The Gambling Scot Who Broke France
- didiermoretti
- Aug 16
- 17 min read
Updated: Oct 1
In the annals of financial catastrophes, few performances rival the breathtaking spectacle orchestrated by John Law, the Scottish gambler-turned-financier. He soared from commoner to the richest man in Europe, only to flee Paris in the dead of night with nothing but a single diamond and the lingering scent of economic ruin. His story reads like a fantastic novel—except the economic devastation he unleashed was chillingly real, the riots were deadly, and the national trauma he inflicted ultimately paved a straight road to the French Revolution. (1)
The Making of a Dazzling Schemer
Born in Edinburgh in 1671 to a goldsmith, John Law was no ordinary lad. He was an accomplished gambler with an uncanny knack for the then-newfangled rules of probability. (2) He came of age as goldsmiths were, quite inadvertently, morphing into the progenitors of modern banks. Their secure vaults, initially for storing gold, soon led to receipts being used as a de facto currency. Law, witnessing the birth of paper money firsthand, immediately grasped its revolutionary potential with a gambler's instinct for leverage and an economist's eye for systemic change.
His father’s death was less a steppingstone and more a stumbling block. Young John promptly gambled away his inheritance, saved from debtors' prison only by his mother’s timely intervention. At 23, in London, he sealed his fate with a duel fought, as the story goes, over the affections of a woman. Duels, rather inconveniently for Law, were illegal. Convicted of murder and sentenced to death, he executed a spectacular prison escape (presumably with some help and well-placed bribes) and fled to the Continent. A man clearly not afraid to bet big, whether on cards, love, or his own neck.
As Law gambled his way through Europe, he observed Amsterdam's burgeoning wealth, crediting it to the city's robust bank, reliable money supply, and bustling stock exchange. In a fit of patriotism—or perhaps a shrewd calculation—he returned to Scotland, attempting to convince parliament to establish a national bank and issue paper money. His goal: to ease borrowing, stimulate investment, and grow the economy. Today, this is simply known as "monetary policy"; back then, it was considered an outlandish proposal, roughly equivalent to suggesting the national currency be backed by fairy dust. Parliament, predictably, scoffed. With Scotland and England on the verge of union, and Law still a fugitive in England, he wisely decided to return to the Continent. (3)
He hawked his scheme from one European court to another, finding little interest until he landed in Paris. There, he befriended a fellow bon vivant, the Duke of Orleans—a man who shared Law's appetite for both pleasure and risk, having himself accumulated debts through a lifestyle that made Versailles courtiers blush. When Orleans became Regent after Louis XIV's death, by a stroke of luck that would make even a seasoned gambler envious, France suddenly found itself ruled by perhaps the only man in Europe desperate enough to gamble the kingdom's entire financial future on an untested Scottish adventurer's wild theories.
Beyond the Betting Table: John Law, the Unsung Economist
As Zoe Schneider points out in her paper, (4) "John Law was more than a mere adventurer. His views on monetary matters reportedly influenced the later eighteenth-century economist Adam Smith." Law's gambling instincts may have driven his risk-taking, but his economic insights were genuinely prescient. In his 1705 treatise Money and Trade Considered with a Proposal for Supplying the Nation with Money, he articulated a revolutionary idea that would later become orthodox economics: the money supply should fluctuate in response to the economy's actual needs, not be chained to a finite supply of gold. Smith would echo these very principles decades later in The Wealth of Nations—making Law not just a reckless speculator, but an unsung pioneer of modern monetary theory.
Law's idea was a direct affront to the prevailing mercantilist theories, championed in France by figures like Jean-Baptiste Colbert, which held that national wealth was primarily derived from a positive trade balance and vast reserves of bullion. Law, much like Smith after him, believed true wealth lay in the prosperity and productivity of a nation's people, and that a flexible money supply could act as economic lubricant for growth. He was, in essence, a financial futurist in a powdered wig.
France's Desperate Hour: A Kingdom On The Brink
By 1715, France was bankrupt. Louis XIV, the Sun King, had spent decades waging perpetual wars and building magnificent palaces, burning through the national coffers with glorious abandon. The nation was drowning in debt. The war of Spanish Succession 1702-1715 (5) had been extraordinarily expensive, leaving the Dutch and English with unprecedented levels of debt, and making France's situation even more dire. Louis XIV, in a truly desperate flourish, had even melted down his own silverware for coinage and promised lenders all future tax revenues for years to come. By the twilight of his reign, the government couldn't service its debts, and the economy, rather predictably, collapsed.
