Introduction
In the early 18th century, a Scottish gambler and financial theorist named John Law revolutionized the world of economics and banking. His ideas about paper money and credit laid the groundwork for modern financial systems, even though they ultimately led to disaster in his own lifetime. Janet Gleeson's book "Millionaire" tells the captivating story of Law's rise from young duelist to economic mastermind, and his eventual fall from grace.
This book takes us on a journey through the birth of modern finance, exploring how Law's innovative but risky schemes transformed the French economy and introduced concepts we still use today. It's a tale of ambition, genius, and hubris that sheds light on the foundations of our current financial world.
The Foundations of Modern Banking
Ancient Roots and New Developments
Banking has ancient origins, with early forms existing in Babylon, China, and the Greco-Roman world. However, the banking system we're familiar with today, centered around credit and borrowing, is a relatively recent development.
The foundations of modern banking began to take shape in the 16th and 17th centuries, particularly in Italian cities like Genoa. In fact, the word "bank" comes from the Italian "banco," meaning the table where financial transactions occurred.
As trade expanded, new lands were colonized, and royal lifestyles grew more extravagant, the old banking system struggled to keep up. A new world of commerce emerged, built not on physical money and precious metals, but on a complex system of credit.
The Rise of Paper Money and Trust
Credit can be a powerful economic tool, but it only works when there's trust in the system. In the 17th century, this trust was established by banks keeping physical money in their vaults as collateral.
Once these reserves were in place, the concept of paper money took off. Banknotes could circulate while a limited amount of gold coins with real value were kept in reserve. In theory, you could exchange your paper money for real currency at the bank. However, this system depended heavily on trust and political stability. If everyone tried to exchange their bills at once, the system would collapse.
It was in this evolving financial landscape that John Law emerged with fresh ideas that would reshape the field of economics.
The Early Life of John Law
A Scottish Family's Rise and Fall
John Law came from a Scottish clerical family that had struggled with poverty for generations. His grandfather encouraged his sons to learn trades, and John's father, William, became a successful goldsmith. William's marriage to a prosperous merchant's daughter further improved the family's fortunes, allowing him to purchase a castle near the Firth of Forth.
However, tragedy struck when William died in 1688 during a medical procedure for bladder stones. John, still young, inherited a considerable fortune. Instead of attending university, he chose to experience big city life and moved to London, then the largest city in Europe.
London: Gambling and Society
London played a crucial role in shaping Law's personality and ideas. He supported himself through gambling, using his mathematical talents to gain an edge. Gambling also served as his entry ticket into high society.
Law's life in London was not without risks. Before he turned 21, he faced potential imprisonment for unpaid debts. He managed to avoid this fate by selling the family estate he had inherited to his mother.
This close call marked a turning point for Law. While he didn't give up gambling entirely, he became more strategic, only playing when he was confident he could win based on his understanding of probability.
These experiences in London's gambling dens not only honed Law's mathematical skills but also sparked his interest in the emerging science of economics.
A Life on the Edge
The Duel and Escape
Law's life in London was fraught with danger. In 1694, he found himself in a duel with Edward Wilson, a notorious dandy. The exact reasons for the duel remain unknown, but the outcome was clear: Wilson was killed.
Wilson's influential family pushed for a murder charge, even though Law, who had been attacked first, should technically only have faced a manslaughter charge at most. Nevertheless, Law was found guilty of murder and sentenced to death. He was imprisoned in Newgate to await execution.
In a dramatic turn of events, Law managed to escape from prison on his second attempt. He fled to Amsterdam, narrowly avoiding death and beginning a new chapter in his life.
Life on the Continent
Law's experiences in London had brought him close to death, but they had also prepared him well for life on the run. He traveled across Europe, supporting himself through gambling. During his time in France, he met Katherine, the wife of a French nobleman, who would become his lifelong partner.
Despite his nomadic lifestyle, Law's interest in economics continued to grow. He immersed himself in studying the field and began to develop his own ideas.
