Some in clandestine companies combine,
Erect new stocks to trade beyond the line;
With air and empty names beguile the town,
And raise new credits first, then cry’em down:
Divide the empty nothing into shares,
To set the town together by the ears.
The sham projectors and the brokers join,
And both the cully merchant undermine;
First he must be drawn in and then betrayed,
And they demolish the machine they made:
So conjuring chymists, with their charm and spell,
Some wondrous liquid wondrously exhale;
But when the gaping mob their money pay,
The cheat’s dissolved, the vapour flies away.
Reformation of Manners (1702)
LONDON WAS A REVELATION. LARGER THAN ANY OTHER Western European capital (only Paris could come close), it was home to some 750,000 inhabitants, many of whom, like Law, had gravitated from elsewhere. The streets were thronged with markets, shops, and hawkers noisily touting oysters, oranges, whalebone stays, patch boxes, glass eyes, ivory teeth, and mandrake potions. Amid the bustling street life, workmen toiled to complete vast building programs begun after the Great Fire. A grand new Royal Exchange had already replaced the old one founded by Gresham, a new Dutch-style custom house now flanked the Thames, while forty-five livery company halls, fifty-one city churches, and innumerable private houses were emerging to replace those that had been destroyed. It was an energetic, exciting milieu, but one in which the gulf between affluence and poverty was starkly evident. To the north and east, factories and workshops drew workers who lived in stinking, insanitary shantytown hovels. Westward, framed by green fields, St. James’s, the Strand, and Piccadilly were inhabited by aristocrats and entrepreneurs who were transforming once rural sites into elegant piazzas, arcades of shops, and avenues of grandiose mansions.
The sharp-witted, rapacious Law must have greeted the city as James Boswell, a fellow Scotsman, did when he caught his first glimpse almost a century later: “When we came to Highgate Hill and had a view of London, I was all life and joy . . . my soul bounded forth to a certain prospect of happy futurity. I sung all manner of songs, and began to make one about an amorous meeting with a pretty girl.”
Law set himself up in lodgings in London’s newly fashionable suburb of St. Giles. Surrounded by countryside, it was virtually a village, on higher ground than the city and encompassing Holborn, Covent Garden, Seven Dials, and Blooms bury. The area was renowned for its verdant surroundings; the grand Bloomsbury Square, the bustling, flower-filled Covent Garden market with its church—well known as a meeting place for unfaithful wives—and its “sweating house,” the Hummums Bagnio, where for five shillings one could find oneself “as warm as a cricket at an oven’s mouth.”
From the outset Law was determined to make his social and intellectual mark. Immaculately dressed, he presented himself as a new young man about town. He visited theaters such as the Drury Lane to enjoy the latest drama and admire the most celebrated actresses, strolled in the elegant walks of St. James’s and Vauxhall Gardens, shopped in the fashionable New Exchange—a favorite with beaux who, according to Ned Ward, a chronicler of London’s less well-publicized customs, were happy to “pay a double price for linen, gloves or sword-knots, to the prettiest of the women, that they might go from thence and boast among their brother fops what singular favours and great encouragement they had received.” He ate in taverns such as the Half Moon or Lockets—notorious for charging such high prices that “many fools’ estates have been squandered away”—breakfasting perhaps on ale, toast, and cheese, or dining on roasted pigeons, goose, boiled calf ’s head and dumplings, or mutton steak. Alternatively, he might visit famous coffeehouses such as Will’s in Covent Garden, the Royal near Charing Cross, or the British in Cockspur Street—a favorite with visiting Scots, where he could catch up on foreign news, exchange ideas . . . and, if so inclined, procure the services of a prostitute.
London life was not without its pitfalls. Neither his fondness for female company nor his penchant for gambling had deserted John Law on his journey south. Gambling provided his entrée to society, women a refuge from its demands and disappointments. Both were to lead him astray. At some point after his arrival in London he was joined in his lodgings by his mistress, a Mrs. Lawrence. Little is known of the woman who was to play a crucial part in his future career. What were her circumstances? Who kept whom? Perhaps they met in Duke Humphrey’s Walk, St. James’s Park, “a rare place for a woman who is rich enough to furnish herself with a gallant that will stick close, if she will allow him good clothes, three meals a day and a little money for usquebaugh [whisky].” In which case she probably provided for Law, who though reasonably affluent, did not have the means to support an expensive mistress.