To put it in starker terms: the British government could typically borrow at 4 percent or less, while the Dutch managed rates as low as 2 percent. France, by contrast, was often forced to borrow at double those rates, frequently topping 7 percent. Imagine paying credit card interest rates on your national debt while your rivals enjoyed mortgage-level borrowing costs. By the time Louis XIV shuffled off this mortal coil, the French state was thoroughly insolvent, and its economy was gasping for air.
Enter John Law, with a proposal so revolutionary it sounded like a fever dream: France could escape its financial quagmire by abandoning gold and silver in favor of paper money, backed by the tantalizing, if entirely speculative, wealth of its American territories. Law proposed a state bank, conveniently to be run by yours truly, to issue this new fiat currency and shoulder the government's mountainous debt. Faced with an impossible situation, the Regent was, perhaps understandably, desperate enough to listen.
The Ascent of Paper: John Law's Monetary Miracle
Law's grand experiment began modestly enough with France's very first bank: the Banque Générale, operating out of his own house. Like the fledgling Bank of England, he planned to raise capital by selling stock. French investors, however, proved rather unimpressed. Ever the charmer, Law managed to convince the Regent, who, in the summer of 1716, transferred chests of royal gold from the Mint to the Banque Générale. Law, having shrewdly acquired a quarter of the bank's shares beforehand, was perfectly positioned. The Regent's substantial deposit ensured the bank's survival, and in 1717, he tipped the scales further by decreeing that all taxes must be paid with the bank's paper notes. With a stroke of the pen, John Law's paper became money.
Law's initial success was genuinely impressive. The bank injected much-needed liquidity into a cash-starved economy, and commerce, rather miraculously, began to revive. In December 1718, Law's bank, having proven its mettle, was elevated to the Royal Bank, becoming the official crown institution, now entirely under the Regent's control. The Regent could now, theoretically, print as much money as he deemed necessary, operating under the rather charming assumption that more paper money would automatically mean more trade and, thus, more prosperity for everyone. Initial subscribers to the bank had gained an impressive 35% annual return, lending some credibility to promises of spectacular gains from subsequent ventures.
With fortune seemingly smiling, and the Regent thoroughly enchanted by his financial wizard, Law embarked on an audacious part of his project: developing France's colonial possessions. In August 1717, he established the Compagnie d'Occident (Company of the West), better known to history as the Mississippi Company. This venture was granted control over France's trade in Louisiana, a territory then more a grand idea than a developed land, its vastness marked by little more than a few scattered forts and trading posts. In the spring of 1718, the company founded a city at the mouth of the Mississippi River, patriotically named New Orleans—after the Regent himself, of course.
Law proposed to generate even more paper wealth at home, promising it would be backed by the exploitation of hoped for silver reserves in Louisiana and the development of this vast new territory. He assured the Regent this would solve the colossal debt left by Louis XIV: The Company's key operation, however, was a scheme for the reduction of the public debt. Payment was only accepted in government bonds - which had an average yield of 4.5%. The Company then lent money to the government, at a lower interest of 3%. The public had to be convinced to exchange government debt for shares in a company whose main asset was government debt with a much lower yield - a very bad deal on the face of it. Law's solution was to entice debt holders with the prospect of spectacular capital gains in short order. In essence, Law set to solve the government debt problem by inventing the financial bubble.
The Bubble Inflates: from Servants to Millionaires (and Back)
By 1719, Law was truly in his stride. He set about expanding operations, merging the Mississippi Company with the French East India Company and acquiring the lucrative right to trade tobacco in France. To finance these ambitious acquisitions, Law issued new shares. His clever gambit: prospective buyers had to own existing shares before they could acquire the new ones, which increased the demand for existing shares and drove prices higher; the new shares were then offered at a slight discount, guaranteeing an instant profit for holders. Law used the bank to expand the money supply to ensure an abundance of funds to purchase shares - the total note issue expanded five-fold in six months - from 200 million livres in June to 1 billion livres by the end of the year.
The stock, as if on cue, began its rapid climb. The Company then purchased the right to all profits from the Royal Mint for the next nine years—financed, naturally, by issuing yet another set of shares with the same ingenious requirement. From then on things accelerated at a dizzying pace. The stock price soared further, rocketing from 500 livres to 3,000 livres in a mere few months. People were getting rich, and quickly; some even resorted to besieging John Law's residence, eager to buy shares directly from the source.
