THE MISSISSIPPI SCHEME AND ITS ANTECEDENTS
THE great “Mississippi Scheme” which wrought havoc on the French in 1720 is the central and turning point in the history of John Law, late of Lauriston, Controller–General of Finance in France. His father, William Law (grand nephew of James Law, Archbishop of Glasgow) was a goldsmith in that city.
As in the seventeenth century the goldsmiths were also the bankers and moneylenders of the community, a successful goldsmith might be looked on as on the highroad to great fortune. To William Law in 1671 was born his first son John, who had considerable natural talent in the way of mathematics — and a nature which was such as to nullify their use. As a youth he showed proficiency in arithmetic and algebra, but as he was also in those early days riotous and dissipated, we may fairly come to the conclusion that he did not use his natural powers to their best advantage. He was already a gambler of a marked kind. Before he was of age he was already in debt and was squandering his patrimony. He sold the estate of Lauriston which his thrifty father had acquired, and gave himself over to a life of so-called pleasure. His mother, who had family ambitions, bought the estate so that it might remain in the family of its new possessors. He removed himself to London where within a couple of years he was sentenced to death for murder — not a vulgar premeditated murder for gain, but the unhappy result of a duel wherein he had killed his opponent, a boon companion, one Austin who had acquired the soubriquet of “Beau” Austin. Through social influence the death penalty was commuted for imprisonment, and the crime only regarded as manslaughter. He had however to deal with the relatives of the dead man who were naturally vindictive. One of them entered an appeal against the commutation of the sentence. Law, with the characteristic prudence of his time and nationality, did not wait for the leisurely settlement of the legal process, but escaped to the continent where he remained for some years sojourning in various places. Being naturally clever and daring he seems to have generally fallen on his feet. Whilst in Holland he became secretary to an important official in the diplomatic world, from which service he drifted into an employment with the Bank of Amsterdam. Here the natural bent of his mind found expression. Banking in some of its forms is gambling, and as he was both banker and gambler — one by inherited tendency and the other by personal disposition — he began to find his vogue, addressing himself seriously to the intricacies and possibilities of the profession of banking. He was back in Scotland in 1701 (a risky venture on his part for his felony had not been “purged”) and published a pamphlet, “Proposals and Reasons for constituting a Council of Trade in Scotland’ This he followed up after some years, with another pamphlet, “Money and Trade considered, with a proposal for supplying the Nation with Money 3; and in the same year (1709) he propounded to the Scotch Parliament a scheme for a State Bank on the security of land — a venture which on being tried speedily collapsed. This, like other schemes of that period, was based on the issue and use of paper money.
In the meantime, and for five or six years afterwards, he was travelling variously throughout Europe, occupying himself with formulating successive schemes of finance, and in gambling — a process in which he, being both skilled and lucky, amassed a sum of over a hundred thousand pounds. He had varying fortunes, however, and was expelled from several cities. He was not without believers in his powers. Amongst them was the Earl of Stair, then Ambassador to France, who allured by his specious methods of finance, suggested to the Earl of Stanhope that he might be useful in devising a scheme for paying off the British National Debt. After the death of Louis XIV, in 1715, he suggested to the Duke of Orleans, the Regent for the young King (Louis XV), the formation of a State Bank. The Regent favoured the idea, but his advisers were against it; it was, however, agreed that Law might found a bank with power to issue notes and accept deposits. This was done by Letters Patent and the Banque Generate came into existence in 1710, and was an immediate success. Its principle was to issue paper money which was to be repayable by coin. Its paper rose to a premium in 1716; in 1717 there was a decree that it was to be accepted in the payment of taxes. This created a new form of cheap money, with the result that there was a great and sudden extension of industry and trade. From this rose the idea of a new enterprise — The Mississippi Company — which was to outvie the success of the East India Company incorporated by Charter in 1600 under the title of “The Governor and Company of the Merchants of London trading to the East Indies,” which after periods of doubtful fortune, and having become consolidated with its rival “The General East India Company;” — partially in 1702, and completely in 1708, under the somewhat elephantine name of “The United Company of Merchants of England trading to the East Indies” — was now a vast organization of national importance. To the new French Company for exploiting the Mississippi Valley was made over Louisiana (which then included what were afterwards the States of Ohio and Missouri) . The Decree of Incorporation was issued in 1717. The Parliament at Paris presently grew jealous of such a concession having been given to a foreigner; and the next year a rumour went about that Parliament was about to have him arrested, tried, and hanged. The Regent met the parliamentary resistance by making (1718) the Banque Generate into the Banque Royale — the King guaranteeing the notes. Law was made Director General; but he was unable to prevent the Regent from increasing the issue of paper money, by which means he managed to satisfy dishonestly his own extravagance. It was a fiscal principle of the time that the State accountants did not go behind the King’s receipt — the acquit de comptant as it was called.
