Part 1 (1/2)
Millionaire.
The Philanderer, Gambler, and Duelist Who Invented Modern Finance.
by Janet Gleeson.
INTRODUCTION.
Within the last twenty years commerce has been better understood in France than it had ever before been, from the reign of Pharamond to that of Louis XIV. Before this period it was a secret art, a kind of chemistry in the hands of three or four persons, who actually made gold, but without communicating the secret by which they had been enriched. . . . It was destined that a Scotchman called John Law should come into France and overturn the whole economy of our government to instruct us.
Voltaire, ”Essay on Commerce and Luxury”
MONEY HAS EVER POSED PROBLEMS. NOT EVEN LOVE, said Gladstone, has made so many fools of men. Throughout time the most obvious but universal dilemma-that there is never enough of it-has confounded everyone, from mendicants to monarchs, and their ministers.
Rarely, however, had the problem seemed more pressing than it did in the late seventeenth century. Money, as most people had always understood it, was silver or gold-precious metals whose value lay in their intrinsic scarcity. But the fact that coin supplies were limited by the metal that could be dug out of the ground was proving a serious hindrance. Throughout Europe, warfare of vast scale and expense coupled with the extravagant lifestyles of kings had emptied entire treasuries. At the same time the growing population, expansion of trade, and colonization of foreign lands demanded more cash to progress. As rulers plotted invasions, perused peace treaties, and yearned to sponsor new industry, build new palaces, and develop their domains overseas, money and how to create more of it became an obsession. In an age poised between superst.i.tion and enlightenment, it became as fas.h.i.+onable to ponder the subject that would soon be christened political economy as the disciplines of philosophy, mathematics, and nature. While on the one hand alchemists strove futilely to turn base metal into gold, on the other entrepreneurs proposed a plethora of ingenious schemes to sidestep the shortage. At the lowliest level, small-change coins made from base metal alleviated the dearth of coins in the streets. On a grand scale, banks and joint-stock companies used the magical device of credit to fund royal debts and colonial expansion by issuing paper banknotes and shares of token rather than intrinsic worth. Thus the frustrating limitations of gold and silver evaporated, but a new, even more baffling problem emerged: the question of how to maintain public confidence in the value of intrinsically valueless paper.
Among monetary philosophers and innovators to confront the problem, John Law stands alone as the most improbable, controversial, yet visionary of financial heroes. He was big in every sense, over six feet tall with ambitions that were larger and more daring than anyone else's. On one level his story is the stuff of romantic legend. He turned his attention to finance after killing a man in a duel over an unfortunate liaison and escaping prison to save his neck. A congenial gambler, prepared to punt on the turn of a card yet burning with mathematical brilliance, he exuded a glamorous, dangerous magnetism. Women were spellbound by his impeccable dress, charming manner, and s.e.xual charisma. Men were intrigued by the ease with which he was able to demystify complex subjects, his nonchalant wit, and his willingness to linger for hours over games of cards and dice. But his ideas and actions invest his life with far more significance than that of a beguiling and ambitious playboy: the things Law made happen still have resonance today.
In an ironic reversal of the concept of the philosopher's stone (the substance by which it was believed gold could be made from base metal), he founded the first national bank of issue in France that made money from paper on a previously unknown scale to revive the ailing economy. He formed the most powerful conglomerate the world had yet seen-the Mississippi Company-and encouraged unprecedented numbers of private investors to dabble in its shares. Once initial hesitation had been banished, investors from England, Germany, Holland, Italy, and Switzerland stampeded to Paris to play the markets, and share prices rose from 150 livres to 10,000 in a matter of months. In comparison, the best bull markets of the twentieth century, between 1990 and 1999, when the Dow Jones rose by 380 percent and the Nasdaq by 790 percent, seem paltry. Law sparked the world's first major stock-market boom, in which so many made such vast fortunes that the word ”millionaire” was coined to describe them. Almost overnight he had become rich beyond expectation, a heroic figure, feted throughout Europe, and promoted in recognition of his achievement to the position of France's financial controller-the most powerful public position in the world's most powerful nation.
