– BOOK REVIEW –
by Michael La Monica, Master student in History at McGill University
History has not been kind to John Law. Beginning almost immediately after the collapse of his system, satirical cartoonists lampooned him, contemporaries such as Montesquieu and Richard Cantillon criticized him, and later economic luminaries David Hume, Adam Smith, Karl Marx, and John Maynard Keynes largely ignored him. When he is referred to at all today, it is typically as a cautionary tale, often with significant moral and political overtones, warning against the dangers of easy money, over-inflation, and excessive government meddling in the economy. The salacious parts of his life take precedence over the details of his economic plan, as if the two are one in the same. Law was a gambler, a duelist, a murderer, a fugitive from justice, a libertine, and a womanizer; since his system failed in such a spectacular fashion, surely it must have been due to his excessive self-confidence, reckless risk-taking, and wanton flouting of the rules. The man was clearly making the biggest bet of his life by going all-in with the largest economy in Europe, or even worse, he was a swindler and a confidence man who attempted to enrich himself at the expense of a kingdom.
Antoin Murphy disputes this assessment in his book, John Law: Economic Theorist and Policy-maker. Here, he examines the historiography of Law and finds it lacking. With so much of the attention focused on either the dramatic bursting of the “Mississippi Bubble” or the more colorful aspects of his personality, the writings on Law largely ignore the details of his economic theory. The very title of the book is telling. Murphy’s goal is to rehabilitate John Law as a serious economic theorist and policy-maker whose ideas were centuries ahead of their time. Extremely well researched and coming in at over 300 pages replete with charts, graphs, and tables, Murphy makes a compelling argument that Law warrants a position in the pantheon of great economic thinkers, or is at least one deserving of more serious study.
For this reason, Murphy’s book is relatively light on personal material concerning John Law and heavy on his policies, with only five or six out of the twenty-one chapters in the book being primarily biographical in nature. These form the weakest parts of the book and they come off feeling a bit tacked on – almost as if Murphy believed that he could not write a book about John Law while avoiding the juicy topics of the ‘dueling beau’ and ‘international gambler.’ However, Murphy places these stories in context by portraying them as a narrative of Law’s transformation from a numerical genius with a penchant for risk-taking to a serious economic thinker. Perhaps it is telling that Law made his gambling fortune not by a stroke of luck, but by carefully calculating and exploiting mathematical probabilities in his favour.
Early in the book, Murphy identifies the issue of sources as one of the biggest challenges in writing about John Law. Unfortunately, very few of the records from either Law’s Bank or the Mississippi Company have survived, leaving us almost entirely dependent on witness accounts. Even Law’s writings are a topic of considerable dispute. Paul Harsin, one of the leading twentieth century scholars of Law, included a number of manuscripts in his three volume Oeuvres Complètes which Murphy believes were inaccurately attributed to Law. Instead, he argues that the unsigned manuscript Essay on a Land Bank was the first work written by John Law on economic theory. He demonstrates how this manuscript is consistent with Law’s other writings and eventually formed the foundation of his 1705 magnum opus Money and Trade Considered with a Proposal for Supplying the Nation with Money. These works are the basis of the system that John Law would implement in France from 1715-1720.
What made Law such a revolutionary thinker was that he was the first economist (in the West at least) to reject the commodity theory of money in favour of an alternative theoretical model. Money was not a physical thing, according to Law, so much as it was a way to measure and store value and to function as a unit of exchange. Therefore, there was no reason for gold and silver to occupy a special role in relation to money. They were simply commodities like any other, and not even very good commodities at that. He directed his first proposal in Essay on a Land Bank to the Scottish Parliament where he called for the replacement of silver coins with paper money issued by a land bank. While it would resolve the main problem of there not being enough silver in Scotland – this resulted in a monetary shortage that led to a stagnant economy – it just substituted one commodity (specie) for another (land). He would later drop this idea entirely in Money and Trade. Money and trade (by which he meant all economic activity) are intimately linked, and the value of money is determined by the demand for it.