Developing Economic Theories
Law believed that European countries had become too dependent on raw materials for generating wealth. He was convinced that introducing paper money would stabilize these economies.
In 1705, Law published a 120-page pamphlet outlining his economic ideas. Although it initially received a lukewarm reception, these theories would later form the basis of his revolutionary financial experiments.
After ten years on the continent, Law appealed to Queen Anne of Great Britain for a pardon, hoping to return home and test his theories on the Scottish economy. When this plea was unsuccessful, he turned his attention to France, a country that would soon provide the perfect laboratory for his economic ideas.
France: The Perfect Testing Ground
A Country in Crisis
In 1705, Law set his sights on France as the ideal place to implement his economic theories. However, with Britain and France at war, he was unable to reach Paris from his base in Holland. Undeterred, Law sent his ideas to Nicolas Desmarets, the King's finance minister.
Law's choice of France was strategic. The country was drowning in debt, owing about 2 billion livres (roughly $11.7 billion in today's money). Law saw increasing the money supply as a potential solution to stimulate the economy, increase tax collection, reduce debt, and boost investment.
Law's confidence in paper money was crucial to his plan. There simply wasn't enough gold and silver in France to manage the enormous debt. His proposal was truly revolutionary: France would become the first economy to run primarily on paper money.
A Change in Leadership
In 1715, circumstances aligned in Law's favor. Philippe, Duke of Orleans, became regent to the new king, Louis XV, and was receptive to Law's ideas. Law acted quickly to present his plans, although he faced resistance from some quarters, including the Duke of Noailles, President of the Finance Council.
The Birth of the Banque Générale
In response to the skepticism he faced, Law took a bold step: in 1716, he founded a private bank called the Banque Générale. This move was seen as outrageous at the time, but it would prove to be a turning point in French economic history.
Meanwhile, the Duke of Noailles implemented his own radical measures, reducing the precious metal content in national coinage and cutting interest rates. These actions sparked panic and led to a decrease in the real value of salaries.
Law's bank offered a solution to these problems. Although he was initially viewed with suspicion due to his gambling history, traders began to warm to the idea of paper money. The banknotes issued by the Banque Générale had a fixed value and could be exchanged for their face value in gold at any time.
As trust in this new paper money grew, the French economy began to show signs of recovery. Law's innovative concept was starting to prove its worth, setting the stage for even more ambitious economic experiments.
The Mississippi Company: Law's Grand Vision
Expanding to the New World
While the introduction of paper money in France was successful, Law had even grander ambitions. He turned his attention to France's North American possession, Louisiana, which stretched from the Mississippi River delta deep into modern-day Canada.
France's overseas ventures had been costly and largely unsuccessful. Law identified underinvestment as the root cause and began formulating a plan to generate funds for colonial development.
The Banque Royale and the Mississippi Company
Law's first step was to transform his private bank, the Banque Générale, into a state bank called the Banque Royale. He raised funds by issuing billets, a type of state bond. With this influx of capital, Law had the resources to invest across the Atlantic.
In 1717, Law used the money from the Banque Royale to purchase the Mississippi Company. His goal was ambitious: to monopolize trade in the French colonies. The Mississippi Company quickly bought out rival trading companies, including the Company of the East Indies and the Company of China. It also began to dominate the tobacco trade from Senegal.
A Meteoric Rise
Law's ideas proved wildly successful in the short term. The value of Mississippi Company shares rose sharply, and by July 1719, Law was able to purchase the Royal Mint. By autumn of that year, his position seemed unassailable.
In a bold move, Law offered to take over the French state debt of 1.2 billion livres at an interest rate of just three percent. He also paid an additional 53 million livres for tax collection rights. To finance these enormous expenditures, Law issued more shares in the Mississippi Company, causing their value to skyrocket even further.
This economic boom seemed unstoppable, and it was all made possible by Law's insistence on the value and potential of paper money. France was experiencing an unprecedented period of prosperity, and John Law was at the center of it all.
