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When John Law was faced
with crippling sovereign debts in eighteenth century France he issued a lot
of successful paper money and made the country feel rich. He was clever,
brave, charming, honest and - for a while - extraordinarily popular.
Unfortunately he also caused virtually everyone who had any money in France
to lose it, which tends to overshadow those other qualities. How it happened
is worth understanding; and never more so than now.
Learning his trades
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 both at
the gaming tables 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.
Although 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
who also enjoyed gambling. Yet surprisingly for a gambler there were signs of
Law believing in a higher purpose. He had without much notice published
serious pieces on economics, and had been very interested in the financing of
trade, which he had learned all about in Amsterdam. The Duc
thought highly enough of him to listen to Law's views on trade and finance.
History, meanwhile, was doing its normal thing
with a great king. Louis XIV was dying, and having been widely celebrated and
revered 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 coinage, which
had 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 good 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 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.
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 previously escaped him.
April 5, 2004
Paul Tustain
Galmarley
Also by Paul Tustain
Paul Tustain edits Galmarley, the popular free research site on gold. He
recently sold London based SAM Systems - the specialist banking and risk
management systems provider which he founded in 1990. He consults on
risk management within the financial sector and is well known as a writer,
publisher and TV panellist both on gold and the workings of the financial
system. In 2005 he launched the BullionVault service - to improve the accessibility, security and affordability of
professional grade gold bullion for private buyers all over the world.
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