John Law and the Mississippi Company, Part 2
Brian Trumbore
President/Editor, StocksandNews.com

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.

Go to : Part 3

[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