By October 1719, another piece of Law's magnificent puzzle clicked into place: the Company took over the collection of direct taxes, or taille. Law, ever the reformer, replaced the existing, convoluted patchwork of specialized taxes with a single income tax, a simplification that was less burdensome for the poor and met with popular enthusiasm. Business across France boomed. In early 1720, the Company took over the Royal Bank.
John Law had effectively become the French economy: he collected taxes, managed the national debt, held a monopoly on overseas trade, and, crucially, he could print money.
The Company's stock continued its relentless climb. Law, a true innovator in the art of financial promotion, deployed numerous techniques to prop up the share price. He introduced futures contracts and publicly took an option to buy shares at a price well above the market, signaling his boundless confidence. He issued prospectuses brimming with extravagant claims and allowed people to buy stock in installments, enabling greater leverage and truly dizzying gains as the stock price surged. Last, but certainly not least, he declared dividends of 12% before the Company had generated a single sou of actual earnings. By November 1719, shares hit 10,000 livres, then 15,000 the following month. This incredible rise minted millionaires overnight, with profits of 400% to 600% in a matter of months.
Law himself became the wealthiest non-royal in Europe; his footman, it was said, became so rich he hired his own footman. The formerly bankrupt country seemed to transform into a booming fairyland. This fabulous run-up, however, was backed by little more than a few scattered settlements in swampy Louisiana and some relatively minor increases in trade with Asia.
In January 1720, Law reached the zenith of his power: he was appointed Controller General of France, the second most powerful position in the country after the Regent.
The Inevitable Reckoning: When Reality Bites
The price of the Company's shares was built on the promise of colossal future profits. This was initially plausible, given Spain's discovery of vast silver deposits in South America and the Dutch making fortunes from the spice trade. Stories circulated in France about immense silver deposits and precious stones waiting to be unearthed in Louisiana. Unfortunately, reality proved a stark disappointment: no silver was to be found, and the development of the land was proceeding at a snail's pace, with many colonists succumbing to disease or starvation.
In an effort to stabilize the market, Law made an unexpected and frankly shocking move: he fixed the price of shares at 9,000 livres, with the Company vowing to buy or sell an unlimited number of shares at that price. Predictably, countless people rushed to sell their stock back to the Company, and the bank (now, conveniently, owned by the Company) simply printed more money to buy the shares. Law dramatically increased the money supply, from 1.2 to 2.7 billion livres in a mere three months.
The inevitable began to unfold: inflation surged, with the price of everyday staples doubling in a single year. The general eagerness of holders to convert their shares into money was now tempered by the grim realization that the notes they received in payment were rapidly becoming as worthless as the shares. Investors found themselves in a rather unenviable position, forced to choose between an investment that would yield nothing and notes that would buy nothing.
The continued plummet of share prices and the rapid escalation in the cost of necessities led to increasingly frantic and desperate measures. As Jacob Goldstein pithily writes, "Law made it illegal to possess large amounts of gold or silver coins. Suddenly everybody had lots of new gold and silver jewelry. So Law made it illegal to produce any gold object bigger than one ounce, except for crosses and ceremonial chalices. This prompted an immediate outbreak of piety in Paris; big gold crosses were the new new thing. Law banned big gold crosses." (6) This was, to put it mildly, not a recipe for public confidence. In May 1720, Law announced that the value of money would be gradually reduced by 50 percent. Riots erupted, and the bank was forced to close its doors. The Regent quickly revoked the order, but by this point, the entire system was in freefall. Within months, the Regent threw in the towel on paper money and banks, reverting to the comforting solidity of silver and gold coins—a financial retreat strikingly similar to what had occurred in China hundreds of years earlier (see How China Invented Modern Money and Sparked an Economic Revolution).The grand experiment of a managed currency had lasted less than two tumultuous years.
Law fled Paris, leaving everything behind and virtually penniless. He settled in Venice and resumed gambling to make a living. By January 1721, a gold louis, worth 45 livres, could purchase a share of stock that had sold just a year prior for 20,000 livres. In 1723, the Regent, perhaps from the sheer stress of it all, died of a heart attack at age 49, reportedly in the arms of his mistress. By then debt servicing cost the state 87 million livres per year, almost exactly the mount as it had in 1717. The French government's ambitious efforts to reform its finances had spectacularly
failed.
