[BITList] The credit for credit

John Feltham wantok at me.com
Sun Mar 21 10:43:57 GMT 2010




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Law,  John  (bap. 1671, d. 1729), finance minister in France, was born in Edinburgh and baptized on 21 April 1671. His father, William Law (d. 1683), a successful goldsmith and banker, acquired the estate of Lauriston, a few miles from Edinburgh. William was one of the leading Edinburgh merchants of his time, but his fortune at his death was largely in outstanding loans (some £25,000 out of a total of £29,000). At school in Edinburgh, John Law was proficient in arithmetic and algebra. He was thus well placed to give practical application to his interest in probability theory, and he went to England to make his fortune, where he spent his time 'gaming and sharping' in the early 1690s. He was forced to sell his rights of inheritance to Lauriston to his mother in 1692. In April 1694 he killed Edward (Beau) Wilson in a duel. Convicted of murder at the Old Bailey in London on 20 April and sentenced to death, he escaped from prison and took refuge on the continent. It was not until 1719 that he was pardoned. (He pleaded in person for this retrospectively in the court of king's bench in 1721.)

The death of Wilson in 1694 confirmed Law in his career as an adventurer who had to earn his livelihood either from gambling or the attempt to sell his speculative ideas to interested governments. This period of wandering did not formally end until the issue of naturalization papers for him as a Frenchman on 26 May 1716. During this time he visited several countries, including France in 1702 (when he proposed a privately owned Banque de France to Madame de Maintenon, the morganatic wife of Louis XIV), Scotland in 1704-5, France again in 1706, Venice (where he observed the activities of the Banca di Rialto), Turin in 1711-12, the Netherlands in 1712, and France for the last time in 1713. The precise details of his itinerary are obscure, but it is known that by April 1714 he was considered one of the most able speculators on the French-Dutch exchange rates. He had contracted a permanent liaison with Katherine Knollys before 1715; but it seems unlikely that they were married in Scotland in 1708 (as has been claimed), since the naturalization papers of 1717 make no mention of his wife. Two children, John and Mary Katherine, were born illegitimately, but neither the places nor the dates of birth are known with certainty. (Both were subsequently excluded from any rights of succession because of the 'vice of their birth'.)

France and finance

The best-studied period of Law's career is the seven years he spent in France between December 1713 and December 1720. There, he proposed a scheme for a royal bank to Louis XIV and his finance minister, Nicolas Desmarets, which came close to acceptance but was rejected shortly before the king's death in September 1715. The advent of the Regence enhanced Law's prospects almost overnight. The regent, Philippe d'Orleans, was an unconventional figure for whom Law's ideas had great appeal, not least because it seemed that they would help alleviate the burden of debt left on the royal finances by Louis XIV. A general bank was established in May 1716 at Law's prompting. This was followed on 21 August 1717 by the Company of the West (Compagnie d'Occident) which had exclusive rights to exploit the French colony in Louisiana (hence the title Mississippi Company and, later, Mississippi System or, simply, the system for Law's whole enterprise). On 4 December 1718 the General Bank (Banque Generale) was renamed a royal bank (banque royale). Gradually, from August to October 1719, the Banque Royale came to assume control of the entire revenue-raising system of the French crown, for both direct and indirect taxes. The driving force behind these changes was none other than Law, though each measure depended on the favour of the regent.

