwhile, on December 4, 1718, the General Bank had been nationalized and its name changed to Royal Bank; nationalization was actually only a formality, since the crown had already bought 100 per cent of the stock. Control over the Bank remained in Law’s hands, subject to approval by the regent (as had been the case up to that time). But notes could be issued only by royal decree and were guaranteed by the crown. In July 1719 the Company of the Indies was granted the right to farm the mints for nine years, and 25 of the 26 mints, the sole exception being the one at Lyons, became virtual branches of the Bank. In August, Law took over the general farm of indirect taxes, and in October he arranged for the Company of the Indies to refund the remaining public debt of 1,500 million livres at 3 per cent. On January 5, 1720, after having been “publicly” converted to Catholicism, Law became finance minister.

Law’s System was complete, and he stood at the pinnacle of his power. After his fall he often said that he had had more power than any other un-crowned person had ever exercised in Europe, and he may have been right; for he controlled the colonial trade, the Royal Bank, the tobacco monopoly, the public debt, indirect taxes, and more than half of what is now the United States (excluding Alaska). In addition to being finance minister, he was the principal economic adviser and favorite of an absolute prince.

Law’s India shares rose fiftyfold in about two years, most of the rise in the last half of 1719, when France experienced the greatest speculative orgy she has ever had. The first impetus to this speculative rise was the substantial profit from the tobacco monopoly; more important was Law’s acquisition of the tax farm, since it was well known that many of the great fortunes in France had been made through tax farming. From the beginning Law encouraged speculation, and his advice was widely taken. Traders rushed in from the provinces and from many foreign countries. Hitherto prudent Frenchmen and even some families in other countries liquidated real property to buy Law’s stock, and the mania extended down to the very poor, who staked their patrimonies and life savings on small fractions of shares. The Nouveau mercure of November 1719 reported that “some stockholders have died from surprise, others from joy, [while still others] have gone mad from calculating their profits.” Law converted much of his own great fortune—most of which was a capital gain on his stock—into magnificent rural estates and town houses, thus advertising his wealth and whetting the public appetite for his shares. The speculative boom rested heavily on hopes of gain from the exploitation of Louisiana.

It was not only the exaggerated estimate of the natural riches of Louisiana that constituted an essential weakness of Law’s System but also his conviction, which went back to at least 1702, that shares of stock are money. Believing this, Law pegged the price of his stock at 9,000 livres when it began falling in January 1720, thus not only monetizing the stock but making it a monetary standard. Sales of stock to the Bank far exceeded purchases, and the quantity of Bank notes in circulation rose so sharply that they occasionally fell below par in specie. On Law’s initiative, pegging was discontinued by the stockholders on February 22, but a considerable decline in the price of Law’s stock led to its resumption on March 20. Inflation was disastrous: from March 26 to May 1 note circulation increased by 1,470 million livres, or about 125 per cent, and during May the note issue reached a peak of 2,696 million livres. Pegging the stock cost more than the equivalent of half the public debt. (The government admitted in 1725 that the second round of pegging was ordered by the regent.) Commodity prices had risen more than 50 per cent in the major cities, and money wages lagged far behind.

Law then made a mistake that again derived from his erroneous belief that stock is money: he chose to deflate, rather than remove the peg on his stock. Although this deflation has been widely attributed to his enemies, a decree lowering the price of stock to 8,000 livres as of May 22, 1720, and by stages to 5,000 livres on December 1, was drafted by Law himself and corrected in his own hand. Bank notes were to be marked down 20 per cent on May 22 and by stages to 50 per cent by December 1. Consternation and panic reigned, intensified by an attempt by the Bank to collect all loans on stock. Yielding to the clamor of the populace, the regent dismissed Law, but this only in-creased the uncertainty. On May 27 the deflationary decree was repealed and the old rating of the Bank’s notes restored, while the peg on stock was removed. The restoration of Law, at the end of May, to his former position in the Bank and the company was not accompanied by any restoration of public confidence, and his System was doomed.