The Western Company was enlarged in 1718 by a grant of a monopoly of tobacco, and of the rights of trading ships and merchandise of the Company of Senegal. In 1719, the Banque Royale absorbed the rights of the East India and China Companies, and then assumed the all-embracing title of Compagnie des Indes. The next year it took in the African Company; and so through that the whole of the non-European trade of France. In 1719, the management of the Mint was handed over to Law’s Company; and he was thus enabled to manipulate the coinage. In the same year he had undertaken to pay off the French National Debt, and so become the sole creditor of the Nation. He already exercised the functions of Receiver General and had revenue-farming abolished in its favour. He now controlled the collection and disposal of the whole of the State taxation. At this stage of his adventure, Law seemed a good fiscal administrator. He repealed or reduced pressing taxes on useful commodities, and reduced the price of necessaries by forty per cent, so that the peasants could increase the value of their holdings and their crops without fear of coming later into the remorseless grip of the tax-farmer under the infamous metayer system. Free-trade was in the Provinces practically established. This, so far as it went, was all Law’s doing. Turgot, who later got credit for what had been done, only carried out what the Scotch financier had planned.
Law had promised high dividends to the speculators in his scheme, and had so far paid them; so it was no wonder that “The System” raised its head again. In 1719–20, all France seemed to flock to Paris to such a degree and with such unanimity of purpose, that it was difficult to obtain room to go on with the necessary work of the Mississippi Scheme. In such matters, resting on human greed which throws all prudence to the winds, the pressure is always towards the centre; and the narrow street of Quin cam poix became a seething mass, day and night, of speculators in a hurry to buy shares. The time for trying to sell them had not yet arrived. Naturally such a locality rose in value, and as demand emphasises paucity of space, extraordinary prices ruled. Even a small share in the lucky street, where fortunes could be made in an hour, rose to fabulous value. Houses formerly letting for forty pounds a year now fetched eight hundred pounds per month. And no wonder, when shares of the face value of five hundred livres sold for ten thousand! When there is such an overwhelming desire to buy, then is the opportunity for sellers to realise, and the time for such speculation on the one side, and for such commerce on the other, is naturally short and the need pressing.
At the beginning of 1720 everything seemed to be increasing in a sort of geometric ratio. After a dividend of forty per cent, had been declared, shares of five hundred value rose to eighteen thousand. Greed, and the opportunity for satisfying its craving, turned the heads of ordinarily sensible people. The whole world seemed mad. It appeared right enough that the financial wonder-worker who had created such a state of things should be loaded with additional honours. It was only scriptural that he who had already multiplied his talents should be entrusted with more. There was universal rejoicing when John Law — exiled foreigner and condemned murderer — was appointed, in January, 1720, Controller–General of the whole finances of France. Naturally enough, even the hard head of the canny Scot began to manifest symptoms of giving way in the shape of becoming exalte. And naturally enough his enemies — financial, political and racial — did not lose the opportunities afforded them of taking advantage of it. Tongues began to wag, and all sorts of rumours, some of them reconcilable with common sense and easily credible, others outrageous, began to go about. Lord Stair reported that Law had boasted that he would raise France on the ruins of England and Holland, to a greater height than she had ever reached; that he could crush the East India Company and even destroy British trade and credit when he chose. Stair resented this, and he and Law from being close friends became enemies. To appease the incensed and at present all-powerful Law, the powers that were recalled Lord Stair.
