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It's just coming out now. And one of the things I found really striking as I was working on it, doing the research was when you look back at like the long arc of the history of money, you see these long periods of time when everything is just stable, things aren't changing much. And then there are these moments when everything just goes like bananas and you see these massive dramatic changes in a really short period of time.
Jacob, I read your book, and one of my favorite parts in the book was one of these moments. It happened a few hundred years ago in Western Europe when the modern economy and modern finance were just beginning to emerge.
There is this one person who comes along at this moment. His name is John Law, and he picks up all these little pieces, all these innovations and puts them together almost single handedly and kind of out of nowhere. John Law creates this entire economy that looks a lot like the world we live in today.
You got to start where everybody starts. This is Steve Quinn. He's an economic historian who I talked to when I was working on the book.
You got to start where everybody starts, which is government debt.
OK, I thought you were going to say the dual I made for me. If there's a dual.
Oh, no, no, no, no. I'm an economist. And don't get me wrong, I know stories of dual sell copy, but, you know, I'm hopelessly focused on OK, OK, what's driving the thing? It's government debt.
OK, let's start with the dual. Absolutely.
John Law is in his early 20s. He grew up in Edinburgh but has moved to London. He's like medium rich, but he is living the high life in London.
He's what's known as a beau, which is like a 90s version of a you know, he drinks a lot, loses a lot of money gambling as all these romances. And then on April 9th, 1894, John Le is standing in Bloomsbury Square in London. Middle of the day, a carriage rolls up and a young man named Edward Wilson gets out, walks up to law and draws his sword.
So this is a planned thing. A duel law draws his own sword. They fight law strikes Wilson, Wilson falls down and dies.
Nobody knows exactly what this was about. There had been some drama law, been living with the woman who was married to another man and Wilson's sister was living in the same building. Maybe that had something to do with it. We don't know. But we know what happens next. Law is arrested for killing Wilson. He's convicted of murder, sentenced to death, and then he escapes from prison.
How did he escaped from prison? This part? I don't. How did he get out? It's not entirely clear.
People who study this say it's likely that he had some, you know, help from outside and somebody maybe even drugged a guard and let him out of his cell. But we don't know. What we do know is what happens next. He gets on a boat and goes on the lam to Europe.
Hello and welcome to Planet Money, I'm Jacob Goldstein. And I'm Mary Childs, John Law. This murderer, convict, he does not lie low in Europe. Hide out, change his name and devote himself to gardening. Oh, no, no. What he does is he transforms an entire nation. He pulls together banks and paper money. It creates this giant stock boom. He essentially invents a whole modern economy. Today on the show, the story of John Law tells us a lot about how finance works and also how it can blow up the world.
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So John Law is on the lam, he is popping up in one city after another across Europe, Amsterdam, Venice, Paris, and he's always at the gambling tables playing cards and he's always winning.
It's not that he's lucky he's not cheating. He's getting rich because he understands this intellectual discipline. He understands really this new way of looking at the world that Europeans are just figuring out during his lifetime probability theory. He's often playing this card game called FERO.
And Law knew that if you were the banker, the house, you had a slight statistical advantage. It's just like how blackjack works in casinos now. So law would roll into town, set himself up as the banker at a high stakes card game, and the odds meant that over time he won more than he lost.
People are starting to notice this gambler who's getting rich when he arrives in Paris. The chief of police sends this warning letter to the foreign minister. He writes, quote, A Scot named law gambler by profession and suspected of evil intentions toward the king appears at Paris in high style and has even bought an impressive home, although no one knows of any resource except fortune in gambling, which is his whole profession.
But law caught a break. The minister wrote in the margin of that letter. He is not suspect he may remain in peace.
So John Law, living in Paris, gambling, making money. But he's also got this, I don't know, a hobby, little side hustle. He's been trying to get going. He's trying to convince France, the whole country of France, to completely change the way it is running its economy.
