Millionaire_ The Philanderer, Gambler, and Duelist Who Invented Modern Finance Part 1

Millionaire.

The Philanderer, Gambler, and Duelist Who Invented Modern Finance.

by Janet Gleeson.

INTRODUCTION.

Within the last twenty years commerce has been better understood in France than it had ever before been, from the reign of Pharamond to that of Louis XIV. Before this period it was a secret art, a kind of chemistry in the hands of three or four persons, who actually made gold, but without communicating the secret by which they had been enriched. . . . It was destined that a Scotchman called John Law should come into France and overturn the whole economy of our government to instruct us.

Voltaire, "Essay on Commerce and Luxury"

MONEY HAS EVER POSED PROBLEMS. NOT EVEN LOVE, said Gladstone, has made so many fools of men. Throughout time the most obvious but universal dilemma-that there is never enough of it-has confounded everyone, from mendicants to monarchs, and their ministers.

Rarely, however, had the problem seemed more pressing than it did in the late seventeenth century. Money, as most people had always understood it, was silver or gold-precious metals whose value lay in their intrinsic scarcity. But the fact that coin supplies were limited by the metal that could be dug out of the ground was proving a serious hindrance. Throughout Europe, warfare of vast scale and expense coupled with the extravagant lifestyles of kings had emptied entire treasuries. At the same time the growing population, expansion of trade, and colonization of foreign lands demanded more cash to progress. As rulers plotted invasions, perused peace treaties, and yearned to sponsor new industry, build new palaces, and develop their domains overseas, money and how to create more of it became an obsession. In an age poised between superst.i.tion and enlightenment, it became as fas.h.i.+onable to ponder the subject that would soon be christened political economy as the disciplines of philosophy, mathematics, and nature. While on the one hand alchemists strove futilely to turn base metal into gold, on the other entrepreneurs proposed a plethora of ingenious schemes to sidestep the shortage. At the lowliest level, small-change coins made from base metal alleviated the dearth of coins in the streets. On a grand scale, banks and joint-stock companies used the magical device of credit to fund royal debts and colonial expansion by issuing paper banknotes and shares of token rather than intrinsic worth. Thus the frustrating limitations of gold and silver evaporated, but a new, even more baffling problem emerged: the question of how to maintain public confidence in the value of intrinsically valueless paper.

Among monetary philosophers and innovators to confront the problem, John Law stands alone as the most improbable, controversial, yet visionary of financial heroes. He was big in every sense, over six feet tall with ambitions that were larger and more daring than anyone else's. On one level his story is the stuff of romantic legend. He turned his attention to finance after killing a man in a duel over an unfortunate liaison and escaping prison to save his neck. A congenial gambler, prepared to punt on the turn of a card yet burning with mathematical brilliance, he exuded a glamorous, dangerous magnetism. Women were spellbound by his impeccable dress, charming manner, and s.e.xual charisma. Men were intrigued by the ease with which he was able to demystify complex subjects, his nonchalant wit, and his willingness to linger for hours over games of cards and dice. But his ideas and actions invest his life with far more significance than that of a beguiling and ambitious playboy: the things Law made happen still have resonance today.

In an ironic reversal of the concept of the philosopher's stone (the substance by which it was believed gold could be made from base metal), he founded the first national bank of issue in France that made money from paper on a previously unknown scale to revive the ailing economy. He formed the most powerful conglomerate the world had yet seen-the Mississippi Company-and encouraged unprecedented numbers of private investors to dabble in its shares. Once initial hesitation had been banished, investors from England, Germany, Holland, Italy, and Switzerland stampeded to Paris to play the markets, and share prices rose from 150 livres to 10,000 in a matter of months. In comparison, the best bull markets of the twentieth century, between 1990 and 1999, when the Dow Jones rose by 380 percent and the Nasdaq by 790 percent, seem paltry. Law sparked the world's first major stock-market boom, in which so many made such vast fortunes that the word "millionaire" was coined to describe them. Almost overnight he had become rich beyond expectation, a heroic figure, feted throughout Europe, and promoted in recognition of his achievement to the position of France's financial controller-the most powerful public position in the world's most powerful nation.