On 23 February 1720, the Compagnie des Indes and the Banque Royale were united, thus linking the ends of the financial chain. “The System” was now complete.
When Aladdin set the Genius, who had hitherto worked so willingly, the final task of hanging a roc’s egg in the centre of the newly-created palace, he brought the whole structure tumbling about his ears. So it was with John Law and the egregious Mississippi Scheme. His idea was complete and perfect. But the high sun when it reaches its meridianal splendour begins from that instant its downward course. The reaction was not long in manifesting itself. Usually in such matters there is a pause before the great driving-wheels reverse their motion, and the backward motion, beginning slowly, gathers way as it progresses. But in this case human intelligence and not soulless machinery was the propulsive force of reaction. The speculators had begun to work before the onward movement had come to an end or even begun to slacken. They were loaded up with a vast amount of stocks whose value, even if there had been money to redeem them, was severely limited, whereas they had purchased at prices varying between the first rise above nominal value and that reached by the last desperate speculator. It is not wise to hold such inflated stock too long, and in a crisis sailing-master Wisdom orders Quarter-master Caution to take a trick at the helm. When the bare idea of unification of financial interests was mooted, the wise holders of stock commenced to unload. When this movement began its progress was rapid — so long as there was anything to be moved. The first class to feel it were the bankers. The specie ran out like the pent-up water from a burst reservoir, till in an incredibly short time there was not sufficient remaining to afford the money-change needed in daily life. The advisers and officials of the State, seriously alarmed, began at once to take strong measures supported by royal decrees. Then as ruin began to stare the whole nation in the face more and more with every hour, desperate expedients were resorted to. The value of the currency was made by every stratagem, dishonest trick, and unscrupulous exercise of power, to fluctuate so that such differences or margins as arose might be grasped forthwith for national use. Payments in bullion, except for very small amounts, were forbidden. The possession of anything over five hundred livres in specie was deemed an offence punishable by confiscation, partial or wholesale, and by fine. Domiciliary visits were paid to seek evidence of offence and to enforce the new laws, and informers in this connection were well paid.
Then began a war, between public oppression and individual trickery, to defend acquired rights and evade unjust demands. The holders of paper money, unable to realise in specie, tried to protect themselves by purchasing goods of intrinsic value. Precious metals, jewels, and such like were bought in such quantities that the supplies diminished and the prices grew, until to avoid immediate ruin, such purchases were proclaimed illegal and prohibited. Then ordinary commodities of lesser values were tried as means of barter, till their prices too rose to such an extent that trade was paralysed. In order to meet the growing danger a still more desperate expedient was resorted to. A decree was issued the effect of which would be to reduce — gradually it was hoped — the obligation of bank notes to one-half their nominal value. This completed the panic, for here was a position which could not be guarded against by any prudence or wisdom.
No one could henceforth by any possibility be financially safe. The speculators who had already realised were alone safe. Bona fide investors, if not already overwhelmed by disaster, saw the tide of ruin rising rapidly around them. Nothing within the power of the state could now be done to check or even lessen the state of panic; not even the reversal of the late decree in ten days after its issue. To make matters still worse the Banque at this very time suspended payment. Probably in a wild endeavour to do something which would avert odium from itself by saddling the responsibility on someone else, the Government procured the dismissal of Law from the Controller–Generalship of Finance. However — strange to say — he was very soon appointed by the Regent as Intendant-General of Commerce and Director of the ruined bank. The much-vaunted, idolised, and believed-in “System” had now fallen hopelessly and was ruined forever. Law was everywhere attacked and insulted with such unmitigated rancour that he had to leave the country. He had invested the bulk of the great fortune which he had by now acquired, in estates in France; and these together with everything else that he had were now confiscated.
