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John Law (economist)

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John Law (economist)

John Law
John Law, by Casimir Balthazar
Born (1671--00) 1671
Died 21 March 1729(1729-03-21) (aged 57)
Republic of Venice
Occupation Economist, Banker, Financier, Author, Controller-General of Finances.


John Law (baptised 21 April 1671 – 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade. He was appointed Controller General of Finances of France under the Duke of Orleans, Regent for the youthful King Louis XV.

In 1716 Law established the Banque Générale in France, a private bank, but three-quarters of the capital consisted of government bills and government-accepted notes, effectively making it the first central bank of the nation. He was responsible for the Mississippi Company bubble and a chaotic economic collapse in France, which has been compared to the early-17th century tulip mania in Holland.[1] The Mississippi Bubble was contemporaneous with the South Sea Company bubble of England.

Law was a gambler and a brilliant mental calculator. He was known to win card games by mentally calculating the odds. He originated economic ideas such as "The Scarcity Theory of Value" and the "real bills doctrine". Law’s views held that money creation will stimulate the economy, that paper money is preferable to metallic money which should be banned, and that shares are a superior form of money since they pay dividends.[2]


Law was born into a family of bankers and goldsmiths from Fife; his father had purchased Lauriston Castle, a landed estate at Cramond on the Firth of Forth and was known as Law of Lauriston. Law joined the family business at age fourteen and studied the banking business until his father died in 1688. Law subsequently neglected the firm in favour of more extravagant pursuits and travelled to London, where he lost large sums of money in gambling.[3]

On 9 April 1694, John Law fought a duel with Edward Wilson in Bloomsbury Square in London.[4] Wilson had challenged Law over the affections of Elizabeth Villiers. Law killed Wilson with a single pass and thrust of his sword.[5] He was arrested, charged with murder and stood trial at the Old Bailey.[5] He appeared before the infamously sadistic 'hanging-judge', Salathiel Lovell and was found guilty of murder, and sentenced to death.[6] He was initially incarcerated in Newgate Prison to await execution.[5] His sentence was later commuted to a fine, upon the ground that the offence only amounted to manslaughter. Wilson's brother appealed and had Law imprisoned, but he managed to escape to Amsterdam.[3]

Portrait of John Law by Alexis Simon Belle

Law urged the establishment of a national bank to create and increase instruments of credit and the issue of banknotes backed by land, gold, or silver. The first manifestation of Law's system came when he had returned to Scotland and contributed to the debates leading to the Treaty of Union 1707. He published a text entitled Money and Trade Consider'd with a Proposal for Supplying the Nation with Money (1705).[7] Law's propositions of creating a national bank in Scotland were ultimately rejected, and he left to pursue his ambitions abroad.[8]

He spent ten years moving between France and the Netherlands, dealing in financial speculations. Problems with the French economy presented the opportunity to put his system into practice.

He had the idea of abolishing minor monopolies and private farming of taxes. He would create a bank for national finance and a state company for commerce, ultimately to exclude all private revenue. This would create a huge monopoly of finance and trade run by the state, and its profits would pay off the national debt. The council called to consider Law's proposal, including financiers such as Samuel Bernard, rejected the proposition on 24 October 1715.[9]

Law made his home in Place Louis-le-Grand, a royal square where he could host and entertain various Parisian nobles. Gaining the attention of such notable people as the Duke of Orleans, Law quickly found himself a regular in high-stakes gambling parties attended by only the most affluent of Paris. His tall stature and eloquent dress allowed Law to charm his way across Europe’s financial hubs, ranging from Amsterdam to Venice. These travels heavily influenced Law’s theories on monetary policies and the importance of paper money as credit. Law’s idea of a centralized bank which would deal in a new form of paper money was years ahead of its time. Despite this forward concept, Law still championed mercantilist beliefs with the promotion of monopolistic companies through government charters.[10]

The wars waged by Louis XIV left the country completely wasted, both economically and financially. The resultant shortage of precious metals led to a shortage of coins in circulation, which in turn limited the production of new coins. With the death of Louis XIV seventeen months after Law’s arrival, the Duke of Orleans finally presented Law with the opportunity to showcase his ingenuity. On May 1, 1716, Law presented a modified version of his centralized bank plan to the Banque Generale which approved a private bank that allowed investors to supply one-fourth of an investment in currency and the other parts in defunct government bonds. The second key feature of the proposal centered on the premise that this private bank was able to issue its own currency backed by Louis of gold. This enabled the currency to be redeemed by the weight of silver from the original deposit instead of the fluctuation of livres which had been devaluing rapidly.

