John Law, the gambler who revolutionised French finance

Anyone who feels gloomy about the current state of the world’s advanced economies — with their public finances groaning and their policymaking paralysed by vested interests — should spare a thought for France in September 1715.

That was the month in which Louis XIV, the “Sun King”, died after 72 years on the throne and half a century of near-constant war. He left behind a necrotic economy, a treasury on the verge of bankruptcy and a system of state finance that depended on a vast class of rentiers virulently opposed to any kind of entitlement reform. Philippe, Duke of Orléans, France’s newly appointed regent, was at a loss for what to do.

Into this desperate situation stepped one of history’s most extraordinary, versatile and enigmatic characters: the subject of James Buchan’s masterly new biography — a little-known Scots gambler, adventurer and sometime economist by the name of John Law.

Born the son of an Edinburgh goldsmith in 1671, Law had travelled to London as a young man and immersed himself in the intellectual ferment of the English financial revolution of the 1690s. His own genius was not destined for England, however; on the morning of April 9 1694, he killed a man in a duel in Bloomsbury Square, was arrested and charged with murder. The following New Year’s Day, he engineered an audacious jailbreak and fled abroad.

As Buchan writes, this “was the capital event of John Law’s life . . . Had he stayed in London, Law might have been just another financial pamphleteer . . . An outlaw, [he] was driven into the world, to live on his wits and his engaging manners, without allegiance except to his family and his ideas.”

And what ideas they were. By the time Law appeared before the regent of France in 1715, he had racked up two decades of financial speculation all across Europe, from Scotland to Savoie. In the new science of money and banking, he had discovered, he believed, the secret sauce for economic success. He wasted no time in recommending shock therapy for France’s feudal economy.

The institutions of capitalism were hot-housed post-haste. In 1716, Law introduced the bank — the Banque Générale — and gave France its first experience with paper money. The following year, he established France’s first modern corporation — the Company of the West — to develop French America. In two bounds, France had drawn level with its great rival England, whose own national bank had already been printing banknotes for two decades, and where joint stock companies were more than a century old.

Not content with dragging France’s financial system from the 16th century into the 18th, Law proceeded to catapult it into the 20th and beyond. In December 1718, the promise to redeem the new banknotes for precious metal on demand was suspended, and the world’s first fiat currency was born. Henceforth, France’s money supply would be determined not by the vagaries of the gold market, but by the deliberate decision of a Monetary Policy Committee.

By August 1719, the Company of the West had gobbled up all the other joint stock corporations in France, and taken over the nation’s tax collection as well. The public debt melted into thin air as staid rentiers caught the speculating bug and rushed to convert their claims into equity in the nation’s gross domestic product.

By the end of the year, the Banque and the Company were merged into a financial Frankenstein known simply as “The System”. The use of gold in payments was banned and the use of banknotes mandated. Shares in the monster enterprise hit such a height that the sovereign’s cost of borrowing sank to an unheard-of 2 per cent. In January 1720, the grateful regent appointed Law France’s first foreign finance minister. “It was a type of miracle”, wrote a wistful contemporary 20 years later, “that posterity will not believe.”

Then came the inevitable crash. The Company shares tanked. The Banque’s notes became worthless. By June, gold had been remonetised and the old system of rentes — funding the state via the sale of annuities — reinstated. Law was excoriated as a fraud and hounded out of France. He ended his days living from gambling in Venice.

This remarkable story has been told many times before — but in Buchan, Law has at last found a biographer who combines an expert understanding of finance, a profound knowledge of 18th-century history, and a novelist’s gift for anecdote and pace. The result is an immensely valuable and enjoyable book that conjures a narrative worthy of Robert Louis Stevenson out of a deeply impressive harvest of primary archival research. It is history of the highest class, and will take its place deservedly as the standard biography of Law.

If I have one regret, it is that Buchan is curiously uninterested in the actual substance of Law’s ideas on money and finance, and in the parallels between Law’s experiment and the financial world of today.

Of course, Buchan is right that 18th-century France is not the 21st-century US. Yet his own narrative compellingly shows how radical monetary policies can re-order the distribution of wealth; how financial booms and busts have dramatic political consequences; and how, when those manias and panics focus on innovation in the monetary system itself, their consequences can be nothing short of revolutionary.

In the post-2008 world of quantitative easing and initial coin offerings for cryptocurrency ventures, these lessons seem to me to be hard to ignore — and one more reason to read not only this fascinating biography, but Law himself.

John Law: A Scottish Adventurer of the Eighteenth Century , by James Buchan, MacLehose, RRP£25, 544 pages

Felix Martin is author of ‘Money: The Unauthorised Biography’

Join our online book group on Facebook at FTBooksCafe. Subscribe to FT Life on YouTube for the latest FT Weekend videos