When I first told this story for Religion Dispatches, I was concerned about the waning days of the Bush administration and the way so many administration insiders made a bundle on privilege and special access. That is no longer a partisan story, if it ever really were, not after the revelations of just how many Obama cabinet members, approved and not, have done the same. And in any case, the intervening months have added new and heretofore unknown names to the mix. Once upon a time, I was worried about Enron; more recently I was worried about Cheney, Bush and the rest. Now I’m more worried about the Madoffs, the Stanfords (the criminal, not the college) and whatever other unknown names whose offshore billions will soon be reported to have vanished, like rivers into the sea.
It is that image, of something seemingly as real as money vanishing into thin air that preoccupies me now. I still want to add a bit of history to the mix, and the larger and longer historical view of the current global crisis. Even religion played a subtle role in the strange story I first told last fall.
Few today recall the name of John Law (1671-1729), though this Scotsman was, in rapid succession, the most famous, and then the most notorious, man in Europe. He was deemed France’s savior for a time, then fairly quickly condemned as the man who brought the once-proud nation to its knees. In all of this, Law’s story—one part morality play, and two parts farce—provides an interesting and illuminating lens through which to view the final weeks of the Bush presidency; doubly so in light of the president’s surreal performance at last fall’s economic summit, where he actually seemed to mock the Europeans for their excessive market regulation.
John Law left us a legacy of two things, a word and a concept, both of which are enormously significant to understanding the current crises: Law gave us the word ‘Millionaire’, which was coined in 1719 (but not admitted into the language by the Académie Française until 1762) to describe the incredible wealth so many of his followers had amassed; and Law bequeathed us the experience of a market Crash, which came shortly thereafter, in May of 1720, and swept that incredible mass of illusory wealth away on a tide of public panic.
Law emerges on the scene in grand style: as a murderer. He killed a man in a duel in London on April 9, 1694, then later escaped from prison in the first week of January, 1695. He bounced around the Continent for a while—various reports place him in Italy, Holland and Paris—where, most of the time, he gambled and he studied money—which, for him, were intimately related activities. John Law was one of the first modern men to understand that in a paper money economy, the distinction between money and credit is very difficult to draw. He banked, quite literally, on that new reality.
The simple side of the issue was this: money, so long as it was made of gold and silver—the value of which was directly related to its scarcity—was always in short supply. The last big infusion of precious metals into the global economy had come a century earlier, through Spanish mining in the Americas. But the human population was growing exponentially, global markets were expanding, wars were becoming far more expensive to wage, and royal courts were becoming ever-more lavish and expensive settings for public spectacle. The solution to this money crunch in the generations prior to the creation of a new discipline called “political economy” was the invention of paper money. The system of modern credit was born and, in the words of Janet Gleeson, “a new and even more baffling problem emerged: the question of how to maintain public confidence in the value of intrinsically valueless paper.”
Law studied this problem with great care. He published a book in Edinburgh in 1705 entitled Money and Trade Considered, with a Proposal for Supplying the Nation with Money. The heart of Law’s bold thesis was that money had no substance. It therefore did not need to be grounded in precious metal; it could be grounded or guaranteed on the productive power of a nation alone. If you think about it, that is just the theory of the modern banknote. Law was ahead of his time; his novelty lay in bringing the hidden logic of the new paper-and-credit economy to light.
But Law’s views were even more radical—money is what it enables, nothing more:
Money is not the value for which goods are exchanged, but the value by which they are exchanged: the use of money is to buy goods and silver while money is of no other use.
You see his point. Paper money is no more than credit, in that it enables the exchange of goods and services, thereby greasing the wheels of a global economic system. And if such paper credit/money can be grounded in anything—from precious metals to sovereign credit—then why could it not be guaranteed by what seems to be the most stable thing of all: productive land? Would that not guarantee the necessary public confidence in paper notes? These questions gave birth to what Law later called “the System.”
Money and Magic
At his rhetorical best, he could be positively utopian. The System, Law later promised the French Regent, would do everything: it would convert French debt into investments on a brighter national future; it would create a new fiscal base that could be secured in the limitless land and limitless potential of the Americas; it would create a new vision of a truly global, mass participatory economy; and it would result in the increase of universal happiness. If Adam Smith worried about him, then it was because John Law made it all too easy (Smith mentions Law in Book II, Chapter 2 of The Wealth of Nations, calling “the Mississippi scheme, the most extravagant project both of banking and stock-jobbing that, perhaps, the world ever saw,” though he grudgingly admits that Law’s ideas still generated interest…and a following).