At the end of the same year, 1720, whilst he was at Brussels he was asked by the command of the Czar (Peter), to administer the finances of Russia, but declined. After this episode, grateful to a broken man, he spent a couple of years wandering about Italy and Germany and probably gaining a fluctuating income through gambling. Next he was to be found in Copenhagen where he had sought sanctuary from his creditors. Next year there was an outward change in his status, when he went to England, on a ship of war, at the invitation of the Government. There he was presented to George I. Somewhat to his chagrin he was denounced in the House of Lords as a Catholic — (he had abjured his old belief of Protestantism before accepting the high office of Controller–General of Finances in 1720) — and an adherent of the Pretender. He pleaded in the King’s Bench the Royal pardon for the murder of Beau Austin which had been sent to him in 1719. He spent the succeeding few years in England whence he corresponded with the Duke of Orleans. He expected to be recalled to France but his hope was never realised. He wished to go to the Continent but was practically a prisoner in England, fearing to leave it lest he should be arrested by his creditors, amongst whom was the new French East India Company which had been reconstructed on the ruins of the old. In 1725 Sir Robert Walpole, then Prime Minister, asked Lord Townshend, the Secretary of State, to give Law a King’s commission of some sort, so that such might serve for his protection. In the same year he went to Italy. He died in Venice in 1729, in what, compared with his former state, was poverty. To the last he was a gambler, always ready to take long risks for a prospect, however remote, of large gain. A story is told that in his last years he wagered his last thousand pounds to a shilling (20,000 to 1) against the throwing of double sixes six consecutive times. The law of chances was with him and naturally he won. He renewed his wager but the authorities would not allow the further gamble to take place.
John Law married, quite early in life, the daughter of the Earl of Banbury and widow of Mr. Seignior. His widow died in 1747. Some of the members of his family were not undistinguished; his son died a Colonel in the Austrian service; and one of his nephews became Comte de Lauriston and rose to be a General in the French army and Aide-de-Camp to the first Napoleon. He was made a Marshal of France by Louis XVIII.
John Law was a handsome and distinguished-looking man, blonde, with small dark grey eyes and fresh complexion. He made an agreeable impression on strangers. Saint–Simon, the social historian, gave him a good character: “innocent of greed and knavery, a mild good man whom fortune had not spoilt.” Others of his time regarded him as a pioneer of modern statesmanship.
How is it then that such a man must be set down an impostor? In historical perspective as an impostor he must be regarded, though not as such in the narrowest view. The answer is that his very prominence sits amongst his judges. Lesser men, and greater men of lesser position, might well stand excused in matters wherein he is accorded condemnation.
“That in the Captain’s but a choleric word Which in the soldier is flat blasphemy.”
If, when a man plays a game wherein life and death and the fortunes of many thousands are involved, it behoves him to be at least careful, much greater is his responsibility where the prosperity and happiness of nations are at stake. Had Law merely started new theories of finance, and had they gone wrong, he might well claim, and be accorded, excuse. But his were inventions of what, in modern slang, is called “get-rich-quick” principles. Not only did Law not enrich human life — with one exception, that of enlarging the currency in use — or add to the sum total of human well-being and happiness; he even neglected to show that forethought and consideration for others which in all honour ought to be exercised by the deviser and controller of great risks. He was a gambler, and a gambler only. He merely put into the pockets of some persons that which he had taken out of the pockets of others; and in doing so showed no consideration for the poor, the thrifty, the needy — for any of those whose contentment and happiness depend on such as are in high places and dowered in some way with productive powers. The soulless uneducated churl who does an honest day’s work does more for humanity than the genius who merely shifts about the already garnered wealth of ages. John Law posed as a benefactor and accepted all the benefits that accrued to him from the praises of those who followed in his wake and gleaned the rich wastage of his empire-moving theories and schemes. Financiers of Law’s type no more benefit a country or enrich a people than do the hordes of wasters and “tape”-betting men who prey on labour as locusts do on the crops. If they wish not to do unnecessary harm — which is putting their duty at the lowest possible estimate — they should at least try to avoid repeating the errors which have wrecked others. A brief glance at the wreckage which lay well within the Scotch gambler’s vision, will show how he shut his eyes deliberately not only to facts, but to the many correlations of cause and effect. Before his Mississippi Scheme was formulated, there had been experience of banking enterprises, of schemes for mercantile combination and for the exploitation of capital, of adventurous dealings in the developments of countries new and more or less savage, East and West and South.
