John Law

The Scottish monetary theorist and banker John Law (1671-1729) anticipated many contemporary banking and fiscal practices.

John Law was born on April 21, 1671, in Edinburgh to wealthy parents. While in London to continue his education, he killed a rival in a love affair in 1694 and had to flee to Amsterdam. There and elsewhere in Europe he studied banking and financial practices and developed his own economic and monetary theories.

Law exposed his views in a number of works, the most important being Money and Trade Considered with a Proposal for Supplying the Nation with Money (1705). According to Law, as well as many of his contemporaries, the main responsibility of government was to increase the prosperity of the country. This could be accomplished most effectively by increasing the amount of currency in circulation. However, unlike the mercantilists who emphasized the importance of the precious metals, Law believed that paper currency had distinct advantages over gold and silver. He concluded that the precious metals should be monopolized by a bank as security for the issuance of paper currency in much larger sums than the supply of gold and silver.

Law attempted to interest several governments in his theories but was unsuccessful until 1716, when the Duc d'Orléans, regent of France for the young Louis XV, approved the establishment of a private bank, the Banque Générale, later the Banque Royale. In addition to providing the services of similar banks, the new institution was authorized to issue paper currency redeemable at face value for the precious metals. In 1717 the bank and the government became more closely associated when the regent instructed that all public funds be deposited in it and authorized the payment of taxes in currency issued by the bank.

In 1718 Law founded the Compagnie d'Occident, which was given a monopoly on trade with the Mississippi Valley region. It was the regent's expectation that, since public securities could be used to purchase shares in the new company, creditors of the state would exchange their bonds for shares, thus reducing the public debt. The company extended its activities, founding new companies that gave it a virtual monopoly of foreign trade and such lucrative internal affairs as the tobacco monopoly and the collection of indirect taxes.

All of these companies issued shares whose value rose rapidly in anticipation of the huge profits to be earned. Propaganda (rumors of the discovery of gold and silver mines, for example) helped stimulate speculation in the shares of the various companies. However, by early 1720 insiders realized that these hopes were exaggerated and began to sell their shares and to exchange their paper currency for bullion. Political intrigue and the activities of rival bankers contributed to the decline of the "system."

Law's efforts to halt the debacle were unsuccessful, and in December 1720 he fled France. He died in Venice on March 21, 1729, a poor man, still convinced of the validity of his theories.

Further Reading on John Law

The most satisfactory study of Law in English is H. Montgomery Hyde, John Law (1948).

Additional Biography Sources

Minton, Robert, John Law, the father of paper money, New York: Association Press, 1975.

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