SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.
JACOB GOLDSTEIN, HOST:
For the last few years, I've been working on a book. It's about the history of money. It's called "Money: The True Story Of A Made-Up Thing." 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.
MARY CHILDS, HOST:
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.
GOLDSTEIN: 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.
STEVE QUINN: You've got to start where everybody starts.
GOLDSTEIN: This is Steve Quinn. He's an economic historian who I talked to when I was working on the book.
QUINN: You got to start where everybody starts, which is government debt.
QUINN: ...At the end of - the worst thing (ph)...
GOLDSTEIN: I thought you were going to say the duel. I mean, for me, if there's a duel...
QUINN: No. No, no, no, no. No, I'm an economist. And don't get me wrong. I know stories of duels sell copy. But you know, I'm hopelessly focused on...
GOLDSTEIN: OK. OK.
QUINN: ...What's driving the thing. It's government debt.
CHILDS: OK. Let's start with the duel.
CHILDS: 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.
GOLDSTEIN: He's what's known as a beau, which is like a 1690s version of a bro. You know, he drinks a lot, loses a lot of money gambling, has all these romances. And then, on April 9, 1694, John Law 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.
CHILDS: So this is a planned thing - a duel. Law draws his own sword. They fight. Law strikes Wilson. Wilson falls down and dies.
GOLDSTEIN: Nobody knows exactly what this was about. There had been some drama. Law had been living with a woman who was married to another man, and Wilson's sister was living in the same building. Maybe that had some 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.
CHILDS: How did he escape from prison? This part I don't - how did he get out?
GOLDSTEIN: 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.
(SOUNDBITE OF MUSIC)
GOLDSTEIN: Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
CHILDS: And I'm Mary Childs. John Law, this murderer convict, does not lie low in Europe, hide out, change his name and devote himself to gardening. Oh, no.
GOLDSTEIN: No. What he does is he transforms an entire nation. He pulls together banks and paper money and creates this giant stock boom. He essentially invents a whole modern economy.
CHILDS: 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.
(SOUNDBITE OF FRANCOIS-MAXIME BOUTAULT AND FREDERIC VITANI'S "PAMPLEMOUSSE")
CHILDS: So John Law is on the lam. He's 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.
GOLDSTEIN: 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.
CHILDS: He's often playing this card game called Pharaoh. 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.
GOLDSTEIN: People are starting to notice this gambler who's getting rich. And 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."
CHILDS: But Law caught a break. The minister wrote in the margin of that letter, he is not suspect; he may remain in peace.
GOLDSTEIN: So John Law's living in Paris. He's 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.
CHILDS: 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.
GOLDSTEIN: John Law knew something about this problem in particular. His father was a goldsmith. And during John Law's lifetime, goldsmiths in Britain were kind of becoming banks. What happened was goldsmiths had safes in their shops, so people started storing the gold with the goldsmiths. Goldsmiths 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 proto paper money. They were money adjacent. 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.
CHILDS: Then the goldsmiths 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.
GOLDSTEIN: 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.
CHILDS: 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 chalice, fractional reserve banking is exactly what you need.
GOLDSTEIN: So John Law is ready to pitch this idea in France. Normally, kind of guy is he, he would just go straight to the top, pitch it to the king. But the king of France at this moment - Louis XV - 5 years old...
GOLDSTEIN: ...Not super into finance or banking. And France at this time is being run by a regent, a duke - the Duke of Orleans - (speaking French) Orleans.
CHILDS: (Speaking French) Orleans.
CHILDS: 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 - John Law.
GOLDSTEIN: 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 bros like John Law.
ANNE MURPHY: 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.
CHILDS: A bank owned and run by John Law...
GOLDSTEIN: And France doesn't really have banks as we know them at this point. Right? It's not a thing in France - banking - like we have banks.
ANNE MURPHY: Not really, no. There's a bit of a suspicion about what banks are and what they can do.
GOLDSTEIN: I mean, there's a suspicion of banks here and now. But we - they exist...
ANNE MURPHY: Yeah.
ANNE MURPHY: (Laughter). Yes. And every country, I think, has to figure out how to make its peace with what banks are and what they do.
CHILDS: So this is step one of John Law's scheme. In 1769, he sets up the first real bank in France. He's jumped from card game banker to actual real banker. It's called the banque generale, 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.
GOLDSTEIN: 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 - 'cause 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 banque generale, 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 Law's paper money to pay their taxes, his paper bills became real money.
CHILDS: 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, Antoin Murphy, for the recap.
ANTOIN MURPHY: 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 great monetary economist to develop from such a figure.
GOLDSTEIN: Depends on your views of monetary economists, maybe.
