Controller General of Finance who presided over the boom and bust of the Bank of France and the Mississippi Company in early colonial days.
FAILED MILLIONAIRE-FINANCIER
John Law, mathematician, financial genius and gambler, is depicted in most history books as the arch villain who brought down the Louisiana colony with his wild schemes. He is also known as the father of modern finance whose career offers a case study of banking practices and stock manipulation (as well as the greed that sustained them) that were repeated in world financial markets that collapsed in 1929.
In his early career, Law traveled among the royal courts of Europe after escaping an English prison and an execution sentence for killing a prominent dandy in a duel.
His fascination with mathematics and the new science of economics, his mastery of probability theory and his willingness to wager large sums, brought him riches at the gaming tables.
But Law had higher ambitions. He wanted nothing less than to mastermind the financial system of a kingdom by replacing metal coins with secured paper money. After unsuccessful attempts to interest the crowns of several European kingdoms, he succeeded with France’s Louis XIV.
France’s economy was the envy of Europe, but Louis ruined it with military aggression and luxurious living while the masses lived in misery, many dying in the famines of 1694 and 1709.
Currency of the day was exclusively silver and gold. Louis XIV had to sell his gold dinner services to pay for his extravagances. Coins were constantly revaluated to stretch resources, and by 1715 the crown was 2 billion livres in debt to a group of financiers who also controlled tax collections.
LAW’S FRENCH BANK
Law’s plan to stop the downward spiral was through credit and the increased circulation of money. Since coins were in short supply, he proposed a national bank that would issue money made from paper. While Louis was reluctant to accept Law’s plan, his nephew, Philippe Duc De Orleans, who became regent for the five-year-old heir to the throne after Louis’s death in 1715, accepted Law’s ideas with a twist: the bank would be private, chartered to Law for 20 years and financed by stockholders.
Because of heavy debts, Robert Crozat relinquished the monopoly of the Mississippi concession which Louis had given him. His exclusive trading privileges reverted to the crown.
Law’s bank opened in 1716, and in 1717, he was named managing director of the Mississippi Company with the exclusive right to all trade between France and the Louisiana colony for 25 years, and the right to maintain an army and navy and to mine and farm the land.
THE BOOM
Law offered many enticements to investors, both in the bank and in the Mississippi Company. Anyone could buy shares. Anyone could grow rich. To play this stock market, one needed only a ten percent deposit. The value of the stock rose from 500 livres to 6,500 lives in six months. People sold their homes, jewels, cattle and crops to buy shares. Aristocrats, their footmen and tradesmen alike crowded Law’s offices to buy shares, which continued to increase in value. The result was general inflation and unbridled luxury. Numerous fortunes were made and in 1720 one journalist coined the word “millionaire.”
After converting to Catholicism and becoming a French citizen, Law was appointed controller general of finance of France. One of his early edicts overhauled the tax system, substituting a tax on income for the old system of scores of levies on wood, hay, oats, soap, cattle, fish, etc.
By November 1719 there were 4.8 billion livres worth of banknotes, of which the crown and the company owned a third, and shares were worth
10,000 by January 1720.
DEVELOPING THE COLONY
Law promoted the glowing reports of riches in the Louisiana colony: gold, silver, copper, lead, mercury and even a large green mountain believed to be of emeralds. New Orleans was described as a prosperous town of 800 very comfortable, well-appointed houses, each attached to 120 acres of land to cultivate for self-sufficiency.
But here’s the reality: Bienville reported to the company in 1719 that there was no gold, no emeralds. As for New Orleans, there were only four modest houses where the immigrants survived by trading with the natives.
THE IMMIGRANTS
Between 1717 and 1720, of the thousands who came to Louisiana, half died en route, and hundreds died of disease or starvation in the colony. Law believed that given enough money, the colony could become valuable. The market depended on public confidence, so Law set out to remedy the shortage of settlers.
The fleet was increased to 30 ships and new edicts led to forced emigration to the colony. Every criminal, vagabond and prostitute as well as servants unemployed for more than four days were listed and liable for transportation.. An army of mercenary soldiers was employed by the company to apprehend them and escort them to the nearest port.
Law rounded up orphans and young people from detention centers and poorhouses. In Paris alone, it was estimated that some 4,000 people, among them the most defenseless, disreputable and dangerous, would swell the numbers of settlers and provide necessary unskilled labor.
The first cargo of female deportees received a warm welcome from the male settlers. While few opposed these measures, public approval was short-lived. One journalist cited problems caused in Louisiana by certain groups of females: “The debauched girls that had been transported to the Mississippi and other French colonies had been the cause of much disorder by their libertine actions and by the venereal disease that they had spread.”
The guards were paid a commission for each captive. A word and a few sous passed could mean getting rid of an unwanted relative or competitor. Children were taken and if ransom was not forthcoming, were carried to a prison and from there to Louisiana. Those who couldn’t escape were abysmally treated – No pains were taken for their subsistence on the journey, and at night they were shut up in barns.
PUBLIC EYEBROWS RAISED
Public disapproval did not stop law. He concentrated on getting volunteers, especially young married couples. He offered dowries to couples in poorhouses who would marry and emigrate. One report notes the taking of 500 boys and girls from the detention areas and hospitals. The girls were taken in wagons and the boys on foot, escorted by guards.
The most bizarre was in September 1719, the mass nuptials of 80 young girls of doubtful repute and 80 specially pardoned criminals. The marriage took place as the couples stood shackled together with heavy iron chains. Afterwards they were paraded in their chains through Paris before being sent to LaRochelle for transport to Louisiana. Public outrage resulted in an end to the deportations in May 1720.
THE BUBBLE BURSTS
By the end of 1719, share prices were dropping precipitously as general realization grew that there were no riches to mine in Louisiana. Law found himself having to buy up shares for which there was no longer a demand. Also, silver and gold were being drained from the bank as many clients, anticipating an end to the boom, were converting to coins. Prince de Conti took some 4.5 million livres in notes to the bank and demanded coins. Law had no alternative but to comply, and Conti needed three wagons to carry away his money. By the end of 1720 some 500 million livres in silver and gold were taken out of the country and vendors began to refuse to accept paper money. Law announced to the Mississippi millionaires that the royal bank was being taken over by the Mississippi Company. Sales offices were closed, and within a week shares plunged.
The financial maelstrom had other consequences for which Law was blamed: a violent crime wave. Law was called “the most notorious cheat with as little capacity as integrity.” Widespread hatred of Law erupted in riots in the streets. Law resigned and fled the country. He worked briefly in European courts as a spy for France and died in Venice on March 21, 1729 at age 57.
The depression following the crash was exacerbated by the plague which claimed more than 100,000 lives.
Law’s system was also dead.
Reference: Gleeson, Janet, MILLIONAIRE, the Philanderer, Gambler and Duelist Who Invented Modern Finance, Simon and Schuster, New York, 1999.