1911 Encyclopædia Britannica/Law, John
LAW, JOHN (1671-1729), Scots economist, best known as the originator of the “Mississippi scheme,” was born at Edinburgh in April 1671. His father, a goldsmith and banker, bought shortly before his death, which took place in his son's youth, the lands of Lauriston near Edinburgh. John lived at home till he was twenty, and then went to London. He had already studied mathematics, and the theory of commerce and political economy, with much interest; but he was known rather as fop than scholar. In London he gambled, drank and flirted till in April 1694 a love intrigue resulted in a duel with Beau Wilson in Bloomsbury Square. Law killed his antagonist, and was condemned to death. His life was spared, but he was detained in prison. He found means to escape to Holland, then the greatest commercial country in Europe. Here he observed with close attention the practical working of banking and financial business, and conceived the first ideas of his celebrated “system.” After a few years spent in foreign travel, he returned to Scotland, then exhausted and enraged by the failure of the Darien expedition (1695-1701). He propounded plans for the relief of his country in a work entitled Money and Trade Considered, with a Proposal for supplying the Nation with Money (1705). This attracted some notice, but had no practical effect, and Law again betook himself to travel. He visited Brussels, Paris, Vienna, Genoa, Rome, making large sums by gambling and speculation, and spending them lavishly. He was in Paris in 1708, and made some proposals to the government as to their financial difficulties, but Louis XIV. declined to treat with a “Huguenot,” and d'Argenson, chief of the police, had Law expelled as a suspicious character. He had, however, become intimately acquainted with the duke of Orleans, and when in 1715 that prince became regent, Law at once returned to Paris.
The extravagant expenditure of the late monarch had plunged the kingdom into apparently inextricable financial confusion. The debt was 3000 million livres, the estimated annual expenditure, exclusive of interest payments, 148 million livres, and the income about the same. The advisability of declaring a national bankruptcy was seriously discussed, and though this plan was rejected, measures hardly less violent were carried. By a visa, or examination of the state liabilities by a committee with full powers of quashing claims, the debt was reduced nearly a half, the coin in circulation was ordered to be called in and reissued at the rate of 120 for 100 — a measure by which foreign coiners profited greatly, and a chamber of justice was established to punish speculators, to whom the difficulties of the state were ascribed. These measures had so little success that the billets d'état which were issued as part security for the new debt at once sank 75% below their nominal value. At this crisis Law unfolded a vast scheme to the perplexed regent. A royal bank was to manage the trade and currency of the kingdom, to collect the taxes, and to free the country from debt. The council of finance, then under the duc de Noailles, opposed the plan, but the regent allowed Law to take some tentative steps. By an edict of 2nd May 1716, a private institution called La Banque générale, and managed by Law, was founded. The capital was 6 million livres, divided into 1200 shares of 5000 livres, payable in four instalments, one-fourth in cash, three-fourths in billets d'état. It was to perform the ordinary functions of a bank, and had power to issue notes payable at sight in the weight and value of the money mentioned at day of issue. The bank was a great and immediate success. By providing for the absorption of part of the state paper it raised the credit of the government. The notes were a most desirable medium of exchange, for they had the element of fixity of value, which, owing to the arbitrary mint decrees of the government, was wanting in the coin of the realm. They proved the most convenient instruments of remittance between the capital and the provinces, and they thus developed the industries of the latter. The rate of interest, previously enormous and uncertain, fell first to 6 and then to 4%; and when another decree (10th April 1717) ordered collectors of taxes to receive notes as payments, and to change them for coin at request, the bank so rose in favour that it soon had a note-issue of 60 million livres. Law now gained the full confidence of the regent, and was allowed to proceed with the development of the “system.”