ANTOIN MURPHY: (Laughter) It sure does. It sure does (laughter), yeah.
CHILDS: Antoin Murphy says John Law really believed that if you build an economy right, everybody can get richer - including but not limited to John Law.
GOLDSTEIN: 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 John Law was gambling in Amsterdam, years earlier, he would have seen what was really the first wildly successful multinational corporation. It was called the Dutch East India Company. There were other companies like this. They were trading companies.
CHILDS: 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.
GOLDSTEIN: 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. It'll come to be called the Mississippi Company. And Law gets the Duke to grant the company a monopoly on trade with all of France's territory in North America.
ANTOIN MURPHY: It's literally half of the landmass of the current United States.
GOLDSTEIN: Not counting Alaska...
ANTOIN MURPHY: And Law, 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, we'll name after you. We'll call it La Nouvelle-Orleans - New Orleans. And suddenly you have New Orleans named after the regent.
CHILDS: Now, there is an important twist here.
GOLDSTEIN: A twist...
CHILDS: 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.
QUINN: But you know, I'm hopelessly focused on...
GOLDSTEIN: OK, OK...
QUINN: ...You know, what's driving the thing. It's government debt.
CHILDS: 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.
GOLDSTEIN: 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.
CHILDS: 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 pay back, and I'll give you a share of my company - a share of all the riches in the New World.
GOLDSTEIN: 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 forks 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.
CHILDS: John Law's 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.
GOLDSTEIN: And John Law and 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.
CHILDS: 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 7 a.m., they rang a bell and banged 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.
ANTOIN MURPHY: And the French are so amazed by what 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 controleur general des finances. Now, it is quite extraordinary. I mean, you could imagine a media headline - Convicted Scottish Murderer Becomes Prime Minister of France and Causes the World's First Stock Market Boom. And he did all of that.
GOLDSTEIN: We didn't talk, by the way, about how rich John Law got.
ANTOIN MURPHY: (Laughter) Yes (laughter). He became extremely rich.
CHILDS: He bought a dozen country estates, several mansions in Paris, a bunch of diamonds, a library of 45,000 books - the true mark of wealth.
ANTOIN MURPHY: And he actually wrote to somebody. And he said, I'm probably the richest man who's ever been. But...
GOLDSTEIN: (Laughter) What could possibly go wrong?
ANTOIN MURPHY: (Laughter) Well...
CHILDS: Everything. That's after the break.
(SOUNDBITE OF MUSIC)
CHILDS: 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.
GOLDSTEIN: 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.
CHILDS: And Law knows this, and he's getting worried. So he makes this really shocking announcement.
GOLDSTEIN: He says the company itself, the Mississippi Company, will buy or sell unlimited quantities of company stock at a fixed price - a 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.
CHILDS: What ends up happening is lots of people sell their stock back to the company, and Law's bank prints more and more paper money to buy back the stock.
GOLDSTEIN: Now France has the opposite problem that it had before 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.
CHILDS: 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.
GOLDSTEIN: People start getting nervous now about Law's scheme. Suddenly everybody wants to go to the bank and turn in their paper money for gold and silver.
ANTOIN MURPHY: 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 pay them. Law said, sorry, (laughter) you can't have that.
CHILDS: 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.
GOLDSTEIN: To try and save it, he makes it illegal in France to possess large amounts of gold or silver coins.
CHILDS: So as if by magic, all the rich people in Paris suddenly had lots of new gold and silver jewelry.
GOLDSTEIN: Then he bans production of any gold object larger than 1 ounce, except for religious purposes.
CHILDS: And then all the rich people in Paris suddenly found religion - started making these big, beautiful gold crosses.
GOLDSTEIN: There's only one thing left for John Law to do.
CHILDS: 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.
GOLDSTEIN: 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 Law's bank. The duke, Law's pal, fired Law, placed him under house arrest. And Law fled France, just like he'd fled England decades earlier. The duke and France gave up on paper money altogether, went back to gold and silver coins.
CHILDS: 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.
GOLDSTEIN: 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.
CHILDS: 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 58th birthday, he died.
(SOUNDBITE OF ASHLEY WARNER, BJORN NILSSON AND JASON TARVER'S "MEET ME IN THE MIDDLE")
CHILDS: You can email us at email@example.com. We are on Facebook, Twitter, Instagram and TikTok at @planetmoney.
GOLDSTEIN: 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.
CHILDS: And I'm Mary Childs.
This is NPR. Thanks for listening.
(SOUNDBITE OF ASHLEY WARNER, BJORN NILSSON AND JASON TARVER'S "MEET ME IN THE MIDDLE")
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