From this new banking platform, Law was able to pursue the monopoly companies he envisioned by having France bankroll the endeavor with 100 million livres’ in the form of company stock. As how the bank was financed, so too was the foundation of the Mississippi Company which was later renamed the Occident Company and eventually a part of the Company of the Indies.

It was in this context that the regent, Philippe d'Orléans, appointed John Law as Controller General of Finances in 1720, effectively giving him control over external and internal commerce. The rapid ascension of this new global monopoly led to massive speculation and stock prices to balloon to over sixty times their original value.

As Controller General, Law instituted many beneficial reforms (some of which had lasting effect, others of which were soon abolished). He tried to break up large land-holdings to benefit the peasants; he abolished internal road and canal tolls; he encouraged the building of new roads, the starting of new industries (even importing artisans but mostly by offering low-interest loans), and the revival of overseas commerce—and indeed industry increased 60% in two years, and the number of French ships engaged in export went from sixteen to three hundred.[11]

Since, following the devastating War of the Spanish Succession, France's economy was stagnant and her national debt was crippling, Law proposed to stimulate industry by replacing gold with paper credit and then increasing the supply of credit, and to reduce the national debt by replacing it with shares in economic ventures.[12]

Speculation gave way to panic as people flooded the market with future shares trading as high as fifteen thousand livres per share. By May 1720, prices fell to 4,000 livres per share, a 73% decrease within a year. The rush to convert paper money to coins led to sporadic bank hours and riots. Squatters now occupied the square of Palace Louis-le-Grand and openly attacked the financiers that inhabited the area. It was under these circumstances and the guise of night that John Law fled Paris some seven months later.

The meteoric rise of a relatively unknown man came as fast as his descent as an economic power vacuum was left in the wake.Though they failed, his theories ironically live on 300 years later and "captured many key conceptual points which are very much a part of modern monetary theorizing".[13]

Paper money endorsed by John Law, 1718
Contemporary political cartoon of Law from Het Groote Tafereel der Dwaasheid (1720); text reads "Law loquitur. The wind is my treasure, cushion, and foundation. Master of the wind, I am master of life, and my wind monopoly becomes straightway the object of idolatry. Less rapidly turn the sails of the windmill on my head than the price of shares in my foolish enterprises."

Mississippi Company

In May 1716, the Banque Générale Privée ("General Private Bank"), which developed the use of paper money, was set up by Law.[14] It was one of only six such banks to have issued paper money, joining Sweden, England, Holland, Venice, and Genoa.[1] Law would become the architect of what would later be known as "The Mississippi Bubble", an event that would begin with the consolidation of the trading companies of Louisiana into a single monopoly (The Mississippi Company), and ended with the collapse of the Banque Générale and subsequent devaluing of the Mississippi Company's shares.

In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in nineteen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second installment was even due, and ordinary citizens flocked to Paris to participate. Based on this success, Law offered to pay off the national debt of 1.5 billion livres by issuing an additional 300,000 shares at 500 livres paid in ten monthly installments.[1]
By mid-1719, the Mississippi Company had issued more than 600,000 shares and the par value of the company stood at 300 million livres. That summer, the share price skyrocketed from 1,000 to 5,000 livres and it continued to rise through year-end, ultimately reaching dizzying heights of 15,000 livres per share. The word millionaire was first used, and in January 1720 Law was appointed Controller General.[1]
The spillover to the economy was immediate and most notable in food prices. By May 21 (1720), Law was forced to deflate the value of banknotes and cut the stock price. As the public rushed to convert banknotes to coin, Law was forced to close Banque Generale for ten days, then limit the transaction size once the bank reopened. But the queues grew longer, the Mississippi Company stock price continued to fall, and food prices soared by as much as 60 percent.[1]

The fractional reserve ratio was one fifth,[15] and a Royal edict to criminalise the sale of gold was decreed.[16] A later Royal edict decreed that gold coin was illegal,[17] which was soon reversed,[18] leading 50 people to be stampeded to death.[19] The company's shares were ultimately rendered worthless, and initially inflated speculation about their worth led to widespread financial stress, which saw Law dismissed at the end of 1720 from his sinecure as Controller General[1] and his post as Chief Director of the Banque Générale.

Later years

Law initially moved to Brussels in impoverished circumstances. He spent the next few years gambling in Rome, Copenhagen and Venice but never regained his former prosperity. Law realised he would never return to France when Orléans died suddenly in 1723 and Law was granted permission to return to London, having received a pardon in 1719. He lived in London for four years and then moved to Venice where he contracted pneumonia and died a poor man in 1729.


