THE FIRST GREAT "PANIC"; John Law's Historic Banking (The New York Times, February 25, 1900, Wednesday)

THE FIRST GREAT "PANIC"; John Law's Historic Banking and Exploiting Scheme.

Its Lessons for Modern Financiers -- Europe Follows His Sound Ideas, Avoiding His Errors.
A.K.F.
February 25, 1900, Wednesday


In most minds the name of John Law is associated with a great land scheme for the development of the Mississipi Valley, in pursuance of which he induced people to invest in the worthless shares fo his company, blowing up a great bubble of speculation until it burst. The general impression of his character is that of a bold and skillful swindler, but this does him injustice. The first great financial panic of modern times was, indeed, the result of his operations, in which he had the French Government for a partner, but it was due to an inflation of currency and an over-expansion of credit which came from a mingling of sound ideas not fully understood with unsound ones partly forced upon him by circumstances over which he lost control, and by a public authority upon which he had to depend. The French Government and people were more responsible for the consequences than he. Law really gave a great impulse to banking and the use of credt and to the development of currency systems, by which the world has benefited; and his failure, which largely due to ideas far in advance of his time, has afforded lessons in finances which are not yet exhausted.

His Genius for Finance

The way had been prepared for him by the deplorable industrial and financial condition of France at the end of the reign of Louis XIV. The nation was burdened with debt, and its credit was gone; the revenue service was inefficient and saturated with fraud and corruption; Government notes of uncertain value were circulating; the coin of the realm was of varying worth, having been "diminished" more than once for the profit of the Government, on the theory that its currency was due to the royal "image and superscription," not to intrinsic value, and all industry and trade were in a languishing condition. The Regency under the Duke of Orleans was facing bankruptcy and considering repudiation, and as a makeshift in a desperate situation it issued 250,000,000 new billets d'Etat, bearing interest at 4 percent, for the redemption of pressing obligations. It was at this time, in the year 1715, that Law appeared on the scene, now at the mature age of forty-four. The son of an Edinburgh goldsmith who was also a banker, he had a genius for finance and had been studying it with original and advanced thought ever since he was a boy in his father's office. To be sure, he had been a prodigal after his father's death an squandered his patrimony in London dissipation, and having killed his man in a duel over a love intrigue before he was twenty-five, became a wanderer and an advendurer on the Cotinent, sustaining himself much of the time by skillful and fortunate gambling. But he studied the Bank of Amsterdam, as he had studied the Bank of England, and was all the time possessed with the idea of extending and expanding the banking principle by a larger use of credit and a fuller volume of money based upon value. In 1715 he had published a pamphlet, entitled "Money and Trade Considered," and submitted to the Scotch Parliament a plan for a "land bank," which was seriously discussed but not adopted. The using of other values than metallic money as bank capital was one of his illusions, and the potency of Government authority in sustaining value and credit in a currency was another.

Planned Government Bank

In his efforts to get his theories accepted and to establish a great public bank founded upon them, he had made the acquaintance of the Duke of Orleans before the latter became Regent of France; and after the death of the King, leaving a seven-year-old heir, he plied the new ruler with petitions, arguments, and documents in support of a plan that was to rescue the nation from its distress and infuse the lifeblood of prosperity throughout the land. There is no reason to doubt that in his designs at this time Law was a sincere enthusiast or that his advanced ideas were in the main sound. He believed in a large volume of coined money and notes redeemable in coin of the weight and standard of the time of issue, which would prevent fluctuations in value. HIs general plan was a Government bank which should issue its notes based upon coin, and receive all the revenues and make all the payments as fiscal agent of the crown, and which should receive deposits subject to transfer in book accounts, and discount paper and make loans. In fact, his mind had long held the germs of the modern banking and currency systems, and under more wholesome conditions they might have developed to his honor and glory instead of finally burying him obloquy.

Law's plan for founding the first Bank of France was opposed by the Finance Minister and other powerful persons of the day, though favored by the Regent, and was defeated; but in 1716 he received letters patent to establish the Banque Générale with private capital, in 1,200 shares of 5,000 livres each. It was to have an exclusive privilege for twenty years to issue notes payable in specie, or "écus de banque" of the weight and standard of the date of issue, to be free from taxation, and was to keep deposits with open accounts subject to transfers and withdrawals. ...

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