The trade of the region about the Mississippi had been granted to a speculator named Crozat. He found the undertaking too large, and was glad to give it up. By a decree of August 1717 Law was allowed to establish the Compagnie de la Louisiane ou d'Occident, and to endow it with privileges practically amounting to sovereignty over the most fertile region of North America. The capital was 100 million livres divided into 200,000 shares of 500 livres. The payments were to be one-fourth in coin and three-fourths in billets d'état. On these last the government was to pay 3 million livres interest yearly to the company. As the state paper was depreciated the shares fell much below par. The rapid rise of Law had made him many enemies, and they took advantage of this to attack the system. D'Argenson, now head of the council of finance, with the brothers Paris of Grenoble, famous tax farmers of the day, formed what was called the “anti-system.” The farming of the taxes was let to them, under an assumed name, for 48½ million livres yearly. A company was formed, the exact counterpart of the Mississippi company. The capital was the same, divided in the same manner, but the payments were to be entirely in money. The returns from the public revenue were sure; those from the Mississippi scheme were not. Hence the shares of the latter were for some time out of favour. Law proceeded unmoved with the development of his plans. On the 4th of December 1718 the bank became a government institution under the name of La Banque royale. Law was director, and the king guaranteed the notes. The shareholders were repaid in coin, and, to widen the influence of the new institution, the transport of money between towns where it had branches was forbidden. The paper-issue now reached 110 millions. Law had such confidence in the success of his plans that he agreed to take over shares in the Mississippi company at par at a near date. The shares began rapidly to rise. The next move was to unite the companies Des Indes Orientales and De Chine, founded in 1664 and 1713 respectively, but now dwindled away to a shadow, to his company. The united association, La Compagnie des Indes, had a practical monopoly of the foreign trade of France. These proceedings necessitated the creation of new capital to the nominal amount of 25 million livres. The payment was spread over 20 months. Every holder of four original shares (mères) could purchase one of the new shares (filles) at a premium of 50 livres. All these 500-livre shares rapidly rose to 750, or 50% above par. Law now turned his attention to obtaining additional powers within France itself. On the 25th of July 1719 an edict was issued granting the company for nine years the management of the mint and the coin-issue. For this privilege the company paid 5 million livres, and the money was raised by a new issue of shares of the nominal value of 500 livres, but with a premium of other 500. The list was only open for twenty days, and it was necessary to present four mères and one fille in order to obtain one of the new shares (petites filles). At the same time two dividends per annum of 6% each were promised. Again there was an attempt to ruin the bank by the commonplace expedient of making a run on it for coin; but the conspirators had to meet absolute power managed with fearlessness and skill. An edict appeared reducing, at a given date, the value of money, and those who had withdrawn coin from the bank hastened again to exchange it for the more stable notes. Public confidence in Law was increased, and he was enabled rapidly to proceed with the completion of the system. A decree of 27th August 1719 deprived the rival company of the farming of the revenue, and gave it to the Compagnie des Indes for nine years in return for an annual payment of 52 million livres. Thus at one blow the “anti-system” was crushed. One thing yet remained; Law proposed to take over the national debt, and manage it on terms advantageous to the state. The mode of transfer was this. The debt was over 1500 million livres. Notes were to be issued to that amount, and with these the state creditors must be paid in a certain order. Shares were to be issued at intervals corresponding to the payments, and it was expected that the notes would be used in buying them. The government was to pay 3% for the loan. It had formerly been bound to pay 80 millions, it would now pay under 50, a clear gain of over 30. As the shares of the company were almost the only medium for investment, the transfer would be surely effected. The creditors would now look to the government payments and the commercial gains of the company for their annual returns. Indeed the creditors were often not able to procure the shares, for each succeeding issue was immediately seized upon, though the 500-livre share was now issued at a premium of 4500 livres. After the third issue, on the 2nd of October, the shares immediately resold at 8000 livres in the Rue Quincampoix, then used as a bourse. They went on rapidly rising as new privileges were still granted to the company. Law had now more than regal power. The exiled Stuarts paid him court; the proudest aristocracy in Europe humbled themselves before him; and his liberality made him the idol of the populace. After, as a necessary preliminary, becoming a Catholic, he was made controller-general of the finances in place of d'Argenson. Finally, in February 1720, the bank was in name as well as in reality united to the company.
The system was now complete; but it had already begun to decay. In December 1719 it was at its height. The shares had then amounted to 20,000 livres, forty times their nominal price. A sort of madness possessed the nation. Men sold their all and hastened to Paris to speculate. The population of the capital was increased by an enormous influx of provincials and foreigners. Trade received a vast though unnatural impulse. Everybody seemed to be getting richer, no one poorer. Those who could still reflect saw that this prosperity was not real. The whole issue of shares at the extreme market-price valued 12,000 million livres. It would require 600 million annual revenue to give a 5% dividend on this. Now, the whole income of the company as yet was hardly sufficient to pay 5% on the original capital of 1677 million livres. The receipts from the taxes, &c., could be precisely calculated, and it would be many years before the commercial undertakings of the company — with which only some trifling beginning had been made — would yield any considerable return. People began to sell their shares, and to buy coin, houses, land — anything that had a stable element of value in it. There was a rapid fall in the shares, a rapid rise in all kinds of property, and consequently a rapid depreciation of the paper money. Law met these new tendencies by a succession of the most violent edicts. The notes were to bear a premium over specie. Coin was only to be used in small payments, and only a small amount was to be kept in the possession of private parties. The use of diamonds, the fabrication of gold and silver plate, was forbidden. A dividend of 40% on the original capital was promised. By several ingenious but fallaciously reasoned pamphlets Law endeavoured to restore public confidence. The shares still fell. At last, on the 5th of March 1720, an edict appeared fixing their price at 9000 livres, and ordering the bank to buy and sell them at that price. The fall now was transferred to the notes, of which there were soon over 2500 million livres in circulation. A large proportion of the coined money was removed from the kingdom. Prices rose enormously. There was everywhere distress and complete financial confusion. Law became an object of popular hatred. He lost his court influence, and was obliged to consent to a decree (21st May 1720) by which the notes and consequently the shares were reduced to half their nominal value. This created such a commotion that its promoters were forced to recall it, but the mischief was done. What confidence could there be in the depreciated paper after such a measure? Law was removed from his office, and his enemies proceeded to demolish the “system.” A vast number of shares had been deposited in the bank. These were destroyed. The notes were reconverted into government debt, but there was first a visa which reduced that debt to the same size as before it was taken over by the company. The rate of interest was lowered, and the government now only pledged itself to pay 37 instead of 80 millions annually. Finally the bank was abolished, and the company reduced to a mere trading association. By November the “system” had disappeared. With these last measures Law, it may well be believed, had nothing to do. He left France secretly in December 1720, resumed his wandering life, and died at Venice, poor and forgotten, on the 21st of March 1729.
