Authors: JANET GLEESON
Tags: #Trade and Finance
SIMON & SCHUSTER
1230 Avenue of the Americas
New York, NY 10020
Visit us on the World Wide Web:
Copyright © 1999 by Janet Gleeson
Originally published in the U.K. in 1999 by Bantam Press, a division of Transworld Publishers Ltd.
All rights reserved, including the right of reproduction in whole or in part in any form.
and colophon are registered trademarks of Simon & Schuster, Inc.
To my parents,
Jill and Michael
A Man Apart
The Root of All Evil
King of Half America
Finding the Philosopher’s Stone
The First Millionaire
The Storms of Fate
The Whirligig of Time
The Prodigal’s Return
Within the last twenty years commerce has been better understood in France than it had ever before been, from the reign of Pharamond to that of Louis XIV. Before this period it was a secret art, a kind of chemistry in the hands of three or four persons, who actually made gold, but without communicating the secret by which they had been enriched. . . . It was destined that a Scotchman called John Law should come into France and overturn the whole economy of our government to instruct us.
“Essay on Commerce and Luxury”
ONEY HAS EVER POSED PROBLEMS
OT EVEN LOVE
, said Gladstone, has made so many fools of men. Throughout time the most obvious but universal dilemma—that there is never enough of it—has confounded everyone, from mendicants to monarchs, and their ministers.
Rarely, however, had the problem seemed more pressing than it did in the late seventeenth century. Money, as most people had always understood it, was silver or gold—precious metals whose value lay in their intrinsic scarcity. But the fact that coin supplies were limited by the metal that could be dug out of the ground was proving a serious hindrance. Throughout Europe, warfare of vast scale and expense coupled with the extravagant lifestyles of kings had emptied entire treasuries. At the same time the growing population, expansion of trade, and colonization of foreign lands demanded more cash to progress. As rulers plotted invasions, perused peace treaties, and yearned to sponsor new industry, build new palaces, and develop their domains overseas, money and how to create more of it became an obsession. In an age poised between superstition and enlightenment, it became as fashionable to ponder the subject that would soon be christened political economy as the disciplines of philosophy, mathematics, and nature. While on the one hand alchemists strove futilely to turn base metal into gold, on the other entrepreneurs proposed a plethora of ingenious schemes to sidestep the shortage. At the lowliest level, small-change coins made from base metal alleviated the dearth of coins in the streets. On a grand scale, banks and joint-stock companies used the magical device of credit to fund royal debts and colonial expansion by issuing paper banknotes and shares of token rather than intrinsic worth. Thus the frustrating limitations of gold and silver evaporated, but a new, even more baffling problem emerged: the question of how to maintain public confidence in the value of intrinsically valueless paper.
Among monetary philosophers and innovators to confront the problem, John Law stands alone as the most improbable, controversial, yet visionary of financial heroes. He was big in every sense, over six feet tall with ambitions that were larger and more daring than anyone else’s. On one level his story is the stuff of romantic legend. He turned his attention to finance after killing a man in a duel over an unfortunate liaison and escaping prison to save his neck. A congenial gambler, prepared to punt on the turn of a card yet burning with mathematical brilliance, he exuded a glamorous, dangerous magnetism. Women were spellbound by his impeccable dress, charming manner, and sexual charisma. Men were intrigued by the ease with which he was able to demystify complex subjects, his nonchalant wit, and his willingness to linger for hours over games of cards and dice. But his ideas and actions invest his life with far more significance than that of a beguiling and ambitious playboy: the things Law made happen still have resonance today.
In an ironic reversal of the concept of the philosopher’s stone (the substance by which it was believed gold could be made from base metal), he founded the first national bank of issue in France that made money from paper on a previously unknown scale to revive the ailing economy. He formed the most powerful conglomerate the world had yet seen—the Mississippi Company—and encouraged unprecedented numbers of private investors to dabble in its shares. Once initial hesitation had been banished, investors from England, Germany, Holland, Italy, and Switzerland stampeded to Paris to play the markets, and share prices rose from 150 livres to 10,000 in a matter of months. In comparison, the best bull markets of the twentieth century, between 1990 and 1999, when the Dow Jones rose by 380 percent and the Nasdaq by 790 percent, seem paltry. Law sparked the world’s first major stock-market boom, in which so many made such vast fortunes that the word “millionaire” was coined to describe them. Almost overnight he had become rich beyond expectation, a heroic figure, fêted throughout Europe, and promoted in recognition of his achievement to the position of France’s financial controller—the most powerful public position in the world’s most powerful nation.
