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John Law was a
Scot. He was born in Edinburgh in 1671, the son of a successful banker
and goldsmith. At 14 he was apprenticed into these trades, and he
re-emerged at 17 just in time to inherit from his father, who died that same
year. He was by then already known for his rare mathematical talents, and for his popularity with the ladies.
Enriched by the family
estate he set off for London where he added gambling to his abilities.
He won regularly, and earned that mixture of respect and jealousy which
follows a man who succeeds in both the card room and the bedroom.
Unfortunately his
winnings in the bedroom carried unsuspected hidden risks. London was in
those days a place where a lady’s virtue was worth dying for (this was
very long ago) and when Law was challenged to a duel he accepted and, not
unreasonably, shot his challenger dead.
Originally sentenced to
hang it is generally accepted that he was given a little friendly assistance
in escaping during the appeals process, and because London had become a
dangerous place for him he set off for Europe.
Getting
the top job
For some years he made
his living off his wits. He was a high-roller, and this way of life
brought him into regular contact with the Duc d’Orleans. Yet surprisingly for a gambler
there were, even then, early signs of Law believing in his own higher
purpose. He had without much notice already published serious pieces on
economics, and had been very interested in the financing of trade which he
had learned all about in Amsterdam. So the society of the Duc, who was far more influential than Law though
certainly not as clever, soon had Law expounding his views on economic
management.
History, meanwhile, was
doing its normal thing with a great king. Louis 14th was
dying, and having been widely celebrated and honoured throughout his life he
was soon to be remembered with some bitterness for the size of the national
debt he had left to his heir. Young Louis XV was only seven, and it was
the Duc d'Orleans who was
appointed Regent. His immediate problem was the 3 billion livres borrowed by the dead king.
Devaluation quickly
followed. The government debased its coinage by 20%, which served no
particular purpose other than to drive the old coins out of
circulation. Then the state decided to offer rewards to informants
against hoarders. The guilty were packed into the Bastille.
As things deteriorated
Law arrived on the Duc's doorstep in Paris.
His plan was simple. He would be granted a bank, the management of the
royal revenues, and the right to issue paper money. The paper would be
secured on a combination of the royal revenues and on its land – an
idea he had proposed in his earnest papers many years earlier.
The Royal
Bank of France
On the 5th of May, 1716
Law’s bank was created. Its notes would thereafter be used in
payment of taxes. Its capital was purchased 25% in coin and 75% in
oversupplied state bills at face value (at that time trading at a heavy
discount). Then by guaranteeing his paper money not with just any coin,
but with the coin in issue at the time of a note's creation he quickly found
his paper was preferred over the doubtful coinage, which had only recently
been debased once and was expected to be debased further. Through this
impressive manoeuvre he collected most of the country’s stock of
precious metal. By the end of the year his bank notes were worth 15%
more than equivalent coinage while the state’s debts were trading
nearly 80% below nominal.
He hadn’t
finished. His next plan was to leverage the optimism of France’s
possessions in North America. He persuaded the Duc
to grant him an outright monopoly on France’s Mississippi trade.
Having got control of the coinage, paper money and tax collection, he now
also had exclusive power over France’s great hope – trade with
the New World. He raised the capital in typical style selling the stock
for a fantastic price payable in those deeply discounted state bills which
no-one could wait to get rid of.
“It was now that the frenzy of speculating began to seize upon
the nation. Law's bank had effected so much good, that
any promises for the future which he thought proper to make were readily
believed. The Regent every day conferred new privileges upon the fortunate
projector. The bank obtained the monopoly of the sale of tobacco; the sole
right of refinage of gold and silver, and was
finally erected into the Royal Bank of France. Amid the intoxication of
success, both Law and the Regent forgot the maxim so loudly proclaimed by the
former, that a banker deserved death who made issues
of paper without the necessary funds to provide for them. As soon as the
bank, from a private, became a public institution, the Regent caused a
fabrication of notes to the amount of one thousand millions of livres. This was the first departure from sound
principles, and one for which Law is not justly blameable.”
Charles Mackay – 1841.
Before long the monopoly
rights to trade with the east were also granted to the company, and in a
succession of stock issues – each at higher prices than the previous
one – a willing public fought for the right to surrender its
increasingly valueless state bills for Law’s bank notes and the
mushrooming Mississippi scrip.
The beast had developed a
momentum all its own. Paris was booming. Luxury goods were sold out as
soon as they went in the shops. Gardens near Law’s bank had
turned into a tented city which acted as an impromptu stock exchange.
Real estate values and rents soared, while the stock just rose and rose until
even the speculators’ own coachmen became magnates and employed their
erstwhile contemporaries.
The Duc
could only conclude that what was clearly so healthy in that particular
quantity could hardly fail to be twice as healthy given twice as much.
And what with the extra trade and the sheer difficulty of supplying
sufficient cash to keep pace with the frenzied exchange of company stock he
took to arranging further issues of bank paper over the head of Law, who
probably knew better, but may have suspended rigorous banking discipline
under the widespread acclaim of his financial ingenuity. Besides,
blocking it would certainly have annoyed his boss.
It was at about this
time, as Paris fawned and worshipped, that the Prince de Conti arrived
intending to buy as much corporate stock as he could lay his hands on.
He was outraged at being denied his full allocation, and as a result sent
three wagons to Law’s bank to demand the immediate settlement –
in coin – of his entire stock of Law’s paper.
The Prince was paid, but
was also instructed at risk of the extreme displeasure of the Duc – an unwise thing to provoke – to return
two of the wagons immediately. He complied. But it was enough to
make the smarter operators see the light.
At first with small
beginnings the professionals started to cash in their paper. Coin,
bullion, jewels and anything of transportable value were surreptitiously
shipped abroad – to Belgium, Holland and England.
Soon it became necessary
to compel by decree the premium which notes had before quite naturally
commanded over coin, and parliament declared that from then on coin would by
law carry only 95% of the value of paper. The decree was as useful as
any similar one before or since.
Law had no choice but to
throw the last major dice of his banking career. Gambling his remaining
authority he abolished coin as a medium of exchange, and then in February
1720 declared it illegal to own more than the tiniest of sums in gold in any
form. Then he closed the borders, and sent instructions to all
coach-houses to refuse fresh horses to anyone travelling to foreign lands
until an inspector had examined their baggage. The substantial fines
imposed were shared with the public spirited individual who filed the report.
By August of that year it
was all over, and John Law was the most hated man in France.
Fortunately he was living in Venice. Like all good gamblers he had gone
on to the next game, by which means he continued his existence for another 9
years. Much of the money he won at this time would have been that which
had earlier escaped him in the capital flight which he had outlawed.
Paul Sustain
Director and Founder
Bullionvault.com
Paul Tustain is director and founder of BullionVault -
the world's fastest-growing gold ownership service, where you can buy gold today
vaulted in Zurich on $3 spreads and 0.8% dealing fees.
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