So France has been fighting war after war, spending all this money and now the country is basically broke. Farmers can't borrow money to plant seeds. At one point, the king had to melt down his silver and gold plates to pay his soldiers, which was kind of emblematic of the whole bigger problem.
The whole economy ran on gold and silver and there wasn't enough gold and silver to go around.
John Le knew something about this problem. In particular, his father was a goldsmith, and during John Laws lifetime goldsmiths in Britain were kind of becoming banks. What happened was Goldsmith had safes in their shops, so people started storing the gold with the goldsmith. Goldsmith started giving people receipts for the gold and after a while people started to use the receipts themselves to buy stuff or to settle debts. The receipts were like Proteau paper money. They were money. It Jason.
This wasn't the first time people in the world had used paper money. China had actually used it hundreds of years earlier. But it's a new thing in Western Europe.
Then the goldsmith went further. They started making loans. Goldsmiths would give you a claim check for gold that you could go out and use as money, but you didn't have to deposit any gold. Your claim check is for gold. That kind of doesn't exist. The goldsmith is creating money out of thin air.
So if everybody with a claim check came back to the goldsmith and asked for their gold back, the goldsmith would not have enough.
To be clear, this is basically how banks work today. We call it fractional reserve banking. And similarly, today, if everybody with a bank deposit came and asked for their money at the same time, we call that a bank run. The bank doesn't have the money. That is just how banks work.
But on the flip side, if your economy, say, runs on silver and gold and you are so low on silver and gold that you just melted down your very favorite, Charles, fractional reserve banking is exactly what you need.
So John was ready to pitch this idea in France normally kind of guy is he would just go straight to the top pitch to the king. But the king of France at this moment, Louis, the fifteenth, five years old, not super into finance or banking. And France at this time is being run by a regent, a duke, the Duke of Orleans, or Leon, earlier.
OK, so the Duke's hobbies include working in his home chemistry lab, composing operas and staying up all night with nobles and opera singers and actresses who would all get drunk, sleep with each other and say, quote, vile things at the tops of their voices.
So I bet you know who the Duke is going to love.
Jumma, we talked about this with Anne Murphy. She is a historian, but she also used to work as a derivatives trader. So she knows a few things about finance pros like John Law.
He's out there networking, getting to know the right people, and he manages to convince them to allow him to set up a private bank, a bank owned and run by John Law.
And France doesn't really have banks as we know them at this point. Right. It's not a thing in France banking like like we have banks.
No, not really. No. There is a there's a bit of a suspicion about what banks are and what they can.
I mean, there's a suspicion of banks here and now, but they exist nevertheless.
Yes. And every country, I think has to has to figure out how to make its peace with what banks are and what they do.
So this is step one of John Laws scheme. In 1716, he sets up the first real bank in France. He's jumped from card game banker to actual real banker. It's called the bank general, which is a fancy name. But it's run out of his house, he prints paper money backed by gold and silver, but everybody thinks his bank is kind of a joke. The next year, though, John Law got another break. His drinking buddy, the Duke, made a new rule that said everybody in Paris has to use the bank's paper banknotes to pay their taxes.
And, you know, a reasonable definition of money is it's the thing you pay your taxes with, because once the government says you have to use this thing to pay your taxes, whether that thing is silver coins or cloth or dollars or paper money from the bank general, then everybody knows that at some point they're going to need to have that thing to pay their taxes. When the Duke forced people to use John Laws paper money to pay their taxes, his paper bills became real money.
So France's economy is now running on the full faith and credit of John Law. So let's pause here for just a moment and go to Law's biographer, Antoine Murphy, for the recap.
He killed a man in a duel. He was sentenced to death and then he escaped from prison. So you wouldn't have expected a grace monetary economist to develop from such a figure.
Depends on your views of monetary be. Yeah.
Antoine Murphy says John really believes that if you build an economy right, everybody can get richer, including but not limited to John Law.