Adam Smith regularly distinguishes between “industry and idleness,” and that fundamental taxonomy informs much of his analysis—as well as his suspicion of John Law. In Book II, Chapter 3, Smith contrasts the small manufacturing towns in England and Holland which are “industrious, sober and thriving” (and Protestant, be sure to note), with the cities that house a royal court, such as Rome and Versailles, where the working class are largely idle, indebted to the wine trade more than manufacturing (and Catholic, by the way). There simply was no Protestant work ethic in the System, which is why Law’s critics used terms like ‘magic’ and ‘alchemy’ to describe his boldest ideas. Law believed that money could actually be made from speculation on the future, and on vagaries like the perceived value of land, not only from labor.
Lying at the heart of this confusion over money, and mistrust of the System, lay a suspicion that these were novel Protestant ideas. Law was “spiritualizing” money, whereas good Catholics knew that money was indeed a substance (more precisely, a metal) with a real presence and a stable value. The Protestant John Law was dematerializing money itself, and in so doing, he was creating credit out of thin air. (Law later became a French citizen and converted to Catholicism, as his fortunes continued to rise in Paris).
By 1715, leaders in Paris were ready to listen to Law’s radical new ideas. With Louis XIV dead, the Regency was forced to admit that the nation was utterly bankrupt: endless wars abroad; a coddled aristocracy at home; a mixture of inflation and debt that had brought the common people to their knees. What happened next led to Law’s creation of the first national bank of credit in France (the Banque Générale), the largest conglomerate in the world (the Mississippi Company), and eventually resulted in Law’s appointment as Financial Controller of France.
By 1715, the nation was not yet ready to take up Law’s ideas in total, but the newly created Finance Council permitted him to perform an experiment. He was given permission to create the Banque Générale in Paris in October 1715. And so it began. Law modeled his institution on the Bank of Amsterdam, and he printed banknotes that were not legal tender yet, but that could be used to settle merchants’ accounts without resort to coin or money. Law’s notes were not paper but a sort of hybrid form, lying somewhere in between notes of credit and paper money; they were paper that represented money, and thus were well on the way to becoming money.
Either way, they rapidly became powerful, symbolic paper. The idea did not take off immediately, but when the state got directly involved in his Bank, it did. In the summer of 1716, Law and the Regency scripted a very public delivery of one million French livres to Law’s Bank (worth perhaps six million dollars). Given the government’s interest in Law’s Bank, public interest immediately skyrocketed. Later in the year, some of Law’s enemies secretly collected some five million livres worth of notes and brought them to Law’s Bank demanding their immediate conversion into coin. Law contacted the Regent, and within 24 hours, produced the impressive sacks of money, much to the consternation of his opponents.
There were two problems here. The first was that while Law needed to create the illusion that all of his notes were backed by cash on hand, the whole purpose of his System was to create wealth that did not currently exist, but rather represented confident speculation on the creation of future wealth. The second problem was that the state’s interest was now directly tied to Law’s Bank, and if the state were absolutist, as it was in France, then the dangers of abuse due to lack of regulation and oversight were acute; Law’s critics knew that (yet tellingly enough, in 1718 his Bank changed its name to the Banque Royale).
At this point, however, the state was concerned with a different kind of oversight, and so in the spring of 1716, the Regency created a “Chamber of Justice” which used torture and other means to root out the human causes of fiscal corruption, and to punish those financiers who were making suspicious profits on the current economic crisis.
By 1717, Law’s position was secure, and his star was decidedly on the rise. His paper notes were so popular that they had become legal tender for the payment of taxes to the state. And in August of that same year, when John Law was named Director of the Compagnie d’Occident, he was finally in a position to put his most ambitious idea to the test. Law now saw a way to secure the value of his new paper notes on the security of an enormous swath of productive land: the Mississippi River Valley. Thus was the so-called Mississippi Company born.
“The Devil Begat Law, Law Begat the Bank…”
Law’s big idea was, once again, compelling in its simplicity. He reasoned that France, alone of all the European gunpowder empires of the 1700s, had failed to reap a harvest in the New World. France’s colonial holdings were vast: called simply “Louisiana,” they encompassed the entire Mississippi River Valley and ran from New Orleans to Canada. But thus far, little had come of the French colonial venture. Law reasoned that the previous failures were due to the fact that these organizations were undercapitalized and poorly managed. He proposed raising one hundred million livres through an initial stock offer of 200,000 shares valued at 500 livres each. And he would direct the venture himself.
