[§ 13. Of the Scheme of Mr. Law.]

The last bad effect that shall be taken notice of is the notion of Mr. Law, a Scotch merchant. He thought that national opulence consists in money, and that the value of gold and silver is arbitrary, and depends on constitution and agreement. He imagined that the idea of value might be brought to paper, and it preferred to money. If this could be done, he thought it would be a great convenience, as the government then might do what it pleased, raise armies, pay soldiers, and be at any expense whatever. Mr. Law proposed his scheme to the Scotch parliament in 17011. It was rejected, and he went over to France, where his project was relished by the Duke of Orleans. In this book2 he agrees with the fore-mentioned writers that, the balance of trade being against a nation, it must soon be drained of its money. In order to turn the balance of trade in our favours, he proposed to the Scotch Parliament the following scheme:

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As there was little gold or silver in this country he thought they might fall upon some other method of creating money, independent of it, to wit, by paper. On this account he proposed the erecting of a land bank at Edinburgh, in which it is to be observed, he falls into many blunders concerning tenures and the nature of property. At this bank they were to keep by them only twenty or thirty thousand pounds to answer small demands, and to give out notes for land. For two acres of arable land they were to issue out a note of equal value, and if any extraordinary demand was made upon them, they would pay so much of it in money, and so much in land. By this means in a very short time the whole land of Scotland would go from hand to hand, as a twenty-shilling note does1.

As this project never was executed, it is hard to say what the consequence might have been; it is, however, obviously liable to the following inconveniences. Taking the land rent of Scotland at five millions per annum, though it be much more, at twenty years’ purchase it amounts to an hundred millions; there would then be just so much currency in the country and if one million was then necessary for circulation there would just be ninety-nine millions for no purpose, as none of it could go abroad; they would not have been able to maintain one man more than formerly, as their food, clothes, and lodging would not have been increased, and every commodity would have risen to ninety-nine times its present value.

Mr. Law, not meeting with the encouragement he expected, went over to France in the year2 1714, and, as was before mentioned, found favour with the Duke of Orleans, then3 Regent, and got liberty to erect a bank Edition: current; Page: [213] there, which at first was only to the extent of six millions of livres1 or £320,0[00] sterling. From this beginning he carried it on to a very great height, issued out many notes, and in a short time engrossed the whole circulation of France. As Mr. Law’s notes were received in payment of the revenue2, this contributed to the success of the scheme. This, too, had a greater effect in France than it could have had here, considering the number of taxes, and the manner in which they are levied. By this and other circumstances, his notes were always at par with gold and silver, especially as they were making continual changes in their coin. About that time twenty-eight livres, which were equal to eight ounces of pure silver, were raised to sixty3, and as a diminution of coin is always the consequent of a sudden rise4, this was daily expected. Mr. Law made his notes payable in what was called the money of the day5. Instead of promising to pay his notes, as we would say, in pounds sterling, he did it in crowns and half-crowns, which was a very proper method to make them par with gold and silver. Suppose that our coin were raised to double, a half-crown would become a crown, and so in this manner the bank notes and money would rise and fall together6.

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As Law wanted to make his notes above par, he fell upon the following scheme. He issued out his bank notes payable in livres tournois, by which, when the coin came to be diminished, he would not be obliged to pay above one-half1. The coin was not received in the market or elsewhere, as the diminution was still expected, and did not come for some time. This favoured his design, and kept the notes above par, by which the credit of his bank was established.

The next step Mr. Law fell upon was the relieving of the public debts, which amounted to 200[0] millions2. As he saw the diminution must needs come, he took another method to keep up his notes. He got a grant of the exclusive privilege of trading to Canada, and established the Mississippi Company. To this he joined the African, the Turkey, and the East India companies. He also farmed the tobacco and all the public revenues of France at 52 millions3, for in France the whole Edition: current; Page: [215] revenue is farmed by one man, who undertakes it and levies it without excisemen, and the farmers there are the richest in the country, and must be skilled in the finances and public revenues1. Mr. Law undertook this, and, having the whole trade of the country monopolized, it was difficult to say what profits he would make. He wanted to lend the government 80 or 90 millions [sterling], which he could easily do by issuing notes to that value, but then he saw that they would soon return upon him. To prevent this, his invention was set on work, and we shall see how far he succeeded. As the company he erected seemed to be in a very flourishing condition, shares were purchased in it at a very considerable rate. He opened a subscription to it at 500 livres, so that a navy ticket or billet d’état purchased a share into it, which raised them to a par, as they had for a long time been far below it. The government of France was never in such a miserable condition as then. The interest of the money which should have paid the billets d’état was seized upon for other purposes. Never was monarch more degraded than Lewis XIV. After the treaty of Utrecht he had occasion to borrow 8 millions of livres from Holland, and not only to give them his bond for 32 millions, but to get some merchants to be security for him2. Since that was the case, we need not be surprised that the billets d’état sold at great discount, as they bore no interest, and it was quite uncertain when they would be paid. Law published a declaration that one of these, which was granted for 500 livres, should purchase a share in the company, and thus they came again to par. The people still continuing in great expectations of profit, he in a few days opened a new subscription at 5000 livres, Edition: current; Page: [216] and afterwards another at 10,000. At this time he was enabled to lend the government 1600 millions of livres at 3 per cent1.