From June to September of 1720, Law and the regent strove desperately to rehabilitate the System through drastic deflation of the Bank’s notes. But the notes steadily lost favor, and by December the country had returned to a specie basis. In mid-December Law was permitted to leave France, and his tottering System collapsed.

Even Law’s worst enemies and severest critics recognized that France had been suffering one of the worst crises in her history in June 1716, when the General Bank opened its doors. Commodity prices had been falling disastrously for a year and a half. Unemployment, bank failures, commercial bankruptcies, agricultural distress, and social unrest were rife. Pessimism filled the air. Law was at the head of a national bank and in a position to influence strongly the economic policy of an absolute prince. No other “Keynesian” economist has ever had such a golden opportunity.

What did Law accomplish? He not only ended unemployment but even induced a labor shortage and overfull utilization of plant capacity. Public and private obligations, hitherto chronically in arrears, were paid promptly. Despair gave way to optimism. The population of Louisiana rose almost tenfold; the burden of taxation was lightened; sinecures were reduced; and many fetters to trade were removed.

Many of Law’s achievements were lasting. There was feverish construction of buildings—including a substantial number of magnificent structures in the Place Vendome in Paris erected by Law him-self. Large numbers of skilled workers and technicians were brought from abroad to establish new industries and improve old ones. The books of the tax farm were rationalized, subfarming was largely eliminated, and the administration was simplified and unified. Reform of the tax system was one of Law’s most durable achievements. Dreams of wealth from Louisiana focused attention on the New World. Reflections on a new people and a new culture enlarged horizons, bred tolerance, and prepared the way for the Enlightenment.

But these gains were not without cost. During the boom commodity prices rose about 100 per cent in Paris and Bordeaux; 170 per cent in Marseilles, afflicted in 1720 by one of the worst plagues in French history; and 140 per cent in Toulouse, also affected by the plague. Creditors, pensioners, and other holders of passive rights suffered cruel losses, and the average decline of daily real wages in Paris, Marseilles, and Toulouse was 25 per cent. Holders of the Bank’s notes and of shares of the Company of the Indies presented more than half a million claims (nearly four-fifths of which were from the provinces) to the commission that liqui-dated the System, and losses in the liquidation ran as high as 95 per cent. (Even for those who could prove they had exchanged coins for notes at the Bank the loss was two-thirds.) Many families were ruined; most were hurt. A surprising number of very poor people suffered crushing losses on small fractions of shares. Thousands of noble and well-to-do families in foreign countries lost major portions of their fortunes.

Law made serious mistakes in theory and practice and undertook far more than anyone should have. However many of his ideas have stood the test of time, and his integrity has withstood all assaults.

Earl J. Hamilton

WORKS BY LAW

(1705) 1966 Money and Trade Considered: With a Proposal for Supplying the Nation With Money. New York: Kelley.

Oeuvres complètes. Edited by Paul Harsin. 3 vols. Paris: Sirey, 1934. → Contains much previously unpublished material.

Oeuvres de J. Law. Translated from the English by Étienne de Sénovert. Paris: Buisson, 1790.

SUPPLEMENTARY BIBLIOGRAPHY

Buvat, Jean 1865 Journal de la régence (1715–1723). Edited by Émile Campardon. 2 vols. Paris: Plon. → Published posthumously.

Dutot (1738) 1935 Réflexions politiques sur les finances et le commerce. 2 vols. Liége, Université de, Faculté de Philosophic et Lettres, Bibliothèque, Vol. 66–67. Paris: Droz.

Fairley, John A. 1925 Lauriston Castle: The Estate and Its Owners. Edinburgh: Oliver & Boyd.

[Forbonnais, FranÇois V. D. de] 1758 Recherches et considérations sur les finances de France, depuis I’annee 1595 jusqu’à I’année 1721. 2 vols. Basel: Cramer. → Published anonymously.

Hamilton, Earl J. 1936 Prices and Wages at Paris Under John Law’s System. Quarterly Journal of Economics 51:42–70.