Pioneers, so they say, usually end up with arrows in their backs. In Law's case, enemies, inexperience, greed, and destiny conspired against his unconventional genius. The idea that money could be made from speculation rather than drudgery was printed indelibly on the popular consciousness. But having made their fortunes, many began to look for alternative investments, or to feel that paper was no long-term subst.i.tute for more traditional, tangible a.s.sets. When speculators began to cash in shares and withdraw paper funds to buy estates, jewels, or gold, or to speculate in other escalating foreign share markets, Law, hampered by jealous rivals, was unable to hold back the tide and the stock plummeted as rapidly as it had risen. People who rushed to the bank to convert paper back into coin found insufficient reserves and were left holding an a.s.set that had become virtually worthless.
Over half a million people, equivalent to two-thirds of the entire population of the city of London at the time, claimed to have lost out as a result of John Law. Having sparked the first international stock-market boom, he had also sparked the first international bust. As loudly as he had been lauded a financial savior months earlier, he was branded a knave and ign.o.bly demoted. Sadder, wiser, immeasurably poorer, he spent the rest of his life unsuccessfully trying to convince the world of his integrity, and that the idea behind his schemes was sound. His fall cast long shadows. It was eighty years before France dared again to try to introduce paper money to its economy. For years afterward history judged Law harshly. In the story of money, the chapter on his life embodies the perils of paper, the monumental significance of his economic foresight largely negated by his ultimate failure.
Today, if John Law or his critics could witness commerce conducted in any mall with credit cards, banknotes, and checks-not a gold or silver coin in sight-they would see, incontrovertibly, his vision achieved, but recognize also the same inherent weakness. The survival of any credit-based financial system still hinges on public confidence in a way that one based on gold does not. Spectacular financial breakdowns have peppered history ever since the advent of paper credit.
The American investment guru Warren Buffett once said, ”If history books were the key to riches the Forbes 400 would consist of librarians.” Nevertheless, three centuries after John Law delighted, then devastated investors in his Mississippi stock, an age of comparably varied and ambitious financial innovation unfolds-witness the introduction of the euro, the opportunity to trade shares on the Internet, and a panoply of monetary instruments, from foreign-currency mortgages to inventive use of derivatives in equity, bond, and currency markets. In such a world Law's story still holds uncanny relevance.
During the period covered in this book English and French currency was based on a similar structure: 240 pennies or deniers = 20 s.h.i.+llings or sous = 1 pound or livre tournois. Coins in common use in France included the gold louis d'or and the silver ecu, which were measured and varied widely against the value of the livre. Another common coin was the pistole, a Spanish silver coin worth approximately 10 livres. Exchange rates also varied enormously: a livre was worth between a s.h.i.+lling and 1s. 6d. According to the Bank of England a pound in 1720 is equivalent to about 73 (US$117) today. Therefore a sum quoted in livres can be converted to its approximate equivalent in dollars today by halving it, then multiplying by twelve.
1.
A MAN A APART.
He came to Paris, where he cut such a fine figure that he held the bank at Faro. He usually played at the house of a famous actress, where they played for high stakes, although he was in as great demand with Princes and Lords of the first order, as in the most celebrated academies, where his n.o.ble manners and even temper, distinguished him from other players.
Barthelemy Marmont du Hautchamp, Histoire du systeme de finances (1739)
IT IS AN EVENING IN N NOVEMBER 1708 1708 IN THE IN THE P PARISIAN salon of Marie-Anne de Chateauneuf-”La Duclos”-a celebrated actress of Paris's Comedie Francaise, and as usual she is entertaining Parisian society. Despite the l.u.s.trous presence of sundry salon of Marie-Anne de Chateauneuf-”La Duclos”-a celebrated actress of Paris's Comedie Francaise, and as usual she is entertaining Parisian society. Despite the l.u.s.trous presence of sundry ducs, marquis, ducs, marquis, and and comtes, comtes, talk is uncharacteristically desultory. France is in the throes of the world's first global war, the War of Spanish Succession, which has raged already for seven years and will endure for another six. This country, the most powerful and populous in Europe, has been ruined by the perpetual conflict. But this coc.o.o.ned Parisian circle is scarcely conscious of it: the talk is not of the devastating defeats France has suffered at the battles of udenaarde, Turin, Ramillies, and Blenheim. It focuses instead on the move of the elderly Louis XIV, the Sun King, and his court from Versailles to Marly, and the love affairs of the fascinating but apricious Duc d'Orleans. talk is uncharacteristically desultory. France is in the throes of the world's first global war, the War of Spanish Succession, which has raged already for seven years and will endure for another six. This country, the most powerful and populous in Europe, has been ruined by the perpetual conflict. But this coc.o.o.ned Parisian circle is scarcely conscious of it: the talk is not of the devastating defeats France has suffered at the battles of udenaarde, Turin, Ramillies, and Blenheim. It focuses instead on the move of the elderly Louis XIV, the Sun King, and his court from Versailles to Marly, and the love affairs of the fascinating but apricious Duc d'Orleans.