Pioneers, so they say, usually end up with arrows in their backs. In Law’s case, enemies, inexperience, greed, and destiny conspired against his unconventional genius. The idea that money could be made from speculation rather than drudgery was printed indelibly on the popular consciousness. But having made their fortunes, many began to look for alternative investments, or to feel that paper was no long-term substitute for more traditional, tangible assets. When speculators began to cash in shares and withdraw paper funds to buy estates, jewels, or gold, or to speculate in other escalating foreign share markets, Law, hampered by jealous rivals, was unable to hold back the tide and the stock plummeted as rapidly as it had risen. People who rushed to the bank to convert paper back into coin found insufficient reserves and were left holding an asset that had become virtually worthless.
Over half a million people, equivalent to two-thirds of the entire population of the city of London at the time, claimed to have lost out as a result of John Law. Having sparked the first international stock-market boom, he had also sparked the first international bust. As loudly as he had been lauded a financial savior months earlier, he was branded a knave and ignobly demoted. Sadder, wiser, immeasurably poorer, he spent the rest of his life unsuccessfully trying to convince the world of his integrity, and that the idea behind his schemes was sound. His fall cast long shadows. It was eighty years before France dared again to try to introduce paper money to its economy. For years afterward history judged Law harshly. In the story of money, the chapter on his life embodies the perils of paper, the monumental significance of his economic foresight largely negated by his ultimate failure.
Today, if John Law or his critics could witness commerce conducted in any mall with credit cards, banknotes, and checks—not a gold or silver coin in sight—they would see, incontrovertibly, his vision achieved, but recognize also the same inherent weakness. The survival of any credit-based financial system still hinges on public confidence in a way that one based on gold does not. Spectacular financial breakdowns have peppered history ever since the advent of paper credit.
The American investment guru Warren Buffett once said, “If history books were the key to riches the Forbes 400 would consist of librarians.” Nevertheless, three centuries after John Law delighted, then devastated investors in his Mississippi stock, an age of comparably varied and ambitious financial innovation unfolds—witness the introduction of the euro, the opportunity to trade shares on the Internet, and a panoply of monetary instruments, from foreign-currency mortgages to inventive use of derivatives in equity, bond, and currency markets. In such a world Law’s story still holds uncanny relevance.
During the period covered in this book English and French currency was based on a similar structure: 240 pennies or deniers = 20 shillings or sous = 1 pound or livre tournois. Coins in common use in France included the gold louis d’or and the silver écu, which were measured and varied widely against the value of the livre. Another common coin was the pistole, a Spanish silver coin worth approximately 10 livres. Exchange rates also varied enormously: a livre was worth between a shilling and 1s. 6d. According to the Bank of England a pound in 1720 is equivalent to about £73 (US$117) today. Therefore a sum quoted in livres can be converted to its approximate equivalent in dollars today by halving it, then multiplying by twelve.
He came to Paris, where he cut such a fine figure that he held the bank at Faro. He usually played at the house of a famous actress, where they played for high stakes, although he was in as great demand with Princes and Lords of the first order, as in the most celebrated academies, where his noble manners and even temper, distinguished him from other players.
Barthélemy Marmont du Hautchamp,
Histoire du système de finances
T IS AN EVENING IN
salon of Marie-Anne de Chateauneuf—“La Duclos”—a celebrated actress of Paris’s Comédie Française, and as usual she is entertaining Parisian society. Despite the lustrous presence of sundry
talk is uncharacteristically desultory. France is in the throes of the world’s first global war, the War of Spanish Succession, which has raged already for seven years and will endure for another six. This country, the most powerful and populous in Europe, has been ruined by the perpetual conflict. But this cocooned Parisian circle is scarcely conscious of it: the talk is not of the devastating defeats France has suffered at the battles of udenaarde, Turin, Ramillies, and Blenheim. It focuses instead on the move of the elderly Louis XIV, the Sun King, and his court from Versailles to Marly, and the love affairs of the fascinating but apricious Duc d’Orléans.
