Chapter 13: Mr. Law's Scheme
The last bad effect of the idea that public opulence consists in money is the notion of Mr. Law, a Scotch merchant.
- He thought that:
- the value of gold and silver is arbitrary and depends on constitution and agreement.
- the idea of value can be brought to paper and preferred to money.
- If this could be done, he thought it would be a great convenience.
- The government could then do what it pleased:
- raise armies,
- pay soldiers, and
- be at any expense.
He proposed his scheme to the Scotch parliament in 1701.
- It was rejected.
- He went to France, where his project was relished by the Duke of Orleans.
In this book, he agrees with the fore-mentioned writers that when the balance of trade is against a nation, it must soon be drained of its money.
- To turn the balance of trade in our favour, he proposed the following scheme to the Scotch Parliament:
There was little gold or silver in this country.
For two acres of arable land, they were to issue out a note of equal value.
- He thought they could find some other way to create money by paper, independent of gold and silver.
- He proposed a land bank at Edinburgh.
- He falls into many blunders on tenures and the nature of property.
- At this bank, they were:
- to keep only 20,000 or 30,000 pounds to answer small demands, and
- to give out notes for land.
- If any extraordinary demand was made on them, they would pay so much of it in money, and so much in land.
- Through this, the whole land of Scotland would go from hand to hand in a very short time, as a 20 shilling note does.
This project was never executed.It is hard to say what the consequence might have been.It is obviously liable to the following inconveniences:
- The land rent of Scotland at 5 million per annum.
- After 20 years’ purchase it amounts to 100 million.
- There would then be just so much currency in the country.
- If 1 million was then necessary for circulation, there would just be 99 million for no purpose, as none of it could go abroad.
- They would not have been able to maintain one man more than before.
- Their food, clothes, and lodging would not have been increased.
- Every commodity would have risen to 99 times its present value.
Mr. Law went over to France in 1714.
- He found favour with the Duke of Orleans, then Regent.
He got liberty to create a bank there.
- At first, it only had 6 million livres or £320,000 sterling.
- From this beginning, he carried it on to a very great height.
- He issued many notes.
- In a short time, he engrossed France's whole circulation.
Mr. Law’s notes were received in payment of the government revenue.
By this and other circumstances, his notes were always at par with gold and silver, especially as they were making continual changes in their coin.
- This contributed to the success of the scheme.
- This also had a greater effect in France than it could have had here, because of:
- the number of taxes, and
- how they are levied.
Instead of promising to pay his notes, in pounds sterling, as we would say, he did it in crowns and half-crowns.
- Around that time, 28 livres were equal to 8 ounces of pure silver.
- 8 ounces were raised to 60 livres.
- Thus, a diminution of coin was expected daily.
- Mr. Law made his notes payable in 'the money of the day'.
Suppose that our coin were raised to double.
- This was a very proper method to make them par with gold and silver.
- A half-crown would become a crown.
- In this way, the bank notes and money would rise and fall together.
Mr. Law wanted to make his notes above par.
The coin was not received in the market or elsewhere since the diminution was still expected and did not come for some time.
- He issued out his bank notes payable in livres tournois.
- When the coin was diminished, he would not be obliged to pay above half.
- This favoured his design.
- He kept the notes above par.
- This established the credit of his bank.
His next step was to relieve the public debts of 200 million.
He got a grant of the exclusive privilege of trading to Canada and established the Mississippi Company.
- He saw the diminution must come and took another method to keep up his notes.
He also taxed the tobacco and all the public revenues of France at 52 million.
- He joined the African, Turkey, and East India companies to this.
Mr. Law undertook this.
- In France, the whole revenue is farmed by one man.
- He undertakes it and levies it without excisemen.
- The farmers there are the richest in the country.
- They must be skilled in finances and public revenues.
To prevent this, his invention was set on work.
- He had the country's whole trade monopolized.
- It was difficult to say what profits he would make.
- He wanted to lend the government 80 or 90 million [sterling].
- He could easily do this by issuing notes to that value.
- But then he saw that they would soon return on him.
He opened a subscription to it at 500 livres.
- The company he started seemed to be in a very flourishing condition.
- Shares were bought in it at a very considerable rate.
The government of France was in its most miserable condition.
- A navy ticket or billet d’état bought a share into it.
- This raised them to a par, just as they had been far below it for a long time.
Never was monarch more degraded than Lewis XIV.After the treaty of Utrecht he had occasion to borrow 8 million livres from Holland.not only to give them his bond for 32 millions, but to get some merchants to be security for him.We should not be surprised that the billets d’état sold at great discount as:
- The interest of the money which should have paid the billets d’étatwas seized upon for other purposes.
Law published a declaration that one of these, which was granted for 500 livres, should purchase a share in the company.