Hamilton, Earl J. 1937 Prices and Wages in Southern France Under John Law’s System. Economic History 3:441–461.

Heinrich, Pierre 1908 La Louisiane sous la Compagnie des Indes, 1717–1731. Paris: Guilmoto.

La JonchÈre, Étienne Lescuyer de 1720 Systêeme d’un nouveau gouvemement en France. 4 vols. Amsterdam: Le Bon.

Levasseur, Émile 1854 Recherches historiques sur le système de Law. Paris: Guillaumin.

LÜthy, Herbert 1959–1961 La banque protestante en France, de la révocation de I’Èdit de Nantes à la Révolution. 2 vols. Paris: S.E.V.P.E.N.

Mann, Fritz K. 1913 Die Vorgeschichte des Finanz-systems von John Law. Schmollers Jahrbuch fur Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reiche 37:1165–1229.

[Marmont du Hautchamp, BarthÉlemi] 1739 Histoire du système des finances, sous la minorité de Louis XV. pendant les années 1719 & 1720. 6 vols. The Hague: Hondt. → Published anonymously.

[Marmont du Hautchamp, BarthÉlemi] 1743 Histoire générale et particulière du visa fait en France.... 4 vols. The Hague: Scheurleer. → Published anonymously.

[Melon, Jean-FranÇois] (1734) 1739 A Political Essay Upon Commerce. Dublin: Woodward & Cox. → First published anonymously in French.

P. C. 1722 Het leven en caracter van den heer Jan Law. Amsterdam. → Published under this pseudonym.

[Paris Duverney, Joseph] 1740 Examen du livre intitulé Reflexions politiques sur les finances et le commerce. 2 vols. The Hague: Prevôt. → Published anonymously.

Wood, John P. 1824 Memoirs of the Life of John Law of Lauriston, Including a Detailed Account of the Rise, Progress, and Termination of the Mississippi System. Edinburgh: Black.

Law, John 1671-1729

BIBLIOGRAPHY

John Law was an outstanding monetary theorist who, unusually for a theorist, was given the opportunity to implement his monetary theory as policy. This he did during the 1716–1720 period through the Indies Company (Compagnie des Indes), which was popularly known as the Mississippi Company. The shares of this company rose from a low of 150 livres in 1717 to a high of over 10,000 in early January 1720, producing in the process Europe’s first major stock-market boom. Such was the success of Law’s policy in its initial phases that he was made controller-general of finances, a position akin to prime minister of France, at the start of 1720. Fearing that Law’s success with the Mississippi Company was regenerating the French economy, the British government authorized the South Sea Company to carry out similar debt-management style operations in 1720, resulting in a considerable boom in share prices in London up to August 1720. The subsequent collapses of both the Mississippi and the South Sea companies in the autumn of 1720 had considerable repercussions in delaying the development of the financial systems of France and, to a lesser extent, Great Britain until well into the nineteenth century. As a result of the failure of his company, Law was excoriated by contemporaries and later by a long line of distinguished economists including Richard Cantillon (1680–1734), Adam Smith (1723–1790), Karl Marx (1818–1883), and Alfred Marshall (1842–1924).

These criticisms were unfair to Law in that he was a man with thoroughly modern conceptions of money and banking. Law had the advantage that he was born the son of an Edinburgh goldsmith in 1671 at a time when goldsmiths were becoming embryonic bankers. His early career did not result in him following this banking gene. Instead, Law became a rake, a gambler, and a philanderer in London in the early 1690s. He killed a rival, Edmund Wilson, in a duel in Bloomsbury in 1694. Arrested for killing Wilson, Law was sentenced to death. However, he escaped from the gallows, most probably assisted by highranking members of the government. Law was forced to travel to the Continent. There, using his mathematical knowledge, he made a fortune at the gambling tables. He also became highly interested in the banking systems that he observed in Italy and Holland. Law’s new interest in banking encouraged him to send proposals to the English and Scottish authorities in 1704 and 1705.

