Law's system and the crash of 1720

Law's system and the crash of 1720

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John law de Lauriston was a visionary in the 18th century, by creating banknotes, to replace coins that were too cumbersome and impractical in trade, by establishing credits, current accounts, by pushing the people to buy shares. The whole world of finance is based on Law system, the basics are the same: share purchases and resales, speculations, investments, interest, bailouts: nothing has really changed since ...

Law's youth

John Law, William Law's fifth child, was born in Edinburgh in April 1671. His father was a wealthy goldsmith in the city and had just enough time to acquire land and a castle, before dying in 1683. The name of the family then becomes Law de Lauriston and John inherits the paternal fortune. Gifted in mathematics and blessed with an “elephant” memory, John continued his education in Edinburgh and then moved to London at age 21. A handsome young man pleasing to ladies, he spends the inherited fortune in a short time and makes a living from gambling: betting and games of chance, using the technique of calculating probabilities.

Sentenced to death following a duel with a young London "dandy" friend of the king, then pardoned, he escaped prison, took refuge in Sussex, then left the continent. We find him, after many comings and goings, in France, then in Holland and back in Scotland where he implores his grace, without success. In the meantime, he meets Catherine Knowles who will give him two children.

An innovative idea: banknotes

His country being in a very complicated financial situation, he drew up a document "of currency and trade" in which he proposed a plan to get out of the crisis. Claiming that the prosperity of a country depends on the abundance of its means of payment, he proposes to create a bank that issues promissory notes in exchange for deposits of currency. The collateral for these notes would be income from the land: the landowner would mortgage his property in exchange for a quantity of notes equivalent to twenty times his income. With Scotland having so much land, the project is feasible as property values ​​are not likely to fall as quickly as cash in currency. But Banker Patterson, founder of the Bank of England, followed by the Scottish Parliament, refuses Law's plan.

Always wanted by the police with a view to his hanging, he crosses the Channel again, arrives in Paris and there, meets "beautiful" people: Desmarets, financial controller of the time, the Prince de Conti, etc ... Appreciating France and wanting to settle there, he proposed his idea to save the finances of the kingdom, which were at their lowest. In vain ! He left for Italy and shared his ideas with the Duke of Savoy Victor Amédée, but no one dared to embark on the adventure.

In Venice, he studied gambling, accumulated a fortune, as well as paintings. For Law, these works will not devalue over time. He also learns the different banking techniques, seeing that the Venetians easily part with their money for paper in order to facilitate trade.

Finding no support in Italy, and back in Holland, he entered gambling games and won big in the Dutch lotteries. Having become rich, he settled permanently in France in 1714, at Place Louis-Le-Grand (now Place Vendôme) and acquired a private mansion.

The "Law" system

In 1715, Law again offered his services to the King, noting that France was on the verge of bankruptcy (all the money had been spent on wars and construction, the precious metal was lacking, the State was borrowing at rates of 8.33%). He takes Holland as an example, the best financial center of the time, with a central bank, the only place for the exchange of currencies and notes… but Louis XIV died. Supported by Philippe d´Orléans, who became Regent, he transformed his initial project by creating a royal bank which would issue paper money in exchange for gold and lend the received metal to the state.

The Regent follows him and Law creates the first Banque Générale in May 1716, opening its first offices in June, rue Saint Avoie, in front of which a superb Swiss dressed in green welcomes customers. It will become Royal Bank in December 1718, following the model of Dutch banks, with deposit of money against delivery of notes, without taking any profit in the process! Profits are made through currency exchange and discounting. Despite the success and the increase in the volume of issues, the system remains fragile because the bank lends its gold to the State, and has to face possible premature repayments of these notes and then a new edict: the notes can be used to pay taxes.

In his wake, Law created the Compagnie d'Occident regrouping that of Senegal, China and the East Indies, obtaining the monopoly of trade with Louisiana for 25 years. For the first time in France, it is the appearance of negotiable bearer securities. In 1719, he transformed this Compagnie d'Occident into the Compagnie Perpetuelle des Indes, after having bought the Compagnie du Mississippi from the financier Crozat. The new Company receives the monopoly of issuing currency in France, a concession for nine years.

From this moment, everything is linked at a rate where bankruptcy is inevitable: the Company negotiates, on behalf of the kingdom, the rents for which it is indebted and lends it 1.2 billion pounds necessary for this buyout operation. , all in banknotes. Subscriptions are well received, the new banknotes are worth more than money: the start of inflation. There are so many speculators that the stock prices are soaring ... The rue Quincampoix is ​​bustling, in every nook and cranny we exchange notes, shares, it is the kingdom of stockbrokers. But the revenues from the Mississippi gold mines do not yet exist. Distraught, investors sell their shares and get reimbursed in cash. The share with a face value of 500 pounds then trades at 3000 pounds in October, then at 10,000 pounds at the end of December !!!

In December 1719, Law took steps to avert the catastrophe, announcing a devaluation, then granting a 5% premium in favor of the notes and limiting the amount of change allowed for payments (600 pounds). But at the end of the year, the share price of the East India Company fell.