- they bore no interest, and
- it was uncertain when they would be paid.
The people still continued to have great expectations of profit.In a few days, he opened a new subscription at 5000 livres .
- Thus. they came again to par.
At this time, he was enabled to lend the government 1,600 million livres at 3%.
- Afterwards another at 10,000.
Had he stopped here, he would have answered all engagements.
It was impossible that the value of shares could long continue at such a high rate.
- But his future proceedings ruined all.
This was principally caused by his opening an office to purchase 500 livres shares at 9,000 livres.
- However, he thought that it was necessary to do all that he could to keep them up, as the whole fortunes of many people were in the bank.
- He had issued notes to double the country's circulation.
- It raised the price of everything.
- Consequently, the exchange was against France in all foreign trade.
Prudent people opposed this scheme.
- This obliged him to issue many notes.
He was not obliged to pay the capital sums, only the annual dividend of 200 livres arising from the profits.
- It was the first thing that made his bank lose credit and cause its dissolution.
When in this manner oppressed, he was making continual changes on the coin to dissuade people from returning on the bank, and disgust them at gold and silver.
- He might have let them fall to their original 500 lives without any great loss but that of reputation.
- But his buying up the shares caused his issuing out so many notes that they must of necessity return on him.
- This was so much the case that he was obliged to open offices in different parts of Paris for their payment.
Through this, he prevented his notes from returning to him.
- He cried up gold.
- But coin cannot be kept much above the metal's level when it was so much depreciated, it was not taken.
- If a person had 20,000 guineas, he would exchange them for notes as he was afraid that the coin would not keep that value.
- The same consideration prevented them from returning on the bank, as they would there be paid in coin.
To accomplish this part of his scheme more perfectly, he most arbitrarily published an edict banning anyone from keeping gold or silver beyond a certain sum.
- He filled his coffers with almost all the gold in France.
He reasoned with himself that some instrument of change is necessary, paper, gold, and silver, at present are the medium.
- He also took away the severe penalties that were in force against coin exportation.
- Everyone was allowed to export money duty free.
- Much of it went to Holland.
He thought this was done effectually when he had swept a part into his coffers and cleared France of the remainder, by an edict.
- If all the gold and silver were exported, only paper would remain and would be the sole instrument of commerce.
However, after many expedients, he found this was impracticable.
- They would therefore be obliged to take paper.
But finally, he published an edict that all bank notes were to be paid only in half.
- By paying out great sums, he kept off ruin for some months.
This ruined many people.Britain can never be much hurt by the breaking of a bank, because few people keep notes by them to any value.
- If he had stood to this, it would have been far better than to have suffered the consequences after.
- Upon this edict, the bank's credit was entirely broken.
- The bank notes suddenly sunk to nothing.
Most of the people had their whole fortunes in notes.They were reduced to a state of beggary.The only people who were safe were the stock-jobbers who had sold out in time.With their bank notes, they had bought all the valuable goods and a lot of land, though at the highest prices.They made immense fortunes by it.
- A man worth £40,000 will scarce ever have £500 of notes by him.
- But the breaking of this bank in France created the most dreadful confusion.
The South Sea scheme in our own country was nothing to this.
The clamour from Law’s last edict made it rescinded.
- Nobody was under any obligations of going into it.
- The government had no share in it.
- The loss was but a trifle in comparison.
However, by raising the coin and other expedients, he kept it from May to October.He was then obliged to leave France which he accomplished with difficulty.
- The notes were again declared to be paid at value.
- But the bank never recovered its credit and this had no effect.
This amazing scheme was founded on these two principles:
- His goods were confiscated and he died soon after.
Consistent with these principles, he thought he might easily increase the public opulence:
- That public opulence consists in money
- That the value of money is arbitrary, founded on the common consent of mankind.
This scheme of Mr. Law’s was not contemptible.
- if he could annex the idea of money to paper, and
- if the government could never be at any loss to produce any effect that money could do.
If the Duke of Orleans had lived only a few days longer, it was agreed upon that he was to have been re-established.
- He really believed in it.
- He duped himself.
- It was thought he had provided well for himself, but it was found to be otherwise.
- After his death, it was not thought expedient to have it put in execution.
Mr. Law’s scheme was imitated all over Europe.It created the South Sea Company in England.In the end, it turned out to be a mere fraud.If it had been carried to as great an extent as Law’s, it would have had the same consequences.It was built in the latter end of Queen Anne’s reign.Its intention was to carry on a trade to the South Seas.For this purpose, they bought up the greater part of the debts of the nation.However, their stock was not great.The profits expected from it were very inconsiderable.The people's expectations were never greatly raised.Its fall was not very prejudicial to the nation.