Law abjured his native protestant faith at Melun on 17 September 1719. Although he was criticized for this in the House of Lords in 1721 (criticism which was linked to the claim that he had consorted with Jacobites), in reality conversion to Catholicism was a prerequisite for his assumption of ministerial office in France. On 5 January 1720 he was appointed controller-general of finance and in April received the more prestigious title of superintendent (surintendant des finances, a title not used since 1661 and never again to be used in France). In the course of April and May 1720 he was effectively chief minister and minister of finance, a sort of latter-day Cardinal Mazarin and Nicolas Fouquet combined; but on 27 May, the first crisis of his 'financial system', he was temporarily dismissed from office and threatened with imprisonment in the Bastille in Paris. Yet the eclipse was only brief: he returned to office on 2 June with the additional responsibilities of the superintendence of French commerce, the director-generalship of the Banque Royale, and a councillorship of state with a seat in the council of regency. With the collapse of his system Law was forced to offer his resignation on 9 December 1720, and he went into exile abroad, first to the Austrian Netherlands on 17 or 18 December. He returned to England, though his time there was not untroubled. The death of the regent in 1723 wrecked his hopes for a restoration in France and he moved on to Italy two years later with a commission from the king of England to any other prince or state 'not for use but for protection'  (DNB). He died from pneumonia at Venice in comparative poverty on 21 March 1729, having received the Catholic last rites. The collapse of his system had brought down his own personal finances, which though very considerable in 1720 (a letter from Law to the regent, dated 1 March 1721, talked of his shareholdings at that time being worth nearly 100 millions) had been inflated by paper assets which in the end proved worthless.

The precise ways in which Law gained power, and hung on to it for a few months in 1719-20, have never been described in detail, partly because the king's council in France kept only formal minutes of decrees and not detailed records of debates. What can be stated with confidence is that the Mississippi System was a unique creation which 'involved a giant holding company controlling [almost the entire revenue-raising system], the national debt, the overseas companies, the mint, as well as the note issuing bank'  (Murphy, 'John Law's theories', 1110). A central question in Law's career is whether he had a 'grand design', or whether the system at its apogee in 1719-20 merely represented a collection of piecemeal creations which were unified as opportunities arose. This raises the related issue of the evolution of his ideas between his earliest known writings about 1704, and the creation of the Company of the West in 1717 which marked the beginning of the non-banking side of the system. He certainly referred in February 1720 to 'a sequence of ideas which are interlinked and which reveal more and more the principle on which they are based', which suggests a grand design  (Law, Oeuvres completes, 3.98-9).

Law's land bank

According to Gray, Law's first biographer in 1721, the projector 'offer'd his paper credit scheme to the Lord Godolphin [lord treasurer] before he carry'd it down to the Parliament of Scotland'. Godolphin did not lightly dismiss the 'fine and nice calculation' but argued that it 'could never be put into execution under a limited Government; that it would want the authority of an absolute prince to carry it through'. (Interestingly, Law met the opposite argument in France with regard to his later, more developed, proposals; namely, that they could not be implemented under an absolute monarchy but only a limited one.) The central idea in Law's 'Essay on a land bank' (c.1704), which remained unpublished until 1994, was to create a land bank which would issue money based on a careful evaluation of the land in England:

land may be brought to a standard and ... a land money may be established either so as to rise and fall with the land or to be liable to no changes in its quality, in its quantity, or in the demand for it. (John Law's Essay on a Land Bank, 63-4)
Law contended that, unlike silver, the value of land was not eroded by increases in bullion imports or debasement of the coinage.

The idea itself was not original: Hugh Chamberlen, John Briscoe, John Asgill, and Nicholas Barbon had all proposed a land bank scheme of sorts in the 1690s, and Law sought to differentiate his proposals from theirs. He contended that Chamberlen's land bank had failed because it overvalued land, while Briscoe's proposal would have created a new type of money less valuable than silver money. Law's central objectives were to arrive at low interest rates and a stable value for money. Whereas the Bank of England promised to pay silver money on demand, the land bank promised 'a payment of land when demanded'  (John Law's Essay on a Land Bank, 49). The Bank of England's silver reserves were clearly finite, whereas the credit of the land bank could 'be extended equal to the value of the whole lands in the nation'  (ibid., 89). This argument raised the possibility of a substantial expansion in the money supply, which was the central idea of Law's system in France by 1720.