In an attempt to restore the situation, Law was appointed Comptroller General of Finance, then Superintendent General of Finance and had part of his own shares bought back to stem the fall. He closed the purchasing office of the Company and in February the Compagnie des Indes absorbed the Banque Générale, thus making it possible to recover 100,000 shares belonging to the king. But Law's enemies (the Duke of Bourbon, Prince de Conti, private financiers) are pushing for speculation and upwards to bring down the system. The shares go to 20,000 pounds! Faced with this, Law fixed the value of the shares at 9,000 pounds at the beginning of March 1720, announced an overhaul of the currencies to buy the shares, ordered the coins to be brought to the Hôtel des Monnaies, prohibited the transport of gold and money, introduces a tax reduction for those who pay taxes in banknotes, prohibits holding more than 500 pounds in cash at home.

The crash of 1720 and the bankruptcy of Law

At the end of March 1720, the bankruptcy of the system began. The Great (Prince de Conti and Duc de Bourbon) come in person to collect their money (25 million for one, 14 million for the other), the shareholders turn out en masse to exchange the notes for cash that the bank no not and to convert them into jewelry, precious stones and real estate; No one has confidence any more, France and Europe are entering a crisis, riots take place, servants and men of confidence of the Greats are killed.

In May, Law reduced the value of the shares to 5,000 pounds and the notes in half. At the end of May, writings circulate, traders close their shops, the population revolts. We must react, the Regent finds himself alone and helpless ... he has Law fired and considers "embellishing" him. Appreciated by D'Argenson, Law is only arrested in his hotel. During this time, a commission is charged to verify the accounts of the bank, no fraud is found, only too strong a note issue is discovered: the Regent will issue retroactive edicts to cover Law. Law was released three days later, promoted Superintendent of Commerce of France, Director General of the Royal Bank and the Compagnie des Indes, and resumed his place on the Regency Council.

He had a lot to do during the last six months of the year: in June he had several senior members of finance and politics ousted (Voyer d'Argenson father and son, the provost of the merchants, the financiers Pâris du Dauphiné) and brought Daguesseau back to his side; he burns a large quantity of old banknotes, prints new small banknotes and orders a new issue of coins; in July, he set up a plan to wipe off 2,200 million banknotes by creating annuities and establishing current accounts. Despite everything, the people panicked and on July 17, 1720, there were at least 8 dead in a new riot around the Royal Palace and rue Vivienne; the revolting parliament was exiled to Pontoise on the 20th, the army came to station itself on the outskirts of Paris, the musketeers roamed the streets. The bank was ordered not to convert any more banknotes and an order banned any gathering of people on the public highway. The songs circulate:

"François, you miss bravery

You are full of blindness,

Hang Law with the Regent

And take over the bank

It's a matter of a moment "

The situation becomes very tense, the Regent no longer leaves the Tuileries for fear of a plot against the young Louis XV. Scuffles take place in many French provinces: peasants store grain, merchants refuse to sell… In August, he upgrades cash compared to tickets, eliminates the tax advantages granted to tickets; in September, the affairs of the Compagnie des Indes are good. It absorbs the Company of Saint Domingue and receives the monopoly of the slave trade; in October, the use of banknotes is different: they are withdrawn from circulation and the new cash receivables are payable one third in banknotes only. Law suggests that holders of shares convert them into current accounts of the Bank, but reduced by ¾ of the value. Unfortunately, the effect is not what you wanted: the exchange of stocks for notes increases dramatically, the bank does not. At the end of October, Law lost control of financial decisions: he could no longer provide the Treasury with the necessary funds, having no more notes or coins, and in December 1720 he resigned. Law left Paris on the 14th, France on the 22nd to settle in Brussels.

The Law system is liquidated by the Pâris brothers: the traditional system of finances is restored, a judgment of October 28 obliges the holders of shares to come and have them "stamped", those judged "in good faith" receive the money under eight days, the others under three years. About 3,000,000 people, or 15% of the population are affected by this liquidation! Many, however, do not make themselves known ... Last point of the liquidation: sanction the stock brokers, those who speculated strongly: 180 names are listed, some must pay a tax ranging from 60,000 to 7 million pounds! The Compagnie des Indes, reorganized in 1722, disappeared in 1769.

Law's system, too innovative?

France and the people were not ready for these new currencies, these credits, these bearer securities, this stock market speculation; everything was too new, too fast. Annuitants and lenders have been ruined, religious congregations with no more assets have been dissolved. But thanks to Law's system, the Regent partially stabilized the finances compared to 1715 and was able to resume the war in Spain. Constructions have emerged, new buildings, work is in abundance, certain layers of the population are becoming rich, there have been large transfers of property and land, the countryside is flourishing: more breeding and cultures.

If the experience made it possible to absorb the public debt and effectively promoted the development of trade, it had important repercussions on the French economy. Public opinion long rejected paper money, which delayed the progress of the banking system.

After many binges and setbacks, extradited, no longer having a protector after the death of the Regent in 1723, finding himself alone, abandoned, decried, threatened with death, without resources, he fled to Venice and lived there. expedients (game tables, etc.). He died in March 1729 of pneumonia, having caught a cold on the banks of the Rialto.


- Arnaud Orain: The politics of the marvelous: Another history of the System of Law (1695-1795), fayard, 2018.

- Edgar Faure, La Banqueroute de Law (July 17, 1720), Gallimard, 1978.

Video: Great Mirror of Folly: The 1720 Crash in Pictures