The Rise and Fall of John Law

By the time Law settled in Paris, he was already on his way to establishing himself as one of the period’s most influential economic theorists. In 1705 he had published Money and Trade Considered with a Proposal for Supplying the Nation with Money, a treatise Law hoped would cure the economic ills of his native Scotland. Law’s proposal centered on the creation of a land bank, which would by design alleviate the country’s specie (hard currency) shortage through the issuance of paper money backed by the value of land. Though Law published the treatise anonymously, his authorship was well known by the time it was considered—and rejected—by the Scottish Parliament in the summer of 1705. His reputation as a gambler and worse preceded him: Sentenced to death for killing a man in a duel, he had escaped from London’s King’s Bench prison in the 1690s.

The following year Law sought an audience with Louis XIV in France, where a severe specie shortage, repeated military engagements, and a mounting state debt combined to put Europe’s most populous nation on increasingly precarious financial footing. In “Mémoire touchant les monoies et le commerce,” Law proposed the creation of a French national bank that would issue paper money, increase available credit, and promote trade (objectives known collectively as Law’s “System”), but he failed to get the proposal past the king’s controller-general.

In 1707 two more submissions were rejected. Not until Law took up permanent residence in Paris were any of his proposals entertained in earnest by the king and his ministers. But just as Law faced the unfamiliar prospect of seeing his financial plans adopted, Louis XIV died, on September 1, 1715.

Louis’s death left France in the hands of his five-year-old great-grandson, whose reign would be overseen by the regent, Philippe, duc d’Orléans, until he reached the age of majority at 13. The regent inherited a financial crisis of epic proportions. France’s treasury was bankrupt. State debt topped 2 billion livres, not including annual interest payments to its creditors of 90 million livres, and the treasury had borrowed against future tax revenues through 1718. The entire financial system was on the verge of collapse, a situation that left the regent predisposed to consider Law’s proposed solutions.

Law’s ascent in the months and years following the death of Louis XIV was meteoric. Within two months his proposal to create a national bank was heard before the finance council. The following summer, the bank became a reality. In August 1717 Law’s newly formed trading company, the Company of the West (Compagnie d’Occident), took over Crozat’s Louisiana charter. The hope was to establish a French version of England’s Virginia colony in the Mississippi Valley, with tobacco as the cash crop. A year later the regent awarded Law’s company a nine-year monopoly of all tobacco trade within the French empire.

To raise capital and fund the acquisition of smaller companies, the Company issued a series of shares. Proceeds from each issuance were intended to create greater solvency. This money-raising scheme was authorized by the state, which benefited from the arrangement by the elimination of some of its floating debt. The initial 1717 offering could only be purchased with billets d’état—the paper notes of credit issued by the Crown, their valuation prone to violent fluctuations. The intent was to decrease the number of unstable billets in circulation, while promoting the sale of shares in what Law and the Crown viewed as a more stable alternative. In exchange, the Company charged 4 percent interest on the billets d’état, a lower rate than what the Crown paid to most of its creditors.

By the summer of 1719 Law’s company had absorbed the Company of the East Indies and the Royal China and Africa Companies. It also acquired the Senegal Company, a slave-trading entity whose resources and contacts Law hoped to exploit in order to bring laborers to Louisiana. The resulting conglomerate, the Company of the Indies (Compagnie des Indes), had the most far-ranging geographic scope in the history of European trading companies.

To finance the expansion, Law released more share issuances and eliminated the stipulation that shares be purchased with billets d’état. At the same time the bank issued 50 million livres of banknotes to ensure that there was enough cash in circulation to cover new share purchases, and Law pledged to personally underwrite the new share issue. Loosened subscription requirements, an increased money supply, and Law’s personal investment bolstered public confidence.

The public’s appetite for company shares in the fall of 1719 seemed insatiable. Between September 26 and October 4, 1719, Law released four additional issuances. Trade along rue Quincampoix spilled over from the Company’s share-sales office into the street, where the frenzied throng of investors and speculators was so thick that the city had to issue a ban on horses and carriages to prevent the crowd from being trampled. Through the beginning of 1720, share values continued to rise, peaking at over 10,000 livres per share just days after Law’s appointment to France’s highest administrative office: controller-general.

Rather than ensuring the success of his System, Law’s appointment represented the beginning of its demise. Big investors, monitoring the stock-purchase mania and sensing an impending fall in stock prices, began to cash in their shares shortly before his appointment. In refusing to accept banknotes in return for their shares, they nearly emptied the bank of specie. At the same time, rumors of the discouraging state of affairs in Louisiana swirled: Immigration was lower than anticipated, and tobacco production in the colony was still small in scale—nothing that could bolster investor confidence or inspire further speculation. Distrust of Law grew; public confidence in his System wavered. As company stock plummeted, shareholders rushed to cash in shares, and the mint printed more banknotes to meet demand, causing widespread inflation. On November 27 the bank closed its doors. By December the System had collapsed, despite Law’s efforts to stabilize the credit markets and restore public confidence.

Law’s fall from favor over the course of 1720 was as striking for its speed as his rise had been some five years earlier. By late December 1720 he had fled France, the nation’s economic apparatus was in shambles, and thousands were left holding worthless paper notes. Law spent the last years of his life in Venice, hounded by shareholders and creditors, before dying of pneumonia on March 21, 1729.

For Louisiana the ramifications of Law’s fall from favor were mixed. Satirical images and derisory texts depicting the colony as a debauched, thoroughly desperate place circulated throughout Europe, causing an already anemic flow of immigrants to nearly dry up. Slave imports, too, slumped in the years immediately following Law’s expulsion, dropping from over 1,100 captives in 1721 to fewer than 100 between 1722 and 1724. Yet the same System that brought financial chaos to France ultimately led to increased stability in Louisiana. The collapse of the System, though spectacular in its speed and magnitude, did not destroy the Company of the Indies.

Unlike the bank, the Company emerged from the chaotic, three-year reorganization period that ended in 1723 as a largely profitable entity. This was possible because, prior to the collapse, company directors had invested profits from shares sold into the nuts and bolts of trade—ships, trade goods, port facilities, and people. In Louisiana, where the reorganized Company maintained its administrative and trade monopoly until 1731, company investments resulted in the largest influx of capital, goods, and slaves since the colony’s founding.