John Law, paper money to escape debt

John Law left his name associated with a considerable financial scandal. Nicolas Buat retraces his adventurous life, and his ambitious projects to boost the economy and extinguish France’s debt.

Whether we seek to draw great lessons from history, or whether we are satisfied with contemplating a gallery of portraits and paintings without consequences for our time, we cannot remain indifferent to the character of John Law. The recent biographical work by Nicolas Buat – chief curator of the Paris Archives – invites us to rediscover it. If it is part of an already relatively long series of works devoted to Law (the best known of which is certainly the book by Edgar Faure, The Bankruptcy of Lawpublished in 1977), its great merit is to immerse us in the bubbling atmosphere of the Regency, without losing the reader in too detailed descriptions of the “ System » established between 1716 and 1720.

A considerable passerby

Before politics, therefore, life. John Law is often compared to Casanova: while he may be less inclined toward women, he is just as inclined toward adventure. It begins at the age of twenty-three, when he escapes from a London prison, where he was languishing, charged with murder, following a duel over a morality issue. The circumstances are poorly clarified, despite the abundant work of historians. The affair is nevertheless decisive: it pushes Law into exile. For twenty years, between 1694 and the start of the Regency, he wandered between France, Italy and Holland. He wins money at cards, leads an often sumptuous life, and frequents great personalities from the theater and finance.

A first chapter, fascinating although brief, restores the monetary context at the turn of the XVIIIe century. These years, which were also those of Law’s intellectual training, were a pivotal moment for monetary questions. In 1694 the Bank of England was founded, the model of which Law had in mind when he proposed to the Regent the creation of the Royal Bank. Law also came from a family of goldsmiths, a profession which, over the past century, had evolved towards that of banker: equipped with safes, the goldsmiths more and more frequently kept XVIIe century precious metals to many depositors, issued receipts, maintained current accounts for traders, and even engaged in lending activities.

In 1705, Law published his Cash and Trade Considerationswhich remains his main writing dealing with economic questions. On the basis of this work, Joseph Schumpeter, in his History of economic analysismakes Law an author who “ ranks first among monetary theorists of all time “. It is probably when he tries to situate it in the history of economic thought that Nicolas Buat’s work is most imprecise – but this is only a minor fault, because such is not the case. not its primary purpose.

Many historians of economic thought, such as Daniel Villey, have associated Law with a reformulation of earlier mercantilist doctrines. Their authors – Jean Bodin in France, Thomas Mun, William Petty or Josiah Child in England – tended to consider the accumulation of metallic money as an end in itself. Conversely, for Law, what matters is not accumulation but the abundant circulation of money, which should stimulate trade and production. This change of perspective has a major consequence: since it is no longer a question of amassing stocks but of generating a flow, money for Law is no longer necessarily metallic, but can become paper money. While economic policy among the mercantilists of the previous generation was essentially to be a commercial policy (promoting exports and limiting imports), it became, in Law’s mind, a monetary policy. In this respect, Law’s theory has a completely modern resonance.

Mercantilism was at the XVIIe century a policy as much as a doctrine. The same is true of Law’s theoretical system, formulated in circumstances favorable to its reception. In France, the end of Louis’ reign XIV is marked by serious financial distress, the result of many years of war. The description given by Nicolas Buat is fascinating, as is that of the multiple attempts at tax reforms. The only monetary policy applied then was the devaluation of the pound sterling (serving as a unit of account) in relation to gold or silver. The old coins had to be brought back to the mint to be remelted, which in turn allowed the collection of seigniorage rights.

History took a new turn with the arrival to power of the Regent, Philippe d’Orléans, in 1715, which allowed Law to exercise considerable influence. At first simply known for a few public positions, he had established and maintained important networks in France and throughout Europe (Holland, Italy) in the 1700s and 1710s. During these years, he became the promoter of numerous banking projects, notably land banks, whose issues would be pledged on land. The Regent, more favorable to the banking environment from the bourgeoisie, offers a breeding ground for new ideas.

Banks and bankruptcy

In 1716, Law was authorized to establish the General Bank and issue paper money for gold. Nearly two thirds of the work are devoted to the few years that followed, the history of which is better known. THE “ system » Law’s monetary policy is implemented over a very short period of time, less than four years. By 1720, the end was here. In a few weeks, Law was appointed controller then general superintendent of finances (the equivalent of a ministry), then had to flee in March when the financial bubble he had created burst.

Is it possible to briefly describe the system implemented by Law ? Initially, the General Bank operated like other banks, but nevertheless with strong support from the State. When it issues shares, they can be subscribed to in government paper, that is to say, in public debt securities. At the same time, the notes it issued could be received in payment of taxes (from 1717). All notes are supposedly convertible into gold, but too abundant quantities are issued. The combined effects of these two provisions result in a monetization of part of the public debt.

A new step was taken when Law created the Western Company, soon nicknamed the Mississippi Company, and obtained a monopoly for the commercial exploitation of Louisiana’s resources. In his mind, the prospects – described to the general public as flourishing – of the colonial exploitation of Louisiana should make it possible to attract gold and public debt securities, in exchange for paper money. The value of the latter is, in Law’s mind, pledged on future income from commercial expeditions. Abundant monetary creation by the bank (transformed in the meantime into the Royal Bank) allowed a considerable increase in the company’s share price. The two institutions merged in 1720, when Law had in his hands the most important fiscal and commercial levers in the Kingdom.

Bankruptcy occurred in March, after several weeks during which the hoarding of gold and silver was punished beyond certain limits, and during which certain “ sowers of false rumors » are deported to the colonies. After the bankruptcy, Law, still under the unofficial protection of the Regent, took refuge in Venice, where he died in 1729.

It is probably of little use at this stage to emphasize that the work has a very current resonance. Today, as in the past, it is a question of reducing the burden of public debt and boosting the economy through monetary expansion. However, it seems to us, we must be careful not to make comparisons that are too hasty and necessarily simplifying. Conversely, the great interest of Nicolas Buat’s work is to show us the genesis of institutions and ideas which, despite their subsequent developments, took shape at the dawn of the XVIIIe century of forms which, even today, are familiar to us in their broad lineaments.