Austrian Perspective on the History of Economic Thought, vol.
1, Economic Thought Before Adam Smith. An MP3 audio file
of this article, read by Jeff Riggenbach, is available
of proto-Keynesian money cranks, both theorist and activist, was
John Law of Lauriston (1671–1729). Son of James Law, a wealthy
Scottish goldsmith and banker, John was born and grew up in Edinburgh,
proceeding to squander his father’s substantial inheritance on gambling
and fast living. Convicted of killing a love rival in a duel in
London in 1694, Law bribed his way out of prison and escaped to
the Continent. After a decade in Europe pondering monetary problems,
Law returned in 1703 to Scotland, where he was not subject to arrest.
There, Law concentrated on developing and publishing his monetary
theory cum scheme, which he presented to the Scottish Parliament
in 1705, publishing the memorandum the same year in his famous or
infamous tract, Money
and Trade Considered, with a Proposal for Supplying the Nation with
Money (1705). The Scottish Parliament considered but turned
down his scheme; the following year, the advent of the union of
Scotland with England forced Law to flee to the Continent once more,
since he was still wanted by English law under the old murder charge.
in a sense, should have been proud of the way John Law "unified
theory and practice" in his proposal. On the one hand, Law
was the theorist, arguing for a central land bank to issue inconvertible
paper money, or rather, paper money "backed" mystically
by the land of the nation. As a crucial part of his proposal, the
grateful nation – in this case Scotland – was supposed
to appoint Law himself, the expert and theoretician, in charge of
putting this inflationist central bank scheme into effect.
John Law, as
his subtitle states, proposed to "supply the nation" with
a sufficiency of money. The increased money was supposed to vivify
trade and increase employment and production – the "employment"
motif providing a nice proto-Keynesian touch. Law stressed, in opposition
to the Scholastic hard-money tradition, that money is a mere government
creation, that it has no intrinsic value as a metal. Its only function
is to be a medium of exchange, and not any store of value for the
Even more than
William Potter, John Law assured the nation that the increased money
supply and bank credit would not raise prices, especially under
Law’s own wise aegis. On the contrary, Law anticipated Irving
Fisher and the monetarists by assuring that his paper money inflation
would lead to "stability of value," presumably stability
of the price of labor or the purchasing power of money.
also anticipated Adam Smith in the latter part of the 18th century
in his fallacious justification for fractional-reserve banking,
that it would provide a costless "highway in the air"
– furnishing a money supply without spending resources on the
mining of gold or silver. In the same way, of course, any
expenditure of resource can be considered a "waste" if
we supply our own assumptions that are not held by people on the
free market. Thus, as Professor Walter Block has pointed out, if
there were no crime, all expenditure on locks, fences, guards,
alarm systems, etc., could be denounced as "wasted resources"
by external observers criticizing these expenditures. Similarly,
if there were no such thing as governmental inflation, market expenditure
on gold or silver could be considered "wasteful" by observers.
price rises constitute the Achilles heel of monetary inflation,
another worry has been the outflow of gold and silver from the country
– in short, an "unfavorable balance of trade" or
of "payment." But John Law dismissed this problem, too.
On the contrary, he declared that an increase in the money supply
would expand employment and output and "therefore" increase
exports, thus causing a favorable balance of payment, with
gold and silver flowing into the country. Note that there is no
analysis of why an increase in the money supply should increase
output or employment, let alone drag exports along with it, in this
seemingly universal expansion.
enough, one of Law’s talking points about the need for more money
was, as in the case of low interest, based on a striking misinterpretation
of the reasons for the prosperity of the Dutch, whom all other nations
envied in the 17th century. We have seen that everyone saw that
the Dutch had low interest rates, leading English mercantilists
to put the cart before the horse and attribute Dutch prosperity
to low interest rates instead of realizing that high savings and
higher standards of living had brought about these low interest
rates. Hence the mercantilists suggested that England force the
maximum usury rate still lower.
