In the previous part, we promised you that today we will deal with the actions of a rather unusual character in the history of money. So we’re starting!
The church of San Moise in Venice is visited by crowds of tourists every year. The baroque facade is decorated with a mysterious inscription for many:
“In honor and remembrance of John Lawa from Edinburgh, the celebrated general finance controller of the kings of France.”
An English name and advisor to the rulers of France? Sounds weird? We promise that it is still more sensational!
An extraordinary biography
John Law was born in Edinburgh in 1671 as the son of a goldsmith and heir to the Lauriston castle. As a young man, he went to London, where he took care of what 20-year-olds could do with the storm of hormones and excess money. Namely, he squandered his father’s estate and mingled with numerous scandals. He must have caused quite a scandal, since in 1694, as a result of a duel (or simply a fight), he killed his neighbor, who supposedly more severely reprimanded him about his morals. Young Law was condemned for his misdemeanor to death. Had the execution been successful, the world would not have experienced the first speculative bubble in its history, and perhaps the French Revolution had not exploded so early and with such violence. John, as befits a real adventurer, escaped from prison and got to Amsterdam.
Capital of finance
He could not find better! Amsterdam was then the capital of finance, something like contemporary Wall Street. The Dutch were really innovative about money. They established one of the first central banks in the world as well as a joint-stock company.
For the young Scot, what he saw in Amsterdam was a revelation. He was looking at the idea of the nascent stock exchange and the rotation of the East India Company. One thing did not suit him. He did not understand why the issuer is only distributing a limited number of shares in Company in a situation of huge demand …
He came up with a pretty quack figure. When he returned to Great Britain in 1700, he proposed concentrating ore in the hands of the state and increasing the issue of paper money (which would replace coins for good). He argued that there could be up to 10 times more money in circulation than the value of gold. Will it not cause an economic catastrophe? “Where else ?!” – argued Law. He believed that the banknotes would be in constant circulation, multiplying the general wealth of the nation. However, the idea did not meet with acceptance.
Feeling like an underestimated genius, Law went to France. Why was the Scot suddenly suddenly appreciated? Initially, he was not taken seriously. Foreign Minister, Marquis Torcy, called him a gambler and spy. However, they did make practical considerations. France was in debt for debt. It was devastated by the expensive war of Louis XIV, the government stood at the bankruptcy of bankruptcy. Someone came up with the idea of revising and reducing the debts of the court. Even that was not enough. To cover the deficit, 250 million were issued. interest bearing banknotes. It was also attempted to withdraw from circulation gold and silver coins. The latter, however, caused a recession. Law said he had an idea to solve these problems.
In autumn 1715, the Royal Council – rather in desperation, and not fascinated by financial innovations – listened to the Scotsman. Law introduced two ideas. One concerned a public bank that would issue money in the form of banknotes. However, the institution’s vision was rejected, mainly by the bold idea of a hand on tax revenues. The second idea, concerning the establishment of a private Banque Generale, has already gained greater approval.
Thus, the bank was established the following year. Law himself stood at its head. The institution had the right to issue paper money for a period of two decades. In 1717, clever John also favored the fact that citizens could pay taxes in the paper currency he produced.
Let us remember that Law was constantly modeled on ideas he had seen from the Dutch. That is why the next step was to establish a joint-stock company – the Western Company. It had a monopoly on the economic exploration of Louisiana. It was not known whether the new territory would provide the country with riches, but the speculative fever led to the company’s stockpile.
Although the beginning of the company’s activity was promising, it caused some skepticism at the beginning. Prince Saint-Simon drew attention to the fact that such a system of functioning may work in England, “where finances are under control” and not in the unstable and absolutistly ruled France. Also the market started saying “I check” and when a competing company was established, it started to collect funds more efficiently. The response of the authorities was further privileges for the Lawa company, which were to attract a new wave of stock buyers.
What’s more, the demand for shares was driven by the same Law leader at the head of Banque Royale (because it was called Banque Generale after nationalization), issuing more and more banknotes. In addition, the West Company absorbed the East India Company and the China Company, which further increased the company’s capitalization. She became so seemingly powerful that she even gave the government a loan to repay his debts. Sam Law took control of the collection of taxes.
The giant is shaking
The first crisis came in 1719, when England demanded the exchange of some of the banknotes she owned for gold. Law solved the crisis, but only thanks to the forgery of the company’s balance sheet and announcements of huge dividends. Speculation reached its peak. A certain hunchback Bombardio did his career at the time. The transaction reported on his hump was said to be extremely favorable … The end was however close. In 1720, the more aware investors began to withdraw their banknotes in exchange for gold received from the bank. In summer, the institution was forced to suspend this process. The banknotes have completely lost their value (due to lack of public trust). At the end of the year Bank Royale was closed, while Law himself escaped abroad, where he died in poverty.
The crisis was so strong that it was only averted after nearly six years by the devaluation of Law. The crash was so severe for many that one of the investors (probably characterized by a specific sense of humor) ordered plates in China with the inscription “S*tty shares and trade of the wind”.
The reason for the bursting of the bubble was not only the storming of investors to the bank after ore. It is fair to note that Company’s operations lacked foundations for such spectacular gains. Louisiana did not turn out to be a land from which you could make huge profits.
Why, however, at the beginning we noted that Law’s actions accelerated the French Revolution? Well, his manipulations have undone in the development of the economy on the Seine and discouraged the French to paper money, but also stock trading. This backwardness also influenced the royal court, which, being constantly ineffectively reformed, eventually drowned in debt to drag the entire country behind him, which ultimately led the people to rebel.
To be continued…