The Millionaire Phenomenon
A New Class of Wealthy Individuals
By 1719, Law's Mississippi Company had become a seemingly unstoppable wealth-creating machine. Law himself was celebrated as an economic genius, and stories of successful investors became commonplace. Many of these newly rich individuals became celebrities in their own right.
It was during this time that the term "millionaire" was first coined to describe those who had amassed fortunes through investments in the Mississippi Company. The sudden influx of wealth led to rampant speculation and inflated prices. In one striking example, a single chicken could cost as much as half the average monthly salary of a craftsman.
International Investment and Expansion
Law began to encourage foreign investment in the Mississippi Company. This strategy was crucial because the paper money system needed to be supported by real coinage kept in banks. More foreign currency would allow for the printing of more French banknotes.
However, this approach was not without its critics. Some worried that it would lead to an ever-increasing amount of credit being issued, potentially destabilizing the economy.
The Bubble Forms
By the second half of 1719, it was clear that a bubble had formed. The share prices of the Mississippi Company had risen twentyfold in a short period. Despite the warning signs, optimism remained high, and Law's reputation continued to grow.
People from all over Europe came to seek Law's advice, and he became a true celebrity. He was even awarded honorary membership to the prestigious Academy of Sciences. Despite all the attention and newfound fame, Law tried to keep a level head. He invested carefully, particularly in property, and devoted himself to streamlining France's notoriously inefficient tax system.
The Peak of Success
The year 1719 had been one of tremendous accomplishments for Law, and his success was crowned by his appointment as Controller-General of Finances in 1720. At this point, Law was at the height of his power and influence. The French economy was booming, and Law was hailed as a financial genius who had solved the country's economic woes.
However, just as Law's star was shining brightest, storm clouds were gathering on the horizon. The vulnerabilities in his economic system were about to become glaringly apparent.
The Beginning of the End
The Louisiana Disappointment
As 1720 began, investors were still flocking to buy shares in the Mississippi Company, expecting to reap enormous profits from France's Louisiana territory. However, the reality of the situation in North America was far different from what had been promised.
The expected rich seams of gold and silver were never found. The land proved to be largely infertile, and the indigenous peoples remained resistant to French colonization efforts. The grand promises of wealth from the New World were beginning to look like little more than empty hype.
The First Signs of Trouble
As news of the disappointing situation in Louisiana began to trickle back to France, the seemingly unstoppable rise in Mississippi Company share prices began to level off. This was a serious problem because the entire French economic system, now based on trust in paper money, was inextricably tied to the company's success.
Towards the end of 1719, major shareholders in the Mississippi Company began to sell their shares. People also started to take gold and silver coins out of the country, fearing that others would soon try to exchange their potentially worthless paper money for hard currency.
Law's Desperate Measures
Faced with this growing crisis, Law began to implement increasingly desperate measures. He banned the export of coins from France. When people tried to exchange their paper money for other valuables like diamonds, Law went so far as to forbid the wearing of diamonds.
These actions only served to increase public anxiety and further undermine confidence in the economic system Law had created. It was becoming a race to the bottom that Law could never win.
The Collapse Begins
By the time Law had banned every form of currency except banknotes, he had suffered a mental and physical breakdown from the stress. In a last-ditch effort to save the system, he ordered the printing of even more banknotes. Between January and May 1720, the amount of paper money in circulation doubled to 2.6 billion livres (about $15.2 billion in modern terms).
This massive increase in the money supply led to rapid inflation, further eroding public confidence in the currency. By December 1720, Law was forced to take a step that went against everything he had previously advocated: he unilaterally devalued paper money by half.
This action was the final straw. Angry mobs took to the streets, and Law's decisions were quickly revoked by the government. Soon after, he was removed from his position as Controller-General of Finances and placed under house arrest.
The economic system that John Law had built, which had seemed so promising just months earlier, was now in a state of total collapse.
The Fall of John Law
A Brief Return and Final Failure
Law's house arrest was short-lived. Upon his release, he formulated a new plan to stabilize the economy and was briefly reinstated as Controller-General of Finances. However, it was too late to salvage the situation.
