He was called the scoundrel who invented credit. He was a Scottish libertine named John Law who rescued France from ruin, then ruined France again by applying his theory of prosperity based on credit. Law showed us the future and it didn’t work back then, and you can be the judge of its present influence…
…gossip says he encountered Phillipe d’Orleans, nephew and son-in-law of Louis XIV in a bawdy-house, and there, amid the chatter and pouts, expounded his financial theories. These were then transcribed into detailed reports which asserted that wealth could be better created by governmental action than by the free play of individual enterprise.
But Law’s own excess of individual enterprise annoyed the police; he and his travel companion, Lady Catherine Senor, were expelled from France as undesirables. They went to Italy, making their headquarters in Venice, the amphibious Las Vegas of eighteenth-century Europe. Law won steadily at games of hazard, and is said to have used private information from Paris to speculate in international exchange.
In August, 1715, at the news that Louis XIV was pushing at death’s door, Law returned to Paris with his head full of projects and his coach groaning with gold worth a million and a half francs. The king died on September 1, and was buried amid scenes of shameless popular rejoicing. He was succeeded by his five year old great grandson, Louis XV. Philippe d’Orleans, John Law’s old companion, was named regent of the kingdom and he found the nation’s finances in a calamitous position. The old king, who was effectively the state, left a total indebtedness of three billion francs. The treasury was empty; the anticipated revenues for the two coming years were already discounted and spent. The regent and his advisers seriously considered declaring the realm bankrupt.
Enter John Law who now came galloping to the rescue. He proposed to create, with his own funds, a private bank, guaranteeing to pay off the government debt in twenty-five years. But…. he must have a free hand to his his revolutionary new ideas into practice.
The few banks already existent in Europe were either banks of deposit, safeguarding money, or discount banks, accepting merchants’ promises to pay and issuing against them their own promises, or notes, and limited to specific transactions. Law proposed a bank that would engage in business, collect state revenues, hold monopolies, and offer profitable investments. It would issue bank notes, paper promises, which would circulate everywhere in place of gold and silver. The bank notes would be secured by a gold reserve and by the country’s credit, or its ability to furnish labor and goods.
Prosperity would ensue, for Law insisted, money creates trade under the motto of we need more money to employ more people. If money is a representation of wealth, money is also a force, which may be manipulated to make wealth. The essential component then, is credit, or faith. But credit, as economists were fraught to say, was merely suspicion asleep.
The dazzled regent and his council believed Law’s promises and accepted his proposal. The Banque Generale opened in June, 1716 with a capital of six million francs. Shares of the capital were eagerly bought. The bank issued its new bank no
legal tender for all payments, convertible into specie at the holder’s will, and handsomely engraved. Paris was delighted with the novelty and convenience of the notes, the relative security of a paper hoard against thieves. The notes were soon quoted at a premium over specie. And the abundance of fresh money did indeed stimulate a revival of commerce.