Bubbles Beyond the Seine: Britain and The Dutch Republic
In 1720, similar speculative manias took place in England and the Dutch Republic. Similar to France, England's South Sea Bubble arose from the British government's desperation to get its debt under control. That year, the South Sea Company, a slave-trade firm, presented a proposal to parliament. The proposal borrowed heavily from John Law's ideas and involved trading government debt for equity in the company. Thanks in part to bribes paid to wavering MPs, the proposal was accepted by parliament. The South Sea Company used the techniques they learned from John Law to inflate the stock price and create a bubble. The crash was dramatic by year end, however by then the government's primary goal had already been achieved, with 80% of callable bonds converted into company shares. Parliament promptly passed legislation to exclude the possibility of rescinding the conversion.
To manage the fallout from angry investors, the government acted to reduce losses for the most recent subscribers, and corruption charges were brought against directors of the company and members of parliament who were actively involved in the scheme. Parliament passed a bill to confiscate the assets of the directors, several MPs were expelled, and one MP was jailed in the tower of London. With these actions, the government could
credibly claim that such schemes would not be repeated, and as a result was able to issue new bonds at reasonable interest rates. In the end the British government achieved an impressive feat: a default on significant existing debt, with no increase in the cost of borrowing going forward!
The Dutch had also run up a significant public debt, however they did not resort to a debt conversion scheme, as they were able to borrow at reasonable interest rates thank to an extended secondary market for debt. The bubble of 1720 in the Netherlands was caused by a boom in speculative joint-stock companies: between June and October 40 such companies were created, with a proposed capital of 800 million guilders, about 3 times the Dutch Republic's GDP at the time. Few of the companies achieved full subscription, and only 6 became operational - the bubble was short lived and its impact nowhere near that of the Mississippi and South Sea companies.
The Long Shadow: How one Bubble Doomed A Kingdom (and Spurred a Revolution)
The British and Dutch bubbles had limited societal and economic impacts. In fact one can argue that Britain emerged stronger, as it managed to reduce its debt and maintain a relatively low cost of borrowing.
There was no such silver lining in France. The collapse of Law's scheme unleashed a widespread revulsion against the stock market and, for decades, effectively retarded the development of French capitalism and industry. France, which had briefly positioned itself at the cutting edge of financial innovation, retreated into a fiscal conservatism so profound it bordered on allergic, just as Britain was eagerly embracing the very techniques Law had pioneered.
The spectacular failure of Law's system created a lasting national trauma that rendered meaningful financial reforms politically impossible—at least until the French Revolution decided to make all things possible through rather unconventional means. Indeed, the French refused to use the discredited term "banque" for most financial institutions until the late twentieth century, steadfastly preferring the less tainted term "crédit". While farsighted in many of its underlying ideas, the catastrophic failure of Law’s system effectively locked the French state into a debt spiral that ultimately ended in insolvency.
When Louis XVI reluctantly convened the Estates-General in 1789, it was to address a financial crisis that traced its lineage directly back to Law's failed experiment seventy years prior. The state of the kingdom was dire: modern financial institutions were politically anathema, fiscal reform was blocked by entrenched interests, and the government spent the majority of its revenue simply paying interest on old debts. In this context, revolution wasn't just attractive—it was, for all intents and purposes, the only viable escape from a debt spiral that conventional politics simply couldn't untangle.
The bubble had one disastrous effect across all three countries involved: it froze the creation of joint-stock companies for the next century.
The spectacular collapse of the South Sea and Mississippi Bubbles created such profound economic trauma that it fundamentally reshaped corporate law for generations. In England, Parliament passed the Bubble Act in 1720, effectively banning the formation of joint-stock companies without an expensive and cumbersome parliamentary charter. This legislation, and the public sentiment behind it, relegated the joint-stock company to the realm of fraud and market manipulation for decades. Only a handful of companies, typically large infrastructure projects like canals or turnpike roads with obvious public benefit, managed to secure charters during this period. (7)
This corporate winter began to partially thaw in the early 19th century as the Industrial Revolution created unprecedented demand for capital that individual partnerships simply couldn't meet. The construction of railways, in particular, required investments far beyond what traditional financing methods could provide. And as we shall see in ensuing chapters, joint-stock companies are critical for driving innovation and growth.
What Went Wrong? Lessons From a Financial Fiasco
There are several reasons why the impact was so severe in France.
Widespread Public Involvement
First, the bubble involved a direct effort to overhaul the country's currency, which meant that a large proportion of the population was involved. This contrasts with the South Sea bubble in Britain, which had no effect on the vast majority of the public who was too poor to invest in the scheme. Participation in the Dutch boom was even narrower. In both cases, people who lost money could generally afford to do so, thereby limiting the impact and the number of bankruptcies.
