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Issue 67 - John Law, a Life of Banking and Gambling

Scotland Magazine Issue 67
February 2013

 

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John Law, a Life of Banking and Gambling

He is widely credited as having introduced paper money to the French economy

Scotland has a prestigious and at times dubious banking history spanning 300 years. It is peppered with famous names and a series of innovations, such as the overdraft, the first mutual savings bank, the first double-sided banknotes, the first banking institute and the first professional body of accountants.

John Law was one of these great Scottish innovators, born to a family of bankers and goldsmiths in Edinburgh in 1671.

He is widely credited as having introduced paper money to the French economy, but more than this, he is known as something of a Jekyll and Hyde character; on the one hand a brilliant theorist of economics, on the other a profligate gambler, a murderer and an international playboy of his time.

His financial grounding was certainly very sound, having been trained in his father’s business from the age of 14.

On the death of his father in 1688, Law abandoned Scotland for the bright lights of London, where he gambled extravagantly and flirted with all the ladies.

He got into trouble, upsetting a rival for the affections of Elizabeth Villiers (who later went on to be a mistress of King William and then the Countess of Orkney).

She must have been out of his league, but this didn’t stop Law from entering into a duel and killing his opponent.

Down on his luck but not yet beaten, Law managed to get his death sentence commuted to a fine, claiming manslaughter instead of murder. Rather than face any further consequence of his actions, Law fled to the continent, living a nomadic existence in gambling houses around Europe.

But his time was also spent in further study of finance, and Law was working on a great scheme for economic revolution.

In 1700 (or thereabouts) he returned to Scotland and put his proposals to the Scottish Parliament, but perhaps his ideas were too radical for the financial brains of the time.

Law’s proposals were rejected, but before he again left Scotland he published his book, Money and Trade considered, with a Proposal for Supplying the Nation with Money (1705).

In 1715 he came to the attention of the Duke of Orleans, regent for the young French king. France was in trouble, facing its third bankruptcy in a century as a result of long, expensive wars and the extravagance of King Louis XIV. Law’s ideas – that the French economy would be turned around through increased credit and the introduction of paper money – were understandably appealing to the beleaguered French duke, and in 1716 the Banque Générale was created.

Law’s bank was a great success. The capital was divided into shares, with banknotes promising to pay the bearer the value specified on the date of issue. By 1717 the banknotes were accepted as a means of paying taxes, and the following year Law’s bank became the Banque Royale, the notes now guaranteed by the King.

The French economy was stabilised through centralised administration of paper money, and Law was hailed as a financial genius.

But a gambler is always seeking the next big win, increasing the stakes and the risk. In 1717 Law set up the Compagnie de la Louisiane ou d’Occident to exploit the apparently limitless resources of the Mississippi basin. Law’s ‘Mississippi Scheme’ attracted investors all over Europe, emboldened by Law’s success and the tantalising thought of all that wealth in the American colony.

Gradually the company swallowed up most of its competitors, becoming the Compagnie des Indes, until it was so powerful that it merged with the Banque Royale and Law became the French Controller General of Finances.

The bubble burst in 1720. Shares soared to 18,000 livres in a frenzy of speculation, at which point the more prudent investors cashed in their stock. Suddenly it became clear that the falsely inflated value of the company and the national bank had far outstripped the available capital, and France went bankrupt overnight.

It was a disaster that sent ripples across Europe and was a contributing factor to the start of the French Revolution.

Disgraced and impoverished, John Law took to the road once more, eventually dying penniless in Venice in 1729. s.