Modern history


In our own day, we can devoutly wish that we may be spared the technically superlative disasters we have prepared for ourselves in order to enjoy the minor vicissitudes of the business cycle—of prosperity and depression and inflation and deflation. If we are so favored, we can count on some future period of prosperity carrying us on into a mood of exhilarant optimism and wild speculative frenzy. Instead of radio and investment trusts, uranium mines or perhaps portable reactors will be the new favorites. Or the speculative fever may strike land, oil, or even Boston.

J. K. Galbraith,

The Great Crash, 1929 (1955)

WITH JOHN LAW’ S DEATH EUROPE DREW BREATH. HE had come to France prosperous, captivating, brimming with dynamic energy and ambition, confident that he could engender an economic revival. While he had seemed set to succeed he had been the people’s hero, by his own admission one of the wealthiest, and certainly among the most powerful men in Europe.

In his eyes he had failed not because of any flaw inherent in his ideas or ability but because of his own impatience: “I do not pretend that I have not made mistakes, I admit that I have made them, and if I could start again I would act otherwise. I would go more slowly but more carefully; and I would expose neither the state nor myself to the dangers which must necessarily accompany disorder of the general system.” Yet this was only part of the reason for his downfall. The road to hell, so the old proverb warns, is paved with good intentions. In Law’s case the more fundamental defect he could never bear to face was his own idealism. In dreaming of utopia he ignored human frailty and never imagined that he was unleashing several monstrous genies—people’s desire to make as much money for as little effort as possible, their instinct to follow the herd, to hoard when threatened, to panic if confidence was shaken. These elemental, uncontrollable human traits, together with the enmity of the establishment and the tragedy of the plague, were ultimately what toppled him.

In the aftermath of his departure and the collapse of the paper-money system, a draconian return to the coinage took place. Along with his paper money, the reactionary backlash swept away most of the tax reforms he had engineered. But the effect of his system remained indelible. He had created rampant but, for the Crown, highly beneficial inflation, which devalued Crown debt by two-thirds, and in so doing relieved the need for high taxation. France was left with a viable economy that allowed the monarchy to survive for a few more generations. The cost was to those who had held government debt in the form of bonds, annuities, or Mississippi shares, who found themselves ruined. His manipulation of finance had two further significant consequences: on the one hand profound distrust that made a state bank impossible to establish before the revolution; on the other, increasing demand for transparency. There were no published royal accounts until Necker’s Comte Rendu of 1781, which became a best-seller as a result. In creating a financial boom and making shares so widely accessible, Law had sown a seed of financial equality that the ancien régime could never entirely obliterate. Significantly, banknotes next returned to France eighty years later, when paper money known as assignats, based on the value of land—a scheme that echoed one of Law’s earliest proposals—was issued by the French National Assembly at the beginning of the revolution.

In hindsight Law captivates as much for his flaws and naïveté as for his flashy brilliance. It was not always so. For years his failure overshadowed his vision. Great eighteenth-century economists such as Adam Smith and Sir James Steuart acknowledged his significance but frowned on his actions. Smith called his system “the most extravagant project both of banking and stock-jobbing that perhaps the world ever saw,” and Steuart felt “the best way to guard against it [being repeated], is to be apprised of the delusion of it, and to see through the springs and motives by which the Mississippi bank was conducted.” The eighteenth-century philosopher and essayist David Hume must have learned something from Law’s mistakes when he wrote, “The greater or less plenty of money is of no consequence; since the prices of commodities are always proportioned to the plenty of money, and a crown in Harry VII’s time served the same purpose as a pound does at present.” Suspicion reverberated throughout the next two centuries. The nineteenth-century writer Charles Mackay included a vivid account of Law’s life in a volume entitled Memoirs of Extraordinary Popular Delusions, in which he figures alongside chapters on Tulipmania and duels. Karl Marx saw him slightly more sympathetically as “the pleasant character mixture of swindler and prophet.”

In this century infamy has turned mainly to neglect, even if, in the specialist world of economic historians, respect for him has increased as time has passed. Norman Angell, author of the famous The Story of Money, published in 1930, described him “juggle[ing] like a master magician with shares, premiums, instalments and issues.” J. K. Galbraith, emeritus professor of economics at Harvard, writing in the 1970s, said that Law “showed, perhaps better than any man since, what a bank could do with and to money,” while his most recent and detailed analyst, Professor Antoin Murphy, called him an “effervescent spirit who made quantum leaps in economic theory.” Beyond such specialist realms, Law, once one of the world’s most famous and powerful figures, is largely forgotten.

In an age of innovation, when one man’s vision and energy could surmount any constraint and change the world, John Law did. He was what would colloquially be called a mover and shaker. Many of his ideas were avant-garde. The idea of conglomerate corporations with multiple interests and sources of income is as ordinary today as it was extraordinary then. The marketing and propaganda techniques he employed were similarly innovative then but familiar now. The realization that art represented not only status but money was also exceptional for its time. Most of all, in conceiving a paper currency that operated independently of gold, he anticipated a development that is now taken for granted.

Often after time the message in past events is more easily read. Unraveling Law’s story three centuries on, one cannot help but feel a sense of plus ça change plus c’est la même chose—nothing really has changed. Today paper and plastic are unthinkingly accepted as valuable, and at the press of a button millions of dollars move around the world. But time’s passage has seemingly brought little in the way of additional invulnerability to the giant institutions public investment has created. Even with regulators, central bank reserves, and eons of experience, stock exchanges, banks, and economies still collapse and threaten the stability of those elsewhere. The economic cycle, which our forebears probably thought of as the wheel of fortune, has in recent history resulted in the meteoric rise and collapse of the Asian economies, Russia’s financial breakdown, and uncertainty surrounding the fate of China and Brazil. In the world of banking and finance the specter of financial calamity looms as intimidatingly as ever it did to investors in Regency Paris or in Georgian London. Maverick financiers can still rock governments, financial landslides on telephone-number scale still happen. The financial chicanery of junk bond guru Michael Milken dominated the speculative world of the 1980s during the boom years, but the market in junk bonds collapsed after his conviction and imprisonment. Under the direction of the Federal Reserve, the ill-fated Long-Term Capital Management was bailed out by leading investment banks in order to avert losses estimated at $14 trillion—more than enough to destabilize markets throughout the world.

Similarly, speculation contagion still periodically infects vast swaths of society. As in the days of the Mississippi, equities are no longer an elitist investment. Nowadays anyone with money invested in a pension, a tax-exempt savings plan, a mutual fund, or a savings-and-loan account is likely to have a vested interest in the stock market, and to feel, directly or indirectly, the effect of huge spikes and falls in stock prices. Recently, speculation fervor has fantastically bubbled Nasdaq Internet company shares.

Most amazingly of all, the driving force that causes the swell and burst of bubbles seems little altered. Within our high-tech information-technology universe, the hunch remains as much a part of the pundit’s repertoire as ever, the herd instinct if anything more able to effect terrifying vacillations in markets. Monetary utopia, John Law would be amazed to see, remains as elusive as ever.

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