John Law

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John Law (baptised 21 April 1671–21 March 1729) was an economist of Scottish origin, most famous for his connection to the financial collapse in France. He was the first to seriously consider using paper money instead of metal.[1]

Early life and work

John Law was born in 1671 Edinburgh to a wealthy goldsmith and banker. Considered unusually gifted, especially in mathematics, he took up a life of hazard and women. He killed a man in 1694 in a duel and was sentenced to death. He escaped the country under an assumed name and became the secretary the English Resident in Netherlands, where he began to study its highly advanced economy, He continued the studies in the wealthy cities of Italy.

His first larger economic treatise was penned after his return home. Scotland was a poor country, without colonies or sources of precious metals. Writing about loans and their importance for trade, he explored in great detail the properties of money, and as first considered using paper money instead of metals. He pondered on the question of trust to paper money and how it could be created. He also spoke of the importance of a large population and workforce for economic growth.

His ideas found no success in Scotland. Silver was the only recognized money in Europe for a thousand years, gold coins were used only for large and international transactions. But the inflow of precious metals from the New World had a serious impact on currencies. Where many complained about rising prices, some, as Law, have recognized (often ascribed to J. Bodin in 1568, but first recognized by Azpilcueta Navarro from the School of Salamanca in 1556[2]), that the goods have not risen in value, but silver has fallen; from 1500 to 1700 it was estimated to be 1/20 of its former value.[1]

Inflation in France

Law continued his writings in Italy and amassed a large property, partially through gambling. In 1715 Law sent his plans for the dismantling of the French public debt to the regent and moved to Paris. He suggested to unify all colony companies and create a royal bank. Exploring the ease of using paper money, its circulation should be much faster. Also, the crown should handle credit with special care, or risk to be ruined.

He convinced the regent of France, that paper money would restore the economy of France and repay its debt. His bank has effectively become the central bank of France until its collapse. After the boom of 1718-1720 turned into a crash in 1721, Law withdrew from Paris on his properties and on December 28, 1720, left the country with a passport from the regent on the name "Du Jardin", with only 800 Luisdor on hand, all of his wealth left in France.

The Compagnie des Indes that Law has founded was not simply a mirage from paper, at its collapse it possessed over 500 ships. It had independent income from the monopolies on tobacco, coinage and taxes. Law sought the opening up of colonies to trade, which he saw brought great wealth to Netherlands and Italy. But colonization required farmers, workers and traders, that were simply nowhere to be found - not even from other countries. The Compagnie continued to exist for several decades. Law was not simply a fraud and fool, as many pamphlets depicted him. The incomes from the bank and company were used to lower the taxes on oil and soap, the tariff on silk was completely removed, tariff on stone coal reduced. These and other measures made food, wood and coal cheaper by 30-40%. Law supported weaving and fishing, mainly by cheap loans. He also planned with the regent the buying back of all sold public offices, including Parliament seats - which would be a major change of the political system. Law has forbidden the bank employers to trade with Compagnie shares, after he found out, that the directors were manipulating its prices. The constant rising and falling, along with the high price of shares, despite the profits it brought, wasn't good for the company.[1]

But in times of crisis, Law resorted to despotic power, banning the export of coins and bullion. Next he prohibited the purchase or wearing of diamonds and other jewels. When this didn't stop the exit from paper, Law outlawed the production and sale of all gold and silver artifacts with the exception of religious paraphernalia, resulting in soaring prices in crosses and chalices. Within a month Law banned the possession of more than 500 livres' worth of silver or gold and required that all payments of more than 100 livres be made in banknotes. People were promised generous rewards if they informed on their neighbors.[3]

Later life

Law attempted to recover his possessions in France to little success.[1] He died in disgrace and was buried in a pauper’s grave.[4]

Economic and political views

To the renegade Scotsman hiding out in Amsterdam, Dutch finance came as a revelation. Law was fascinated by the relationships between the East India Company, the Exchange Bank and the stock exchange. Always attracted by gambling, Law found the Amsterdam Beurs more exciting than any casino. He marvelled at the antics of short-sellers, who spread negative rumours to try to drive down VOC share prices, or the specialists in windhandel, who traded speculatively in shares they did not themselves even own. Financial innovation was all around. Law himself floated an ingenious scheme to insure holders of Dutch national lottery tickets against drawing blanks.

Law’s ambition was to revive economic confidence in France by establishing a public bank, on the Dutch model, but with the difference that this bank would issue paper money. As money was invested in the bank, the government’s huge debt would be consolidated. At the same time, paper money would revive French trade - and with it French economic power. ‘The bank is not the only, nor the grandest of my ideas,’ he told the Regent. ‘I will produce a work which will surprise Europe by the changes which it will effect in favour of France - changes more powerful than were produced by the discovery of the Indies . . .’

Law had studied finance in republican Holland, but from the outset he saw absolutist France as a better setting for what became known as his System. ‘I maintain’, he wrote, ‘that an absolute prince who knows how to govern can extend his credit further and find needed funds at a lower interest rate than a prince who is limited in his authority.’ This was an absolutist theory of finance, based on the assertion that ‘in credit as in military and legislative authorities, supreme power must reside in only one person’. The key was to make royal credit work more productively than in the past, when the crown had borrowed money in a hand-to-mouth way to finance its wars. In Law’s scheme, the monarch would effectively delegate his credit ‘to a trading company, into which all the materials of trade in the kingdom fall successively, and are amassed into one’. The whole nation would, as he put it, ‘become a body of traders, who have for cash the royal bank, in which by consequence all the commerce, money, and merchandise re-unite’.[5]


  1. 1.0 1.1 1.2 1.3 Richard Gaettens. Geschichte der Inflationen Von Altertum bis zum Gegenwart (German: History of Inflations from Old Ages to the Present), John Law und die französischen Finanzprobleme nach dem Tode Ludwigs XIV. (John Law and the French financial troubles after the death of Louis XIV.) p. 100-126. ISBN: ISBN 3-87045-211-0. Referenced 2010-02-27.
  2. Marjorie Grice-Hutchinson. "The School of Salamanca", p.52, referenced 2010-03-11.
  3. Doug French. "John Law and the Invention of Modern Finance", July 2009, referenced 2010-02-27.
  4. Sean Corrigan. "The Saga of John Law and Richard Cantillon", December 2004, referenced 2010-02-27.
  5. Niall Ferguson. The Ascent of Money, Chapter 1, p. 138-141. Published 2008, ISBN 9780141035482. Referenced 2012-06-10.

External links