Those who find these topics less than engaging are drawn instead to the cl.u.s.ter of players engrossed in a card game, faro. Most are habitues of the tables-at this level of society everyone knows everyone else-but among them one man stands apart. He is fas.h.i.+onably clad as one would expect in a wideskirted velvet coat, unb.u.t.toned to reveal a damask waistcoat and cravat of Brussels lace, while a periwig of black curls cascades over his shoulders. But at over six feet tall-a remarkable stature in these diminutive days-he is a man of grand and imposing looks that according to one acquaintance ”places him among the best made of men.” Amid the twitchy players, he is also remarked for his gentle and insinuating manners, a serenity of temperament that amply reflects his outward appearance.
During a lull in play La Duclos proudly presents the stranger as John Law, a Scottish gentleman visiting Paris. Her guests soon realize, however, that although Law is as charming and witty as he is physically attractive, he's reticent when questioned on his circ.u.mstances. They also discover, as the evening progresses, that he is a master gambler.
According to the rules of the game, the players must defeat a single opponent, the talliere, or banker, to win. This evening Law has been permitted to pit his wits against the rest and adopt the solitary role of opponent. He is the bank. As the stakes grow higher, the players' mood s.h.i.+fts from studied composure to overt unease, and a crescendo of voices pledge increasingly reckless sums. But no matter how great the amount at risk, Law never relinquishes control over his outward expression.
Each player chooses one, two, or three from a deck of cards on the table before them, using gold louis d'or as their stake. Slowly the croupier takes his pack, discards the uppermost card, plays the next two-the loser and the winner-and places them in front of him. Winning depends on players having selected the same number as the second card dealt by the croupier (suits are irrelevant), so long as he does not deal two cards of the same face value, in which case the banker also wins. The dealing continues, players betting on every draw until three cards remain. The room is transfixed for the final turn, when the players must guess the cards in order of appearance. Inevitably, Law triumphs over most. He scoops the gold coins he has acc.u.mulated into the leather purses he has brought with him, leaving the losers, ruefully, to review their depleted wealth. Once again he has apparently defied the laws of chance and emerged spectacularly victorious.
Few among those present perceive that he has been a.s.sisted by anything more than unusual good fortune. Years later his closest acquaintances, such as the Duc de Saint-Simon, failed fully to understand his gaming victories, and described him as ”the kind of man, who without ever cheating, continually won at cards by the consummate art (that seemed incredible to me) of his methods of play.” In fact, success on this scale has almost nothing to do with luck or consummate art but lay in ensuring that the odds are stacked heavily in his favor. Even when not in the lucrative role of banker, by marshaling a remarkable mathematical intellect and employing his understanding of complex probability theory, of which few are aware, Law was able to measure with astonis.h.i.+ng accuracy the likelihood that a given card would appear. To him there was little doubt about the evening's outcome.
Not far from the opulent interior of La Duclos's salon, in a plain but comfortably appointed apartment of the Benedictine Priory in Faubourg St. Antoine, was one of the few men in Paris to whom John Law's success was of pressing concern. Marc Rene de Voyer de Paulmy, Marquis d'Argenson, Paris's superintendent of police, was as physically unattractive as Law was outwardly engaging, with sallow skin and deep-socketed eyes. He was noted chiefly for his ”subtle mind” and ”natural intelligence,” and his business-others' secrets-was a metier at which he excelled. As the eagle-eyed Duc de Saint-Simon remarked, ”There was no inhabitant [of Paris] whose daily conduct and habits he did not know.”
