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John Law

John Law (1671 - 1729) was a Scottish economist who believed that money was only a means of exchange and did not constitute wealth in itself, national wealth depended on trade.

Law urged the establishment of a national bank[?] to create and increase instruments of credit, and the issue of paper money[?] backed by land, gold, or silver. He had the almost socialist idea of abolishing minor monopolies and private farming of taxes and creating a bank for national finance and a state company for commerce and ultimately exclude all private venue. This would create a huge monopoly of finance and trade run by the state, and its profits would pay off the national debt. The Conseil des Finances, merchants, and financiers objected to this plan.

In 1716 a General Bank was set up by Law. It was a private bank, but of the capital consisted of government bills and government accepted notes. The next year Law floated a joint-stock trading company called the Compagnie d'Occident which was granted a trade monopoly of the West Indies and North America. The bank became the Royal bank in 1718, meaning the notes were guaranteed by the king. The Company absorbed the Compagnie des Indes Orientales, Compagnie de Chine, and other rival trading companies and became the Compagnie Perpetuelle des Indes in 1719. In 1720 the bank and company were united and Law was appointed Controller General of Finances to attract capital.

Law exaggerated the wealth of Louisiana with an effective marketing scheme, which led to wild speculation on the shares of the company. Time, however proved his forcast for the territorial wealth to be true. Shares rose from 500 to 15,000 livres, but by summer of 1720, there was a sudden decline in confidence, leading to panic and a fall of 50% in share prices. By the end of 1720 Philippe of Orleans dismissed Law and he fled.Time, however proved his forcast for the territorial wealth to be true.

Results of the scandal:

  • Some families were ruined
  • sharp inflation in prices which caused hardship in the urban poor
  • the financial system remained unchanged
  • distrust in governments financial ability and reflected poorly on the government

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