Tales of Soft Money — John Law and the Humiliation of Dignity

Early Life

Born in 1671, John Law was the son of a Scottish goldsmith of considerable social importance. Being the oldest out of nine surviving children, and being perceived as gifted, John was given the greatest care and education after the father suddenly died. According to A.W. Wiston-Glynn, the youngster took a liking to mathematics and then to the nature of private- and public debt and the properties of money. Done with his education by a Presbyterian minister, Law journeyed to London where he socialized with the country's elite while accumulating a gambling debt large enough to prompt his mother to liberate estate funds.

These debts, however, would turn out to be the least of young John Law's problems after he fatally wounded an English aristocrat in a duel over a woman. Law was tried by court and sentenced to death. It was here that all of his acquaintances finally paid off as the King's mercy was invoked. Initially pardoned, Law was thrown in to jail yet again after a public outcry about the blatant corruption in the legal system. With the help of his friends, and a bottle of opiates, Law managed to escape his guard and quickly flee to the Sussex coast where he boarded a boat destined for France. In France he tried to secure a position connected to the court of St. Germain but failed, and instead consequently tried to amass wealth through systematic gambling in which he likely was successful. The gambling occurred while Law traveled throughout the finance centers of Europe, and Wiston-Glynn specifically mentions Venice as the place where Law first took a liking to paper money, which the Venetians prudently backed with specie.

Fascinated by the various cogs of finance and credit, Law started to theorize about how to improve related systems and thought his home country a good testing ground. In the end of the 17th century he finally went back, having been promised safe conduct by Scottish authorities. His mind was set on reforming money, as is evident in Wiston-Glynn's words:

Convinced so thoroughly as he was with the soundness of his theories, and with the possibilities they opened up, if adopted, of infusing new life and new energy into the commercial world of his day, he regarded himself as a man with an important mission. [1]

Proposing a Land Bank for an Impoverished Nation

The Scotland that Law arrived to was a land in financial trouble. Although the Scottish people absolutely rejected the idea of a union with England, this construction still moved forward. Political resistance to it had partly diminished in the face of a recent disastrous colonization attempt nicknamed the 'Darien scheme', in which Scotland put up to 20% of he country's money to the task of securing the Panama canal in order to control trade. Sabotaged by England and Spain and various external factors like deceases, the colony fell and ruined parts of Scottish society. Despite the impoverished state, Scottish authorities rejected Law's proposals for radical reforms. Law, in turn, responded by writing what must be his most famous work: 'Money and Trade considered, with a Proposal for Supplying the Nation with Money'.

In it, Law proposed the establishment of a Land Bank with power to issue notes to landlords, secured upon their estates. These notes were to relieve the country from what Law meant was insufficient specie circulation; in other words a detrimental scarcity of money which according to Law hurt trade and prosperity. Additionally, these notes were thought to fluctuate less as they were to be backed by something from which all production originated, not by specie which at best had niche uses. The scheme, supported by the Duke of Argyll and the Marquis of Tweedale, was rejected by the Scottish Parliament. Seeing as his ambitions were not welcomed at home, and that his old dueling sentence was looming over him again as a union between England and Scotland became ever more likely, Law decided to yet again leave for the safety and opportunities of mainland Europe. This was in late 1707 or early 1708.

Living extravagantly at the Hague, and then at Brussels, he managed to introduce the concept of lotteries to the Dutch, which even culminated in a State lottery system that caused enough harm to the country that Law got himself expelled. Some sources also pointed to the fact that Law himself got very wealthy from the Dutch lotteries, either through some kind of embezzlement or from securing the 'house edge' in one way or another.

A France in Distress

Having left Holland, Law spent years as a gambler in various European cities, building quite a reputation around himself as successful at presumed games of chance. His newfound wealth also attracted followers and admiration from various aristocrats, and one of those were Duc de Chartres, better known as the powerful Duc d'Orleans, Regent of France during the minority of Louis XV. This gave Law opportunity to reach with his novel ideas of money management, the very core of the French Government. After overcoming initial obstacles, and with an ever growing indebtedness of the French State and debasement of French currency, Law established himself in a large mansion and entertained lavishly all the Frenchmen he thought he would need in order to implement his bold reforms. The ruinous effects of the War of the Spanish Succession proved fertile ground for his ideas to slowly gain acceptance.

