This week I’ve been continuing my reading on money, but from a slightly different angle. The Moneymaker is a biography of John Law, the gambler, financier and economist who bankrupted France in the early 1700s. It’s a remarkable tale.
Law was born in Fife, the son of a goldsmith. He had a remarkable mind for mathematics, and was an early adopter of theories of probability, making him a very good gambler. By stacking the odds in his favour, he soon began to earn himself a very good living, ingratiating himself into the high society of Edinburgh and then London.
Things took a turn for the worse when he was involved in a duel and accused of murder, but with the help of some influential friends he escaped from prison and fled to the continent. For a while he gambled his way around the gaming tables of Europe, amassing a vast and dubious fortune and many important friends. One of these was, the Duc D’Orleans, was to become regent of France after the death of Louis XIV, which created a unique opportunity to test some of his economic theories.
France was the greatest country in the world at the time, but was impoverished by a lavish court and its ill-advised wars. There wasn’t enough gold or silver to produce coins, creating a serious lack of money. Law argued for paper money, a controversial measure at the time. It took several years to win Paris round to his insight that money was not wealth in itself, but simply a measure of exchange, but in time he was able to found his Banque Generale. It began printing bank notes in 1716.
His second innovation was to follow, buying the rights to the trade routes between France and its newly acquired colonies in Louisiana and Mississippi. He issued shares, on behalf of the Mississippi company, to raise the funds for the colonial investment. The rumours of vast American wealth met the easy availability of money to create a perfect economic storm – noblemen and commoners alike took loans from the new royal bank, and used the paper money to buy shares. Demand was high, share prices sky-rocketed, and unimaginable fortunes were made. The term ‘millionaire’ was coined, and because anyone could buy shares, wealth was democratized. John Law saw several of his own servants make their fortunes and leave.
Predictably, it didn’t last. The American territories failed to yield any great wealth of gold or silver, the regent printed too many bank notes, confidence evaporated and there were riots, witchhunts and investigations. Law fled the country and left all his wealth behind, and saw out his days in Venice, pursued by admiring princes and angry creditors alike.
Within a couple of years, the mistakes of the Mississippi company were repeated in London in the South Sea Bubble, and we still make them today. Law’s was the first stock-market boom, and we still haven’t worked out how to prevent the inevitable collapse. The Dot.com fiasco, property prices in California, oil speculation this time last year, we’re still doing it. The greed and wishful thinking still runs away with us, and we believe the good times can go on forever.