John Law: An Economist Who Was Far From Dull
The New School in New York City describes John Law as an “economist, gambler, banker, murderer, royal advisor, exile, rake, and adventurer.” The great economist Alfred Marshall also said he was “reckless, and unbalanced, but a most fascinating genius.”
John Law’s Early Life
John Law was born in 1671. He came from a family of Scottish bankers that owned Lauriston Castle and its considerable estate in Aberdeenshire. His was of privileged background growing up in a house that overlooked the Firth of Forth.
At the age of 14 he was already working in the family business but left to gain an education in political economy, economics, and banking in London. He also picked up some learning in darker pursuits.
Trouble Stalks the Young Banker
For a man of Law’s somewhat volatile temperament, London was a place where trouble could easily be found. He became an accomplished gambler using his math skills to calculate odds and seems to have been something of a ladies man. It was the latter pursuit that almost ended his life prematurely.
As recorded by mapforum.com; “In 1694, however, he was forced to flee to Amsterdam, after killing an opponent in a duel.”
It seems Edward Wilson and John Law were competing for the affections of one Elizabeth Villiers, Countess of Orkney. She was a high-born society lady and acknowledged mistress of King William III.
After Law skewered Wilson he was tried, found guilty of murder, and sentenced to hang. Probably on account of his high status and connections, the sentence was reduced to a fine. He bribed his way out of Newgate Prison and took off for Holland until things quietened down a bit.
Law Writes on Economics
He returned to Scotland, banking, and writing about economics. He was concerned about value and how it is calculated and devised a solution for a famous paradox. How is it that diamonds have always been valued more highly than water when life can’t exist without water but can without diamonds?
According to Canada and the World, “In his Essay on a Land Bank, Law … decided the solution lay in supply and demand. Any changes in the value of goods, he said, were due to a change in the quantity supplied or demanded.
“In Money and Trade Considered Law states that, 'The prices of goods are not according to the quantity in proportion to the [sales], but in proportion to the demand.' ”
That might sound Dick-and-Jane simple today, but it was revolutionary thinking back then.
France’s First Paper Money
But, the restless Law was soon back on the continent. This had a lot to do with the Acts of Union between Scotland and England of 1707. Scotland was no longer beyond the reach of the British justice system, which still had an interest in getting John Law back into prison over that pesky murder fine.
You can't keep a man with a glib tongue down and, by 1715, he was a favourite at the French Court.
Louis XIV had bankrupted France by borrowing gold to build his palace at Versailles and fight wars. John Law came up with a solution to the financial embarrassment of the monarchy.
He would open the Banque Generale and issue paper money backed by gold and silver. Mississippi History Now reports that “Law believed that paper notes would increase the money in circulation, which, in turn, would increase commerce. These conditions would help revitalize and rehabilitate the finances of the French government.”
Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds, summed up the simple, but sadly flawed, logic used by Law: “If five hundred millions of paper had been of such advantage, five hundred millions additional would be of still greater advantage.”
The Mississippi Bubble
In 1717, Law started up the Mississippi Company, with the exclusive right to all the trade with France’s vast possessions in North America. Who knew what riches lay in this undiscovered country? Gold? Silver? Diamonds? Timber?
Alas, it was mostly mosquito-infested marsh simmering in an almost unbearably hot and humid climate. Historian Niall Ferguson says that 80 percent of the early settlers in the region died of disease or starvation.
But, across the Atlantic the people knew nothing of this inhospitable place and their enthusiasm for investing was fed by rumours of untold riches.
France’s Louisiana territory proved attractive to investors and Law had no trouble selling shares in the venture. As The Economist explains “The money raised from these share issues was used to repay the government’s debts; on occasion, Law’s bank lent investors the money to buy shares.”
But, as pointed out in a National Film Board animation, “The Louisiana venture itself never quite got off the ground; it remained an undeveloped swamp.”
The Bubble Bursts
Investors kept buying and trading shares, their value sky-rocketed, and for the first time the word millionaire was heard.
The price of shares in the Mississippi Company kept rising and The Economist points out the parallels with the recent past, “… money was lent on the back of rising asset prices, and higher prices gave banks the confidence to lend more money.”
Of course, shrewd traders today can see where this is going.
One day, a nobleman tried to turn his paper money back into gold and discovered the government had been printing more paper notes than it could back with precious metal. Word got around and people rushed to convert their paper money into gold.
Then, in 1720, in an action that has a familiar ring to it, the whole shaky edifice came tumbling down, which, as the New School explains, plunged “France and Europe into a severe economic crisis.”
John Law disguised himself as a woman and fled the country. The rest of his life was devoid of the wealth and flamboyance he had come to know. He gambled his way around Europe but never regained his prosperity. He died of pneumonia in Venice in 1729.
John Law’s tactic of printing money is still used today but now it has a sophisticated-sounding name “quantitative easing.” It was most recently pressed into service to rescue the economy after reckless bankers drove it into the glue.
While John Law’s Mississippi scheme soared and then tanked the South Sea Company in England was floating share issues. It was based on a monopoly of trading in South America, territory controlled almost entirely by Spain, a country with which Britain was at war. Although there was almost no hope that the promised trading would take place the value of South Sea Company shares rose on speculation. Each buyer hoped to make a profit and sell before the music stopped. And, just like the pass-the-parcel game, the music stopped in 1720.
- “Law of Easy Money.” The Economist, August 13, 2009.
- “John Law and the Mississippi Scheme.” Mapforum.com, undated.
- “John Law: Proto-Keynesian.” Murray N. Rothbard, The Mises Institute, November 18, 2010.