April 21, 2011 <Back to Index>
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John Law (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 appointed Controller General of Finances of France under King Louis XIV. In 1716
Law established the Banque
Générale in
France,
a private bank,
but
three-quarters of the capital consisted of government bills and
government accepted notes, effectively making it the first central
bank of the nation.
He was responsible for the Mississippi Bubble and a
chaotic economic collapse in France. Law was a gambler and a brilliant mental
calculator. He 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". 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 at age 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. After Law killed Wilson, he 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. 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 published a text entitled Money and Trade
Consider'd with a Proposal for Supplying the Nation with Money (1705).
Law's
propositions of creating a national bank in Scotland were ultimately rejected,
and he left to pursue his ambitions abroad. 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. 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. 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 the number
of French ships engaged in export went from sixteen to three hundred. 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. 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".
Law
would
become the architect of what would later be known as the "The
Mississippi
Bubble"; an event that would begin with the
consolidation of the trading companies of Louisiana into a single monopoly (The
Mississippi Company), and ended with the collapse of the Banque
Generale and
subsequent devaluing of The Mississippi Company's shares. The
company's shares were
ultimately rendered worthless, and initially inflated speculation about
their worth led to widespread financial stress, which saw Law dismissed
from his post as Chief Director of the Banque Generale. Law ultimately
fled the country.
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
Orléans 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. |