D'Argenson relished sophisticated company and felt easy in the elite world to which John Law's gaming skills had given him access. During the decade he had held his position, Law's sporadic appearances and extraordinary successes had grown increasingly perturbing. D'Argenson was convinced that John Law was filling some secret role for the British, or that he const.i.tuted some other even more insidious threat. His unease deepened when, despite every attempt to find out more about Law, intelligence was discovered to be worryingly spa.r.s.e. Some said he was a fugitive from British justice, that he had escaped from prison, where he had been sentenced to death by hanging for killing a man. His fortune was variously rumored to have come from gaming tables in Vienna, Rome, Venice, Genoa, Brussels, and The Hague, or from an inherited Scottish estate. But all this was hearsay and speculation. A year earlier, when d'Argenson discovered Law intent on masterminding a dangerous scheme that might undermine France's economy-the introduction of paper money to France-he had expelled him from Paris. Now the King's foreign minister, the Marquis de Torcy, had informed him that not only was Law back without a pa.s.sport but that ”his intentions are not good,” and that ”he is serving our enemies as a spy.” Torcy was worried and wanted to know more. D'Argenson, equally disturbed, had attempted for some weeks to track Law down. The quarry had proved elusive.
2.
GILDED Y YOUTH.
In an island near the Orcades a child was born, whose father was Aeolus G.o.d of the winds, and whose mother was a Caledonian nymph. He is said to have learned all by himself to count on his fingers, and, at four years of age, to have been able to distinguish between the different metals so exactly that when his mother tried to give him a ring made of bra.s.s, instead of gold, he realized that it was a trick and threw the ring on the ground.As soon as he was fully grown his father taught him the secret of catching the wind in balloons, which he then sold to travelers. However, since his wares were not greatly appreciated in his own country, he left, and began to lead a wandering life in the company of the blind G.o.d of chance.
Montesquieu, Persian Letters (1721) (1721)
THERE IS LITTLE IN J JOHN L LAW' S BACKGROUND TO SUGGEST the professional gambler, seducer, murderer, adventurer, or international celebrity he would one day become. His family originally came from Lithrie in Fifes.h.i.+re, Scotland, and for generations had followed careers as men of the Church. John Law's great-grandfather, Andrew, and his grandfather, John Law of Waterfut, after whom he was named, were both ministers of Neilston, a small, unremarkable village in Renfrews.h.i.+re. the professional gambler, seducer, murderer, adventurer, or international celebrity he would one day become. His family originally came from Lithrie in Fifes.h.i.+re, Scotland, and for generations had followed careers as men of the Church. John Law's great-grandfather, Andrew, and his grandfather, John Law of Waterfut, after whom he was named, were both ministers of Neilston, a small, unremarkable village in Renfrews.h.i.+re.
Long-standing clerical family tradition was not, however, inviolate. During the Civil War and Commonwealth, Presbyterian extremism was ruthlessly enforced in the Scottish Church. John Law of Waterfut was too tolerant to fit in with the prevailing mood and in 1649 was ousted from his post ”for inefficiency.” Bereft of home and income, and with no profession to pa.s.s on to his two young sons, he was left with little alternative but to seek employment in Edinburgh.
Writing of the city, which he visited toward the end of the century, the English chaplain Thomas Morer observed that it was ”very steepy and troublesome, and withall so nasty (for want of bog houses which they very rarely have) that Edinburgh is by some likened to an ivory comb, whose teeth on both sides are very foul.” Daniel Defoe described it as a place of ”infinite disadvantages,” that ”lies under such scandalous inconveniences as are, by its enemies, made a subject of scorn and reproach; as if the people were not as willing to live sweet and clean as other nations, but delighted in stench and nastiness.” In other words, it was like most other large cities of the time: a foul, stinking metropolis-stark contrast to the uncontaminated though bleak country ministry of Neilston.
The transition to such an environment was for Minister Law and his family painful and distressing. The city was recovering from the ravages of the worst plague in its history that had left it ”never in a more miserable and melancholy situation than at present.” Pestilence, coupled with draconian Commonwealth rule, had depleted the population, provoking mounting poverty and dwindling trade. For the next decade the family lived a hand-to-mouth existence while their father tried to secure a pension from the Church and find a suitable occupation for his two young sons, John and William. There was an obvious solution to the second dilemma: members of the Law family not involved in the Church had been goldsmiths since the early sixteenth century, and with the help of family contacts, soon after their arrival in Edinburgh, the two young Laws were apprenticed to prominent goldsmiths. In the late seventeenth century the profession enjoyed an elevated status that set goldsmiths apart from most other craftsmen. As well as fas.h.i.+oning jewels, trophies, and household valuables, many had developed an even more valuable and influential sideline business as money dealers.