Law outlined his monetary theory in two major works: John Law’s Essay on a Land Bank, written around 1704 but not published until 1994, and Money and Trade Considered (1705). In the former work, Law became the first economist to introduce the term demand in its proper economic sense into English. He then introduced the concept of the demand for money, and showed how inflation could arise when the demand for money was out of line with the supply of money. These were extraordinary achievements for someone writing in the first decade of the eighteenth century. In Money and Trade, he attempted to show the real role of money in the economy, contending that an increase in the money supply would generate increases in economic activity when there were unutilized resources in the economy, as was the case in Scotland in 1705. Law presented a rudimentary, circular flow-of-income model of the economy, the money-in-advance requirement, and the law of one price.

Law was provided with the opportunity to implement his monetary theories in France after the death of Louis XIV in 1715. In 1716 Law created the General Bank, and followed this a year later with the establishment of the Company of the West, which became the Mississippi Company. The General Bank, later transformed into the Royal Bank, attempted to solve France’s monetary crisis through the issue of banknotes, while the Mississippi Company addressed the problems of debt management and the development of colonial trade, particularly that of North America, where the Mississippi Company claimed ownership of all the lands between the British holdings in the Carolinas and those of the Spanish in Texas. In theory, this meant that the company had claims to half of the current contiguous United States. Law hoped that by swapping the equity of the Mississippi Company for government debt, he could greatly reduce France’s debt problem. Initially, the system worked, and people flocked to Paris to invest in the company. However, Law had created a financial circuit that was out of line with the real economy. When he attempted to address this problem in May 1720 by reducing the value of shares and paper money, confidence in the system was lost, and by December 1720 he was forced to flee from France. He was nearly brought back to France in 1723, at the invitation of the regent, Philippe (1674–1723), duke of Orléans. However, the latter’s sudden death stopped that possibility. Law died in Venice in 1729.

Law believed that money was the value by which goods are exchanged and not the value for which goods are exchanged. This placed him on the outside of most economic theory of his time, because he was asserting that money did not need to be intrinsically valuable. He wanted to rid the monetary system of the use of gold and silver, and replace these metals with paper money and bank credit. For a short period in France, he showed that this was possible, but it would take another 250 years before the final link with the gold standard was broken by the decision of the United States to refuse to guarantee the price of the dollar in terms of gold.

SEE ALSO Bubbles; Demand; Economic Crises; Gold Standard; Mercantilism; Monetary Theory; Money, Demand for; Quantity Theory of Money

BIBLIOGRAPHY

PRIMARY WORKS

Law, John. 1705. Money and Trade Consider’d, with a Proposal for Suppllying the Nation with Money. Edinburgh: Andrew Anderson.

Law, John. [1934] 1980. John Law: Oeuvres complètes. Ed. Paul Harsin. Paris: Vaduz.

Law, John. 1994. John Law’s “Essay on a Land Bank.” Ed. Antoin E. Murphy. Dublin: Aeon.

SECONDARY WORKS

Du Tot, Nicolas. 2000. Histoire du systême de John Law (1716–1720). Ed. Antoin E. Murphy. Paris: INED.

Faure, Edgar. 1977. La banqueroute de law. Paris: Gallimard.

Hamilton, Earl J. 1967. John Law of Lauriston: Banker, Gamester, Merchant, Chief? American Economic Review 37: 273–282.

Hamilton, Earl J. 1968. John Law. In International Encyclopedia of the Social Sciences. Vol. 9. New York: Macmillan.

Murphy, Antoin E. 1986. Richard Cantillon: Entrepreneur and Economist. Oxford: Clarendon.

Murphy, Antoin E. 1997. John Law: Economic Theorist and Policy-Maker. Oxford: Clarendon.

Antoin E. Murphy

John Law

The Scottish monetary theorist and banker John Law (1671-1729) anticipated many contemporary banking and fiscal practices.