The following list will typify. Of all these John Law had knowledge sufficient to judge of difficulties to be encountered in the early stages, of dangers not only incidental to the things themselves, but based deep in human nature.
The East India Company founded in 1600 The Bank of England founded in 1694 The Africa Company founded in 1695 The Darien Company founded in 1695
A glance at each of these, all of which were within the scope and knowledge of Law, their aims, formation and development, up to the time spoken of, can hardly fail to be illuminative. The sixteenth century had been an age of adventure and discovery; the seventeenth of the foundation of great commercial enterprise, of conception of ideas, of the constructive beginnings of things. The time for development had come with the eighteenth; and now care and forethought, prudence and resource, were the preparations for success.
The East India Company was in reality the pioneer of corporate trading, and as for nearly a hundred years it was in a measure alone in its scale of magnitude, its experiences could well serve as exemplar, guide, and danger signal. It was based on that surest of all undertakings, natural growth. It came into existence because it was wanted, and from no other cause. Its very name, its modest capital, its self-protective purpose make for understanding.
In its Charter of Incorporation its purpose was indicated in the name: “The Governor and Company of Merchants of London trading to the East Indies.” Its capital was £70,000, which though a large sum for those days, was, according to our modern lights, an almost ridiculously small sum for the object then before it, and to which it ultimately attained. The time was ripe for just such an undertaking.
The Peace of Vervins (1598) which left both France and Spain free to look after their domestic concerns, was immediately followed by the Edict of Nantes (1599) which gave religious liberty to France, and such a new freedom is always followed by national expansion. By this time Spain — the explorer or conqueror — and Holland — the patient organiser — held Eastern commerce in their hands. England had been gradually making a commerce of her own in the Indies, and all that was required was an official acknowledgment, so that the thunder of her guns should, when required, follow the creaking of her cordage. From the story of this great enterprise, through its first twenty-five years, could be drawn the lesson of such schemes as Law was now formulating. Though it had succeeded, in spite of Dutch and Portuguese opposition, in establishing “factories” when the historic massacre by the Dutch at Amboyna in the Molucca Islands, took place in 1725, the Eastern Company seemed near its dissolution. It was not till the establishment of the Hooghly factory in 1742 that things began to look up. After that, fortune favoured the Company more than she had appeared likely to do at the start. The marriage of Charles II to Catherine of Braganza in 1661 brought progress in its train. Catherine’s dower, which included Bombay and so put a part of Portugal’s later possessions in British keeping, greatly stimulated the East India Company which thenceforth was able to weather the storms that threatened or assailed. The privilege of making war on its own account, conceded by Charles II, gave the Company a national importance which was destined to consolidate its interests with those of England itself. So strong did it become that before the end of the eighteenth century it was able to resist the attack on its charter made by a powerful and progressive rival, the “New Company.” The rivals, after a few years of pourparlers and tentative efforts, were united in 1708; and thenceforth the amalgamation, under the title “The United Company of Merchants of England trading to the East Indies,” was practically unassailable on its own account. It was additionally safe in that it had the protection of the great Whig Party under Godolphin. The capital of the Company, now enlarged to £3,200,000, was lent to the Government at five per cent, interest and was finally merged in the National Funds. The history of the Company, after 1717 does not belong here, as it is only considered as showing that John Law had the experience of an earlier Company similar to his own to guide him in its management if he had chosen to avail himself of it.