  • John Law: Economic Theorist and Policy-Maker by Antoin E. Murphy (Oxford University Press, 1997) is the most extensive account of Law's writings. It is given credit for completing the transformation of opinion about Law from a con man (see Mackay below) to an important economic theorist and successful financial leader.
  • Letters to John Law by Gavin John Adams (Newton Page, 2012) is a collection of early eighteenth-century political propagandist pamphlets documenting the hysteria surrounding John Law's return to Britain after the collapse of his Mississippi Scheme and expulsion from France. It also contains a very useful chronology and extensive biographical introduction to John Law and the Mississippi Scheme (ISBN 9781934619087).
  • Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance by Janet Gleeson (2000). (ISBN 0-684-87295-1) is a straightforward biography.
  • The Poker Face of Wall Street by Aaron Brown (John Wiley & Sons, 2006) credits Law for the inspiration of the modern futures exchange and also the game of Poker.
  • John Law – The History of an Honest Adventurer by H. Montgomery Hyde (W. H. Allen, 1969) is one of the earliest favorable accounts of Law's ideas.
  • John Law, the father of paper money by Robert Minton (Association Press, 1975) treats Law's financial innovations that led to modern paper money.
  • Crime, Cash, Credit and Chaos by Colin McCall (Solcol, 2007) examines the events and circumstances that became Law's dramatic and tragic life.
  • Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, published 1841, contains a colorful negative account of Law's financial activities in France. Available as a reprint and online, including as a free Kindle text.
  • The Gamester by Rafael Sabatini (Houghton Mifflin Company Boston, 1949) is a sympathetic fictionalized account of Law's career as financial adviser to the Duke of Orléans, Regent under Louis XV.


Richard Condie's 1978 National Film Board of Canada (NFB) animated short John Law and the Mississippi Bubble is a humorous interpretation. The film was a collaboration between Condie and his sister, Sharon Condie, who had been inspired to make a film on the Mississippi Bubble after reading Extraordinary Popular Delusions and the Madness of Crowds. The film was produced by the NFB at its newly opened Winnipeg studio. It opened in Canadian cinemas starting in September 1979 and was sold to international broadcasters. The film received an award at the Tampere Film Festival.[20]

See also


  1. ^ a b c d e f Federal Reserve Bank of New York: "Crisis Chronicles: The Mississippi Bubble of 1720 and the European Debt Crisis" (Narron and Skeie)
  2. ^ , November 2009The Life and Times of Nicolas DutotFederal Reserve Bank of Chicago,
  3. ^ a b Mackay, Charles (1848). "1.3". ["" Memoirs of Extraordinary Popular Delusions and the Madness of Crowds]. London: Office of the National Illustrated Library. 
  4. ^ Adams, Gavin John (2012). Letters to John Law. Newton Page. pp. xiv, xxi. 
  5. ^ a b c Adams, Gavin John (2012). Letters to John Law. Newton Page. p. xxi. 
  6. ^ Adams, Gavin John (2012). Letters to John Law. Newton Page. pp. xiv, liii. 
  7. ^ Buchan, James (1997). Frozen Desire: An inquiry into the meaning of money. Picador. p. 136.  
  8. ^ Collier's Encyclopedia (Book 14): "Law, John", page 384. P.F. Collier Inc, 1978.
  9. ^ Buchan, James (1997). Frozen Desire: An inquiry into the meaning of money. Picador. p. 141.  
  10. ^ Robert, Harms. The Diligent: A Voyage through the Worlds of the Slave Trade. pp. 43–54. 
  11. ^ Will and Ariel Durant, The Age of Voltaire, Simon & Schuster(1965), page 13
  12. ^ Antoin E Murphy (1997). John Law. Oxford U. Press. p. 105. 
  13. ^ Antoin E Murphy (1997). John Law. Oxford U. Press. p. 1. 
  14. ^ BACKHOUSE, Roger, Economists and the economy: the evolution of economic ideas, Transaction Publishers, 1994, ISBN 978-1-56000-715-9, p. 118
  15. ^ "John Law and the Mississippi Company" (5:55 of 9:44)
  16. ^ "John Law and the Mississippi Company" (6:45 of 9:44)
  17. ^ "John Law and the Mississippi Company" (7:35 of 9:44)
  18. ^ "John Law and the Mississippi Company" (7:55 of 9:44)
  19. ^ "John Law and the Mississippi Company" (8:00 of 9:44)
  20. ^ Ohayon, Albert. "John Law and the Mississippi Bubble: The Madness of Crowds". Blog.  

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