John Law was born on April 21, 1671, in Edinburgh to wealthy parents. While in London to continue his education, he killed a rival in a love affair in 1694 and had to flee to Amsterdam. There and elsewhere in Europe he studied banking and financial practices and developed his own economic and monetary theories.

Law exposed his views in a number of works, the most important being Money and Trade Considered with a Proposal for Supplying the Nation with Money (1705). According to Law, as well as many of his contemporaries, the main responsibility of government was to increase the prosperity of the country. This could be accomplished most effectively by increasing the amount of currency in circulation. However, unlike the mercantilists who emphasized the importance of the precious metals, Law believed that paper currency had distinct advantages over gold and silver. He concluded that the precious metals should be monopolized by a bank as security for the issuance of paper currency in much larger sums than the supply of gold and silver.

Law attempted to interest several governments in his theories but was unsuccessful until 1716, when the Duc d'Orléans, regent of France for the young Louis XV, approved the establishment of a private bank, the Banque Générale, later the Banque Royale. In addition to providing the services of similar banks, the new institution was authorized to issue paper currency redeemable at face value for the precious metals. In 1717 the bank and the government became more closely associated when the regent instructed that all public funds be deposited in it and authorized the payment of taxes in currency issued by the bank.

In 1718 Law founded the Compagnie d'Occident, which was given a monopoly on trade with the Mississippi Valley region. It was the regent's expectation that, since public securities could be used to purchase shares in the new company, creditors of the state would exchange their bonds for shares, thus reducing the public debt. The company extended its activities, founding new companies that gave it a virtual monopoly of foreign trade and such lucrative internal affairs as the tobacco monopoly and the collection of indirect taxes.

All of these companies issued shares whose value rose rapidly in anticipation of the huge profits to be earned. Propaganda (rumors of the discovery of gold and silver mines, for example) helped stimulate speculation in the shares of the various companies. However, by early 1720 insiders realized that these hopes were exaggerated and began to sell their shares and to exchange their paper currency for bullion. Political intrigue and the activities of rival bankers contributed to the decline of the "system."

Law's efforts to halt the debacle were unsuccessful, and in December 1720 he fled France. He died in Venice on March 21, 1729, a poor man, still convinced of the validity of his theories.

Further Reading

The most satisfactory study of Law in English is H. Montgomery Hyde, John Law (1948).

Additional Sources

Minton, Robert, John Law, the father of paper money, New York: Association Press, 1975. □

Law, John (1671–1729). Law, a Scottish financial genius, banker, and gambler, believed that an increase in the quantity of money would stimulate production. In 1716 the French regent gave him permission to set up his own bank in France, which was suffering from Louis XIV's wars and deeply in debt. Law issued paper money, lent both to the state and to private entrepreneurs, business revived, and industry expanded. In 1719 his Mississippi Company absorbed other trading companies and gained the monopoly of all French overseas trade. Its stock was placed on the market, demand was high, speculators made fortunes. In the mean time Law had become director-general of the Banque Royale (previously his Banque Générale) and issued paper notes to match the share issues of the company. The proceeds of the sales of stock, however, went not to develop the company, but as loans to the government, which spent them. Recipients of this money bought more stocks, the government received more money, paid it out, and so on. Holders of paper money began exchanging it for coin, of which there was insufficient to redeem all paper; a decree to halve the notes' value led to loss of confidence, panic, and crash (1720). Law fled and spent the remaining years of his life in England and Italy. Galbraith called him ‘perhaps the most innovative financial scoundrel of all time’.

Margaret Wilkinson

Law, John (1671–1729) French financier, b. Scotland. His banking and stock-market schemes created a boom in France, where he founded a state bank, later named the Banque Générale, in 1716. His “Mississippi Scheme” (1717) attracted huge investment in French Louisiana and, as the Company of the Indies (1719), took over all other trading companies. Appointed controller-general of finance (1720), he merged all his interests into one organization. Within months a dip in public confidence caused heavy selling and the whole scheme collapsed. Law died in exile, a bankrupt.