Malcolm Balen - A Very English Deceit - The Secret History of the South Sea Bubble and the First Great Financial Scandal

Instead, it was the ambitious economic theories of the Scottish outcast John Law that helped to change the destiny of the South Sea Company. Under his leadership, France was transforming its fortunes with a speed and skill that George’s indebted government, and the South Sea Company of which he was now head, could only admire and fear. ‘I wish to God,’ complained a despairing British diplomat in France to an under-secretary back home, ‘there may be something done quickly to put our affairs in order before it is too late; and that the great men of Britain would think of something else than merely of tripping up one another’s heels.’

The unthinkable had happened – France was winning the peace. War had been replaced by something which proved to be far more dangerous for Britain: economic rivalry.

Britain’s financial markets are in the grip of an unprecedented stock-buying fever as punters rush to buy almost any share with a whiff of the Internet about it. The City has been caught on the hop and cannot cope with the surge in demand. People report spending up to a day waiting for a free line to some stockbrokers and then having to wait up to an hour more before it is answered. The City regulator is right to warn people of the risks, but that won’t be enough to stem this get-rich-quick boom as punters everywhere stake their claims to some of the instant fortunes made by Internet start-up companies.Guardian , 11 December 1999

After the Scottish Parliament’s rejection of his dream of introducing paper money, John Law had escaped once more across the Channel, only pausing in his flight, or so it is recounted, to win an estate worth more than £1,000 a year by gambling. True or not, it would have been of little comfort to him, for there is no doubting the severity of the setback Law had suffered. He was clearly condemned to a life of permanent exile unless the union of England and Scotland failed or the Act of Settlement, which excluded the exiled Catholic James II from the throne, was overturned, for only a political sea-change, it seemed, could now grant him passage home. This was painful enough, but equally hurtful was the knowledge that his cogent analysis of the benefit paper money could bring to a country might not now be put into practice. Law was not only physically in exile, he was in intellectual exile too, fated to be a perpetual academic rather than a participant, forever denied the chance to put his certitude into practice.

So sure was Law that his intellectual vision was accurate, however, that he determined to succeed despite the hand he had been dealt. Just as he had developed a system at the gaming tables that had made him personally wealthy, so he was certain that his system for a whole country would bring it riches too. Neither activity, in his own mind, was a gamble: in both cases his system was a certainty. An enlightened ruler, he was sure, would share his vision, and accordingly he had set out across Europe to try to find a country more amenable to his project. If his homeland could not see the merits of his proposals then he would show what it was missing: as a patriot, he had done his best to convince his own people to take up his ideas.

For nine years, from 1706 to 1715, Law had trudged across Europe, vainly trying to convince a succession of monarchs and ministers to back him with their money. Until 1713, the closest he came to success was in Turin, where he suggested to the Duke of Savoy, Victor Amadeus that he should be allowed to establish a state bank in Savoy-Piedmont. He designed a bank that would issue paper notes and also act as a trading corporation to buy and sell property. It would lend money at a fixed rate of interest and the gold and silver in the ducal treasury would act as its reserves, backing, in tangible form, the authority of Law’s paper currency, which would bear the royal coat of arms. To guard against inflation, Law ruled that there must be a strict ratio between the notes in circulation and the reserves. While the bank would have the power to print notes, he declared that the vaults must never hold less than three-quarters of the value of the paper money it had released into the world beyond.

Victor Amadeus was easily swayed by Law and took little convincing, but the project ran into immediate political difficulties. The powerful finance minister objected, and when the Duke was forced to back down Law once more packed his bags and took off in search of a country that would adopt his system: first, it is said, to Vienna to try to convince the Emperor of his plans; then to The Hague, where he applied his mind, successfully, to making as much money as possible from the state lotteries; finally, in the summer of 1713, he reached France with a fortune put at more than 1.5 million livres. (There were about 14 livres to the £.)

France would be the making, and the breaking, of John Law and his project. The country’s economy was, if anything, in a worse state than England’s. Two wars lasting more than a quarter of a century had left it crippled. In 1715, after the War of the Spanish Succession had ended, the national debt was as high as three billion livres , and the budget rejected all attempts to persuade it to balance. The failure added another eighty or ninety million livres a year in interest payments to the runaway overspend, and the government was living hand to mouth. It could keep going only by anticipating its revenue, begging for advances on future taxes it would levy – and already taxes had been committed three or four years in advance. Louis XIV was forced into the humiliation of borrowing eight million livres from one of the country’s leading financiers, Samuel Bernard, for thirty-two million livres’ worth of credit notes. So dire was its predicament that a full two-thirds of the nation’s running costs were met either by the time-honoured practice of selling offices or by borrowing money. But the King could not pay his creditors and they, in turn, could not pay anyone else. One contemporary commentator wrote that ‘the shortage of credit was universal, trade was destroyed, consumption was cut by half, the cultivation of lands neglected, the people unhappy, the peasant badly dressed and nourished’. Some of the country’s representatives abroad had not been paid regularly for years, nor had they much prospect of ever seeing their money: the finance minister suggested it would take eleven years to balance the books. Indeed, so parlous was the state of the nation’s finances that the Council of Regency, presided over by the Duke of Orleans, which ran the country on the death of Louis XIV, had even considered declaring the state bankrupt.

Before Louis XIV died Law had presented him with plans for a state bank to issue paper money along the lines of the bank he had so nearly established for Victor Amadeus in Turin. He would pay off the national debt by issuing stock, with the shares to be redeemed after twenty-five years, and he promised to cut interest rates from 7 per cent to 5 per cent. Few gamblers, if any, can break a bank; fewer still can create one with wealth gained from the tables. But Law offered to pay for the cost of establishing the bank himself, from his gambling riches, and to give half a million livres to the poor if the project failed. Perhaps with his rejection by the Scottish Parliament in mind, he also declared he would restore French credit to a higher level than that of Great Britain. So hopeful was he of a positive outcome to his proposals that he had even drafted the letters patent authorising the bank’s creation for the King to sign. But Louis had turned him down.

On Louis’s death, power passed to the Duke of Orleans, who, as Regent, held the throne on behalf of the child-king, Louis XV. The Duke was more amenable to Law’s project than the late King had been, and perhaps more realistic too about the condition of the country and the stark choices it now faced. His finance minister opined that ‘we have found matters in a more terrible state than can be described; both the King and his subjects ruined, nothing paid for several years past and confidence entirely gone’. Desperate times needed desperate measures. On 1 May 1716, Law was finally offered the chance he had been seeking for most of his adult life. A decade after his rejection in Edinburgh, he was given the opportunity to put his ideas into practice. Now in his forties, he was no longer a young gambler, but well on the way to statesmanship.