The Man Who Broke France

There have been few people in history who have created as much havoc outside of war, and who are so little remembered as John Law, a rake, murderer, gambler, and brilliant rogue economist. He was the first to introduce paper money to Europe, which led to the bankruptcy of France, which in turn gave a major leg-up to the nascent British Empire. In an era of bubbles, tulips, and other financial manias, he was the outstanding maniac. 

Born in 1671, he was fortunate. His father, William, was a financier and dealer in gold. Precious metals were the linchpin of mercantilism, the dominant economic ideology of the age. An objective of trade was its accumulation. The goldsmiths had safes where people could store their gold, getting a receipt in the process. In addition, they could charge interest on loans secured on the deposited gold. Those receipts and written promises were used by some as paper money. William did well enough from all this to buy Lauriston Castle, a grand rather than defensible house outside Edinburgh. 

Lauriston Castle

William died in 1688. John’s mum was a shrewd judge of character and, correctly judging that John would squander the family fortune, promptly threw him out. He set off for London, where, in the coffee houses and in Exchange Alley, he applied his mathematical and statistical talents to the dark arts of speculation and gambling, learning how to make money the hard way, i.e. by first losing a lot of it, and then contemplating his errors in Marshalsea debtors' prison.

Marshalsea, Southwark

While in London, he had a dalliance with the future Countess of Orkney. Her husband challenged him to a sword duel. (This was a matter of honour, but his rather than hers!) Law ‘ran him through’, and was tried for murder and condemned to death by the wonderfully named ‘hanging judge’ Sir Salathiel Lovell. This was later commuted, but that made no difference because he escaped with the help of friends who drugged or bribed the guards, and fled to Amsterdam, where he learnt the equally dark arts of banking. 

The Countess of Orkney

The details of the escapee give us a picture, describing him as a very tall, thin, dark-haired man with a big nose and a loud and commanding voice. He probably travelled with Lady Katherine Knowles, who was regarded as his wife although they never actually married, and with whom he had two children. We hear little of them in the rest of the story. 

A bit of context. In the year Law’s father died, south of the border and to the delight of many, the Dutch William of Orange invaded England and became King William III of England. That Countess was an ex-squeeze of his. The wars that the Dutch had fought with both the English, French, and Spanish had exhausted them, but while their days of dominating European trade were behind them, they still had a reputation as shrewd financiers.

Amsterdam c. 1700

Law spent ten years in Europe, mainly in Amsterdam but also in Venice, whose own sophisticated trade and financial markets reflected its trading interests to the east. He learnt a lot while enjoying the bars, bordelos and boudoirs, while developing his notion that paper money could and should play a greater role in the economy, before returning to a Scotland laden with debt problems following from a failed scheme to establish a colony in Darien, on the coastline of a swampy, malarial jungle area in what is now Panama. 

He applied his ideas to their problems in a book, ‘Money and Trade Considered’. You might be surprised at how undeveloped some of the ideas about money and economics were at the time. Law’s explanation of supply and demand, why diamonds are more valuable than water, was considered novel. He thought he had a solution to their problem.

Money and Trade Considered :  1705

 

Let’s go back to his father’s business. William made money by issuing IOU’s secured against the gold he held for others in his safe. In short, it relied on their trust and his confidence that he could meet requests for the return of the gold when required. That was fine until too many people wanted their gold back, and there simply wasn’t enough.

This is what happens today when a bank experiences a run and collapses. The macroeconomic consequence was that the amount of gold became capped on the amount of money that could flow around the economy. If you could remove that cap, increased employment and trade would follow. 

Law’s first grand idea was that land and property also had intrinsic value and could be used alongside precious metals to underpin the value of paper money. This wasn’t an entirely novel idea. Property had served as collateral for loans for ages, and Law had already mortgaged his father’s estates to pay his gambling debts; however, it hadn’t been used to underpin a paper currency. Law thought this would be a popular innovation, writing that ‘the convenience will be such that everyone will be charmed to have bank bills rather than coin because of the facility of making payments in paper and the certainty of receiving value whenever they wish’.

The Scots were needy, mainly because of the Darien scheme, but they weren’t interested and eventually opted for Union with England. 

Darien 

Seeking pastures new, he ended up careering around Europe, a financial prophet ahead of his time, making enemies and getting himself ejected from Venice and Genoa, and ending up in Paris, where he befriended the heir to the throne, Louis, the energetic but ineffectual young Duke of Orleans.