At first, Law found surprisingly few takers; many were still trying to figure out the banking side of his System. Something else needed to be done to inspire confidence in the value of his Company and his stock. The gambler gambled brilliantly. He went bigger and bolder still, attempting to create a monopoly on the colonial trading industries of France. First, Law’s Company acquired the similarly mismanaged and unprofitable East India and China companies, then slaving companies, then tobacco monopolies, and he even offered to buy up further quantities of the Crown’s bad debt, converting it to stock. Law’s public display of bewildering confidence in the future of his Company finally sold others on his ideas. The big idea man, who was also a consummate big talker, finally succeeded—for increasing public interest in his stock, he limited access to the shares, creating a veritable buying frenzy and the first bull market in French history.
By the summer of 1719, shares of stock in the Mississippi Company had doubled in value. By mid-August, they were trading at 3500 livres, or seven times their original value. Law made more shares available; their value continued to soar. The price was 6500 livres in October, and would climb past 10,000 later in the year. In the clamor to possess these magic-seeming pieces of paper, those who sold their shares became instant “millionaires” (which is likely why we refer to the nouveaux riches in French, to this day), and made a very public show of their newfound wealth on the streets of Paris. This generated still further demand for the shares. At the height of his five hundred days of fame, John Law was the richest man in the world. And at this precise moment, his Company and his Bank were amalgamated, creating one megolithic super-organization called the Compagnie des Indes.
Law’s ultimate goal was Faustian in its ambition: the creation of a single unified and integrated world system. His friends think that he simply came too early. His enemies insist that the distinction between money and credit cannot be entirely erased; Law, they suggest, did not understand that the renter and the worker possess very different relationships to money and to credit. Some can absorb debt better than others; some can wait out a crisis longer than others; some can postpone payment of debts, while others cannot. In short, Law’s System was not nearly as universal as he alleged; it took the perspective of the wealthy into more and better account.
Both sides agree that it was the precipitous rise of the value of his Bank’s notes and his Company’s stock that led to the Crash in May of 1720. Once public confidence in Law’s magic-seeming System faltered there came a predictable run on his Bank and a sell-off of his Company’s stocks—the whole thing simply fell apart. Millions vanished into thin air, ironically proving one part of his theory: that money is not substance. But neither is it pure function. Money was a strange hybrid form, which was linked to the complex motives and psychologies of people…people no one, no matter how eloquent or brilliant or absolutist, could control.
As you might expect, there were calls for his head in late 1720 and Law, who had experience to draw upon, got quickly and quietly out of town. Adam Smith notwithstanding, France was not the only country hammered by the failure of Law’s scheme; Protestant Holland took the hit as well. One of the most telling ditties about Law comes from a satirical and pornographic Dutch journal, which put the point simply enough:
The Devil begat Law
Law begat the Bank
The Bank begat Mississippi
Mississippi begat THE SYSTEM…
Law returned to Venice, where he spent most of his time on gambling and his memoirs. He also tried to explain to anyone who would listen (there weren’t many) why his System need not have failed, if only people had trusted him more. But that was the point he never realized: trust is a rarer commodity than metal; trust, not land, is what money and credit both are founded on.
John Law caught pneumonia during the last week of Carnival in 1729, and died on March 21 of that year. He was buried first at San Geminiano, but his remains were moved to San Moisè in 1808, where an inscribed white marble stone marks the spot. For by then, even John Law was no longer substance, but rather a strange mixture of function, fame and fury.
I have deliberately resisted the temptation to underline the parallels between Law’s story and our own time too crudely; I trust that the way I have told it makes this clear enough. For the real question before us is where we are in the whirlwind cycle of the System? Is it 1715, or 1720? And if, as seems increasingly likely, it is 1720—or even 1721—and the System has indeed collapsed, then what are we to do by way of imagining a different system, a different fiscal reality, and a different conception of the public trust? These are questions for which the imaginative arts will be at least as important as the moral arts should have been before.
I have profited from two eminently readable accounts of the story I try to tell here. The first is Janet Gleeson’s Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern France (Simon and Shuster, 1999), and the second is the far more wide-ranging and provocative book by James Buchan, Frozen Desire: The Meaning of Money (Farrar Strauss Giroux, 1997).