John Law (economist)

John Law (1671 April 21 - 1729 March 21) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself, and that national wealth depended on trade. He is said to be the father of finance, responsible for the adoptation or use of paper money or bills in the world today.

Biography

Law was born into a banking family from Fife; his father had purchased a landed estate at Cramond on the Firth of Forth, and after his death in 1688, Law travelled to London and lost large sums of money in gambling.

Related Topics:
Fife - Cramond - Firth of Forth - 1688

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On April 9, 1694 John Law fought a duel with Edward Wilson. Wilson had challenged Law over the affections of Elizabeth Villiers (later Countess of Orkney). Wilson was killed and Law was tried and found guilty of murder and sentenced to death. His sentenced was commuted to a fine, upon the ground that the offence only amounted to manslaughter. Wilson's brother appealed and had Law imprisoned but he managed to escape to the continent.

Related Topics:
April 9 - 1694 - Duel - Elizabeth Villiers

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Law urged the establishment of a national bank to create and increase instruments of credit, and the issue of paper money backed by land, gold, or silver. The first manifestation of Law's system came when he had returned to his homeland and contributed to the debates leading to the Treaty of Union 1707 with a text entitled "Money and Trade Considered, with a Proposal for Supplying the Nation with Money" (1705). After the Union of the Scottish and English parliaments, Law's legal situation obliged him to go into exile again.

Related Topics:
National bank - Credit - Paper money - Gold - Silver - Treaty of Union 1707

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He spent 10 years moving between France and the Netherlands, dealing in financial speculations, before the problems of the French economy presented the opportunity to put his system into practice.

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He had the almost socialist idea of abolishing minor monopolies and private farming of taxes and creating a bank for national finance and a state company for commerce and ultimately exclude all private revenue. This would create a huge monopoly of finance and trade run by the state, and its profits would pay off the national debt. The Conseil des Finances, merchants, and financiers objected to this plan.

Related Topics:
Monopolies - Conseil des Finances

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In 1716 Banque Générale ("General Bank") was set up by Law. It was a private bank, but ¾ of the capital consisted of government bills and government accepted notes. In August 1717, he bought the Mississippi Company, to help the French colony in Louisiana. In the same year Law floated the Mississippi Company as a joint-stock trading company called the Compagnie d'Occident which was granted a trade monopoly of the West Indies and North America. The bank became the Royal bank (Banque Royale) in 1718, meaning the notes were guaranteed by the king. The Company absorbed the Compagnie des Indes Orientales, Compagnie de Chine, and other rival trading companies and became the Compagnie Perpetuelle des Indes in 1719. In 1720 the bank and company were united and Law was appointed Controller General of Finances to attract capital. Law's pioneering note-issuing bank was extremely successful until it collapsed and caused an economic crisis in France and Europe.

Related Topics:
Banque Générale - Bank - Mississippi Company - Louisiana - Joint-stock - Compagnie d'Occident - West Indies - North America - Banque Royale - Compagnie des Indes Orientales - Compagnie de Chine - Compagnie Perpetuelle des Indes

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Law exaggerated the wealth of Louisiana with an effective marketing scheme, which led to wild speculation on the shares of the company in 1719. In February 1720 it was valued for a very high future cash flow at 10,000 livres . Shares rose from 500 livres in 1719 to as much as 15,000 livres in the first half of 1720, but by summer of 1720, there was a sudden decline in confidence, leading to a 97% decline in market cap by 1721. By the end of 1720 Philippe II of Orléans dismissed Law, who then fled from France.

Related Topics:
Louisiana - Cash flow - Market cap - Philippe II of Orléans - France

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Law subsequently moved between London and Venice where he contracted pneumonia and died a poor man in 1729.

Related Topics:
Venice - Pneumonia

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