Scotland appeared to offer better prospects for Law than England, since in 1704-5 there was agreement that the services supplied by the Bank of Scotland were inadequate and that the money supply needed to be expanded. In 1705 he unsuccessfully presented the idea of a land bank to parliament in Scotland, and in the same year his seminal work Money and Trade Consider'd with a Proposal for Supplying the Nation with Money was published in Edinburgh. (By 'trade' Law meant economic activity in general.) The central thrust in his argument was that an expansion in the money supply would produce an expansion in output, which he considered erroneously would lead to an export surplus: 'more money, by employing more people, will make an overplus to export'  (Law, Oeuvres completes, 1.16). A similar theme recurred in his Memoire touchant les monoies et le commerce presented to the French government in November 1706, in which he argued that effective labour was dependent upon money. Money, in other words, is required to facilitate the circular flow of income: Antoin Murphy argued in 1993 that it was Law, not Richard Cantillon or Francois Quesnay, who formulated the so-called 'circular flow of income' model  (Murphy, 'John Law and Richard Cantillon', 55). In Memoire pour prouver qu'une nouvelle espece de monnaie peut etre meilleure que l'or et l'argent (1707) Law recognized that financial innovation had led to the existence of 'new' forms of money. Thus, for example, the shares of the English East India Company were 'not promises of payment in specie' but 'a new type of money'  (Law, Oeuvres completes, 1.205); money was thus defined as any financial instrument that could be used as a medium of exchange. Instead of linking money to land alone, Law wanted his monetary system to be linked to the entirety of the 'real' economy.

Influences on Law, 1707-1712

Not much is known of Law's activities between 1707 and 1711. In 1712 he proposed the establishment of a bank and a company of commerce to Victor Amadeus II, duke of Savoy-Piedmont. By this date the primary influence on his thought was the experience of the Bank of England and the East India Company, while he made fundamental criticisms of the French experience of billets de monnaie, which had been issued during the War of Spanish Succession. It was not that an 'absolute' monarchy could not produce a satisfactory system which could only succeed under a representative system. Rather, the solution adopted in France had been a bad one: the billets de monnaie had been issued in excessively high denominations, not backed by adequate reserves of specie, refused by the government in certain exchange transactions, and yet forced on an unwilling merchant community. In contrast, Law calculated (erroneously) that England had benefited in effect from an expansion of the money supply of some £4.4 million. The British model was therefore the one to follow, and it was a British-inspired system that he sought to introduce in France over the next five years.

Further activities in France, 1713-1719

The duke of Savoy-Piedmont rejected Law's scheme allegedly with the remark that he was not rich enough to take the risk of ruining himself. By 1713 Law was back in France. It was the scale of the public debt incurred in France during the reign of Louis XIV, especially in the War of Spanish Succession, which encouraged Law to persist in his lobbying of the French authorities, rather than the relatively small (and effectively administered) state of Savoy-Piedmont. If the central government could be converted to his viewpoint in an absolute monarchy, then his career was assured. If the governing principles of a great kingdom such as France could be adapted to his ideas, then the prospects for European hegemony, at least in economic and financial respects, were great indeed. Thus, first Desmarets, the controller-general of finance in the last years of Louis XIV's reign, and then the regent were lobbied. Whereas the old king and his experienced minister were extremely cautious, Philippe d'Orleans was less conventional and was a gambler by instinct. The eighteenth-century mania for gambling is at least a partial explanation for the initial success of Law's system and perhaps for its subsequent overextension. Law rapidly expanded the market capital of his company from 34 million livres to over 5 billion livres between August 1717 and October 1719. While at first the rapid rise in the share price increased confidence in the system, capital gains rather than dividends occupied the minds of most 'investors', including the shrewd Richard Cantillon who later implicitly denounced Law's system in his 'Essai sur la nature du commerce en general' (written in 1728-30 though not published until 1755). Fevered share-dealing led to a speculative bubble, and the speculation was transferred abroad: the English South Sea Bubble was in part at least a response to the initial success of Law's system.

