“…I always hated work…”—John Law
John Law—the notorious financier and exponent of “managed currency”—was born April 1671, the son of a prosperous goldsmith. From the start he displayed high intelligence, a remarkable aptitude with numbers and “a worrying waywardness” that caused his mother many sleepless nights. He grew into a very polished, very attractive man who focused on clothes, women, and—most of all—gambling. Fresh out of school and already “nicely expert in all manner of debaucheries,” Law spurned his hometown of Edinburgh, Scotland for the bright lights of London, gambled away his inheritance, and then fled the country (after breaking out of jail) under a sentence of death for having killed a man in a duel.
For most people that’d be enough fun for a lifetime, but Law was not most people; he was just getting started. Combining his passion for gambling with an interest in probability theory, he then went on to dominate Europe’s finest gaming tables. Law’s great historic renown, though, is not due to all that but to his study of monetary theory and the infamous System he built upon his intellectual labors. That System allowed him for a brief, wonderful moment to convince the entire French nation that, for them, the irresistible promise of instant, effortless wealth was soon to come true. By summer 1719, Law’s financial wizardry had Paris consumed by the modern era’s first speculative mania.
Ground Zero was the rue Quincampoix—one of the city’s filthiest streets—and there each morning the opening bell sent the waiting throng into a frenzy to buy the stock of Law’s Mississippi Company. It was a democratic madness, with the priest, the prince, and the prostitute all tangled together in the muck, losing their heads, their dignity, and then their money to the irresistible promise. From 1719 until 1721 hordes of people bellied up to Law’s gaming table and a few did actually become—all of a sudden—very, very rich, and word of their luck fueled the hysteria. But once the carnival tent was struck and the dust settled, almost all of France would come to regret they had ever heard the name John Law.
Despite the fact his System proved a disaster, Law’s genius cannot be denied. His Money and Trade Considered (published in 1705) was groundbreaking and set the study of monetary theory onto a higher plane. Yet, his great System also harbored an ever-fatal flaw—its insistence that money creates wealth, so the more money the better. This, in theory, put the cart before the horse (wealth begets money, not the other way around), and it also, in practice, did not increase the supply of money at all, but instead substituted debt in its place. Law tried to talk around that problem by arguing (in his words) “credit is money and will have the same effects” and—again in his words—that the debt created would offer a “promise…that serves as money.” But credit is not money; it is the promise of money in the future, and, as everyone knows (or will soon enough learn), promises are made to be broken, especially when you make far too many of them.
Soon after his book’s publication, Law presented his System to the Scottish parliament but his notorious reputation worked against him; the Scots rejected it as the proposal of a monetary crank of ill repute. While Scotland dodged a bullet, it was the cruel fate of France that the late king’s nephew and then-regent, a dissolute womanizer named Philippe, Duc d’Orleans, had become one of John Law’s closest associates (water seeks its own level). France at the time was impoverished by endless war and Law offered his System as a simple, painless solution to set things right, and Orleans was of the kind who grasped habitually at the easy and pleasurable option. In May 1716, Law was granted a charter to open a bank in France and from the start Orleans would repeatedly lend to his friend’s bank the power of the state. Then Law—whose ambition went beyond being a mere banker—in August 1717 obtained from Orleans exclusive trading rights to the French colony of Louisiana. He then created his infamous Mississippi Company to take advantage of the privilege.
Within six months, Law was floating the idea that his bank—now heavily entwined with the royal finances—should be nationalized and in December 1718 it became the Banque Royale. Soon after the conversion to government ownership, the issue of bank notes exploded higher as investors used loans from Law’s bank to fund their purchases of Mississippi Company stock, which was rising rapidly in price on the promise of even greater gains and the huge dividends it was surely and routinely to pay. This flood of bank notes now had direct government backing, and Law would declare them to be “incorruptible” and “more precious” than gold and silver. The notes filtered throughout France, prices began to rise, economic activity boomed and France hailed John Law and the good times he had magically conjured out of his bank’s ledger. Few bothered to ask questions; everyone was too busy basking in the glow of impending riches. On January 5, 1720, it was announced that Law had been appointed the comptroller general of finance by a grateful nation. That was his peak.
He was already flying too close to the sun. In order to conceal the wretched state of the Mississippi Company, Law first turned to lies. Once the French people began to lose faith in the blizzard of bank notes descending upon them, he then turned to the sword, since “despotic power, to which we are beholden for it (the System), will also sustain it.” He—now the comptroller general of finance—declared anyone who turned away a royal bank note to be “an enemy to himself and to his Homeland.”
An edict was passed ordering all precious metals to be bought to the bank and exchanged for paper notes, while informants were encouraged by giving them a cut of anything confiscated from those who failed to do so. Denunciations skyrocketed, trust amongst the public evaporated, and a crime wave washed over Paris as each day another portion of its population was impoverished by surging prices and a now collapsing economy. On the rue Quincampoix the frenzy to get in had switched to a frenzy to get out. People were crushed to death in the chaos and the armed guards hired by Law’s Bank were forced to fire on the crowds. With the public in a fury, Orleans had no choice but to place Law under house arrest, though he was soon allowed to flee France with his head still on his shoulders but with little else. The French government, most especially Orleans, had profited far too heavily and had hands far too dirty to put Law on trial.
Law might have thought he had good intent, but he was a man of low morals and therefore completely unsuited for any position of public trust. For all his genius, he was just as blinded by his System’s irresistible promise as everyone else. Law got to disprove in real time his monetary theory, as he was allowed to drown a nation under an ocean of his paper “money” and in the end rendered her a far poorer affair. Despite that, he went to his grave claiming that his System was sound—it was merely in the implementation where things had gone awry. He was not alone in that opinion. Tsar Nicholas I of Russia was so dazzled by the initial boom that he ignored its subsequent collapse and he offered Law the chance to perform his act again in Moscow. And likewise, every generation since has set into motion one version or another of Law’s System, confident that, this time, finally, the irresistible promise of instant, effortless wealth will prove true.