By that time, he had already pitched his idea to Louis’ dad who, coincidentally, was called Louis. (Dad was the Louis known as the Sun King). At the time, Louis the elder’s state coffers were stuffed with gold, so he had no use for new-fangled ideas from a rogue, Protestant, Scotsman. But in 1715, he died having blown the lot, partly on building the Palace of Versailles.

Young (now King) Louis inherited a government teetering on the edge of bankruptcy, with an income-to-debt ratio of around 20:1. In contrast, the equivalent figure that we are fretting about in the UK is around a tenth of that. He needed someone who could pull a metaphorical rabbit out of the metaphorical hat. Remembering his old friend Law's radical ideas for transforming the monetary system, he summoned him to Paris. 

Here are two pics of Louis. Believe whichever you want. 

Louis 15th as Louis 15th

Johnny Depp as Louis 15th.

Law’s plan was simple: issuing paper money would expand the economy while, in passing, solving the debt problem. With Louis' blessing, Law established a bank, the Banque Generale, and issued notes equivalent to about 2 years' tax revenues and backed by coinage.  This wasn’t new. England had had what was effectively a central bank that had been issuing notes for twenty years. Louis helped Law by insisting that taxes were paid in the new paper money. 

Banque Generale : Dix Livres

The bank did well. People didn’t trust the frequently debased existing currency to maintain its value, so Law’s parallel paper money was popular and commanded a premium when swapped for the old money. Nobles cashed in old estates, and foreign investors poured money into the country. Instant success. The Bank expanded, and the economy picked up. Louis was chuffed.

Law decided to seize the moment and to 'move fast and break things' in the style of Attila the Hun and Mark Zuckerberg and Atilla the Hun. Confident in his ideas about using property and land to back the issue of paper money, he went for the bazooka. Notionally, France had vast tracts of land in the American territories, comprising the sparsely populated states around the Mississippi and stretching 3000 mostly unexplored miles into Canada. Here is a map of their entire claim, marked in blue, the orange area is Spanish, and the red is English.  

French America Mid 1700s

He never actually went to America and clearly hadn't learnt much from the Scottish experience in similarly hot, wet and wild Darien, but optimistically claimed that the place was blessed with silver. His idea was to place it all into a new company, the Compagnie d’Occident, which would be given a monopoly on trade with the new territory and could issue shares that could be traded. Again, this was not an entirely new idea, but the scale was epic. Names kept changing, so I will simply call it Mississippi Co. 

The King thought he was on a roll. Law’s bank was nationalised and became the Banque Royale, with its paper money guaranteed by the Crown. He even bought the Royal Mint! Louis appointed him the Controller General of Finance, effectively the Chancellor of the Exchequer. He was Le Grand Fromage, the most powerful man in the Kingdom.

However, the sky was darkening. Some people had twigged that, perhaps, the American lands were not as promising as promised. The Mississippi delta itself was swampy, and drainage was difficult and expensive; life was hard and malaria a constant threat. The northern reaches of the river were remote, largely unexplored, prone to flooding, and not easy to navigate thanks to shifting sandbanks. Sometimes the locals had an adverse view of overstaying visitors. Even on the Gulf Coast, in New Orleans, progress was hard to spot. Little was getting built. 

The Delta Swamps

Welcoming natives

Law was not blind to this and adopted a playbook that would be used again and again in our own time. He persuaded Louis to allow many of France’s other assets, colonies, outposts, and trading companies in remote places to be rolled into Mississippi Co. Even more spectacularly, he used newly issued shares in the company to purchase the national debt in return for the right to collect future tax revenues. In short, he privatised the state.

Law avec la Grande Coiffure

He then went several steps further.

Paper money is so common now, we don’t think about what it is based on. The small print on our own banknotes says ‘I promise to pay the bearer on demand the sum of….’ The promissor here is the Bank of England but in fact, if you ask them to pay you a sum equivalent to the value of the note, you will be given, not gold, but another note. Now look at the message on the (expandable) pic below of one of Law’s banknotes. It says that ‘La Banque promet au payer le porteur’. Snap.  

You are being asked to accept that, if push comes to shove, you can cash it in for real money. In fact it is based on nothing more than confidence, like the emperor's new clothes, as people in countries as diverse as Zimbabwe, Weimar Germany, and Argentina have discovered. Bitcoin is simply an extension of the principle that is promoted by people who don’t even bother to pretend that there is any underpinning. These are ‘fiat’ currencies, with no intrinsic value beyond people’s belief in the promises made by the issuer, some of which merit more confidence than others. Even gold only has value because we think it has. It is actually good for very little, and certainly not as essential as water! 

