Wall Street History

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Wall Street History

04/04/2003

John Law and the Mississippi Company, Part II

This week’s installment of the John Law story will focus on the
development of his economic theories. The great economist
Joseph Schumpeter wrote in his “History of Economic
Analysis”:

“I have always felt (Law) is in a class by himself .He worked
out the economics of his projects with a brilliance and, yes,
profundity, which places him in the front rank of monetary
theorists of all times.”

To prove such a claim, and to do this story justice, it’s necessary
to take a look at Law’s 1705 work, “Money and Trade
Considered: with a Proposal for Supplying the Nation with
Money.” This was Law’s plan for a land bank in Scotland.
Rejected by the Scottish Parliament, it nonetheless is the basis
behind the creation of his Banque Generale in Paris and later the
Mississippi Company and Bubble.

What follows are mere excerpts from John Law’s extensive
work. I’ve tried to pick out some of the more easily digested
concepts. This is revolutionary stuff for the time, remember.
After all, Adam Smith wouldn’t write “The Wealth of Nations”
until 1776.

Finally, recall from part I of our story that Law mused about his
theories in the morning, while he gambled and womanized the
rest of the time. When did the lad sleep, I ask you?

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[Spelling and punctuation are as originally written.]

Goods have a Value from the Uses they are apply’d to; And their
Value is Greater or Lesser, not so much from their more or less
valuable, or necessary Uses: Example. Water is of great use,
yet of little Value; Because the Quantity of Water is much
greater than the Demand for it. Diamonds are of little use, yet of
great Value, because the Demand for Diamonds is much greater,
than the Quantity of them.

Goods of the same kind differ in Value, from any difference in
their Quality. Ex. One Horse is better than another Horse.
Barley of one Country is better than Barley of another Country.

Goods change their Value, from any Change in their Quantity, or
in the Demand for them. Ex. If oats be in greater Quantity than
last year, and the Demand the same, or lesser, Oats will be less
valuable ..

Before the use of Money was known, Goods were exchang’d by
Barter, or Contract; and Contracts were made payable in Goods.

This State of Barter was inconvenient, and disadvantageous.

1. He who desir’d to Barter would not always find People who
wanted the Goods, he had, and had such Goods as he desir’d in
Exchange.

2. Contracts taken payable in Goods were uncertain, for Goods
of the same kind differ’d in value.

3. There was no measure by which the Proportion of Value
Goods had to one another could be known.

In this State of Barter there was little Trade, and few Arts-men.
The People depended on the Landed-men. The Landed-men
labour’d only so much of the Land as serv’d the occasions of
their Families, to barter for such necessaries as their Land did not
produce; and to lay up for Seed and bad Years. What remain’d
was unlabour’d; or gifted on condition of Vassalage, and other
Services .

So, Much of the Land was unlabour’d, what was labour’d was
not employ’d to that by which it would have turn’d to most
Advantage, nor the People to the Labour they were most fit for

Money is the Measure by which all Goods are valued; and unless
Goods rise to the full proportion the Money is rais’d, the Goods
are undervalued. If the yearly Value of Scotland in Product and
manufacture be 2 Millions, at 20 Years Purchase 40 Millions .

National Power and Wealth consists in numbers of People, and
Magazines of Home and Forreign (sic) Goods. These depend on
Trade, and Trade depends on Money. So to be Powerful and
Wealthy in proportion to other Nations, we should have Money
in proportion with them; for the best Laws without Money
cannot employ the People, Improve the Product, or advance
Manufacture and Trade .

Credit that promises a Payment of Money, cannot well be
extended beyond a certain proportion it ought to have with the
Money. And we have so little Money, that any Credit could be
given upon it, would be inconsiderable.

It remains to be considered, whether any other Goods than
Silver, can be made Money with the same safety and
convenience.

From what has been said about the nature of Money, it is evident,
that any other Goods which have the Qualities necessary in
Money, may be made Money equal to their Value with Safety
and Convenience. There was nothing of Humour or Fancy in
making Silver to be Money; it was made Money, because it was
thought best Qualified for that use.

I shall endeavor to prove, that another Money may be Establish’t,
with all the Qualities necessary in Money in a greater degree than
Silver; with other Qualities that Silver has not: And preferable
for that Use, tho Silver were the Product of Scotland. And that
by this Money, the People may be Employ’d, the Country
Improv’d, Manufacture Advanc’d, Trade Domestick and
Forreign be carried on, and Wealth and Power attain’d .

Money is the Measure by which Goods are Valued, the Value by
which Goods are Exchanged, and in which Contracts are made
payable.

Money is not a pledge, as some call it. It’s a Value payed, or
Contracted to be payed, with which ‘tis supposed, the Receiver
may, as his occasions require, Buy an equal Quantity of the same
Goods he has Sold, or other Goods equal in Value to them: And
that Money is the most secure Value, either to Receive, to
Contract for, or to Value Goods by; which is least liable to a
change in its Value .

To Supply the Nation with Money, it is humbly propos’d, That
40 Commissioners be appointed by Parliament, Answerable to
Parliament for their Administration, and the Administration of
the Officers under them: The Nomination of these Officers being
left to the Commissioners.

That the Commissioners have Power to Coin Notes: Which
Notes to be received in Payments, where offer’d.

That a Committee of Parliament be appointed to inspect the
Management, and that none of the Commissioners be Members.

That the Commission and Committee meet twice a year at
Whitsunday and Martinmass; their Meetings, to begin 10 days
before, and to continue 10 days after each Term.

There are three ways humbly offer’d to the Parliament, for giving
out these Notes: They in their Wisdom may determine which will
be most safe.

1. To authorize the Commission to lend Notes on Land
Security, the Debt not exceeding one half, or two Thirds
of the Value: And at the ordinary interest.

2. To give out the full Price of Land, as it is valued, 20 years
purchase more or less, according to what it would have
given in Silver-money. The Commission entering into
Possession of such Lands, by Wadset granted to the
Commission or Assigneys; and redeemable betwixt and
the expiring of a Term of years.

3. To give the full Price of Land, upon Sale made of such
Lands, and dispon’d to them, upon paying in the value to
the Commission .

So that this Paper Money propos’d, having a better Value than
Silver; and receiving no Addition to its Value, from being used
as Money; and not being liable to any change in its Value, the
Quantity and Demand encreasing and decreasing together: It is
so far more Qualified to be the measure by which Goods are
valued, the Value by which Goods are Exchanged, and in which
Contracts are made payable.

The other Qualities necessary in Money, Are,

1. Easy of Delivery.
2. Of the same Value in one place to what it is in another.
3. To be kept without Loss or Expense.
4. To be divided without loss.
5. To be capable of a Stamp.

Paper Money has these Qualities in a greater degree than Silver.

[Source: "Great Bubbles" Edited by Ross B. Emmett]

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Law even rhapsodized over corporate governance as you can see.
Next week onto the Mississippi Company and I promise it will
be far easier to read.

Brian Trumbore

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