Louis XIV, the infallible Sun King, died in 1715, resulting in the succession of his 5-year old grandson with accompanying Regency under Duc d'Orleans. A commission was put together to deal with the high national debt, and meanwhile the Regent implemented new issues of debased currencies, harsher taxation, limited confiscations, the sale of invented office titles, etc. Law continued to court anyone that would listen about how money were mere exchange tokens representing real wealth, and how in other words, an increase in the quantity of such tokens very well could lead to an increase in riches through the encouragement of trade. The duke, soon convinced that Law´s views on money could help France, decided to put the Scotsman's ideas on the table. All of the Council of Finances had to listen to John Law's outline, but a majority seems to have opposed it in silence. According to Wiston-Glynn, no specific reason for the opposition was recorded:

The precise ground of opposition is nowhere recorded, but probably the fear, expressed at the former Council in July, had not been dissipated, that the system would lend itself to abuse at the hands of an absolute monarch, and might bring in its train greater evils than those it was intended to remedy. [2]

In early 1716, any opposition left finally fell, even though Duc de Saint-Simon lamented the risks of this new type of private bank with paper money issuing power:

[...] But along with this advantage I found two inconveniences, the first, how to govern the bank with sufficient foresight and wisdom, so as not to issue more notes than could be paid whenever presented: the second, that what is excellent in a republic, or in a monarchy where the finance is entirely popular, as in England, is of pernicious use in an absolute monarchy such as France, where the necessities of war badly undertaken and ill sustained, the avidity of a first minister, favorite or mistress, the luxury, the wild expenses, the prodigality of a King, might soon exhaust a bank, and ruin all the holders of notes, that is to say overthrow the realm. [3]

Few dared to openly hold the opinion of Duc de Saint-Simon, and so the scheme passed. A private bank was formed under the name of the General Bank of Law & Company (better known as Banque Générale). Issuing specie-denominated notes backed 25% by specie and 75% by France's equivalent to Treasury notes, the Bank was an immediate success that facilitated stable credit markets and commerce - something the debased silver coinage had failed to do. Law's notes, trading at a price above the specie they nominally represented, became legal tender in April, 1717. At this time, Law drafted plans to consolidate France's entire wealth under the umbrella of the new paper money. It is not entire clear to what extent, exactly, Law's Bank wanted to embrace fractional reserve banking. The fact was that, due to the financial distress of the State and the sheer size of its mountain of debt, the Treasury notes traded at huge discounts on the free market, and not anywhere near the face value of which Law booked them as reserves in his banking system. That meant that while Law's paper money traded at a premium to silver, they were actually backed by 75% of highly speculative promises of future repayments.

The Mississippi Scheme

France had through its explorers acquired vast tracts of lands in North America, specifically in the north-east and along the Mississippi river. The Mississippi land was rented to a certain Antoine Crozat, who found himself in over his head in the task of profitably utilize it. Crozat, looking for a solution to this far-away financial burden, turned to the man of the hour, Law, who happily accepted the challenge. A corporation under the name of West India Company was formed, and given a 24-year long monopoly on trade with Louisiana. Furthermore, after some financial tricks where notes of debt were exchanged for company shares, Law transferred parts of France's national debt to this private company, as well as several thousand of the nation's creditors. This intertwining of the two entities would have consequences later on.

Propaganda and rumors were readily available and informed the French populace about the abundances of the New World, and of the peaceful natives hoping for religious redemption as well as for the relieving of their gold abundances for mere trinkets. Emigrants and convicts queued up to embark. Revenues did not come quickly however, and the company's shares traded at a 50% discount in 1718, down from the nominal value of 500 livres per share. To counter this depreciation, Law offered to buy shares at premium - a move that raised the excitement of many investors, who were then quick to bid on the shares as well. He also tried to give away shares for free to important allies in order to spur a higher interest and align incentives of the politically powerful.