Pioneers, so they say, usually end up with arrows in their backs. In Law's case, enemies, inexperience, greed, and destiny conspired against his unconventional genius. The idea that money could be made from speculation rather than drudgery was printed indelibly on the popular consciousness. But having made their fortunes, many began to look for alternative investments, or to feel that paper was no long-term subst.i.tute for more traditional, tangible a.s.sets. When speculators began to cash in shares and withdraw paper funds to buy estates, jewels, or gold, or to speculate in other escalating foreign share markets, Law, hampered by jealous rivals, was unable to hold back the tide and the stock plummeted as rapidly as it had risen. People who rushed to the bank to convert paper back into coin found insufficient reserves and were left holding an a.s.set that had become virtually worthless.

Over half a million people, equivalent to two-thirds of the entire population of the city of London at the time, claimed to have lost out as a result of John Law. Having sparked the first international stock-market boom, he had also sparked the first international bust. As loudly as he had been lauded a financial savior months earlier, he was branded a knave and ign.o.bly demoted. Sadder, wiser, immeasurably poorer, he spent the rest of his life unsuccessfully trying to convince the world of his integrity, and that the idea behind his schemes was sound. His fall cast long shadows. It was eighty years before France dared again to try to introduce paper money to its economy. For years afterward history judged Law harshly. In the story of money, the chapter on his life embodies the perils of paper, the monumental significance of his economic foresight largely negated by his ultimate failure.

Today, if John Law or his critics could witness commerce conducted in any mall with credit cards, banknotes, and checks-not a gold or silver coin in sight-they would see, incontrovertibly, his vision achieved, but recognize also the same inherent weakness. The survival of any credit-based financial system still hinges on public confidence in a way that one based on gold does not. Spectacular financial breakdowns have peppered history ever since the advent of paper credit.

The American investment guru Warren Buffett once said, "If history books were the key to riches the Forbes 400 would consist of librarians." Nevertheless, three centuries after John Law delighted, then devastated investors in his Mississippi stock, an age of comparably varied and ambitious financial innovation unfolds-witness the introduction of the euro, the opportunity to trade shares on the Internet, and a panoply of monetary instruments, from foreign-currency mortgages to inventive use of derivatives in equity, bond, and currency markets. In such a world Law's story still holds uncanny relevance.

During the period covered in this book English and French currency was based on a similar structure: 240 pennies or deniers = 20 s.h.i.+llings or sous = 1 pound or livre tournois. Coins in common use in France included the gold louis d'or and the silver ecu, which were measured and varied widely against the value of the livre. Another common coin was the pistole, a Spanish silver coin worth approximately 10 livres. Exchange rates also varied enormously: a livre was worth between a s.h.i.+lling and 1s. 6d. According to the Bank of England a pound in 1720 is equivalent to about 73 (US$117) today. Therefore a sum quoted in livres can be converted to its approximate equivalent in dollars today by halving it, then multiplying by twelve.

1.

A MAN A APART.

He came to Paris, where he cut such a fine figure that he held the bank at Faro. He usually played at the house of a famous actress, where they played for high stakes, although he was in as great demand with Princes and Lords of the first order, as in the most celebrated academies, where his n.o.ble manners and even temper, distinguished him from other players.

Barthelemy Marmont du Hautchamp, Histoire du systeme de finances (1739)

IT IS AN EVENING IN N NOVEMBER 1708 1708 IN THE IN THE P PARISIAN salon of Marie-Anne de Chateauneuf-"La Duclos"-a celebrated actress of Paris's Comedie Francaise, and as usual she is entertaining Parisian society. Despite the l.u.s.trous presence of sundry salon of Marie-Anne de Chateauneuf-"La Duclos"-a celebrated actress of Paris's Comedie Francaise, and as usual she is entertaining Parisian society. Despite the l.u.s.trous presence of sundry ducs, marquis, ducs, marquis, and and comtes, comtes, talk is uncharacteristically desultory. France is in the throes of the world's first global war, the War of Spanish Succession, which has raged already for seven years and will endure for another six. This country, the most powerful and populous in Europe, has been ruined by the perpetual conflict. But this coc.o.o.ned Parisian circle is scarcely conscious of it: the talk is not of the devastating defeats France has suffered at the battles of udenaarde, Turin, Ramillies, and Blenheim. It focuses instead on the move of the elderly Louis XIV, the Sun King, and his court from Versailles to Marly, and the love affairs of the fascinating but apricious Duc d'Orleans. talk is uncharacteristically desultory. France is in the throes of the world's first global war, the War of Spanish Succession, which has raged already for seven years and will endure for another six. This country, the most powerful and populous in Europe, has been ruined by the perpetual conflict. But this coc.o.o.ned Parisian circle is scarcely conscious of it: the talk is not of the devastating defeats France has suffered at the battles of udenaarde, Turin, Ramillies, and Blenheim. It focuses instead on the move of the elderly Louis XIV, the Sun King, and his court from Versailles to Marly, and the love affairs of the fascinating but apricious Duc d'Orleans.

