King William’s administration came up with a novel answer: borrow a huge sum of money, and use taxes to pay back the interest over time. In 1694, the English government borrowed 1.2 million pounds at a rate of eight per cent, paid for by taxes on ships’ cargoes, beer, and spirits. In return, the lenders were allowed to incorporate themselves as a new company, the Bank of England. The bank had the right to take in deposits of gold from the public and—a second big innovation—to print “Bank notes” as receipts for the deposits. These new deposits were then lent to the King. The banknotes, being guaranteed by the deposits, were as good as gold money, and rapidly became a generally accepted new currency.

This system is still with us, and not just in England. The more general adoption of the scheme, however, was not a story of uninterrupted success. Some of the difficulties are recounted in James Buchan’s fascinating “John Law: A Scottish Adventurer of the Eighteenth Century.” Law was the Edinburgh-born son of a goldsmith turned banker. He moved to London in 1692, where he observed the wondrous new scheme of government paid for by long-term debt and paper money. One of the most significant effects of the paper money was the way it stimulated borrowing and lending—and trading. Law had an instinctive understanding of finance and a love of risk, and it is tempting to wonder what would have happened if he had lent his services to the English government. Instead, on April 9, 1694, a different fate was set in motion. He killed a man in a duel, or brawl—the distinction, as Buchan explains, was not all that clear. “Duels then were not the tournaments of the Middle Ages or the affairs of honour of later years, governed by written codes of conduct and discharged at dawn with pistols in some snowy forest clearing,” he writes. They might be conducted “with rapiers or short swords in hot or barely cooling blood, sometimes with seconds drawn and fighting, and shading away into assassination and armed robbery.” Law was sent to prison to await a murder trial. He used his connections to get out, as prisoners of means did, and fled abroad as an outlaw.

Law spent the next few years knocking around Europe, learning about gambling and finance, and writing a short book, “Money and Trade Considered,” which in many respects foreshadows modern theories about money. He became rich; like Littlefinger in “Game of Thrones,” Law seems to have been one of those men who had the knack of “rubbing two golden dragons together and breeding a third.” He bought a fancy house in The Hague and made a close study of the many Dutch innovations in finance, such as options trading and short selling. In 1713, he arrived in France, which was beset by a problem he was well suited to tackle.

The King of France, Louis XIV, was the preëminent monarch in Europe, but his government was crippled by debt. The usual costs of warfare were added to a huge bill for annuities—lifelong interest payments made in settlement of old loans. By 1715, the King had a hundred and sixty-five million livres in revenue from taxes and customs. Buchan does the math: “Spending on the army, the palaces and court and the public administration left just 48 million livres to meet interest payments on the debts accumulated by the illustrious kings who had gone before.” Unfortunately, the annual bill for annuities and wages of lifetime offices came to ninety million livres. There were also outstanding promissory notes, amounting to nine hundred million livres, left over from various wars; the King wouldn’t be able to borrow any more money unless he paid interest on those notes, and that would cost an additional fifty million livres a year. The government of France was broke.

In September of 1715, Louis XIV died, and his nephew the Duke of Orleans was left in charge of the country, as regent to the child king Louis XV. The Duke was quite something. “He was born bored,” the great diarist Saint-Simon, a friend of the Duke’s since childhood, observed. “He could not live except in a sort of torrent of business, at the head of an army, or in managing its supply, or in the blare and sparkle of a debauch.” Facing the financial crisis of the French state, the Duke started listening to the ideas of John Law. Those ideas—more or less orthodox policy today—were wildly original by the standards of the eighteenth century.

Law thought that the important thing about money wasn’t its inherent value; he didn’t believe it had any. “Money is not the value for which goods are exchanged, but the value by which they are exchanged,” he wrote. That is, money is the means by which you swap one set of stuff for another set of stuff. The crucial thing, Law thought, was to get money moving around the economy and to use it to stimulate trade and business. As Buchan writes, “Money must be turned to the service of trade, and lie at the discretion of the prince or parliament to vary according to the needs of trade. Such an idea, orthodox and even tedious for the past fifty years, was thought in the seventeenth century to be diabolical.”

This idea of Law’s led him to the idea of a new national French bank that took in gold and silver from the public and lent it back out in the form of paper money. The bank also took deposits in the form of government debt, cleverly allowing people to claim the full value of debts that were trading at heavy discounts: if you had a piece of paper saying the king owed you a thousand livres, you could get only, say, four hundred livres in the open market for it, but Law’s bank would credit you with the full thousand livres in paper money. This meant that the bank’s paper assets far outstripped the actual gold it had in store, making it a precursor of the “fractional-reserve banking” that’s normal today. Law’s bank had, by one estimate, about four times as much paper money in circulation as its gold and silver reserves. That is conservative by modern banking standards. A U.S. bank with assets under a hundred and twenty-four million dollars is obliged to keep a cash reserve of only three per cent.

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The new paper money had an attractive feature: it was guaranteed to trade for a specific weight of silver, and, unlike coins, could not be melted down or devalued. Before long, the banknotes were trading at more than their value in silver, and Law was made Controller General of Finances, in charge of the entire French economy. He also persuaded the government to grant him a monopoly of trade with the French settlements in North America, in the form of the Mississippi Company. He funded the company the same way he had funded the bank, with deposits from the public swapped for shares. He then used the value of those shares, which rocketed from five hundred livres to ten thousand livres, to buy up the debts of the French King. The French economy, based on all those rents and annuities and wages, was swept away and replaced by what Law called his “new System of Finance.” The use of gold and silver was banned. Paper money was now “fiat” currency, underpinned by the authority of the bank and nothing else. At its peak, the company was priced at twice the entire productive capacity of France. As Buchan points out, that is the highest valuation any company has ever achieved anywhere in the world.

It ended in disaster. People started to wonder whether these suddenly lucrative investments were worth what they were supposed to be worth; then they started to worry, then to panic, then to demand their money back, then to riot when they couldn’t get it. Gold and silver were reinstated as money, the company was dissolved, and Law was fired, after a hundred and forty-five days in office. In 1720, he fled the country, ruined. He moved from Brussels to Copenhagen to Venice to London and back to Venice, where he died, broke, in 1729.