Confidence in the French economy had been irreparably damaged. People were rushing to banks to exchange their paper money for coins, but there simply wasn't enough hard currency to meet the demand. Law's system of paper money, which had once seemed so revolutionary, was now seen as worthless.
The End of an Era
By October 1720, it was clear that Law's economic experiment had failed. In November, the system of paper money that he had established ceased to exist entirely. The Mississippi Company, already teetering on the edge of bankruptcy, was dealt a final blow when sea trade stalled due to an outbreak of plague.
Law's Escape and Exile
Realizing that his position in France had become untenable, Law decided to flee the country. He managed to escape to Holland and then Italy with his son, but his wife and daughter were not granted permission to leave France.
Law found himself penniless and alone in exile. Although he was eventually allowed to return to Great Britain, this provided little comfort. His wife Katherine remained trapped in France, and the French authorities had no interest in helping them reunite or allowing Law to return.
The Aftermath
The consequences of Law's economic policies were far-reaching. An estimated half a million people claimed losses from worthless shares and banknotes. The French economy was in shambles, and it would take years to recover from the burst bubble.
Law himself never recovered from this fall from grace. He fell ill and died in poverty, never seeing his wife again. It was an ignominious end for a man who had once been hailed as a financial genius and savior of the French economy.
The Legacy of John Law
Short-Term Disaster, Long-Term Influence
While Law's economic experiments ended in disaster during his lifetime, many of his ideas have had a lasting impact on modern finance. France may not have circulated paper money for another hundred years after the Mississippi Bubble burst, but today it's a core aspect of economies worldwide.
Enduring Financial Concepts
Law's approach to raising investment through the issuing of shares remains a cornerstone of modern finance. The concept of using paper money as the primary currency, backed by a central bank, is now the standard in most countries around the world.
His ideas about stimulating economic growth through increasing the money supply, while controversial in his time, are now fundamental principles of monetary policy used by central banks globally.
Lessons in Economic Bubbles
The Mississippi Bubble serves as an early example of the boom-and-bust cycles that continue to plague economies today. The rapid inflation of asset prices, followed by a sudden crash, is a pattern that has repeated itself numerous times since Law's era, from the Dutch Tulip Mania to the more recent dot-com bubble and housing crisis.
The Double-Edged Sword of Financial Innovation
Law's story illustrates both the potential and the dangers of financial innovation. His ideas revolutionized the French economy and created unprecedented wealth in a short time. However, the lack of proper controls and the overreliance on speculative investments led to a catastrophic collapse.
This serves as a cautionary tale for modern financial systems, highlighting the need for robust regulation and oversight in increasingly complex economic environments.
Final Thoughts
John Law's life story reads like a financial thriller, full of brilliant innovations, spectacular successes, and catastrophic failures. His journey from a young Scottish gambler to the architect of France's economic policy is a testament to the power of ideas and the unpredictable nature of financial markets.
While Law's immediate legacy was one of economic ruin, his long-term impact on the world of finance cannot be overstated. Many of the financial instruments and concepts we take for granted today have their roots in Law's ambitious experiments.
The story of John Law and the Mississippi Bubble serves as a fascinating case study in economic history. It demonstrates how financial systems based on trust and confidence can create enormous wealth, but also how quickly that wealth can evaporate when that trust is broken.
As we navigate our own complex financial landscapes, with their booms, busts, and bubbles, we would do well to remember the lessons of John Law. His story reminds us of the potential of financial innovation to transform economies, but also of the need for caution, regulation, and a clear-eyed view of economic realities.
In the end, John Law's legacy is a complex one. He was a visionary who saw the potential of paper money and credit to revolutionize economies. Yet he was also a cautionary tale of the dangers of unchecked financial speculation and the fragility of systems built on confidence alone.
As we continue to grapple with economic challenges in our own time, the story of John Law and his audacious attempt to revolutionize the French economy remains as relevant and instructive as ever. It's a reminder that in the world of finance, the line between genius and folly can be perilously thin, and that the consequences of crossing that line can be felt for generations to come.