Those who find these topics less than engaging are drawn instead to the cluster of players engrossed in a card game, faro. Most are habitués of the tables—at this level of society everyone knows everyone else—but among them one man stands apart. He is fashionably clad as one would expect in a wideskirted velvet coat, unbuttoned to reveal a damask waistcoat and cravat of Brussels lace, while a periwig of black curls cascades over his shoulders. But at over six feet tall—a remarkable stature in these diminutive days—he is a man of grand and imposing looks that according to one acquaintance “places him among the best made of men.” Amid the twitchy players, he is also remarked for his gentle and insinuating manners, a serenity of temperament that amply reflects his outward appearance.
During a lull in play La Duclos proudly presents the stranger as John Law, a Scottish gentleman visiting Paris. Her guests soon realize, however, that although Law is as charming and witty as he is physically attractive, he’s reticent when questioned on his circumstances. They also discover, as the evening progresses, that he is a master gambler.
According to the rules of the game, the players must defeat a single opponent, the tallière, or banker, to win. This evening Law has been permitted to pit his wits against the rest and adopt the solitary role of opponent. He is the bank. As the stakes grow higher, the players’ mood shifts from studied composure to overt unease, and a crescendo of voices pledge increasingly reckless sums. But no matter how great the amount at risk, Law never relinquishes control over his outward expression.
Each player chooses one, two, or three from a deck of cards on the table before them, using gold louis d’or as their stake. Slowly the croupier takes his pack, discards the uppermost card, plays the next two—the loser and the winner—and places them in front of him. Winning depends on players having selected the same number as the second card dealt by the croupier (suits are irrelevant), so long as he does not deal two cards of the same face value, in which case the banker also wins. The dealing continues, players betting on every draw until three cards remain. The room is transfixed for the final turn, when the players must guess the cards in order of appearance. Inevitably, Law triumphs over most. He scoops the gold coins he has accumulated into the leather purses he has brought with him, leaving the losers, ruefully, to review their depleted wealth. Once again he has apparently defied the laws of chance and emerged spectacularly victorious.
Few among those present perceive that he has been assisted by anything more than unusual good fortune. Years later his closest acquaintances, such as the Duc de Saint-Simon, failed fully to understand his gaming victories, and described him as “the kind of man, who without ever cheating, continually won at cards by the consummate art (that seemed incredible to me) of his methods of play.” In fact, success on this scale has almost nothing to do with luck or consummate art but lay in ensuring that the odds are stacked heavily in his favor. Even when not in the lucrative role of banker, by marshaling a remarkable mathematical intellect and employing his understanding of complex probability theory, of which few are aware, Law was able to measure with astonishing accuracy the likelihood that a given card would appear. To him there was little doubt about the evening’s outcome.
Not far from the opulent interior of La Duclos’s salon, in a plain but comfortably appointed apartment of the Benedictine Priory in Faubourg St. Antoine, was one of the few men in Paris to whom John Law’s success was of pressing concern. Marc René de Voyer de Paulmy, Marquis d’Argenson, Paris’s superintendent of police, was as physically unattractive as Law was outwardly engaging, with sallow skin and deep-socketed eyes. He was noted chiefly for his “subtle mind” and “natural intelligence,” and his business—others’ secrets—was a métier at which he excelled. As the eagle-eyed Duc de Saint-Simon remarked, “There was no inhabitant [of Paris] whose daily conduct and habits he did not know.”
D’Argenson relished sophisticated company and felt easy in the elite world to which John Law’s gaming skills had given him access. During the decade he had held his position, Law’s sporadic appearances and extraordinary successes had grown increasingly perturbing. D’Argenson was convinced that John Law was filling some secret role for the British, or that he constituted some other even more insidious threat. His unease deepened when, despite every attempt to find out more about Law, intelligence was discovered to be worryingly sparse. Some said he was a fugitive from British justice, that he had escaped from prison, where he had been sentenced to death by hanging for killing a man. His fortune was variously rumored to have come from gaming tables in Vienna, Rome, Venice, Genoa, Brussels, and The Hague, or from an inherited Scottish estate. But all this was hearsay and speculation. A year earlier, when d’Argenson discovered Law intent on masterminding a dangerous scheme that might undermine France’s economy—the introduction of paper money to France—he had expelled him from Paris. Now the King’s foreign minister, the Marquis de Torcy, had informed him that not only was Law back without a passport but that “his intentions are not good,” and that “he is serving our enemies as a spy.” Torcy was worried and wanted to know more. D’Argenson, equally disturbed, had attempted for some weeks to track Law down. The quarry had proved elusive.