Those who find these topics less than engaging are drawn instead to the cl.u.s.ter of players engrossed in a card game, faro. Most are habitues of the tables-at this level of society everyone knows everyone else-but among them one man stands apart. He is fas.h.i.+onably clad as one would expect in a wideskirted velvet coat, unb.u.t.toned to reveal a damask waistcoat and cravat of Brussels lace, while a periwig of black curls cascades over his shoulders. But at over six feet tall-a remarkable stature in these diminutive days-he is a man of grand and imposing looks that according to one acquaintance "places him among the best made of men." Amid the twitchy players, he is also remarked for his gentle and insinuating manners, a serenity of temperament that amply reflects his outward appearance.

During a lull in play La Duclos proudly presents the stranger as John Law, a Scottish gentleman visiting Paris. Her guests soon realize, however, that although Law is as charming and witty as he is physically attractive, he's reticent when questioned on his circ.u.mstances. They also discover, as the evening progresses, that he is a master gambler.

According to the rules of the game, the players must defeat a single opponent, the talliere, or banker, to win. This evening Law has been permitted to pit his wits against the rest and adopt the solitary role of opponent. He is the bank. As the stakes grow higher, the players' mood s.h.i.+fts from studied composure to overt unease, and a crescendo of voices pledge increasingly reckless sums. But no matter how great the amount at risk, Law never relinquishes control over his outward expression.

Each player chooses one, two, or three from a deck of cards on the table before them, using gold louis d'or as their stake. Slowly the croupier takes his pack, discards the uppermost card, plays the next two-the loser and the winner-and places them in front of him. Winning depends on players having selected the same number as the second card dealt by the croupier (suits are irrelevant), so long as he does not deal two cards of the same face value, in which case the banker also wins. The dealing continues, players betting on every draw until three cards remain. The room is transfixed for the final turn, when the players must guess the cards in order of appearance. Inevitably, Law triumphs over most. He scoops the gold coins he has acc.u.mulated into the leather purses he has brought with him, leaving the losers, ruefully, to review their depleted wealth. Once again he has apparently defied the laws of chance and emerged spectacularly victorious.

Few among those present perceive that he has been a.s.sisted by anything more than unusual good fortune. Years later his closest acquaintances, such as the Duc de Saint-Simon, failed fully to understand his gaming victories, and described him as "the kind of man, who without ever cheating, continually won at cards by the consummate art (that seemed incredible to me) of his methods of play." In fact, success on this scale has almost nothing to do with luck or consummate art but lay in ensuring that the odds are stacked heavily in his favor. Even when not in the lucrative role of banker, by marshaling a remarkable mathematical intellect and employing his understanding of complex probability theory, of which few are aware, Law was able to measure with astonis.h.i.+ng accuracy the likelihood that a given card would appear. To him there was little doubt about the evening's outcome.

Not far from the opulent interior of La Duclos's salon, in a plain but comfortably appointed apartment of the Benedictine Priory in Faubourg St. Antoine, was one of the few men in Paris to whom John Law's success was of pressing concern. Marc Rene de Voyer de Paulmy, Marquis d'Argenson, Paris's superintendent of police, was as physically unattractive as Law was outwardly engaging, with sallow skin and deep-socketed eyes. He was noted chiefly for his "subtle mind" and "natural intelligence," and his business-others' secrets-was a metier at which he excelled. As the eagle-eyed Duc de Saint-Simon remarked, "There was no inhabitant [of Paris] whose daily conduct and habits he did not know."

D'Argenson relished sophisticated company and felt easy in the elite world to which John Law's gaming skills had given him access. During the decade he had held his position, Law's sporadic appearances and extraordinary successes had grown increasingly perturbing. D'Argenson was convinced that John Law was filling some secret role for the British, or that he const.i.tuted some other even more insidious threat. His unease deepened when, despite every attempt to find out more about Law, intelligence was discovered to be worryingly spa.r.s.e. Some said he was a fugitive from British justice, that he had escaped from prison, where he had been sentenced to death by hanging for killing a man. His fortune was variously rumored to have come from gaming tables in Vienna, Rome, Venice, Genoa, Brussels, and The Hague, or from an inherited Scottish estate. But all this was hearsay and speculation. A year earlier, when d'Argenson discovered Law intent on masterminding a dangerous scheme that might undermine France's economy-the introduction of paper money to France-he had expelled him from Paris. Now the King's foreign minister, the Marquis de Torcy, had informed him that not only was Law back without a pa.s.sport but that "his intentions are not good," and that "he is serving our enemies as a spy." Torcy was worried and wanted to know more. D'Argenson, equally disturbed, had attempted for some weeks to track Law down. The quarry had proved elusive.