And so he thinks, OK, now that I have the bank, I'm going to go even bigger, I'm going to go international. When Jonah was gambling in Amsterdam years earlier, he would have seen what was really the first wildly successful multinational corporation was called the Dutch East India Company. There were other companies like this. They were trading companies.
And to be clear, these companies were brutal colonizers, extracting profits through violence and oppression and slavery. But John Law did not seem too troubled by that yet, nor did the French in general.
They had had trading companies like these before, but none had really taken off the way they had in other countries. So law says, I'm going to create a company that will be bigger and better than any that has ever existed. You'll come to be called the Mississippi Company and Logits, the Duke, to grant the company a monopoly on trade with all of France's territory in North America.
It's literally half of the landmass of the current United States, not counting Alaska and law.
Once he once he gets the Mississippi company moving, he's sending ships over to North America and they're coming in to a small little port in the Gulf of Mexico, which he says to the Regent will name after you will call it La Newfeld, Arcoleo, New Orleans and suddenly of New Orleans, named after the Regent.
Now, there is an important twist here, a twist, a twist. And the twist finally brings us to the point where Steve Quinn, that historian we heard from back at the beginning of the show, said we should start.
But, you know, I'm hopelessly focused on, OK, OK, you know what's driving the thing? It's government debt.
Then as now, government debt was one of the most important parts of finance and of the economy as a whole. England, France's rival, had started this new kind of bank, the Bank of England, that was helping it deal with government debt.
France also had this huge national debt from fighting all these wars against England. France had borrowed all this money, sold all these government bonds, and it's having a hard time making the interest payments on the bonds. The national debt is just killing the French economy. So law comes up with a plan to help the Duke, to help France really solve its national debt problem.
When he first sells stock in the Mississippi company, law says to the public, OK, instead of paying for the stock with money, pay for it with government bonds. You give me some of those bonds that the government isn't going to be able to pay back. And I'll give you a share of my company, a share of all the riches in the new world.
It is amazing how fast this is happening. This truly is one of those moments in the history of money when everything is happening all at once, you know, it's just 1717 right now. Not long ago, France was a country where the king was melting down his fork's to pay the bills. Now, in France, you can borrow paper money, lend that to the government to get government debt and then trade that debt in to get shares in a multinational corporation that controls half of North America.
And John Law, by the way, gets a cut of all of this.
John Laws scheme is working. Paper money is working. It's easier for people to borrow money. In the countryside. Farmers are growing more food. In Paris, artisans are making more dishes and clothes.
And John Line, the Mississippi company, are taking over more and more, essentially, all of France's foreign trade, tobacco sales, the entire French national debt all flowing through John Law and the Mississippi company.
So by now, John Law basically is the French economy.
The stock price of the Mississippi company is going up and up and up. There was no stock market. At the time, so people would just go into the streets outside the Mississippi company office to trade stock back and forth. It got so crowded on this little street that officials closed it off. They put iron gates at either end. And then every day at seven a.m., they rang a bell and bang the drum and opened up the gates. And everyone rushed in to buy and sell stock in the Mississippi company.
In fact, so many people were getting so rich. This is when they invented the word millionaire.
And the French are so amazed by what the law has done and so thankful that what happens in January of 1720 at the start of January 1720 John Law is made the equivalent of Prime Minister of France. He's made comptroller general of the Phenols. Now, it is quite extraordinary. I mean, you could imagine a media headline, convicted Scottish murderer becomes prime minister of France and calls us the world's first stock market boom. And he did all of that.
We didn't talk, by the way, about how rich John God, yes, he became extremely rich.
He bought a dozen country estates, several mansions in Paris, a bunch of diamonds, a library of 45000 books, the true mark of wealth.
And he actually wrote to somebody and he said, I'm probably the richest man who's ever been.
But what could possibly go wrong? Well, now everything.
