Scotland Magazine Issue 83
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Banking Pioneers of Chancers?
James Irvine Robertson evaluates the lives of two of Scotland's original money men
Two Scotsmen founded great national banks and each of them became deeply involved in two of the great financial disasters of the early 18th Century. William Paterson founded the Bank of England in 1695. 20 years later, John Law founded the Bank of France.
Both were Lowland Scots – Paterson was born in Dumfriesshire; Law in Edinburgh. Each had remarkable careers in the buccaneering world of nascent finance and each brought a nation to its knees.
Paterson was the son of a farmer and left home when he was 17. He first moved to Bristol to live with an aged aunt and after her death went to Amsterdam where he became interested in commerce with the West Indies, which was booming thanks to the triangular trade carrying slaves to the Americas and returning with sugar and tobacco from the Americas. He went to the Bahamas and conceived the dream of a colony in the Darien, an isthmus of Panama. He returned to tour Europe to find backing for the idea but failed, instead making a fortune in the West India trade in the Netherlands and, from 1681, in London.
At the time, the lending of money was in the hands of goldsmiths who issued promissory notes, but the system was inadequate to fund the wars against France when William of Orange became king in 1689. The idea of a bank had been around for a couple of decades but Paterson ran with it and founded the Bank of England in 1694. With him as a director and stockholder, £1.3million was raised and was loaned to the Government, which paid eight per cent to investors. A year later, in1695, Paterson resigned after falling out with his fellow directors.
Immediately, he turned his attention back to his pet project, the Darien Scheme. He promoted an Act in the Scottish Parliament to create The Company of Scotland Trading to Africa and the Indies. A book was opened in London and £300,000 was subscribed. Then the long established English East India Company became alarmed at the threatened competition. The ten English directors of the company were forced to withdraw and other sources of finance dried up.
With England ruled out, Paterson concentrated his attention on Scotland where the opposition south of the Border had infuriated the nation. A surge of patriotic fervour raised £400,000, perhaps 50 per cent of the wealth of the country. Paterson originally hoped for £2million, and knew that this was a shoestring budget. He was among the first colonists but the venture was a disaster. He returned to Scotland but his wife and child died along with the vast majority of settlers – perhaps 2,000 in total.
Paterson was one of those who worked towards the Act of Union, aware that this could be the only way to restore solvency to Scotland. He was commended for his efforts by the last Scots Parliament. Much of the rest of his life was spent trying to recover his Darien losses from the British Government, which he finally achieved in 1715, three years before his death. His great achievement was the Bank of England. His greatest failure brought Scotland's economy to the point of collapse.
Both Paterson and Law seem to have been men of integrity, but there is more than a whiff of a chancer about their careers, particularly that of Law. He has been described as 'the economic theorist who laid the cornerstone for present-day finance.'
It began in his father's goldsmith business in Edinburgh where he honed his skills in banking and arithmetic. His father died when he was 17 and so he left for London where he found a more congenial occupation as a gambler. He was a tall, good-looking man and fled England after being sentenced to death for killing a love rival in a duel. He thereafter charmed his way round Europe, studying banking systems wherever he went and making a fortune in gambling and financial ventures. He soon earned a reputation as the most able speculator on the French-Dutch exchange rates and more than once fell foul of the law.
In 1713, Law settled in France and approached Louis XIV's ministers to propose a national bank with its money based on paper, bills of credit and shares rather than gold. His ideas were rejected but the King died in 1715 leaving the massive debts incurred by his incessant warfare.
The Duke of Orleans took over the French Government as Regent for the five year-old Louis XV and gave Law the go-ahead to start a bank that enabled merchants to settle accounts with transferable paper notes rather than with coin. A year later Law founded the Mississippi Company to exploit the resources of French America. Its shares went from 500 livres to 10,000 livres apiece. Immense fortunes were made and much of the money ended up in Law's bank.
In 1718, it was renamed the Royal Bank, and Law was created the Duke of Arkansas. In 1720, he was appointed France's Controller General of Finance and was running the entire French financial system – overseas trade, mints, tax, revenues and national debt with immense influence and power. He was as 'rich as nobody before or since.' The word millionaire was coined to describe those speculators who made more than a million livres – perhaps $10million today.
The frenzy of speculation engulfed the French population. For one of Law's issues, 300,000 people applied. Rue Quincampoix was the Stock Exchange of the day. So crowded was it that a hunchback made 150,000 livres in a few days by renting out his hump as a writing desk to stock jobbers.
An enormous bubble was inflating, and Law was helpless to control it. Shrewd investors were now converting their paper into gold, silver and plate and were exporting it to Amsterdam, or even to London where the fraudulent South Sea Bubble was creating a similar frenzy.
Confidence in the value of Law's paper weakened. More people tried to convert and the financial system collapsed. Law had invested his fabulous fortune in French property and assets, all of which were confiscated.
Law ended up in Venice, earning his living as a gambler once more and he died almost destitute in 1729. Nevertheless, his ideas 'proved to be the blueprint for the emergence of modern markets and included such essential features as easily exchangeable paper money, commercial loans, and corporate structure.'
Greed can and does still overwhelm our financial systems but William Paterson and James Law at least had the excuse of being pioneers.
Bank of Scotland
The Bank of Scotland was founded the year after the creation of the Bank of England. Ironically, it was the idea of an Englishman, John Holland, a London merchant. However, the Bank of Scotland was a very different institution to that of England and was established by the parliament of Scotland specifically to support Scottish business. The multi-purpose headquarters of the Bank of Scotland (Scottish Headquarters of Lloyds Banking Group) is situated on the Mound, Edinburgh, and today houses The Museum on the Mound, a fresh look at money and much, much more.