2.

GILDED Y YOUTH.

In an island near the Orcades a child was born, whose father was Aeolus G.o.d of the winds, and whose mother was a Caledonian nymph. He is said to have learned all by himself to count on his fingers, and, at four years of age, to have been able to distinguish between the different metals so exactly that when his mother tried to give him a ring made of bra.s.s, instead of gold, he realized that it was a trick and threw the ring on the ground.As soon as he was fully grown his father taught him the secret of catching the wind in balloons, which he then sold to travelers. However, since his wares were not greatly appreciated in his own country, he left, and began to lead a wandering life in the company of the blind G.o.d of chance.

Montesquieu, Persian Letters (1721) (1721)

THERE IS LITTLE IN J JOHN L LAW' S BACKGROUND TO SUGGEST the professional gambler, seducer, murderer, adventurer, or international celebrity he would one day become. His family originally came from Lithrie in Fifes.h.i.+re, Scotland, and for generations had followed careers as men of the Church. John Law's great-grandfather, Andrew, and his grandfather, John Law of Waterfut, after whom he was named, were both ministers of Neilston, a small, unremarkable village in Renfrews.h.i.+re. the professional gambler, seducer, murderer, adventurer, or international celebrity he would one day become. His family originally came from Lithrie in Fifes.h.i.+re, Scotland, and for generations had followed careers as men of the Church. John Law's great-grandfather, Andrew, and his grandfather, John Law of Waterfut, after whom he was named, were both ministers of Neilston, a small, unremarkable village in Renfrews.h.i.+re.

Long-standing clerical family tradition was not, however, inviolate. During the Civil War and Commonwealth, Presbyterian extremism was ruthlessly enforced in the Scottish Church. John Law of Waterfut was too tolerant to fit in with the prevailing mood and in 1649 was ousted from his post "for inefficiency." Bereft of home and income, and with no profession to pa.s.s on to his two young sons, he was left with little alternative but to seek employment in Edinburgh.

Writing of the city, which he visited toward the end of the century, the English chaplain Thomas Morer observed that it was "very steepy and troublesome, and withall so nasty (for want of bog houses which they very rarely have) that Edinburgh is by some likened to an ivory comb, whose teeth on both sides are very foul." Daniel Defoe described it as a place of "infinite disadvantages," that "lies under such scandalous inconveniences as are, by its enemies, made a subject of scorn and reproach; as if the people were not as willing to live sweet and clean as other nations, but delighted in stench and nastiness." In other words, it was like most other large cities of the time: a foul, stinking metropolis-stark contrast to the uncontaminated though bleak country ministry of Neilston.

The transition to such an environment was for Minister Law and his family painful and distressing. The city was recovering from the ravages of the worst plague in its history that had left it "never in a more miserable and melancholy situation than at present." Pestilence, coupled with draconian Commonwealth rule, had depleted the population, provoking mounting poverty and dwindling trade. For the next decade the family lived a hand-to-mouth existence while their father tried to secure a pension from the Church and find a suitable occupation for his two young sons, John and William. There was an obvious solution to the second dilemma: members of the Law family not involved in the Church had been goldsmiths since the early sixteenth century, and with the help of family contacts, soon after their arrival in Edinburgh, the two young Laws were apprenticed to prominent goldsmiths. In the late seventeenth century the profession enjoyed an elevated status that set goldsmiths apart from most other craftsmen. As well as fas.h.i.+oning jewels, trophies, and household valuables, many had developed an even more valuable and influential sideline business as money dealers.

Money, perhaps more than any other human artifact, has a multiplicity of meanings. To a modern layman's eye it might signify security, power, luxury, freedom, temptation. But its more prosaic prime function, economists tell us, is as a medium of exchange. Without it we would be forced to barter for anything we could not provide for ourselves. Money lets us separate the buying of one thing from the selling of another. It means we need not swap eggs for oranges, carpets for bricks, a book for a bowl of rice. Almost anything can and has served as money: a herd of cows, a wife or two, a bundle of tobacco leaves, a pouch of sh.e.l.ls. Form matters little; what counts is that both buyer and seller trust that if they exchange it for whatever goods or services they are selling, it will hold its value and, at some later stage, they will be able to buy something else with it.

