The law paid for these activities and privileges by issuing additional shares of the company. These shares could be paid for with banknotes (from his bank) or with public debt. GOLDSTEIN: And France doesn`t really have banks as we know them now. Right? It is not a thing in France – the bank – as we have banks. John Law (pronounced [lɑs] in English in the traditional approach to laws, the colloquial Scottish form of the name[ 1][2] baptized on 21 April 1671 – 21 March 1729) was a Scottish economist who distinguished money as a medium of exchange from national wealth dependent on trade. He served as Comptroller General of Finances under the Duke of Orleans, who was regent for the young Louis XV de France. In 1716, Law founded a private General Bank in France. A year later, at his request, it was nationalized and renamed the Royal Bank. Private banking was mainly financed by John Law and Louis XV; Three-quarters of its capital consisted of government bills and government-accepted notes, making it the country`s largest central bank. It was only partially backed by money and was a reserve bank.
Law also founded and directed the Mississippi Company, which was financed by the Royal Bank. Its chaotic collapse has been compared to tulip mania in Holland in the 17th century. [3] The Mississippi bubble coincided with the South Sea bubble in England, which would have taken ideas. Law was a player who won card games by mentally calculating the odds. He developed ideas such as the theory of the scarcity of value[4] and the Realpieces doctrine. [5] He believed that money creation stimulates an economy, that paper money is preferable to metal, and that dividend-paying stocks are a superior form of money. [6] The term “millionaire” was coined to refer to the beneficiaries of Law`s program. [7] [8] CHILDS: He often plays this card game called Pharaoh. And Law knew that if you were the banker – the house – you had a slight statistical advantage.
This is exactly how blackjack works in casinos now. So Law came to town and pretended to be a banker in a high-stakes card game. And the odds meant he was gaining more than he was losing over time. Law, however, had grander ideas than limiting his bank to this least offensive function. Among them was a plan to replace gold reserves with securities on much larger lands, whose relative abundance allowed it to “provide more liquidity to the market,” as we might say today. GOLDSTEIN: It was too much for the French people. They panicked. They took to the streets. They threw stones through the windows of John Law`s bank.
The duke, Law`s boyfriend, fired Law, placing him under house arrest. And Law fled France, just as he had fled England decades earlier. The Duke and France abandoned paper money altogether and returned to gold and silver coins. The law pushed for the creation of a national bank to create and increase credit instruments and issue banknotes secured by land, gold or silver. The first manifestation of Law`s system came when he returned to Scotland and contributed to the debates that led to the Treaty of Union of 1707. He wrote a pamphlet entitled Two Overtures Humbly Offered to His Grace John Duke of Argyll, Her Majesties High Commissioner, and the Right Honourable the Estates of Parliament (1705),[11][12] which anticipated the ideas he had advanced for the establishment of new systems of financing, paper money, and refinancing of public debt in a later treatise entitled Money and Trade Considered: with a proposal for the supply of money to the nation (1705). [13] [14]: 136 Law`s proposals to establish a national bank in Scotland were ultimately rejected and he left the country to pursue his ambitions abroad. [15] When the public rushed to convert the notes into coins, Law was forced to close the General Bank for ten days and then limit the size of transactions after the bank reopened. But the queues got longer, the Mississippi Company`s stock price continued to fall, and food prices rose 60 percent.
[3] The shares of the Louisiana or West Company were initially issued at 500 livres, but the shares of the successor East India Company had increased rapidly, reaching 10,000 livres in 1719. In 1720, the company issued a high dividend based on forecasts of future development, and the share price briefly rose to £18,000 before speculators decided to take their profits. Panic erupted when it became clear that the inflated value of the company – and the bank with which it was now merged – far exceeded the available capital. The company and the bank went bankrupt overnight, causing a severe financial crisis in France that affected all of Europe. By this time, however, speculators had completely lost confidence in the company`s shares, and the selling pressure continued (instead of stopping the sale, the fixed price acted as an incentive to sell), which again prompted the bank to significantly increase the money supply. John Law suddenly realized that his main problem was no longer his fight against gold, which he had tried to devalue, but inflation. He issued an edict stipulating that the banknotes and shares of the Mississippi Company would be gradually devalued by 50%. GOLDSTEIN: To be clear, that`s essentially how banks operate today. This is what we call fractional reserve banking.
And it`s the same today, when everyone comes with a bank deposit and at the same time asks for their money – we call it a bank run – the bank doesn`t have the money. That is how banks work. GOLDSTEIN:. Not great in finance or banking. And the France at that time was ruled by a regent, a duke – the Duke of Orleans – (spoke French) Orleans. GOLDSTEIN: I mean, there are suspicions about the banks here and now. But we – they exist. The son of a wealthy banking family, Law grew up in Fife and Cramond, west of Edinburgh. His training focused on the fields of political economy, commerce and economics. Law`s father died in 1688 and inherited the family`s estates and fortune. Law went to London and gambled a fortune in a short time. In the process, however, he became an experienced gambler who used his mathematical and statistical genius to win decks of cards by mentally calculating the odds.
As confidence in paper money declined, land and gold prices rose. This forced Law, who still enjoyed the support of the regent, to take extraordinary measures.