Money, perhaps more than any other human artifact, has a multiplicity of meanings. To a modern layman's eye it might signify security, power, luxury, freedom, temptation. But its more prosaic prime function, economists tell us, is as a medium of exchange. Without it we would be forced to barter for anything we could not provide for ourselves. Money lets us separate the buying of one thing from the selling of another. It means we need not swap eggs for oranges, carpets for bricks, a book for a bowl of rice. Almost anything can and has served as money: a herd of cows, a wife or two, a bundle of tobacco leaves, a pouch of sh.e.l.ls. Form matters little; what counts is that both buyer and seller trust that if they exchange it for whatever goods or services they are selling, it will hold its value and, at some later stage, they will be able to buy something else with it.
Of all money's chameleon masks, gold and silver are its most recognizable, widespread, and enduring. Ancient Mesopotamians used precious metals according to standards set by the king and the temple and invented the earliest forms of writing to keep accounts; Egyptians measured their pharaoh's wealth or a servant's worth in Nubian gold, silver, and copper ingots and slivers. In ancient Greece gold and silver were similarly esteemed. Herodotus claimed that the first coins-pieces of metal of a standard weight and fineness-were invented in the sixth century B.C. B.C., in ancient Lydia, the kingdom of Croesus, whose name still signifies riches beyond compare. In fact, archaeologists have since discovered coins from a century earlier used by Ephesians, and that coins were similarly employed by Greeks in the realm of Ionia.
Banking, too, had its origins in the ancient past. The first bankers lived three millennia ago in the ancient city of Babylon, a site in modern Iraq; in ancient Athens in the fifth century B.C. B.C., there were bankers who changed foreign visitors' money and accepted deposits, and in ancient Rome money lending bankers wielded huge political clout. The first modern banking inst.i.tutions were born in the great medieval Italian trading cities of Genoa, Turin, Pisa, and Milan. The word ”bank” comes from the Italian banco, banco, meaning the bench used by money dealers. But in a world in which coin was made from precious metals, the system's overriding disadvantage was that sources of precious metals were finite, whereas greed and aspiration were not. meaning the bench used by money dealers. But in a world in which coin was made from precious metals, the system's overriding disadvantage was that sources of precious metals were finite, whereas greed and aspiration were not.
A breakthrough came with what the eminent economist J. K. Galbraith has called ”the miracle of banking”: the discovery of credit. If money was lodged in a bank vault for safe-keeping, the person who owned it could take away a piece of paper testifying to his owners.h.i.+p of the sum, which he could use as a form of currency, while the guardian of the cache could lend part of it to others (keeping some reserve to pay to those who wanted to withdraw their deposits for whatever reason) and profit by charging interest for the service he offered. In this way money could be multiplied and the problems of limited supplies of gold and silver overcome. The only pitfall was an outside event that intervened to make everyone want to withdraw their deposits at once. Then the guardian of the treasure would find himself unable to repay the depositors because the reserves would be exhausted-much of their money would still be on loan and therefore inaccessible-and he would be bankrupt. Thus, it was realized, political stability and healthy reserves were the key to successful money dealing.
Britain was far from enlightened when it came to credit. Moneylending for profit was called usury, a crime against G.o.d; its perpetrators were hanged, drawn, and quartered. During medieval times the trade was thus monopolized by foreigners, first by Jews and later by entrepreneurial gold merchants from Italy, known as the Lombards. In London, the early Italian financiers were permitted to lend and trade in money, provided they confined themselves and their businesses to a London street that still bears their name. Lombard Street remains to this day at the heart of international financial dealing. Many of the Lombards who set up their businesses in medieval London were also goldsmiths, using surplus bullion to make objects from which they could also profit, and after the relaxation of the usury laws in the mid-sixteenth century, English goldsmiths began to join the lucrative business. The so-called ”father of English banking,” Sir Thomas Gresham, broke new ground with his sophisticated moneylending business, which operated at the Sign of the Gra.s.shopper in Lombard Street, offering loans to private individuals and the Crown at set rates of interest, paying interest on deposits, arranging bills of exchange, and dealing in coin and bullion. Largely by such services he became one of the most powerful courtiers of Henry VIII, Edward VI, Mary I, and Elizabeth I. Much of the vast fortune he acc.u.mulated was kept in gold chains wrapped around his body; he detached a link or two to serve as cash when he needed it.