John Law (economist) facts for kids
Quick facts for kids
John Law
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![]() John Law, by Casimir Balthazar
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Born | Edinburgh, Kingdom of Scotland |
21 April 1671
Died | 21 March 1729 Venice, Republic of Venice |
(aged 57)
Occupation | Economist, banker, financier, author, controller-general of finances |
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John Law (born April 21, 1671 – died March 21, 1729) was a Scottish-French economist. An economist studies how countries manage their money and resources. Law had important ideas about how money works. He believed that money, which is used for buying and selling, was different from a country's true wealth. True wealth came from trade and goods.
He worked for the Duke of Orleans, who was ruling France for young King Louis XV of France. In 1716, Law started a private bank in France called the Banque Générale. A year later, it became a national bank, owned by the government, and was renamed the Banque Royale. This bank was like France's first central bank. A central bank manages a country's money supply.
Law also created a big trading company called the Mississippi Company. This company was funded by the Banque Royale. Its quick rise and fall, known as the Mississippi Bubble, was a famous financial event. It was similar to the "tulip mania" in Holland, where tulip prices went crazy. The term "millionaire" was first used for people who got rich from Law's plans.
Law was also a gambler who was very good at card games. He could figure out the chances of winning in his head. He thought that creating more paper money could help an economy grow. He also believed that shares in companies that paid dividends were a good form of money.
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John Law's Early Life and Adventures
John Law was born into a family of bankers and goldsmiths in Scotland. His father bought a large estate called Lauriston Castle. John joined the family business when he was 14. He learned about banking until his father passed away in 1688.
After his father's death, John Law enjoyed gambling and spent a lot of money. He traveled to London and lost large sums of money. In 1694, he had a serious argument with another man. This led to a fight where the other man died.
Law was arrested and found guilty. He was sentenced to death, but his punishment was changed to a fine. However, he was still put in prison. He managed to escape from prison and fled to Amsterdam.
Law's Big Ideas for the Economy
How John Law Wanted to Change Banking
John Law believed that countries needed a central bank. This bank would create more credit and print banknotes. These banknotes would be backed by things like land, gold, or silver. This meant the paper money would have real value.
When he returned to Scotland, he shared his ideas. He wrote a paper called Money and Trade Considered: with a Proposal for Supplying the Nation with Money in 1705. In this paper, he suggested new ways to manage money and pay off national debt. However, his ideas for a national bank in Scotland were not accepted. So, he left to try his plans in other countries.
He spent ten years traveling between France and the Netherlands. During this time, he made money by investing in different things. He saw that the French economy was having problems. This gave him a chance to try out his banking system.
Law wanted to get rid of small monopolies and private tax collectors. He planned to create one big bank for the country's money. He also wanted a state-owned company for trade. This would give the government control over finance and trade. The profits from this would help pay off France's national debt.
Creating France's First Central Bank
France's economy was in trouble after many wars. There wasn't enough metal to make coins, so money was scarce. When King Louis XIV died, the Duke of Orleans became the ruler. He gave John Law a chance to try his ideas.
France had a huge national debt. Law suggested a plan to boost business. He wanted to replace gold coins with paper money. This paper money would be based on credit. He also planned to pay off the national debt by selling shares in new businesses.
On May 1, 1716, Law opened the Banque Générale Privée in Paris. This private bank allowed people to invest using government bonds. The bank could also print its own money. This money was backed by gold coins, not the changing value of the French currency. This made the paper money more stable.
The Banque Générale was one of the first banks in Europe to issue paper money. In December 1718, Law asked for the bank to become nationalized. This meant it became owned by the French government.
From this new bank, Law started the big companies he dreamed of. France helped fund these companies with a lot of money in company stock. The famous Mississippi Company was started this way.
The Mississippi Company and Its Rise
Law became the main person behind the Mississippi Bubble. This event started when he combined several trading companies in Louisiana into one big company. This company became known as the Mississippi Company. It ended with the collapse of the Banque Générale and the value of the Mississippi Company's shares.
In 1719, the French government allowed Law to sell 50,000 new shares in the Mississippi Company. People could buy these shares for 500 livres each. They only had to pay a small amount upfront and the rest in monthly payments. The price of these shares quickly went up to 1,000 livres. Many ordinary people rushed to Paris to buy them.
Law's company lent the French government 1.5 billion livres. This was to help pay off the national debt. The company raised this money by selling even more shares.
Between May and December 1719, the price of a share jumped from 500 to 10,000 livres. It kept rising into early 1720. Law promised a 4 percent dividend, which made people even more eager to buy shares.
As prices went up very fast, Law tried to keep the share price at 9,000 livres. Then, in May 1720, he tried to slowly lower the value of both the banknotes and the shares. But this plan was quickly changed back.
The Fall of the Mississippi Bubble
People started to panic and rushed to exchange their paper money for coins. Law had to close the Banque Générale for ten days. When it reopened, he limited how much money people could exchange. But the lines grew longer, and the Mississippi Company stock price kept falling. At the same time, food prices went up by a lot.
The company's shares eventually became worthless. The huge excitement about their value led to widespread financial problems. Law was removed from his job as Controller General and head of the Banque Générale at the end of 1720.
People were selling shares very fast, and prices dropped sharply. By May 1720, prices fell to 4,000 livres per share. This was a 73 percent drop in less than a year. The rush to change paper money into coins caused bank runs and riots. People who had lost money gathered in the streets and attacked bankers.
John Law left Paris secretly a few months later. He left behind all his valuable properties in France. These included the Place Vendôme and many castles. He left them to help pay back the people he owed money to.
One economist, Henry Thornton, explained why Law's plan failed. He said Law forgot that there might be no limit to the demand for paper money. He also didn't realize that more money would make prices go up. And higher prices would then seem to justify printing even more money.
Law's rise and fall happened very quickly. But his ideas are still studied today. Many of his thoughts are part of modern ideas about money.
John Law's Later Years
John Law moved to Brussels in December 1720. He was no longer rich, as his properties in France were taken to pay his debts. He spent the next few years gambling in different cities like Rome, Copenhagen, and Venice. However, he never became wealthy again.
He realized he could not return to France after the Duke of Orleans died in 1723. Law was given permission to go back to London, where he had been pardoned earlier. He lived in London for four years. Then he moved to Venice, where he got pneumonia and died in 1729. He was buried in the San Moisè, Venice.
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See also
In Spanish: John Law para niños
- Assignat, a bank note system of the French Revolution