John Law (1671–1729)

3 key takeaways

• John Law was a pioneer in financial innovation, advocating for the use of paper money and central banking.
• He established the Banque Générale and played a key role in the economic expansion of France under the regency of Philippe II, Duke of Orléans.
• Law’s speculative activities led to the infamous Mississippi Bubble, a financial collapse that significantly impacted France’s economy.

Who was John Law?

John Law was born on April 21, 1671, in Edinburgh, Scotland. He came from a wealthy family and studied various subjects, including economics and finance. Law’s career was marked by his radical ideas about money and banking, which were revolutionary for his time. He believed that money was merely a means of exchange and that increasing its supply could stimulate economic growth.

Early life and career

Law’s early life was marked by controversy. In 1694, he was convicted of killing a man in a duel and fled to the European continent to escape execution. While in exile, he traveled extensively and studied banking and finance, developing his theories about the potential benefits of paper money and the expansion of credit.

Contributions and innovations

Banque Générale and paper money

In 1716, John Law established the Banque Générale in France, which was one of the first banks to issue paper money backed by land, gold, and silver. The bank’s notes were initially successful and helped to stabilize the French economy, which was struggling with debt and a lack of liquidity.

Mississippi Company and economic expansion

Law is best known for his involvement with the Mississippi Company, also known as the Compagnie d’Occident. In 1717, the company was granted a monopoly on trade with French colonies in North America, particularly the Mississippi Valley. Law’s ambitious plans included developing the region and promoting settlement and commerce.

In 1719, the Mississippi Company merged with other trading companies to form the Compagnie des Indes, which held a monopoly on all French colonial trade. Law used his influence to encourage investment in the company, leading to a speculative frenzy. The value of the company’s shares skyrocketed as investors were lured by the promise of immense profits from the colonial ventures.

The Mississippi Bubble

Rise and collapse

The Mississippi Bubble refers to the rapid inflation and subsequent crash of the Mississippi Company’s stock prices. The speculative boom reached its peak in 1720, with shares trading at exorbitant prices. However, the company’s financial situation could not support such high valuations, and doubts about its profitability led to a sudden and dramatic collapse in stock prices.

Economic impact

The bursting of the Mississippi Bubble had severe repercussions for the French economy. Many investors, including members of the aristocracy, suffered significant losses. The collapse undermined public confidence in the financial system and led to economic turmoil. John Law was forced to flee France in disgrace, and his financial innovations were discredited.

Legacy

Despite the ultimate failure of his schemes, John Law’s ideas about banking and monetary policy had a lasting impact on economic thought. His advocacy for the use of paper money and credit expansion influenced the development of modern central banking and monetary theory. While his methods were flawed, his recognition of the importance of a flexible money supply was a significant contribution to economic theory.

Related topics

• Mississippi Bubble: Learn more about the speculative frenzy and financial collapse associated with John Law’s Mississippi Company.
• Central banking: Explore the role and functions of central banks in modern economies.
• Monetary theory: Understand the principles of monetary theory and how money supply affects economic activity.

John Law’s life and career were marked by both innovation and controversy. His ambitious financial schemes and the dramatic rise and fall of the Mississippi Bubble left a lasting legacy in the history of economic thought and practice.