John Law was a "reckless, and unbalanced, but most fascinating genius" as Alfred Marshall (1923: p.41) called him, with "the pleasant character mixture of swindler and prophet" as Karl Marx (1894: p.441) added. A Scottish economist, gambler, banker, murderer, royal advisor, exile, rake and adventurer, the remarkable John Law is renowned for more than his unique economic theories. His popular fame (infamy?) rests on two remarkable enterprises he conducted in Paris: the Banque Générale and the Mississippi Scheme. His economic fame rests on two major ideas: the scarcity theory of value and the real bills doctrine of money.
John Law (1705) elaborated upon Davanzati's distinction between "value in exchange" and "value in use", which led him to introduce his famous "water-diamond" paradox: namely, that water, which has great use-value, has no exchange-value while diamonds, which have great exchange-value have no use-value. However, contrary to Adam Smith (who used the same example but explained it on the basis of water and diamonds having different labor costs of production), Law regarded the relative scarcity of goods as the creator of exchange value.
Law's "Real Bills Doctrine" of money applied the "reflux principle" to the money supply. Money, Law argued, was credit and credit was determined by the "needs of trade". Consequently, the amount of money in existence is determined not by the imports of gold or trade balances (as the Mercantilists argued), but rather on the supply of credit in the economy. And money supply (in opposition to the Quantity Theory) is endogenous, determined by the "needs of trade".
Law's schemes were launched on the basis of this logic. Exiled in Europe because of a duel, Law ingratiated himself into the French court through patronage and friendship of the Regent, the Duke of Orleans. The state of French finances after Louis XIV's death in 1715 was so dismal that the Duke turned to Law for assistance. Law proposed the establishment of a state-chartered bank with the power to issue unbacked paper currency (see here for pictures of notes), the Banque Générale, which was established in 1716. Around the same time, Law also established the Mississippi Company, an enterprise designed to develop the then-French colony of Louisiana in North America.
Law's note-issuing bank was a spectacular success -- until it collapsed after a bank run in 1720, plunging France and Europe into a severe economic crisis, which had an important role in setting the stage for the later French Revolution. Indeed, the experience of Law's banking schemes on France were so traumatic that, until recently, the term "banque" was largely eschewed by French banks in order to avoid stoking up memories of Law's unfortunate institution (the common substitute term was "credit", as in "Credit Lyonnais", "Credit Agricole", "Credit Foncier", etc.).
Major works of John Law
Resources on John Law