Weimar 1921 : Devalued notes

Back to the tale. The Banque Royale and the Mississippi Co. were merged, and shares in the company effectively became shares in the French economy, underwritten by the Crown. Notwithstanding the mutterings from America, it sounded like a good deal.

Like the tulip mania in the Netherlands and the South Sea Bubble in England, the shares soared. This was the bubble of all bubbles. Thousands benefited, nobs, nobodies, and knaves, some enormously. The basis of the money economy had changed, but FOMO ruled and at the centre of the vortex was Law’s house on the Rue Quincampoix. This is where the term ‘millionaire’ came from. And Law was one. By this time, he was the Rothschild of the age, immensely influential, with lots of grand estates, and the other bling of the ostentatiously wealthy. 

The problem with the whole scheme of flooding an economy with paper money remains a problem today, in that if you increase the amount of cash without increasing the goods available to buy, the prices go up. Rapidly. People started to ask to convert their money back into gold, thinking that this was more likely to retain its value.

Confidence is everything, and at this point, it melted away. Law initially responded by suspending the bank's promise to swap the notes for precious metal on demand. The value of the paper then stemmed solely from people’s simple belief that it would be accepted as payment for things when required. The bank’s paper notes thus became Europe’s first fiat currency. And people stopped believing!

In Paris, people rioted to get their hands on (literally) gold coinage, which was rapidly reintroduced by Law’s mint; however, there wasn’t enough, so he responded by outlawing it for everything other than religious reasons. (The business of making gold devotional icons soared). Then he resorted to a playbook that is common today. He tried to fix exchange rates, then fixed the price of the shares, then printed more money, which exacerbated the problem. The train was rolling down the hill and gathering pace. Millionaires became paupers overnight. 

Paris : Rioting for Repayment

Effectively, Law’s system had crashed, and the experiment was at its end. The King was not chuffed, and those paupers were even less chuffed. Law (and anyone who looked like him) was in grave danger.

If you watch old Roadrunner cartoons, Law, like Wile E Coyote, had gone over the cliff edge and was hovering in the air before plummeting into the canyon. If, on the other hand, you spent your childhood immersed in the classics, think of Icarus flying too close to the sun.

Once again, Law fled, reputedly taking only a fabulous diamond (I can’t believe he didn’t take spare socks and a toothbrush), and he returned to Venice. Unfortunately, his reputation travelled quicker than he did; his ideas were known to be discredited, and his reputation was ruined. 

Not much of Law after that, except that he ended up a pauper and died some nine years later. He left his fortune to Lady Katherine, but it amounted to zilch. His grave is in San Moise church in Venice. A stone memorial in the floor, nothing grand. I couldn’t find my own photo of it, so credit this one to Wikimedia. 

The impact on France was profound. It was effectively broke and took decades to recover, not least because people were phobic about financial engineering and breaking the link between coinage and tangible assets. It was difficult to borrow money, and increasingly regressive taxation led to what would become a revolution. 

Louis, who was at least partly to blame for the whole fiasco, had a long, if unimpressive, reign, eventually being succeeded by his grandson Louis, do you detect a pattern here, who is mostly famous for his relationship with Marie Antoinette and losing his head in the Revolution.

You might wonder why tulips and bubbles didn’t have the same effect on Holland and England, re

spectively. Of the two, at the time, the French economy was collapsing, and the Dutch economy was already weakened by wars and would not recover. 

In contrast, England had no land borders to fight over; it had escaped the clutches of an uncontrolled monarchy and had a more mature banking system. Adam Smith was around shortly afterwards. His view was that Law’s economics were sound enough, but he had gone too far too fast, and that the Mississippi venture was overreach. That sounds right to me! Now, the fact is that almost every country in the world has adopted Law’s fiat money. 

In contrast to its broke rival, England’s rise, propelled by its mastery of the seas and underlined by military successes against France, was paid for with loans, which were still available because people trusted the Government to repay them. Those loans were repaid in part from the growth in the economy through trade and investment, which later fuelled the first industrial revolution.

In short, the collapse of Law’s scheme fuelled the rise of the British Empire, something that would have been hard to achieve if France, a larger and more populous country, had been in a position to effectively dispute it.

Now, here in post-imperial Britain and up to our eyeballs in the manipulation of fiat money, with quantitative easing, Trussonomics, and cryptocurrencies, maybe we should remember our French lessons!

If you want more, my main source for all this is a brilliant but exhaustingly prolix biography by James Buchan. “John Law: A Scottish Adventurer of the Eighteenth Century”.

I have also posted an excellent paper on Law's system itself on my Drive account. You should be able to get it here: John Law's System