Interest in the company´s shares reached incredible proportions as the Guinea Company was absorbed, then the French East India Company, meaning the right to trade and colonization on islands in the Pacific, Persia, the Mughal Empire, Siam, China, Japan, South America, and more. Up to 300 000 applications for shares were received from speculators. As Law expressed his intention of demanding old shares, or 'Mothers' as a requirement for the successful application of procurement of new shares, or 'Daughters', the price of old shares doubled in a few days. With enthusiasm and with the full support of the Regent as well as Law, Frenchmen set path westward, only to slowly realize their new lands were not the fruitful gardens of Eden as had too often been imagined. Wiston-Gynn gives the account from one of these pioneers:

Our Fort lies in about 28 degrees of latitude; the country is prodigiously sandy; and, I must say, they might as well have sent us to the deserts of Libia, or Barco, to have settled a colony [...].

I went up the river in a canoe for some hundred of miles, without seeing the country mend, and after three months stay embarked again for France. [4]

The Bank is Converted

While the doings and dealings of the Company proceeded, changes were occurring in Law's private bank. Wiston-Glynn mentions a push by the Regent to convert it to a State institution despite Law's supposed opposition to this. Other sources state that it was Law himself that wanted the conversion in order to fully consolidate the advantages of his schemes for the realm. And so, on the 4th of December, 1718, the General Bank of Law & Company was proclaimed a Royal Bank and Law himself was appointed Director-General. Very quickly were changes made to the conditions of paper-to-specie convertibility; what once had been a sound principle, where a note was always convertible to the amount of specie defined for it at time of issuance, now turned in to the disaster being a note with the right to coins subject to possible debasement. The change effectively made paper the currency standard of the nation, not specie. Not long thereafter, paper notes backed by nothing were issued. As the printing of paper money for the purpose of lending continued, while at the same time the inflow of silver reserves hesitated, the Bank's effective reserve ratio quickly diminished.

Answering this hesitation, silver and gold suffered restrictions as legal tender to encourage the use of the new money instead as the chosen medium of exchange. These new restrictions caused many Frenchmen to head to the Bank to get rid of their now less usable coins for more usable paper notes. Wiston-Glynn quotes one onlooker that wittily tried to calm the onrush:

Don't be afraid, gentlemen, that your money should remain on your hands; it shall all be taken from you. [5]

Consequently, the Bank's reserve ratio increased again, which was as good a reason as any to issue more paper. The abundance of new money created higher Company share prices as well as an increase in the price of other assets. A Cantillon effect materialized, where the economy as a whole did not properly realize the extent of the inflation, resulting in producers not being able to keep up with the demand from nouveau riche consumers. A wind with the taste for everything luxurious or extravagant swept in over the people of France. Meanwhile, the management of the Company and the Bank both converged on Hotel Mazarin in Paris, which became the seat of both - a natural decision since they were both governed by Law and were ever more intertwined.

Throngs of people clustered day after day in the streets around the Bank and the Company, hoping to acquire more shares. The aristocracy as well as many thousand foreigners were heavily involved in the speculation as well, and there are records of enormous debts being liquidated due to newly won wealth. Duc d'Orleans profited mightily as well and was recorded to give much to various charities. John Law was by this time regarded as a national hero, and was courted my dukes, and duchesses especially. With the help of bribes, Law managed to get Church approval to convert to Roman Catholicism - a prudent career move in a country where deadly religious bigotry had recently run rampant on Huguenots. A few days after a ceremony at Saint-Roch, on the 5th of January, 1720, Law was named Controller General of Finance. In this office, he did promote healthy tax reforms that crushed various old extortionate systems that abused peasants as well as merchants.

The Ground Shakes

In the end of 1720, various reports of bad news reached Law. First, a run on the Bank had occurred, and second, what seemed to be a speculative attack on the Company share price had been uncovered. These events caused a small rift in the relationship Law had with the Regent, Duc d'Orleans. They also caused a rift with British ambassador to France, and former friend of Law, Lord Stair. Stair was accused by Law to be the instigator of Company share sell-offs, and so their friendship - Law had corruptly offered Stair Company shares despite the application period being over, something Stair rejected to Law's great annoyance - ended and Stair was dishonorably relieved of his position.