That's after the break. This message comes from NPR sponsor Microsoft teams. Now, there are more ways to be a team with Microsoft teams, bring everyone together in a virtual room, collaborate, live on the same page and see up to 49 people on screen. Learn more at Microsoft dotcom slash teams. I'm Guy Raz and on NPR's How I Built This, How a simple splash of color accidentally launched Sandy Chilliwack into a 40 year career as a designer, entrepreneur and creator of the now famous Chilliwack placemat subscriber.
If we can say that John Law created modern finance, which he sort of did in ways, then we can say that he also created the first modern financial collapse.
The trouble started in Mississippi where the big plans were really not working out. As of 1719, French settlers had built a total of four houses in New Orleans. Most of the people moving to the territory died of disease or starvation. The company does have tons of other businesses going by this point, but the price of the company's stock is so high that all of the businesses put together are not enough to justify it.
And Lord knows this and he's getting worried. So he makes this really shocking announcement.
He says the company itself, the Mississippi company, will buy or sell unlimited quantities of company stock at a fixed price price just below where it was trading on the open market at the time. It's unclear exactly what was going on, but it seems like his hope was that it would stabilize the market.
What ends up happening is lots of people sell their stock back to the company and laws bank prints more and more paper money to buy back the stock.
Now, France has the opposite problem that it had before a law got there. Before he got there, there was not enough paper money. Now there's too much classic financial boom. More and more money is circulating and prices on basic staples, wheat, milk, candles start going up fast.
What ends up happening is lots of people sell their stock back to the company. But luckily, law doesn't just own the company. He owns a bank that can print paper money. So he takes his bank and he prints more and more paper money to buy back the stock.
People start getting nervous now about law scheme. Suddenly, everybody wants to go to the bank and turn in their paper money for gold and silver.
But once people started trying to convert their paper money into gold and silver, problems arose because there wasn't enough gold and silver to to pay them all said sorry, you can't have that.
He had spent years promoting this dream of paper money and now it was all unraveling. So he starts kind of flailing around looking for ways to save his system, to save paper money, to try and save it.
He makes it illegal in France to possess large amounts of gold or silver coins.
So as if by magic, all the rich people in Paris suddenly had lots of new gold and silver jewelry. Then he bans production of any gold object larger than one ounce except for religious purposes.
And then all the rich people in Paris suddenly found religion started making these big, beautiful gold crosses.
There's only one thing left for John Law to do. He decides that by the end of the year, paper money will no longer be redeemable for gold and silver.
It will just be paper. Oh, and by the way, the value of each paper bill will be half of what it is now.
This was too much for the people of France. They flipped out. They took to the streets. They threw rocks through the windows of John Laws Bank, the Duke Laws. Powell fired law, placed him under house arrest and law, fled France just like he fled England.
Decades earlier, the Duke and France gave up on paper money altogether, went back to gold and silver coins.
John Law is remembered as a failure as a con man. Modern economists don't think of him as one of the great forefathers of their field.
But our world today looks a lot like what he had envisioned.
So there is this question. Why did John Law fail? I think he failed, at least in part because for modern money to work for this kind of system he was trying to create to work, you need to have a balance of power. You need to have banks and governments and ordinary people all pushing and pulling and arguing over who gets to do what and how much and when. And it's this arguing, this pushing and pulling that at least gives you a shot at keeping things in check.
France did not have any of that, really.
It was an absolute monarchy law never went back to France. He ended up in Venice, made his living as a gambler and collected art. And in 1729, just before his 15th birthday, he died.
You can email us at Planet Money at Unpeg. We are on Facebook, Twitter, Instagram and Tic-Tac at at Planet Money.
Today's show was produced by Darian Woods. Alex Goldmark is our supervising producer. Robert Smith edited the show. And I wrote the book Money The True Story of a Made Up Thing. I'm Jacob Goldstein. And I'm Mary Childs. This is NPR.
Thanks for listening. Oh.