John Law and Banque Generale

Who is John Law?

A gambler, murderer, fugitive; a mathematician, economist, genius…

"he was neither knave nor madman, but one more deceived than deceiving, more sinned against than sinning". (By Mackey Charles)

John Law was born into a family of bankers and goldsmiths in Scotland in 1671. When he was fourteen, he joined the family business and studied the banking business. After his father died (1688), he left for London with all the heritages.

Owing to his talent, Law won lots of money through gambling. But he killed Edward Wilson in 1694 and was found guilty of murder. Out of frustration, he escaped to Netherlands.

In Netherlands, Law was interested in local banks and commercial companies. After reading abundant books about money, finance and trade, he published Money and Trade Consider’d with a Proposal for Supplying the Nation with Money in 1705. Law urged to issue paper money backed by land. Thus, the fixed assets such as land can be transformed into liquid assets to stimulate economic activity and improve trade efficiency.  However, he had no opportunity to practice his ideas in Scotland and Netherland. Fortunately (or unfortunately), in 1714, he  got a chance to carry out his ideals in France.

At that time, public economy in France is at risk of crashing because of staggering national debt generated by the prolonged war by Louis XIV. High taxes and royal prerogative significantly impeded to economic development. Such environment set the proper stage for Law’monetary theory.

In June 1716, Law established the private bank in France, Banque Generale. The government is the biggest debtor. It was provided a lot of bank notes from Law’s bank, with which the government paid to cover its expenses and reduce debt. In October 1716, tax collectors were required by the government to pay taxes with bank notes which led to the consequence that Banque Generale’s notes became the country’s fiat currency.

In Law’s opinion, metallic money hindered the economic development in France. To stimulate economy, printing paper money was the solution. Increasing paper currency increased the demand; increasing demand boosted the economy. He believes that the value of a note depends on the "trust". As long as the public trust the government and his bank, the increasing money will boom the economy unconsciously.

However, printing paper money alone cannot create value and resolve the depression fundamentally. It also may bring the danger of inflation. Law needs to create some investment oppotunity to absorb excessive paper money and to make a profit. How did Jhe deal with such problem? In the next post, we will talk about it.

The following video is a cartoon about Mississippi Bubble; it’s interesting, giving us a brief view of this bubble. I believe before talking about the three stages of this bubble, it is helpful to learn the background. I hope you enjoy the video!