Banking System Over-involvement
Second, the banking system was very deeply involved in the creation of the Mississippi bubble. This led to a dramatic over-issue of bank notes, resulting in high inflation, followed by a sharp deflation, contraction of credit, and economic depression. This created a severe economic fallout which affected every section of French society.
Flawed Political Structure
The third, and perhaps most critical, reason had to do with inherent flaws in the political setup in which John Law operated. Law's genius was undeniable, but his failure stemmed from an insatiable ambition. Furthermore, the absolute nature of the French power structure meant there was no one to provide necessary checks and balances, no mechanism for constructive pushback. "The founding of a national bank would be fatal in an absolute monarchy," observed the Duke of Saint-Simon, with remarkable prescience, just before Law founded his bank, "whereas in a free country it might be a wise and profitable undertaking." In the end, even the most brilliant financial scheme needs a sturdy political foundation to stand.
In essence, John Law's system didn't fail because his core ideas were wrong (many, like Adam Smith, would later build on them). It failed because the political and social architecture of 18th-century France was utterly unprepared to contain, regulate, or even comprehend the forces he unleashed. It's a testament to how even the most dazzling financial innovations can become instruments of ruin if they operate in a void of governance and accountability.
Law's tale is a stark reminder of the perils of unchecked power. In an absolute monarchy, with no independent institutions, no legislative oversight, and no free press to question the wisdom of printing endless amounts of money, Law's system lacked any natural circuit breakers. There was no one to say "no" to the Regent, and by extension, no one to say "no" to Law. This absence of checks and balances allowed a brilliant idea to metastasize into a financial tumor. Modern central banks, by contrast, are designed with layers of independence and accountability precisely to prevent such unilateral folly. A pertinent lesson for today, as leaders in multiple countries actively seek to undermine the independence of their central banks—a move that, in light of Law's catastrophic experiment, should send shivers down any fiscally responsible spine.
Previous Article: When Holland Was the World's Superpower
Reference Article on the Growth Framework: The Growth Enigma: How Humans Cracked the Code to Prosperity
Next Article: Coming Soon
(1) This article borrows liberally from Money: The True Story of a Made Up Thing by Jacob Goldstein, Boom and Bust: A Global History of Financial Bubbles by W. Quinn and J.D. Turner, The Ascent of Money: A Financial History of the World by Niall Fergusson, and The History of Money by Jack Weatherford.
(2) French mathematicians Blaise Pascal and Pierre de Fermat laid the groundwork of probability theory in 1654. Interestingly, their work was spurred by a letter from a gambler asking about the practical application of probabilities to gambling.
(3) The possibility of young Louis XV ascending the throne had initially been remote, with a grandfather, father, and older brother ahead in the line of succession. A rather aggressive bout of smallpox and measles conveniently cleared the path within 18 months. The boy king was saved by his governess, who hid him in a closet while he was sick to escape the "traditional" remedy of bloodletting. He survived despite being very ill, whereas his older brother was not so lucky—dying from the deadly combination of disease and bloodletting treatment. The boy was made king at the age of 5 - the Kingdom of France was to be governed by a regent until a given king had reached "maturity" at the age of 13.
(5) The Habsburg family had almost exclusively married other family members to consolidate wealth and power, leaving their descendants to pay the genetic price. Carlos II of Spain suffered from severe deformities and handicaps, and died childless in 1700. His designated heir was Philip of Anjou, a grandson of Louis XIV—whose accession would have unified the French and Spanish empires under Bourbon rule. This terrified Britain, the Dutch Republic, Portugal, and the Holy Roman Empire. War broke out in 1702 and raged for thirteen years until the Treaties of Utrecht and Rastatt provided resolution: Philip could remain king of Spain only if he renounced any claim to the French throne.
(6) Goldstein, Jacob. Money: The True Story of a Made-Up Thing
(7) At first blush, the Bubble Act looked like a valiant effort to shield the public from the dangers of rampant speculation. But don't be fooled. Recent research definitively shatters that illusion, exposing it as pure special interest legislation. It was pushed by the South Sea Company to crush any nascent rivals vying for precious investment capital. The damning evidence? The Act was hastily enacted in June 1720, before the bubble's apex, revealing its true nature as a calculated, pre-emptive strike by a company consolidating its power.