He also encountered many of London’s most illustrious inhabitants. Although documentary evidence of this period of his life is sparse, among his probable acquaintances was Thomas Neale, the seedy Master of the Mint and Groom Porter to the King, and a keen property speculator. As part of his royal responsibilities Neale provided the cards, dice, and other gambling equipment for the royal palaces, settled squabbles at the card table, and licensed and supervised gaming houses. He was not well suited to the role. Neale was a compulsive gambler who is said to have run through two fortunes at cards. Like Neale, Law quickly discovered the seamier side of London. The prevailing passion for gambling had created an entire social group, of gamesters whose fortunes depended on the roll of the dice or the cut of a pack. It was a life “subject to more revolutions than a weathercock” in which, according to Ward, most “die intestate, and go as poor out of the world as they came into it.” At Christmas Neale was allowed to keep an open gaming table, a chaotic and disorderly scrum where “Curses were as profusely scattered as lies among travellers . . . money was tossed about as if a useless commodity . . . every man changed countenance according to the fortune of the cast, and some of them . . . in half an hour showed all the passions incident to human nature.” Already drawn to gambling in Edinburgh, Law was mesmerized by this frenetic, dangerous existence. Mingling with aristocrats and opportunists, he joined in high-rolling games of hazard, brag, primero, and basset—and predictably found himself dogged by ill fortune. Bad luck and bad company took rapid toll. By early 1692, before his twenty-first birthday, Law’s inheritance was exhausted and debts had mounted. Incarceration in a debtor’s prison loomed, unless he could raise money. He had no option but to ask his mother to sell the Lauriston estate.
Jean Law now knew that her son was continuing his life of recklessness, but she did not despair. With keen business acumen she used her own well-managed legacy from her husband to buy the tenancy of the estates from her son and could congratulate herself that his reputation was salvaged, debtor’s prison avoided, and her husband’s money preserved.
The episode marked a turning point in Law’s approach to gambling. Always intensely proud and private, he must have hated having to ask his mother for help. He began to see how easily he, like Neale, could lose all he possessed at the tables. And unlike Neale, he had no lucrative royal position with which to rebuild his fortune. At the same time abstention from gambling was impossible. The pastime was almost de rigueur in polite society and provided a sociable young man such as Law with an easy way to infiltrate the glamorous circles to which he was drawn. To reduce the risk, without losing the frisson, he began to search for ways of loading the chances of success in his favor.
He became circumspect, almost academic in his approach to gambling. He studied various newly published pamphlets detailing theories of probability. Study in this field had long preoccupied scientists: Gerolamo Cardano had studied the science of dice throwing at Padua University in the sixteenth century and had worked out that the reason it was easier to throw a nine than a ten with two dice was a matter of probability (1 in 9 for nine: 1 in 12 for ten). Galileo had also, reluctantly, tackled similar problems for his employer, and a century later new ground had been broken in France when mathematician Pascal was able to explain to his friend the Chevalier de Mère that to have a marginally better than even chance of throwing a double six with two dice he would need to allow twenty-five throws. One of the first books on the subject was published anonymously in 1662 at a French monastery patronized by Pascal. La logique ou l’art de penser contained four chapters on probability and was widely translated and disseminated throughout Europe. The Swiss mathematician Jakob Bernoulli, whose Art of Conjecturing, a pioneering study of combinations and analysis of profit expectations from various games of chance, would be published posthumously in 1713, had also visited London at around this time, and Law may have known about Bernoulli’s research.
Law’s formidable mathematical talents made it easy for him to absorb the “science” of chance, and he began to try out his new skill at the gaming salon. Over games of dice and cards he taught himself to calculate, often at incredible speed, the odds on a certain sequence of numbers being rolled at dice or a certain card appearing in the deck. “No man understood calculation and numbers better than he; he was the first man in England that was at the pains to find out why seven to four or ten was two to one at hazard, seven to eight six to five, and so on in all the other chances of the dice, which he bringing to demonstration, was received amongst the most eminent gamesters, and grew a noted man that way,” recalled Gray, an acquaintance and Law’s earliest biographer. The approach rapidly paid off, and Law’s luck turned. He ceased to be the stereotypical compulsive gambler, addicted to the frisson of gain but invariably losing. He had mastered the art of risk in much the same way a statistician is able to calculate odds. Betting became a serious business.
Nevertheless, even a master of odds cannot be guaranteed to win as much as Law seemed to do, without cheating or drawing on some other advantage. Law’s friends and contemporaries invariably describe him as a gambler, and either suspected him of card sharping or were simply amazed by his luck. How did he manage it? With hindsight, most biographers now feel that Law’s wins were not a result of luck but of wiliness. His large gains were made when he was able to adopt the role of banker—where the odds were stacked heavily in his favor—rather than gambler. Most of the time when not playing banker he was presumably canny enough not to bet excessively. He is also known to have invented his own gambling games—where again he could ensure the odds were stacked in his favor.
Showpiece routines for the rich reaped hefty rewards, but they were not demanding enough to satisfy him for long. Law’s study of probability reawakened his natural mathematical talent, and the urge to use it drew him to one of the new obsessions of the age: the science of economics.
At the time London was poised on the brink of economic and financial revolution. A flurry of publications had recently appeared penned by writers such as Sir William Petty, Nicholas Barbon, and Hugh Chamberlen, who had debated monetary theory, commodities, and currencies. There were two strands to the emerging material: some writers concentrated on ways of assisting mercantile trade, usually for their own profit; others blended the role of the state and issues of morality with the theme of money. All were anxious to solve, or at least explain, the nation’s overwhelming shortage of cash and suggest ways of making it more prosperous.