John Law saw that prosperous Holland enjoyed a plenty of metallic
money; he attributed the prosperity to the abundance of money, and
proposed to supply paper money instead. Again, he overlooked the
point that it was Dutch property and high production and export
that brought a plenitude of coin into the country. The export surplus
and abundant coin were reflections of Dutch prosperity, not its
Not that John
Law neglected the low-interest argument for Dutch prosperity. But
instead of direct usury laws, Law proposed to arrive at low interest
rates in what would become the standard inflationist manner –
expanding bank credit and bank money and thereby pushing down the
rate of interest. Indeed, Law worked out a proto-Keynesian mechanism
– increasing the quantity of money would lower interest rates,
thereby expanding investment and capital accumulation and assuring
To Law, as
to Potter before him and Keynes after him, the main enemy of his
scheme was the menace of "hoarding," a practice that would
defeat the purpose of greater spending; instead, lower spending
would diminish trade and create unemployment. As in the case of
the late 19th-century German money crank Silvio Gesell, Law proposed
a statute that would prohibit the hoarding of money.
It took John
Law another decade to find a ruler of a country gullible enough
to fall for his scheme. Law found his "mark" in the regent
of France, a country that had been thrown into confusion and turmoil
upon the death of its seemingly eternal ruler, Louis XIV, in 1715.
The regent, the duke of Orléans, set up Law as head of the
Banque Générale in 1716, a central bank with
a grant of the monopoly of the issue of bank notes in France. Soon
the banque became the Banque Royale. Originally, banque
notes were receivable in French taxes and were redeemable in silver;
soon, however, silver redeemability was ended. Quickly, by 1717,
John Law had all monetary and financial power in the realm placed
into his hands. To his old scheme he added the financing of the
massive government debt. He was made the head of the new Mississippi
Company, as well as director-general of French finances; the notes
of the Mississippi Company were allegedly "backed" by
the vast, undeveloped land that the French government owned in the
Louisiana territory in North America. Law’s bank created the notorious
bubble"; notes, bank credit, prices, and monetary values
skyrocketed from 1717 to 1720.
observer in Paris noted that for the first time the world "millionaire"
had become prevalent, as suddenly many people seemed to possess
millions. Finally, in 1720, the bubble collapsed, and Law ended
a pauper heavily in debt, forced once again to flee the country.
As before, he roamed Europe, making a precarious living as a gambler,
and trying to find another country that would adopt his scheme.
He died in 1729, in Naples, trying to persuade the Neapolitan government
to make him its inflationary central banker.
cataclysm of John Law’s experiment and his Mississippi bubble provided
a warning lesson to all reflective writers and theorists on money
throughout the 18th century. As we shall see below, hard-money doctrines
prevailed easily throughout the century, from Law’s former partner
and outwitter Richard Cantillon down to the Founding Fathers of
the American Republic. But there were some who refused to learn
any lessons from the Law failure, and whose outlook was heavily
influenced by John Law.
Charles Rist justly criticized Law that "To infer from the
abundance of metallic money in a prosperous country that it is
enough to "create" paper money … in a poor country
in order to develop industry or natural resources in which it
is lacking, is an idea that affronts common sense. … Scotland,
a country of shepherds and fisherman, mountainous and poor in
raw materials … could have increased its currency, but it would
have given the country neither industry, nor trade, nor agriculture,
nor a prosperous shipping industry. That could be attained only
by the labour and frugality of its inhabitants." Charles
of Monetary and Credit Theory from John Law to the Present Day
(1940, New York: A.M. Kelley, 1966), pp. 47–8.
See Joseph T Salerno, "Two Traditions in Modern Monetary
Theory: John Law and A.R.J. Turgot," Journal des Économistes
et des Études Humaines, 2, note 2–3 (June/Sept.
1991), pp. 340–41.
For the relations between Law and Cantillon in this dramatic period,
see chapter 12 on Cantillon. On the interrelationships of Law,
Cantillon, and the contemporaneous Mississippi and South Sea bubbles,
see Antoin E. Murphy, Richard
Cantillon: Entrepreneur and Economist (Oxford: Clarendon,
1986); on the evolution of Law’s doctrines, see Antoin E. Murphy,
"The Evolution of John Law’s Theories and Policies, 1707–1715,"
European Economic Review, 34 (July 1991), pp. 1109–25.
For an analysis of Law’s doctrines and his unheralded influence
upon modern economics, see Salerno, op. cit., note 29, pp. 337–79.
For Law’s influence on Adam Smith, see also Roy Green, Classical
Theories of Money, Output and Inflation (New York: St.
Martin’s, 1992), pp. 110–27.
For example, Sir Humphrey Mackworth "plagiarized" Law
and his inflationist arguments in his tract, A
Proposal for Payment of the Publick Debts (2nd ed., 1720).
See Viner, op. cit., note 27, pp. 44–5.
N. Rothbard (1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic vice
president of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report, and appointed Lew as his
literary executor. See