Setting the stage
The French economy had been shattered by Louis XIV's long reign, characterised by excessive belligerence and over-indulgent expenditure of which the building of Versailles was a prime example.
Law restructured the French economy by (1) substituting paper money for gold and silver specie and (2) converting the French national debt into shares of the Compagnie du Mississippi (Mississippi Company). He succeeded to such an extent that he was made Controller General of Finances in January 1720, at a time when the British copied Law’s debt management approach by giving the South Sea Company a charter to take over the British national debt. If imitation is the sincerest form of flattery then this was it, because Law was still a convicted murderer on the run from British justice. In France, one of his contemporaries Nicolas Du Tot would later write of Law’s performance:In this state, this construction was admired by everyone in France and was the envy of our neighbours who were alarmed by it. Its beauty even surpassed all the hopes that had been placed in it since it made people despise and refuse gold and silver. It was a type of miracle which posterity will not believe.
(Du Tot [1738] 1935, I, 106)
However, no one likes failure. After the collapse of his System, Law was excoriated by his contemporaries, lampooned by the Dutch in The Great Mirror of Folly (1720), and then, over time systematically criticised by some of the great economic theorists. Cantillon, Hume, Smith, Marx and Marshall condemned Law for his unrealistic and “visionary” theories. These economists found it difficult to grasp Law’s vision of an economy operating in an environment without intrinsically valuable metallic money such as gold and silver. It was not until the fall of the gold standard in 1931 that Law’s vision of a specie less monetary habitat was realised and economists could start to reappraise the extraordinary modernity of Law’s conceptualisation of a monetary economy in the early eighteenth century.
More recently, the use of quantitative easing by the world’s major central banks to counter the financial collapse of 2008 could be interpreted as a very Lawian type of operation. Indeed, Law has claims to be the spiritual father of quantitative easing.Contrastingly with the above-named economists, Joseph Schumpeter (1954) rated Law very highly: “John Law (1671-1729) I have always felt is in a class by himself He worked out the economics of his projects with a brilliance and yes,
profundity which places him in the front ranks of monetary theorists of all time” (Schumpeter 1954, 295).
This was significant praise for Schumpeter who was not particularly generous to economists prior to Leon Walras. So, should Law be placed amongst the great economists or was he just a charlatan who destroyed a good part of the French economy in 1720?
Law’s background
John Law was born in Edinburgh in 1671. His father was a goldsmith. Edgar Faure, in his biography on Law, raised a type of Freudian issue in observing that “the enemy of gold was born in a goldsmith’s house” (Faure 1977, 3). But this was to misunderstand the role of the goldsmiths at this time for the Scottish goldsmiths were becoming embryonic bankers by lending money against the deposits that they obtained for safe keeping. At his Scottish school, besides showing that he was a good tennis player, Law was noted for his agile mind and his mathematical abilities. Law travelled to London in the 1690s and whilst there acquired the reputation of a dandy, philanderer and rake. Further important details on Law’s early life may be found in Murphy (1997) and Buchan (2018). Known as “Beau” Law, he killed another “Beau”, Edward Wilson, in a duel in Bloomsbury Square in 1694. The cause of this duel has been disputed. Some commentators believe that the duel arose, as many did at the time, over a lady’s affection. Others believe (Norton 1992) that Law was used by Charles Spencer, the 3rd Earl of Sunderland, to rid him of his unwanted lover because he was having a homosexual love affair with Wilson.
Law was sentenced to death for Wilson’s murder but escaped from prison with the assistance of leading British politicians of the day.He travelled to the Continent where he changed from his hitherto dilettante gambler role to that of the equivalent of an eighteenth-century bookmaker, using his mathematical skills to make a fortune at the gambling tables in France and Italy. More importantly, influenced by the Italian and Dutch banking models that he had witnessed in his travels, Law turned his mind to money and banking writing a paper “Essay on a Land Bank” - now published as John Law's Essay on a Land Bank (Law 1994) - which he sent to Lord Godolphin in the hope that the English authorities would be interested in his proposal. Rejected by the English, he returned from the Continent to Edinburgh where he wrote Money and Trade Considered with a Proposal for Supplying the Nation with Money (1705). This book contained his recommendations to the Scottish Parliament for the establishment of a land bank issuing paper money in Scotland. However, the Scottish Parliament was more interested in discussions on the Act of Union which was passed into law in 1707. Law, still a convicted murderer on the run from British justice, was forced to leave Scotland after the Act of Union. He travelled back to the Continent where he attempted over the next nine years to encourage various European monarchs and states to implement his monetary proposals.
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