The Bank of England was, strangely enough, the project of a Scotchman, William Paterson. The plan was submitted to Government in 1691 but was not carried into existence for three years. It was purely a business concern, brought into effective existence through the needs of commerce, the opportunity afforded being the need of the State and the concern of the statesman. It had a capital at first of over £1,200,000, which was loaned to the nation on the security of the taxes when the Charter was signed, there being certain safeguards against the possibility of political mis-use. The Controlling Board was to have twenty-five members who were to be elected annually by the stockholders with a substantial qualification. There were at this time in England private banks; but this was an effort to formulate the banking rights, duties, and powers of capital under the a?gis of the State itself. But even so sound a venture, enormously popular from the very first and with the whole might of the nation behind it, had its own difficulties to encounter. Its instantaneous success was an incentive to other adventurers; and the cooperation with government which it made manifest created jealousy with private persons and commercial concerns. Within two years its very existence was threatened, first by the individual hostility of those in the bullion trade, who already acted as bankers, and then by a rival concern incorporated under strong political support. This was the National Land Bank whose purpose was to use the security of real estate as a guarantee for the paper money which it issued for convenient usage. Strong as the Bank of England was by its nature, its popularity, and its support, it was in actual danger until the rival which had never “caught on” — to use an apposite Americanism — actually and almost instantaneously collapsed.
The safety thus temporarily obtained was purchased at the cost to the Government of a further loan of two million sterling — with the value to the contra of an alliance thus begun with the Whig ministry.
A further danger came from the mad and maddening South Sea Scheme five years later; but from which it was happily saved solely through the greater cupidity and daring of the newer company.
The Darien Company, which followed hard on the heels of The African Company, was formed in 1695, by Paterson; on the base of An Act of the Scottish Parliament for the purpose of making an opening for Scottish capital after the manner of the East India Company by which English enterprise had already so largely benefited. Its career was of such short duration and its failure so complete that there was little difficulty in understanding the causes of its collapse. It might serve for a pendant of Lamb’s criticism of the meat that was “ill fed and ill killed, ill kept and ill cooked.” The Company was started to utilise, in addition to exploiting new lands, the waste of time, energy and capital, between West and East; and yet it was not till the first trading fleet was sailing that its objective was made known to the adventurers. Its ideas of trading were those of a burlesque, and its materials of barter with tropical savages on the criminal side of the ludicrous — bibles, heavy woollen stuffs and periwigs! Naturally a couple of years finished its working existence and “The rest is silence.” And yet at the inception of the scheme two great nations vied with one another for its control.
There are those who may say that John Law was not an impostor, but a great financier who made a mistake. Financiers must not make mistakes — or else they must be classed amongst the impostors; for they deal with the goods and prospects of others as well as their own. Law was simply a gambler on a great scale. He led a nation, through its units, to believe that the following of his ideas would lead to success. Financial schemes without good ideas and practical working to carry them out are deceptive and destructive. The Mississippi Scheme is a case in point. If the original intention had been carried out in its entirety — which involved vast pioneering and executive action of present and future generations, and an almost absolute foregoing of immediate benefits — the result would have been of immense service to the successors in title of the original ventures. The assessable value of the real estate conveyed under the Mississippi Scheme today equals more than a third of the present gigantic National Debt of France, swollen though the latter is by the Napoleonic wars, the war with Austria, the cost and indemnity of the war with Germany, and, in addition, by the long wars with England and Russia.
If human beings had been angels, content with the prospect of gains in the distant future. Law’s schemes might have succeeded. As it was, he, working for his own purposes with an imperfect humanity, can only be judged by results.
Last updated Sunday, March 27, 2016 at 12:00