John Law's Radical Monetary Theories and French Financial Reform
TL;DR
- John Law's early life as a gambler and fugitive, culminating in a murder conviction and prison escape, forged his unconventional thinking and drove him to seek radical financial reforms in France.
- Goldsmiths' practice of lending out deposited gold, even without a one-to-one reserve, established an early form of fractional reserve banking, demonstrating money's abstract "moneyness" beyond its physical form.
- The establishment of the Bank of England in 1694 marked a shift towards institutionalized public debt, moving away from reliance on the crown's whims and formalizing state financing.
- John Law's monetary treatises, particularly "Money and Trade Considered," posited that money is a technological tool for exchange rather than an intrinsic value, influencing modern monetary theory.
- Law's proposal for a land bank, anchoring paper currency to land's stable value, aimed to mitigate the volatility inherent in precious metal-backed currencies, reflecting an idealistic pursuit of economic stability.
- France's dire financial state in the early 18th century, with debt at 100% of GDP, created a critical juncture ripe for John Law's radical monetary reform ideas, setting the stage for his later influence.
Deep Dive
John Law, an 18th-century Scottish gambler and fugitive, profoundly influenced the modern monetary system through his radical theories and practical experiments. His life story, marked by exile, daring financial schemes, and spectacular collapse, offers critical insights into the evolution of money, banking, and state finance, revealing fundamental principles that still shape economic systems today. Law's journey from a goldsmith's son to a pivotal financial theorist highlights the inherent tensions between tangible assets and abstract value in monetary systems and the persistent challenge governments face in managing debt and currency.
Law's early life exposed him to the mechanics of banking and the concept of "moneyness" -- the abstract property of gold as money distinct from the physical metal. This understanding, coupled with his innate talent for probability and gambling, fueled his later theories. His expulsion from Scotland and subsequent exile, stemming from a fatal duel, propelled him to France. This period of wandering allowed him to study sophisticated financial markets in Amsterdam and observe the fiscal crises afflicting European nations, particularly England and France. England's establishment of the Bank of England in 1694, a novel institution designed to raise government debt through share sales backed by tax revenues, provided a stark contrast to France's older, more corrupt, and less efficient system under Louis XIV, where tax collection was farmed out. These differing approaches to state finance laid the groundwork for Law's later proposals, which sought to create a more stable and efficient monetary system by anchoring currency to tangible assets like land, rather than volatile precious metals, and by centralizing monetary authority.
Law's core contribution, articulated in his treatise "Money and Trade Considered," was the idea that money is not an intrinsic store of value but a medium of exchange--a "financial technology" essential for economic activity. He argued that scarcity of money, rather than an excess of it, was a primary impediment to economic growth. His proposals, such as the land bank, aimed to issue paper currency backed by land, positing land as a more stable asset than silver. This theoretical framework, combined with his practical experience in gambling and finance, positioned him to address France's dire financial situation. By 1713, France, exhausted by war and burdened by massive debt (approaching 100% of GDP), was ripe for radical reform. Law, having failed to implement his ideas in Scotland and elsewhere, saw in France an opportunity to test his theories on a grand scale, setting the stage for his most significant and ultimately catastrophic endeavors, which would be detailed in the subsequent part of this narrative.
Action Items
- Audit John Law's early financial thinking: Identify 3-5 core principles of his monetary theories (ref: Money and Trade treatise).
- Analyze John Law's risk tolerance: Document 2-3 instances of his high-stakes gambling or financial ventures to understand his decision-making drivers.
- Evaluate John Law's proposed land bank: Identify 2-3 key features of his land-backed currency proposal to assess its theoretical stability.
- Track John Law's European financial market exposure: List 3-5 specific markets or instruments he engaged with (e.g., shorting, options in Amsterdam) to understand his practical financial education.
- Measure John Law's early wealth accumulation: Calculate his estimated liquid assets (140,000 lira) relative to a laborer's daily wage to quantify his financial success before France.
Key Quotes
"Look back through the history of money and quite often it seems like nothing is happening long long bits of calm and then suddenly there's a catalyst something of some kind stuff changes right and you get everything exploding things flipping a period of chaos and then everything seems to reinvent itself."
The hosts, Joe Weisenthal and Tracy Alloway, introduce the narrative by framing historical economic shifts as periods of calm punctuated by sudden catalysts. This sets the stage for understanding John Law's story as a pivotal moment that dramatically altered the monetary system. They suggest that these periods of chaos and reinvention are recurring patterns in financial history.
"Now John Law, John, you know all about John Law his history reflects exactly that so what we're trying to do here over this holiday and over two episodes is tell his story which tells us a lot about money right."
Merryn Somerset Webb highlights that John Law's life story is a direct reflection of the historical pattern of economic upheaval and reinvention previously mentioned. She emphasizes that by recounting his experiences over two episodes, they aim to illuminate fundamental aspects of how money functions and evolves. This quote underscores the biographical approach to explaining monetary theory.
"You could arguably say that his thinking is more important than a lot of that academic muck yeah you could and actually and whatever else he was he was a gambler and and i think sometime murderer he was also a practitioner he did what he believed in and of course as we'll find out that didn't necessarily work to his advantage all the time."
John Stepek posits that John Law's practical application of his ideas, despite his controversial personal life, makes his thinking more significant than purely academic theories. He acknowledges Law's flaws, including gambling and potential murder, but stresses that Law acted upon his convictions. Stepek notes that this hands-on approach, while influential, also led to personal setbacks.