William III was frantic for money to pursue his war in Europe, but the royal record for failing to repay loans made London’s goldsmiths and moneylenders reluctant to help. Memories lingered of Charles II’s unreliability. And there was such an acute lack of coins that money was hard to come by. The treasury had tried threats and bribes but could raise only a paltry £70,000 (US$112,000). It was not nearly enough to prop up the desperate king.
In 1694 Neale partly saved the day by instituting a government lottery that would provide a sixteen-year loan for the Crown. His scheme, something like today’s premium bonds, sold tickets for £10 (US$16) each, paid annual interest of 10 percent, and also entitled the holder to a chance of winning some of the £40,000 (US$64,000) annual prize money. The idea, borrowed from Venice, captured Londoners’ imaginations—there were much-publicized stories of big wins—but failed to reach its target of raising £1 million (US$1.6 million). The diarist John Evelyn’s coachman was one of the lucky ones: he won £40 (US$64).
Law, perhaps surprisingly, deplored the use of lotteries to raise money. A few years later, when Victor Amadeus of Savoy asked for his advice on the subject, Law’s disapproval was unmistakable: “Public lotteries are less bad than private ones, but they are injurious to a state. They do harm to the people, take the paltry sums they earn by their labour, make them dissatisfied with their lot, and give them a desire to grow rich by gambling and luck. Servants lacking money are tempted to steal from their masters to obtain means to play in the lottery.” What inspired such strongly voiced censure of “gambling and luck”? It could have been the humiliation of having to ask his mother to help him out with his gaming debts, or revulsion at recalling his seedy life as a London gamester.
Law’s fascination with money taught him other crucial lessons. The Crown’s checkered track record on repayment was only part of the reason William found it hard to raise money. Equally to blame was the fact that the coinage was in disarray. At the Tower of London, Neale, in his role as mint master, was supervising a massive upheaval. Minting had remained virtually unchanged since the Middle Ages, and much of the currency in circulation was over a century old. Coins varied hugely in weight and size because shavings of gold or silver had been pared from their middle or edges—a crime known as clipping—and used to make counterfeit coins or sold as bullion. All in all, by the late seventeenth century the diarist John Evelyn reckoned that England’s coins contained less than half the silver or gold of their face value. The penalty for counterfeiting or clipping was death, but many were desperate enough to try it.
The unreliable coinage created difficulties for everyone: Ward was typically enraged when his money dealer tried to pay him in debased coins that he thought only a rogue would dare offer and only a foolish man accept. At times the situation was so acute that traders returned to bartering or charging inflated prices to compensate for the dubious value of the money available, and civil unrest frequently erupted. One remedy was to introduce new coins with a metal content closer to their face value, and with clipperproof milled edges. At first the treasury circulated new coins without withdrawing the old ones and the situation grew even worse: money dealers rushed to melt down the old coins and smuggle the resulting bullion onto the European market, where it fetched a higher price than in England—which proved a theory put forward a century earlier by Gresham and immortalized as Gresham’s Law, that bad money drives out good. The financial pandemonium taught Law a valuable lesson: he began to see that for a country to prosper and maintain its political status quo, sound money was essential.
While the theoreticians and “projectors”—entrepreneurial proposers of new financial schemes—wrestled with how to manufacture and maintain an adequate money supply, King William needed money to pay, feed, and equip his soldiers against the French, and to build and fit new ships. But, infuriatingly, every request for a loan was thwarted. The only way out was to authorize one of the flurry of inventive money-raising projects. Many were harebrained or deceitful, but a few held real promise. Watching from the sidelines, Law took note.
The ingenious scheme that William eventually sanctioned was proposed by William Paterson, a Scot. It was simple, as have been many of the most effective innovations throughout history. Basing his ideas on the highly successful national banks of Amsterdam and Venice, Paterson proposed that money could be raised for the king by the formation of a bank funded by a large number of private investors. Each would subscribe to a total value of £1,200,000, and this sum would then be lent to the king for eleven years at 8 percent interest. To allay fears of a repetition of Charles II’s waywardness, the government would guarantee repayment of the loan. Depositors were to be given handwritten banknotes, signed by one of the bank’s cashiers, which contained a promise to pay the bearer on demand the sum of the note—in other words, the note could be exchanged for gold or silver coin at any time by anyone presenting it for payment. Thus banknotes would circulate in a limited way as paper money.
The subscription list of the institution, known ever since as the Bank of England, was opened for investors on June 21, 1694. Within twelve days the total was subscribed. The king had enough money to pursue his war—for the time being at least—and the limited issue of banknotes as a new medium of exchange helped alleviate the shortage of coin.
Even if he had had the resources to do so, John Law could not have invested in what turned out to be a financial landmark that underpinned the rapid advances of his age. He was in prison, convicted of murder.