Had he stopped here, it is probable that he would have answered all engagements, but his future proceedings ruined all. It was impossible that the value of shares could long continue at such a high rate. He thought, however, that it was necessary to do all that he could to keep them up, as the whole fortunes of many people were in the bank. He had issued out notes to double the circulation of the country, which raised the price of everything to an enormous pitch, and consequently the exchange was against France in all foreign trade. This was principally occasioned by his opening an office to purchase 500 livres shares at 9000 livres2, which obliged him to issue out many notes. People of prudence who were concerned opposed this scheme, and indeed it was the first thing that made his bank lose credit, and occasioned its dissolution. As he was not obliged to pay the capital sums, only the annual dividend of 200 livres arising from the profits3, he might have let them fall to their original 500 without any great loss but that of reputation; but his buying up the shares occasioned his issuing out so many notes that they must of necessity return upon him. This was so much the case that he was obliged to open offices in different parts of Paris for the payment of them. When in this manner oppressed, he was making continual changes on the coin, in order to dissuade people from returning on the bank, and disgust them at gold and silver4. He cried up gold, but as coin Edition: current; Page: [217] cannot be kept much above the level of the metal, when it was so much depreciated, it was not taken. If a person had 20,000 guineas, as he was afraid that the coin would not continue at that value, he went to the bank and got it exchanged for notes. The same consideration prevented them from returning upon the bank, as they would there be paid in coin. By this means he not only prevented his notes from coming upon him, but filled his coffers with almost all the gold in the country. In order to accomplish this part of his scheme more perfectly, he most arbitrarily published an edict prohibiting any persons from keeping by them gold or silver, beyond a certain sum1. He also took away the severe penalties that were in force against the exportation of coin, and every person was allowed to export money free from duty2. By this means much of it went to Holland. He reasoned with himself, some instrument of change is necessary, paper, gold, and silver, at present are the medium; if gold and silver be utterly exported, paper only remains, and may be rendered the sole instrument of commerce. This he thought he had done effectually when by an edict he had swept a part into his coffers, and cleared the country of the remainder. They would therefore be obliged to take paper. At last, however, after a great number of expedients, he found it was impracticable. By paying out great sums, he kept off ruin for some months, but at last published an edict that all bank notes were to be paid only in one half: and indeed if he had stood to this, as some imagined he might have done, it would have been far better than to have suffered the after consequences. Upon this edict the credit of the bank was entirely broken, and the bank notes all on a sudden sunk to nothing3. This ruined an immense number of people. Britain can never be much hurt by Edition: current; Page: [218] the breaking of a bank, because few people keep notes by them to any value1. A man worth £40,000 will scarce ever have £500 of notes by him. But the breaking of this bank in France occasioned the most dreadful confusion. The greatest part of people had their whole fortunes in notes, and were reduced to a state of beggary. The only people who were safe were the stock-jobbers who had sold out in time, or with their bank notes had purchased all the valuable goods and a great deal of land, though at the highest prices. These made immense fortunes by it.

The South Sea scheme in our own country was nothing to this. Nobody was under any obligations of going into it, the government had no share in it, and the loss was but a trifle in comparison. The clamour which Law’s last edict made caused it soon to be rescinded2, and the notes were again declared to be paid at value, but the bank never recovered its credit, and this had no effect. However, by raising the coin and other expedients, he kept it from May to October, and then3 was obliged to leave France, which with difficulty he accomplished; his goods were confiscated and he died soon after4. This amazing scheme was founded on these two principles, that public opulence consists in money, and that the value of money is arbitrary, founded upon the common consent of mankind. Consistent with these principles he thought he might easily increase the public opulence if he could annex the idea of money to paper, and the government could never be at any loss to produce any effect that money could do. This scheme of Mr. Law’s was by no means contemptible; he really believed in it, and was the dupe of it himself. It was thought he had provided well for himself, but it was found to be otherwise. If the Duke of Orleans had lived only Edition: current; Page: [219] a few days longer it was agreed upon that he was to have been re-established. After his death it was not thought expedient to have it put in execution1.

This scheme of Law’s was imitated all over Europe. It gave occasion to the South Sea Company in England, which turned out at last a mere fraud, and, could it have been carried to as great an extent as Law’s, would have been productive of the same consequences. It was erected in the latter end of Queen Anne’s reign, and the intention of it was to carry on a trade to the South Seas. For this purpose they bought up the greater part of the debts of the nation. Their stock, however, was not great, and the profits which could be expected from it were very inconsiderable; the expectations of the people were never greatly raised, and its fall was not very prejudicial to the nation.