Such international competition was also a consequence of Law's ideas, for he had stressed that the establishment of a bank on the lines of the Bank of England would not only 'furnish 500 million [livres] which would cost the public nothing'; it would also increase the national income from 1200 million to 1500 or even 1800 million, some three times the British figure  (Law, Oeuvres completes, 2.51-2). Thus, true French national greatness would return in the aftermath of a long and bloody war which had resulted, if not in a national defeat, at least in a settlement which had favoured British interests. Law's bank would 'surprise Europe by the changes' it would generate in France's favour greater than those from the discovery of the Indies or the introduction of credit  (ibid., 2.266). The attraction of such a scheme was great given the enormous problems posed in servicing a public debt which was in the region of 1739 million (or 1977 million, if non-interest-bearing debts are included). The precise figure is of some importance, because Law's critics sought to reduce the figure for the total debt to strengthen their argument that his system had worsened, rather than alleviated, the debt problem. On balance, it would seem that his system did increase the debt, but by much less than his critics claimed, and had the predicted growth in national income occurred simultaneously royal revenues would have been so increased that the problem of the national debt would have faded into insignificance. Instead, it was subsequently said of Law's system by a writer close to its author that the whole edifice had been sacrificed to 'the extinction of all the debt', which was seen as 'the greatest obstacle to affluence'  (ibid., 3.373).

Compagnie des Indes

From being a simple trading company, Law's Compagnie des Indes took over the collection of indirect taxes and redemption of the debt on 27 August 1719. In return for lending the crown 1200 million at 3 per cent p.a., the company assumed the lease of the general revenue farms. Direct taxes followed in mid-October, when the company assumed administration of the recettes generales and pays d'impositions. Only the administration of taxation within the pays d'etats remained firmly outside the newly integrated revenue-raising process. These changes were of considerable potential significance in the long term. In the short term, the reality was that the expansion of Law's system had greatly outstripped the growth of the real economy and tax revenues. The consolidated debt represented by office-holding, estimated at perhaps 0.75 billion livres, or four times the annual revenue of the crown, enjoyed a higher rate of interest than that intended by Law (5 per cent as against 2 per cent). The elimination of this unproductive capital would eventually have freed a substantial amount of investment for economic growth. In March 1720 Law launched a rumour that he was contemplating the complete abolition of venality of office. In the end, nothing came of the idea, which most regarded as impracticable: in any case, it would have consumed resources because of the need to compensate office-holders for the loss of their property rights. On 21 May 1720 shares were reduced by four-ninths and banknotes were to be reduced by a half between May and December. The decree was revoked on 27 May due to popular pressure, but confidence in the system never recovered from this moment. It was the excessive expansion of the scheme, rather than the resistance of vested interest groups, which brought about the final collapse of the system on 17 July 1720.

Law's significance as an economist

The economist Eli Filip Heckscher called Law an exponent of 'paper money Mercantilism'. He argued that his views did not differ from earlier exponents of paper money; 'all he did was to express the doctrines of the new school with particular clarity, and he becomes of special interest because he later was able to translate his ideas into action'  (Bonney, 206). This view minimizes Law's originality. In contrast, Joseph A. Schumpeter considered Law to be 'in the front rank of monetary theorists of all times'  (ibid., 206n., 285). The importance of Law rests less with his unsuccessful and short period in office in France ('the fatal bankruptcy in 1720', as Sir James Steuart termed it) than in his 'splendid, but visionary ideas' (as Adam Smith termed them). Smith commented that 'the idea of ... multiplying paper money to almost any extent, was the real foundation of what is called the Mississippi scheme, the most extravagant project both of banking and stock-jobbing that, perhaps, the world ever saw'  (ibid., 470-71). Subsequent epochs of hyperinflation in France during the 1790s and in the Weimar Republic in the late 1920s have served only to demonstrate the dangers inherent in Law's ideas. On the more positive side, the abandonment by most Western states of convertibility against a fixed monetary exchange such as the gold standard has shown that modern states cannot manage without that recourse to fiduciary issues of which Law was the earliest exponent. The difference was that at no stage in his career did he suggest that the new paper money would be valueless and issued merely at the whim of the ruler.