"So basically if everyone came to the goldsmiths at once and wanted all their money back it wouldn't be there immediately that day I reckon I would want my own gold coins back I mean I think you probably would at this time because a lot of them are debased but the other people's maybe chipped and clipped etc I wouldn't mind."
The hosts explain a foundational concept of early banking by describing how goldsmiths, acting as early bankers, lent out deposited coins. They highlight the inherent risk: if all depositors demanded their gold simultaneously, the goldsmith would not have enough to meet the demand. This illustrates the practical limitations and potential instability of early monetary systems where physical gold was the primary medium.
"So basically law might have been defending his friend's honor which I think is probably quite believable because he's clearly still quite hot headed and reckless but I mean ultimately we don't know the real reason after the fight law's arrested and the key legal question is whether it was a planned duel or a spontaneous fight and duels were common but illegal and I mean this will seem a bit weird that's to say pre meditation is what made it murder and therefore punishable by hanging whereas a kind of heat of the moment impulse fight meant it was manslaughter and basically basically in those days you got away with manslaughter."
The hosts discuss the legal proceedings following John Law's duel, explaining the critical distinction between murder and manslaughter in the 18th century. They note that premeditation determined the severity of the charge, with murder carrying a death sentence and manslaughter being a lesser offense. This highlights how legal interpretations of intent significantly impacted outcomes, even for violent acts.
"Money is not the value for which goods are exchanged but the value by which they are exchanged."
This quote, attributed to John Law through his treatise "Money and Trade Considered," is presented by the hosts as a core insight into his monetary theory. It signifies Law's view that money's primary function is not as a commodity with intrinsic value, but as a tool or technology that facilitates the exchange of all other goods and services. This conceptual shift is central to understanding his ideas on paper currency and financial systems.
Resources
External Resources
Books
- "John Law: A Scottish Adventurer of the Eighteenth Century" by James Buchan - Mentioned as a key book for further reading on John Law.
- "John Law: Economic Theorist and Policy-Maker" by Antoin Murphy - Mentioned as a key book for further reading on John Law.
Articles & Papers
- "Money and Trade Considered" (Anonymous publication) - John Law's monetary treatise, published by his aunt Agnes.
People
- John Law - Historical figure who became a financier in France and is credited with influencing the modern monetary system.
- James Buchan - Author of a book on John Law and a respected financial historian.
- Antoin Murphy - Author of a book on John Law and a respected financial historian.
- Edward Chancellor - Respected financial historian and former podcast guest.
- Felix Martin - Respected financial historian and former podcast guest.
- William Law - John Law's father, a goldsmith.
- Jane Campbell - John Law's mother.
- John Campbell - A fellow Scot who set up a goldsmiths in London.
- Edward Beau Wilson - A dandy with whom John Law fought a duel.
- Elizabeth Villiers - King William's mistress, speculated to be involved in the duel.
- Mrs. Lawrence - A friend of John Law's and landlady involved in the events leading to the duel.
- King William - The king who reprieved John Law from his death sentence.
- Johnston - Scottish Secretary of State who reported on John Law's release.
- Catherine Nollis - John Law's long-term partner.
- Charles Nollis - Catherine Nollis's brother, who was in jail with John Law.
- Mary Boleyn - Catherine Nollis's great-great-grandmother.
- Anne Boleyn - Mary Boleyn's sister.
- Henry VIII - King of England, associated with Anne Boleyn.
- Louis XIV - King of France during John Law's time.
- Daniel Defoe - Writer and political pamphleteer.
- Robert Wilson - Brother of Edward Beau Wilson, who agreed to drop his appeal against John Law.
- Duke of Savoy - Approached by John Law with a proposal for a central bank.
Organizations & Institutions
- Bloomberg Podcasts - The network to which the "Merryn Talks Money" podcast belongs.
- Merryn Talks Money - A sister podcast to "Odd Lots" on Bloomberg Podcasts.
- Coutts' Bank - A bank eventually established by John Campbell in London.
- Bank of England - Established in 1694 to raise money for the government.
- Jacobites - A political faction in Scotland that was fond of John Law.
Websites & Online Resources
- omnystudio.com/listener - Provided for privacy information.
- bloomberg.com/subscriptions/oddlots - URL for Odd Lots newsletter subscription.
- odu.com - Website to try Odoo for free.
- lenovo.com - Website for deals on Lenovo computers.
- spectrum.com/freeforever - Website for Spectrum's free home internet offer.
- cvs.com - Website for CVS.
Other Resources
- Fiat Currency - Mentioned as a concept John Law is credited with influencing.
- Fractional Reserve Banking - A banking concept discussed in relation to goldsmiths.
- Billment - A concept related to goldsmiths holding gold deposits.
- Land Bank - A type of bank proposed by John Law, issuing currency backed by land.
- Moneyness - An abstract property of gold discussed in relation to its function as money.
- Shorting, Futures, Options - Financial market concepts John Law learned about in Amsterdam.
- Darian Scheme - An ill-advised colonial scheme that led to Scotland's bankruptcy.
- Act of Union - The union of Scotland and England in 1707.
- War of the Spanish Succession - A European war that ended in 1713.
- GLP-1 - Mentioned in relation to weight loss and its side effects.
- PDFs - Mentioned in relation to Adobe Acrobat Studio capabilities.
- AI - Discussed in relation to worker potential and business management.
- HFC - Technology used in Spectrum internet delivery.
- LDL-C - Mentioned in relation to heart health and Repatha.