The situation was further complicated by a few other factors. Britain had recently occupied Gibraltar and upset the tender balance in western Europe. Furthermore, Law had through Dutch facilitators bought shares in the British South Sea Company - something now deemed a security risk by some British officials. In private correspondence, Lord Stair also mentions Law's hatred for Britain and his want for 'mischief'. As Stair in shame headed back to his home country, he still maintained that Law's great schemes, now at the height of their prosperity, were destined to fail spectacularly.

After the share price of the West Indian Company rose from 10 000 livres to 20 000 livres (resulting in a valuation higher than the annual production of France), calls were made to exchange such notes for paper money, and then to exchange at the Bank for their equivalent value in specie. It must be noted that the hardships of the Louisianian settlers must have started to trickle back to the mother country by now. And so Law realized that, if unchecked, faltering enthusiasm and large redemptions could quickly deplete the Bank's reserves, which had not yet been much increased by profits from Mississippi. One of the main 'offenders' in this regard was Prince de Conti, who with wagons of notes converted them into specie at the Bank. Law's answer was a decree in 1721 which increased the official price of a silver marc to 54 livres. As people refused to bring their old silver coins for re-minting at the Bank, tyrannical home visits followed. Further decrees were issued to discredit specie as much as possible as a medium of exchange; harsh restrictions were issued on specie payments, and all public offices were told to only accept payments in notes. The reserves of the Bank had to be defended, at any cost, for the good of all.

A Tyrant's Tinkering

Public confidence in paper money was not able to be quickly restored. On the pretext that a massive amount of specie was not put to proper use as it now due to restrictions lay idle in chests or coffers, an edict of the the Council was published on the 27th of February, 1721:

[...] that no person, of whatever estate or condition, not even any religious or ecclesiastical community, should keep more than 500 livres in coined money or ingots, under pain of confiscation of the excess, and of a fine of 10 000 livres. [6]

Purchases of jewelry for the purpose of investment was made illegal. Informants were employed to rat on hoarders for a reward worth half the concealed amount. The price of a silver marc was raised to 85 livres on March 5th, and raised yet again on March 11th. Here Wiston-Glynn disgustingly defends Law, as he has done in most chapters:

These various decrees wrought a revolution in the fiscal arrangements of the country. No one appreciated more fully the danger than Law himself, but extraordinary circumstances such as those with which he was forced demanded the employment of extraordinary methods to counteract them. [...]

It is questionable if any other methods could have been devised than those followed by Law, and in judging their character it is necessary to bear in mind the ultimate object he had in view. [7]

By the time of the March 11th decree, the Regent appears to have started to realize what type of character he had assigned so much power. The French populace was in a violent mood, and meanwhile reports of Law's erratic behavior reached the duke as well. An officer of Law's guard had, upon being called by loud noises, gone to Law's bedroom at night only to find him dancing and singing half-naked around chairs. After making more promises to fix the dire situation of the Bank, Law managed to increase the specie reserve ratio to about 10%, meaning an ocean of unbacked notes were still circulating. But the poor walked ever more hungry, tyrannical home visits continued, and even Bank directors themselves had their wealth confiscated. In what may be considered dark humor, informants started to inform on themselves in hopeful attempts to reap the 50% reward for their own confiscation. Wiston-Glynn quotes what seems to be an unknown source:

Never before had sovereign power been so violently exercised, never had it attacked in such a manner the temporal interests of the community. There-fore was it by a prodigy, rather than by any effort or act of the government, that these terribly new ordinances failed to produced the saddest and most complete revolutions; but there was not even talk of them; and although there were so many millions of people, either absolutely ruined or dying of hunger, and of the direst want, without means to procure their daily subsistence, nothing more than complaints and groans was heard. [8]

To further try to conjure confidence in the paper money, it was decided that the West India Company and the Royal Bank, already under the same roof, were to merge in fullness. Shortly after this merger, a massive 2 000 000 000 (over 300% of existing stock) unbacked livres were printed and used to pay off France's national debt. Because of the merging, national creditors now involuntarily became creditors to the faltering Company instead.

