John Law’s Paper Pyramid

John Law, the real name Jean Lauriston, a Scottish-born Frenchman is considered to be the author of the first financial pyramid in the history of mankind. We must be thankful to him for the appearance of paper money. Today we will tell about this talented economist and even more genious fraudster.

This vivid personality was born in Edinburgh in 1671. At the age of 20 he moved to England. As he was an inveterate card player and reckless duelist after three years of his wild London life this young man was forced to escape the country because he had killed his opponent in а duel. His escape from London was successful and John Law safely fled from justice to Holland.

We must give him his due because he had never stopped his personal development by regularly visiting libraries and public lectures in European universities. In Amsterdam John thoroughly learned the principles of the banking system and even wrote a scientific research “Money and Trade Considered With a Proposal for Supplying the Nation with Money”.

The idea of the treatise was that for financial system to be improved and to overcome economic stagnation the state needed special banknotes preferably issued by a state bank.

The thing is that in those times trading relationships were mostly natural. Besides natural exchange coined money from precious metals like gold and silver was in turnover. It was necessary to create a universal method of settlement convenient for all.

After living for some time in Holland our hero returned home to Scotland for a while. He unsuccessfully corresponded with representatives of various European authorities offering them to realize his banking reforms. In Edinburgh he got married and together with his family decided to try luck in France. John arrived in Paris as a wealthy man (remember his passion for gambling in which he was very lucky).

A caricature of John Law and his system

In one of the gambling parlors he met the duke of Orleans who almost solely ruled over France at that time, being a regent of а minor king’s son Louis XV. The duke was so fascinated by John’s idea of issuing banknotes that Law’s small private joint-stock bank became a royal (state) bank in three years of its existence in 1719. The bank got the title “General bank” and began a mass issue of banknotes. Paper money quickly gained popularity among trading people; it was accepted for payment more willingly than louis d’ors and livres.

Emergence of a progressive financial tool brought to life the decaying French market. Treasury notes were actively exchanged for gold, the country’s treasury being quickly filled. At some moment an economic revival took place bringing wealth and carefree life to the royal court.

The General bank went through the next level in its development: it started granting loans to traders and industrialists. But Law was not going to stop. He realized all his plans concerning the bank and was ready to move on.

In 1717 he founded “Mississippi Company”, a joint-stock company dealing with financing development of the lands opened by Columbus. After gaining state support the company started sending trade ships, but business didn’t prosper as quickly as desired: Indians were not hospitable and colonists often died of diseases and exhausting work. construction of New Orleans city at the river (named after the duke of Orleans) became an intermediate result, reminding one-time success of “Mississippi Company”.

Despite a series of failures and absence of any significant results, French newspapers were eager to tell about ships loaded with precious metals and fur arriving in the port almost every day. John Law took care to provide good news, generously bribing editors and owners of publishing houses.

The company’s good reputation promptly increased the cost of its shares freely sold at the stock exchange. The prosperous French, merchants and noblemen, made all efforts to hold their huge capitals in shares of “Mississippi Company”. All these shares were secured by banknotes of the General bank, each share being signed personally by John Law as the guarantor of this security. Every day more and more shares as well as banknotes were issued, and nobody paid attention to the fact that binding of paper to real metals faded away a long time ago.

A crash came suddenly. Once duke of Bourbon decided to exchange a part of his shares and banknotes for a precious metal and it took him 4 carriages to carry gold out of the royal court. Rumors were spread quickly, and some days later John faced a great inflow of speculative dealers who had been buying up shares from the population abundantly before that and now they understood that they might not have a second chance to sell those shares.

The panic among other shareholders started to grow, and soon there were no funds to pay the value of shares. Hardly a day passed without several deaths in the crowd besieged John Law’s bank. In one incident fifteen people were crushed and suffocated to death in a bank’s doorway.

In order to pour cold water on people it was decided to introduce restrictions on possession of coins, which finally impaired confidence in paper money. The decree forbidding to use paper money within France put an end to these excitements, and millionaires were left with nothing. Packs of Mississippi Company shares became useless garbage.

All the country’s population was impoverished, yesterday’s rich men were today on the edge of hunger. Furious crowds besieged the duke of Orleans’s palace demanding to expose John Law to a public execution, people were eager to see the beheaded originator of the tragedy. John hurriedly left his beloved family and escaped the country where he received a ducal title and was treated kindly with glory and honors not so long ago. A rich “new Frenchman” crossed the border with empty pockets.

For the rest of his days the father of paper money was hiding in Venice where he died in loneliness and in poverty in spring of 1729.