Law’s argument was that the money supply had political and social as well as economic implications. Thus, the state needed the power to regulate the supply of money in order to meet the demands of both the economy and society. This is a particularly important point. Law did not envision economic policy as something that was politically neutral, much less as an immutable law of nature that operated on its own volition and tended towards equilibrium. All economic policies are fundamentally political and involve the choice of where to apportion gains and losses amongst the various members of society. Law’s goal was not simply to enrich the sovereign at the expense of his people. Rather, he intended for his plan to generate broad-based prosperity, with the increase in the money supply helping to stimulate economic activity and drive down unemployment.
Law finally had the opportunity to put his theories to work in the largest economy in Europe. France was left with unserviceably large debts after the death of Louis XIV and the new regent was willing to trust John Law if he would help alleviate the problem. France faced both a monetary as well as a fiscal crisis, requiring Law to restructure the debt while expanding the money supply at the same time. Law set about gradually implementing his system in parts, using each success to build support for his next stage in the plan. His system had two separate components that ran parallel to each other up until their final merger in 1720: the Bank and the Company.
The Bank, which began as a privately funded general bank before the Regent agreed to transform it into a royal bank, was the primary tool of Law’s monetary policy. The Bank would accept deposits of gold and silver and issue notes with a high rate of interest. The key component to the success of these banknotes was a royal decree allowing them to be used as payment for taxes. As the notes grew in popularity they began to circulate as paper money, just as Law had intended. Over time, he restricted the use of gold and silver in commercial transactions before banning them entirely in 1720, thus completing the transition to a pure paper money system. Murphy does a masterful job of estimating the Bank’s number of notes, deposits, and interest payments to the best of his ability given the paucity of primary source evidence (the Bank’s books have not survived). While the Bank’s charter did not authorize it to produce credit instruments, Murphy surmises that Law may have done so in order to generate the profits he needed to justify its eventual nationalization as France’s first central bank.
The second part of his plan called for the creation of an enormous holding company that would acquire trading monopolies throughout France’s colonial empire. Law’s idea was to sell shares in this company in exchange for government debt instruments. In a sense, he would eliminate the public debt by transforming it into private equity. The shares of the Company sold well and he used the capital generated from these sales to purchase more and more assets. By 1720, the Company owned nearly all of the state’s public debt, monopolies on all colonial trade and development, the right to collect domestic taxes throughout France, and eventually acquired the Bank as well. Murphy is able to describe this complex system in a way that is understandable to non-economists while providing numerous charts and tables as a visual aid. However, he seems to vacillate between arguing that this was all part of Law’s grand plan from the beginning versus Law being the consummate improviser. Did Law intend for banknotes to be used as money alone or did he intend for a dual paper money system whereby Company stock would also circulate as money? It is difficult to say, and Murphy seems to argue for both at times. Another criticism in his analysis of the Company is that he does not discuss its actual colonial operations. He seems to justify this by saying that its primary focus was always on debt management rather than colonial development (with the lack of profits from trading being one of the factors leading to the collapse of its share price in the summer of 1720). However, failing to discuss the colonial side at all seems like a missed opportunity for a comprehensive assessment of John Law’s system.
Murphy’s book largely succeeds in portraying John Law in a sympathetic light. He was placed in an impossible situation and asked to perform financial miracles in a very short period of time. Working against him was a “cabal” of powerful interests – rentiers who profited from the old system of annuities and parlementarians who feared that a financially self-sufficient monarch would destroy their influence. Murphy blames this cabal for the May 27th arrêt that caused the system to collapse by countermanding Law’s earlier attempt to control the share price. While it is a stretch to say that Law’s system would have worked if not for sabotage, Murphy does an effective job of demonstrating how financial policies are determined as much by politics as by economic necessity. In the end, Murphy makes a convincing argument that John Law was a visionary figure whose theory of money would eventually prevail by the late twentieth century. Indeed, at times he seems almost proto-Keynesian in his thinking on the link between the money supply and unemployment. In this way, Murphy’s book fills a gap in the English-language scholarship on John Law and points the way to further investigation into his theory and system.
Murphy, Antoin E. John Law: Economic Theorist and Policy-Maker. Oxford: Clarendon Press, 1997.