The End Point of Easy Money

On the 21st of May, 1721, an edict of the Council was issued that depreciated bank-notes by 20% of their value, while establishing six further depreciation events - one on the 1st of every month from July to December. Company shares were to undergo a similar depreciation schedule. The last confidence in Law and the whole financial system evaporated overnight and troops had to guard the Royal Bank in Paris. Revolutionary posters were finally distributed in the thousands, calling for people to resists the humiliation, with violence if needed. Meanwhile, the Parliament refused to register the edict, leading the Regent to withdraw it. But the faith was lost already.

As holders of paper money now tried to save at least some of their wealth by redeeming the depreciated notes for silver at the Bank, Law quickly issued further restrictions on exactly that. Investigations in the circumstances of numerous frauds among Bank officials commenced as well, adding to public outcry. Trading for a fraction of the represented value in silver, this could be contrasted with the wild surge to get rid of silver for the very same notes at a premium not long before. Now, silver or gold was often demanded by shop keepers who would not accept paper money at any discount. The price of specie and all else rose rapidly.

Restricting note-to-specie conversion to a small amount per person, a situation was created in Paris such that thousands of people thronged the doors of the Bank during the few hours of which it was kept open. Many were badly hurt in all the chaos, and some died, trampled to death. Those few who managed to enter were often unable to withdraw specie, which had already been exhausted for the day by friends and families of clerks and bank officials. In July, attacks on soldiers increased and a handful were killed while defending the barricades of war surrounding the Bank. The Parliament, always a thorn in the sides of Law and the Regent, was practically dissolved as its members were ordered to take paid vacation until they had come to their senses and ratified the latest tyrannical edicts. They did not, and remained in exile until December.

After the skirmishes in the capital, people were forbidden to assemble in crowds under pain of harsh punishments. The Bank closed for security reasons, making any more note conversion temporarily impossible. All notes of 1 000 livres or higher were demonetized, unless converted into debt issued by the Bank. In November, a similar edict was issued, putting also smaller notes to the same sad fate. This again meant that merchants could and would not accept any paper money, even at very large discounts. The result was even higher food prices and resulting starvation. Price controls were put on food, but was generally ignored as sellers in that case would have had to accept large losses. Dozens of bakers were fined in Paris, placed in the stocks and had their goods confiscated. The death penalty was introduced for emigrants who tried to escape France with some of their wealth.

On the 16th of December, in a France boiling with revolutionary sentiments, Law saved his own life by escaping to Brussels, doing the very thing which he and his noble allies could have more innocent but lesser men murdered for. He later continued to Venice, where his family met up with him and where he died relatively poor in 1729.

In France, no less than 100 000 families had to bail out the Bank and the Company, as Law in secret had printed vast amounts of unbacked notes that gave their owners the right to dividends. This bailout came in the form of drastic haircuts. Wiston-Glynn ends the biography on a disgusting note, blaming the people of France for the catastrophic failure of it all:

That France did not take full advantage of the great principles of sound industrial progress which were formulated for them and advocated by Law was neither the fault of him nor of his System. It was the fault of the people themselves, who were yet to find that resort to violence was to prove the only means of removing the great obstacles which stood in the way of their advancement as a nation. [9]

This article serves as a reminder that, even when dressed up in the brilliance of its authors, the soundness of its intricate workings, the promises of full backing by its issuers, easy money always fail to deliver anything other than the humiliation of human dignity.

[1] Wiston-Glynn, A.W. (1907). John Law of Lauriston, Financier and Statesman. Edinburgh: E. Saunders & Co., p.14.

[2] Ibid., p.39.

[3] Ibid., p.42.

[4] Ibid., pp.80-81.

[5] Ibid., pp.94-95.

[6] Ibid., pp.157-158.

[7] Ibid., pp.158-159.

[8] Ibid., pp.161-162.

[9] Ibid., p.203