John Law Was Right... Mostly

I first read about John Law while writing my first master’s thesis — a dry, technical affair about the dematerialisation of securities that would put you to sleep before the second page. A Colombian academic named Libia Guerra Delgado had herself recounted a story from July 1720 in an academic article I found online. It was about a crowd gathered outside the Banque Royale in Paris, a nobleman — Prince Conti — with three carts full of banknotes, and fifteen people crushed to death trying to exchange worthless paper for gold.

Wanting to find out more about the man behind that bank started a fascination with financial history, bubbles, and how money actually works that has never quite left me. His name was John Law, and more than two decades later I am still thinking about him.

So who was he?

John Law was born in Edinburgh in 1671, the son of a goldsmith. He was brilliant, charming, mathematically gifted, and almost entirely without conventional restraint. By his mid-twenties he had made a small fortune at the gaming tables of London and Amsterdam — not through luck, but through the systematic application of probability theory, which he understood better than almost anyone alive. He was also, fatally, a man who settled arguments with a sword. In 1694 he killed a man in a duel over a woman, was convicted of murder, and escaped from prison while awaiting execution. He spent the next two decades as a fugitive, drifting between the gambling houses and courts of Europe, refining a theory about money that nobody yet wanted to hear.

The theory was simple and, as it turned out, essentially correct. Gold and silver, Law argued, were terrible bases for a modern economy. There was never enough of them, they couldn’t expand to meet the needs of growing trade, and their supply depended on the accidents of mining rather than the needs of commerce. What an economy needed was paper money — backed not by metal but by land, by productive assets, by the credibility of the institution issuing it. A well-managed bank could expand credit, stimulate trade, lower interest rates, and employ idle resources. The metal in your pocket was not wealth — he argued. Wealth was activity, exchange, production. Money was just the instrument that made it flow.

He was, in this, about three hundred years ahead of his time. Every major economy on earth now runs on exactly this principle. The problem was that in 1715, the only country desperate enough to let him try it was France.

France was broke. The Sun King, Louis XIV, had spent half a century building Versailles, fighting wars across Europe, and running up debts that his successors had no idea how to pay. When Louis died in 1715, he left behind a kingdom teetering on the edge of bankruptcy, a child king in Louis XV, and a regent — Philippe, Duke of Orléans — who was intelligent enough to know he needed a miracle and reckless enough to ask a Scottish fugitive to provide one.

Law got his chance. He established the Banque Générale — France’s first national bank — and began issuing paper notes. It worked. Credit expanded, trade revived, the economy stirred back to life. Emboldened, Law went further. He founded the Mississippi Company, a trading enterprise given monopoly rights over France’s Louisiana territory — an area roughly the size of Western Europe, rumoured to be stuffed with gold, silver, and every other form of wealth the imagination could conjure. He began selling shares. The public bought them. Then bought more. Then lost their minds entirely.

Banque Royale, Mille livres Tournois, Paris, 1st January 1720. Within months it was worthless.

By 1719, the Rue Quincampoix — a narrow street outside Law’s offices — had become the most extraordinary place on earth, long before Wall Street was anything but its eponymous wall. Nobles and servants stood in it together before dawn. Foreigners crossed half of Europe for the chance to buy shares. A hunchback reportedly made a small fortune renting out his back as a writing desk to people completing transactions in the street. Share prices rose from 500 livres to 10,000 livres in eighteen months. A new word was coined on those cobblestones to describe the people getting rich: millionaire.

Law was now the most powerful man in France. He controlled the bank, the company, the national debt, and effectively the entire French economy. A convicted murderer from Edinburgh was running one of the great powers of Europe.

Then it collapsed.

Not all at once, but in the way Hemingway described going bankrupt: gradually, then suddenly. A few shrewd investors began converting paper into gold. Others noticed and followed. The crowd outside the Banque Royale grew. The gold reserves shrank. When the Prince of Conti arrived with his three carts of banknotes demanding metal in return, the game was already over. By the time Law tried to cut share prices in half to stabilise things, it was too late. There were riots. Fifteen people died in the crush outside the bank. Law fled France as he had fled England — one step ahead of the mob, this time carrying almost nothing.

He died in Venice in 1729, living on borrowed money, still convinced that his theory had been sound.

He was right.

The theory was sound. Fiat money, central banking, credit expansion as an economic tool — all of it is now orthodox policy. What he didn’t know was the natural limits of money printing. The problem was never the idea but the lack of institutional constraints. Law had been given unlimited power with no controls, no independent oversight, no rules separating the money printer from the political authority that benefited from printing. When the Regent needed more revenue, Law simply printed more notes. When share prices needed support, Law also printed more notes. There was nobody to say no, and no mechanism to force restraint. Eventually the economic effects of the collapse of the bubble he created, worsened by Louis XVI’s massive expenditures in support of the American war of independence, led almost sixty years later to France’s own revolution and the king’s own head rolling into a basket.

Which brings us back to the question from the last post. When there are institutional constraints, you get Wall Street instead of the Rue Quincampoix. When there aren’t, you get the three carts, the fifteen dead, and eighty years of France refusing to touch paper money again.

John Law was right about almost everything. He just didn’t understand that he needed better institutions around him.

As do most brilliant people, in my experience.