Chapter 4--John Law, Genius or Swindler

John Law, Genius or Swindler 4

Perhaps no person in the history of economics has inspired such strong opinions, both for and against, as John Law. Some view Law as a genius. To others he is considered a madman and swindler. In many ways, he was all of these things.

Very rarely is an economist presented with the opportunity that John Law enjoyed. Typically, the closest an economist comes to implementing his or her ideas is by serving in some advisory capacity to a ruler, president, or governing body. But even in this capacity, the economist’s recommendation becomes just one of many considerations that the politician or monarch takes under advisement when setting economic policies. But Law’s situation was much different. Law himself said, after his fall, that he had exercised more power than any other uncrowned individual in Europe. At the height of his power, he controlled the Royal Bank (and thus the supply of money), the public debt, indirect taxes, colonial trade, the tobacco monopoly, and more than half of what is now the continental United States. Additionally, Law was the finance minister, the main economic advisor, and the favorite of an absolute prince.¹

Because of his power, Law was able to manipulate all aspects of the French economy, and gave what is now known as “Keynesian economics” its first test. Ultimately, Law’s system ended in disaster. But unfortunately, the mistakes made by John Law and his imitators in Britain continue to be made over and over again, to this day.

John Law was born in Edinburgh in 1671, the son of a goldsmith-banker. Law’s father died when John was in his teens.² Law’s mother, a distant relative of the Duke of Argyll, saw to it that her son received an education in both theoretical and applied economics. Mackay indicates that young John worked for his father for three years, learning the Scottish banking trade. Law displayed a great aptitude for numbers, which aided in his quick grasp of the principles of the banking business.

After the death of his father, Law’s interest in the banking business waned. At age seventeen, Law was a strapping young man who was a favorite with the ladies, in spite of his face being deeply scarred from the small-pox. The young women called him Beau Law, while the men nicknamed him Jessamy John, for his foppery.

With young Law receiving an inheritance from his father’s estate, he could afford to take off and see the world. His first stop was London, which provided John the opportunity to profit from certain gambling systems using his considerable mathematics skills. Law was the envy of all the other gamblers, who after witnessing his success, began to follow his bets. Law’s way with the ladies continued in London, with John having his choice of the most beautiful.

Law’s life of leisure continued for nine years. But by this time, John was addicted to gambling, and he eventually lost more than he could repay without mortgaging his family estate. About this same time, Law’s love life also created trouble. While in London, a love affair with Elizabeth Villiers,³ led to a duel with a jealous suitor of Ms. Villiers, named Edward Wilson. Law proved to be good with a gun also, killing Wilson on the spot. Normally, this would not have been considered a grave offense. However, Wilson had many powerful friends, which, combined with the fact that Law was a foreigner, led to arrest on a charge of murder. After being found guilty, he was sentenced to death. But the sentence was subsequently lowered to just a fine on the grounds that his offense was only manslaughter. While being detained pending an appeal by Wilson’s brother, Law bribed a guard and escaped to the continent. A reward was offered for him. Mackay quotes the ad in the Gazette, describing Law:

Captain John Law, a Scotchman, aged twenty-six; a very tall, black, lean man; well shaped, above six-feet high, with large pock-holes in his face; big nosed, and speaking broad and loud.⁴

Mackay speculates that this description was published to aid Law in his escape, given its exaggerated nature. Law traveled for three years on the European continent studying the monetary and banking matters of the countries he was in by day, and speculating at the gaming tables by night.

After returning to Edinburgh in 1700, Law began to write on the subjects of money and trade. His first pamphlet entitled, Proposals and Reasons for constituting a Council of Trade was not well received.

Law went back to the continent after his proposal was sacked. More importantly, Law was unable to obtain a pardon for his murder of Mr. Wilson, thus making life in Scotland somewhat uncomfortable. For fourteen years, Law gambled his way across Europe, supporting himself on gaming wins. He was known in gambling halls everywhere as a skilled player. His reputation was such that he was persona non grata, in Venice and Genoa. The magistrates in those two cities believed him to be a dangerous influence on youth. While in Paris, Law made an enemy of the lieutenant-general of the police, who eventually told Law to leave town. However, by that time, Law had become friends with the Duke de Vendome, the Prince de Conti, and, more importantly, the Duke of Orléans. The Duke of Orléans and Law shared the preference for social life, and they frequently ran into each other at social functions. It was through the Duke of Orléans that Law would eventually implement his monetary and financial plans.⁵

Law submitted a proposal for a privately owned Bank of France to Madame de Maintenon, the head mistress of Louis XIV, in 1702. Part of the introduction of this proposal included the financial instruments that Law considered part of the money supply: stock in the Dutch and English East India companies, exchequer notes, Dutch government bonds, and Bank of England stock. Branches of the bank would be located in each province, with notes payable to bearer being redeemed at the parent bank in Paris or at any branch. Through this bank, Law argued, the supply of money could be increased, which would lower interest rates and stimulate economic activity. But the proposal was not accepted, some believe, due to Law’s protestant faith, Louis being a catholic.⁶

With Scotland in the throes of a depression in 1704, the Bank of Scotland suspended specie payments. This development led Law, who was back in Edinburgh at the time, to make his land bank proposal to the Scottish Parliament. In 1705, this proposal was published anonymously as: Money and Trade Considered: With a Proposal for Supplying the Nation With Money. Numerous other tracts were written during that same period, with each author claiming that a lack of money was the cause of the crisis. Law’s work, however, went much further than the others in terms of formulating the theory behind his proposal. But again, his work was for naught. In spite of support from the Lord High Commissioner, the Earl of Islay, and the Duke of Argyll, only two Scottish Parliament members supported the plan.⁷

In 1706, Law again was in France submitting his “Treatise on Money and Commerce” to French finance minister, Michel Chamillart. Hamilton calls this presentation Law’s best, although it has never been published. Law was told to leave France due to his radical ideas, according to Hamilton, who argues that allegations that Law was banished because of his gambling prowess are untrue.⁸

Law’s next stop was Italy, where, in 1711, he presented his bank proposal, based upon the Bank of England, to Vittorio Amadeo II, Duke of Savoy. Although impressed with Law’s intelligence and knowledge, the Duke felt the plan much too ambitious for his small country. He urged Law to try the king of France again.⁹

France’s new finance minister, Desmaretz, turned down Law’s proposal yet again in July 1715. Desmaretz liked the plan, but was uneasy about a bank being so dominated by one man, especially if that man was to be John Law. But later that same year, persistence would finally pay off. Louis XIV died, and with the immediate heir to the throne being only seven years old, Law’s old friend, the Duke of Orléans, assumed the reins of the French government.

Louis had made a shambles of the finances of the country. France was deeply in debt and on the verge of bankruptcy. The regent tried such odious tactics as a recoinage, which depreciated the currency by 20 percent, and aggressive, heavy handed attempts at increasing tax collections. Neither of these tactics worked. Rather, they served to incite the ire of the populace. Thus, when Law presented, his plan he was well received. But while Law was able to garner the Duke’s support for a royal bank, the Council of Finance rejected the proposal on October 24, 1715. However, this was to be Law’s last defeat. Law altered the plan, making the bank a privately owned institution, and obtained a charter for the General Bank in early May, 1716.¹⁰ Being the first Bank of France, Law was able to draft the charter document, and subscribed to 25 percent of its stock. Alas, Desmaretz’s worst fears had come true, as the bank was completely dominated by Law, possibly more than any bank had or ever would be dominated by one man in history.¹¹