Of Law's writings the most important for the comprehension of the “system” is his Money and Trade Considered. In this work he says that national power and wealth consist in numbers of people, and magazines of home and foreign goods. These depend on trade, and that on money, of which a greater quantity employs more people; but credit, if the credit have a circulation, has all the beneficial effects of money. To create and increase instruments of credit is the function of a bank. Let such be created then, and let its notes be only given in return for land sold or pledged. Such a currency would supply the nation with abundance of money; and it would have many advantages, which Law points out in detail, over silver. The bank or commission was to be a government institution, and its profits were to be spent in encouraging the export and manufacture of the nation. A very evident error lies at the root of the “system.” Money is not the result but the cause of wealth, he thought. To increase it then must be beneficial, and the best way is by a properly secured paper currency. This is the motive force; but it is to be applied in a particular way. Law had a profound belief in the omnipotence of government. He saw the evils of minor monopolies, and of private farming of taxes. He proposed to centre foreign trade and internal finance in one huge monopoly managed by the state for the people, and carrying on business through a plentiful supply of paper money. He did not see that trade and commerce are best left to private enterprise, and that such a scheme would simply result in the profits of speculators and favourites. The “system” was never so far developed as to exhibit its inherent faults. The madness of speculators ruined the plan when only its foundations were laid. One part indeed might have been saved. The bank was not necessarily bound to the company, and had its note-issue been retrenched it might have become a permanent institution. As Thiers points out, the edict of the 5th of March 1720, which made the shares convertible into notes, ruined the bank without saving the company. The shares had risen to an unnatural height, and they should have been allowed to fall to their natural level. Perhaps Law felt this to be impossible. He had friends at court whose interests were involved in the shares, and he had enemies eager for his overthrow. It was necessary to succeed completely or not at all; so Law, a gambler to the core, risked and lost everything. Notwithstanding the faults of the “system,” its author was a financial genius of the first order. He had the errors of his time; but he propounded many truths as to the nature of currency and banking then unknown to his contemporaries. The marvellous skill which he displayed in adapting the theory of the “system” to the actual condition of things in France, and in carrying out the various financial transactions rendered necessary by its development, is absolutely without parallel. His profound self-confidence and belief in the truth of his own theories were the reasons alike of his success and his ruin. He never hesitated to employ the whole force of a despotic government for the definite ends which he saw before him. He left France poorer than he entered it, yet he was not perceptibly changed by his sudden transitions of fortune. Montesquieu visited him at Venice after his fall, and has left a description of him touched with a certain pathos. Law, he tells us, was still the same in character, perpetually planning and scheming, and, though in poverty, revolving vast projects to restore himself to power, and France to commercial prosperity.
The fullest account of the Mississippi scheme is that of Thiers, Law et son système des finances (1826, American trans. 1859). See also Heymann, Law und sein System (1853); Pierre Bonnassieux, Les Grandes Compagnies de commerce (1892); S. Alexi, John Law und sein System (1885); E. Levasseur, Recherches historiques sur le système de Law (1854); and Jobez, Une Préface au socialisme, ou le système de Law et la chasse aux capitalistes (1848). Full biographical details are given in Wood's Life of Law (Edinburgh, 1824). All Law's later writings are to be found in Daire, Collection des principaux économistes, vol. i. (1843). Other works on Law are: A. W. Wiston-Glynn, John Law of Lauriston (1908); P. A. Cachut, The Financier Law, his Scheme and Times (1856); A. Macf. Davis, An Historical Study of Law's System (Boston, 1887); A. Beljame, La Pronunciation du nom de Jean Law le financier (1891). See also E. A. Benians in Camb. Mod. Hist. vi. 6 (1909). For minor notices see Poole's Index to Periodicals. There is a portrait of Law by A. S. Belle in the National Portrait Gallery, London. (F. Wa.)
- A work entitled Proposals and Reasons for constituting a Council of Trade in Scotland was published anonymously at Edinburgh in 1701. It was republished at Glasgow in 1751 with Law's name attached; but several references in the state papers of the time mention William Paterson (1658-1719), founder of the Bank of England, as the author of the plan therein propounded. Even if Law had nothing to do with the composition of the work, he must have read it and been influenced by it. This may explain how it contains the germs of many of the developments of the “system.” Certainly the suggestion of a central board, to manage great commercial undertakings, to furnish occupation for the poor, to encourage mining, fishing and manufactures, and to bring about a reduction in the rate of interest, was largely realized in the Mississippi scheme. See Bannister's Life of William Paterson (ed. 1858), and Writings of William Paterson (2nd ed., 3 vols., 1859).