The study of Law was revitalized in the twentieth century, first, by the publication of his works by Paul Harsin in 1934, though this collection included two works, the Restablissement du commerce and the Histoire des finances pendant la Regence, which are no longer considered to be by Law. The great economic historian Earl J. Hamilton stressed Law's importance and intended a study of his career which remained unwritten at the time of his death. Biographies by Montgomery Hyde (1948) and Edgar Faure (1978) contain numerous errors. J. P. Poisson (1985) enumerated the number of notarial acts passed by Law between October 1713 and April 1721; as might be expected, these reached a peak in 1719-20. A second period of renewed scholarly study has subsequently been undertaken by Antoin Murphy. His study of Richard Cantillon (1986) contains an important discussion of Law's system; and in his writings on Law, culminating in his biography (1997), Murphy has contended that he was an economist of the highest calibre. Murphy has also discovered and published some of Law's early writings which were hitherto entirely unknown. A satirical engraving of Law stoking a cookpot of inflationary shares in his system has been reproduced in several studies.

Richard Bonney 

Sources  R. J. Bonney, Economic systems and state finance (1995) + E. Faure, La banqueroute de Law: 17 juillet 1720 (1978) + J. M. Felix, 'Les dettes de l'etat a la mort de Louis XIV', Comite pour l'histoire economique et financiere de la France: etudes et documents, 6 (1994), 603-8 + E. J. Hamilton, 'John Law', International encyclopaedia of the social sciences, ed. D. L. Sills, 9 (1968), 78-82 + E. J. Hamilton, 'The political economy of France at the time of John Law', History of Political Economy, 1 (1969), 123-49 + H. Montgomery Hyde, John Law: the history of an honest adventurer (1948) + T. E. Kaiser, 'Money, despotism and public opinion in early eighteenth-century France: John Law and the debate on royal credit', Journal of Modern History, 63 (1991), 1-28 + T. M. Kavanagh, Enlightenment and the shadows of chance: the novel and the culture of gambling in eighteenth-century France (1993) + J. Law, Oeuvres completes, ed. P. Harsin, 3 vols. (1934); repr. (1980) + C. F. Levy, La monarchie buissonniere, 1718-23 (1980), vol. 3 of Capitalistes et pouvoir au siecle des lumieres  + A. E. Murphy, Richard Cantillon: entrepreneur and economist (1986) + A. E. Murphy, 'John Law and the assignats', La pensee economique pendant la Revolution francaise, ed. G. Faccarello and P. Steiner (1990), 431-48 + A. E. Murphy, 'John Law: aspects of his monetary and debt management policies', Perspectives on the history of economic thought, ed. W. J. Barber (1991), vol. 5 of Themes in pre-classical and Marxian economics, 49-60 + A. E. Murphy, 'The evolution of John Law's theories and policies, 1707-1715', European Economic Review, 34 (1991), 1109-25 + A. E. Murphy, 'John Law's proposal for a bank of Turin, 1712', Economies et Societes, Serie Oeonomia, 15 (1991), 3-29 + A. E. Murphy, 'John Law and Richard Cantillon on the circular flow of income', European Journal of the History of Economic Thought, 1 (1993), 47-62 + John Law's essay on a land bank, ed. A. E. Murphy (1994) + A. E. Murphy, John Law: economic theorist and policy-maker (1997) + J. P. Poisson, 'Introduction a une etude quantitative des effets socio-economiques du systeme de Law', Notaires et societe: travaux d'histoire et de sociologie notariales (1985), 309-56 + DNB
Archives Hants. RO + NRA, priv. coll., corresp. and papers + University of Chicago Library, financial papers
Likenesses  attrib. A.-S. Belle, oils, c.1715-1720, NPG [see illus.] · line engraving, pubd 1720 (after a portrait), NPG · E. Desrochers, line engraving, BM, NPG · L. Schenk, line engraving, BM, NPG · G. F. Schmidt, line engraving (after H. Rigaud), BM · C. Wermuth, silver and pewter medal, BM · engraving, repro. in Murphy, Richard Cantillon · medals, BM



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