Of all money's chameleon masks, gold and silver are its most recognizable, widespread, and enduring. Ancient Mesopotamians used precious metals according to standards set by the king and the temple and invented the earliest forms of writing to keep accounts; Egyptians measured their pharaoh's wealth or a servant's worth in Nubian gold, silver, and copper ingots and slivers. In ancient Greece gold and silver were similarly esteemed. Herodotus claimed that the first coins-pieces of metal of a standard weight and fineness-were invented in the sixth century B.C. B.C., in ancient Lydia, the kingdom of Croesus, whose name still signifies riches beyond compare. In fact, archaeologists have since discovered coins from a century earlier used by Ephesians, and that coins were similarly employed by Greeks in the realm of Ionia.

Banking, too, had its origins in the ancient past. The first bankers lived three millennia ago in the ancient city of Babylon, a site in modern Iraq; in ancient Athens in the fifth century B.C. B.C., there were bankers who changed foreign visitors' money and accepted deposits, and in ancient Rome money lending bankers wielded huge political clout. The first modern banking inst.i.tutions were born in the great medieval Italian trading cities of Genoa, Turin, Pisa, and Milan. The word "bank" comes from the Italian banco, banco, meaning the bench used by money dealers. But in a world in which coin was made from precious metals, the system's overriding disadvantage was that sources of precious metals were finite, whereas greed and aspiration were not. meaning the bench used by money dealers. But in a world in which coin was made from precious metals, the system's overriding disadvantage was that sources of precious metals were finite, whereas greed and aspiration were not.

A breakthrough came with what the eminent economist J. K. Galbraith has called "the miracle of banking": the discovery of credit. If money was lodged in a bank vault for safe-keeping, the person who owned it could take away a piece of paper testifying to his owners.h.i.+p of the sum, which he could use as a form of currency, while the guardian of the cache could lend part of it to others (keeping some reserve to pay to those who wanted to withdraw their deposits for whatever reason) and profit by charging interest for the service he offered. In this way money could be multiplied and the problems of limited supplies of gold and silver overcome. The only pitfall was an outside event that intervened to make everyone want to withdraw their deposits at once. Then the guardian of the treasure would find himself unable to repay the depositors because the reserves would be exhausted-much of their money would still be on loan and therefore inaccessible-and he would be bankrupt. Thus, it was realized, political stability and healthy reserves were the key to successful money dealing.

Britain was far from enlightened when it came to credit. Moneylending for profit was called usury, a crime against G.o.d; its perpetrators were hanged, drawn, and quartered. During medieval times the trade was thus monopolized by foreigners, first by Jews and later by entrepreneurial gold merchants from Italy, known as the Lombards. In London, the early Italian financiers were permitted to lend and trade in money, provided they confined themselves and their businesses to a London street that still bears their name. Lombard Street remains to this day at the heart of international financial dealing. Many of the Lombards who set up their businesses in medieval London were also goldsmiths, using surplus bullion to make objects from which they could also profit, and after the relaxation of the usury laws in the mid-sixteenth century, English goldsmiths began to join the lucrative business. The so-called "father of English banking," Sir Thomas Gresham, broke new ground with his sophisticated moneylending business, which operated at the Sign of the Gra.s.shopper in Lombard Street, offering loans to private individuals and the Crown at set rates of interest, paying interest on deposits, arranging bills of exchange, and dealing in coin and bullion. Largely by such services he became one of the most powerful courtiers of Henry VIII, Edward VI, Mary I, and Elizabeth I. Much of the vast fortune he acc.u.mulated was kept in gold chains wrapped around his body; he detached a link or two to serve as cash when he needed it.

By the late seventeenth century, wars, wages, burgeoning commerce, a growing population, and expanding overseas trade had combined to create a vast demand for credit throughout Europe. In England and Scotland, goldsmiths continued to dominate the field of money. In colonial America the situation was even worse. No sizable indigenous supply of silver and gold had been found, and colonist settlers had to rely on official British currency-and on numerous foreign coins to supplement it. So drastic was the shortage of coin that a variety of alternatives ranging from furs to maize, rice, tobacco, indigo, and sh.e.l.ls were inst.i.tuted. Money made from a type of clamsh.e.l.l known as wampum was one of the most popular alternatives. Already in widespread use by American Indians, wampum became legal tender in several colonies. Six beads were worth a penny in seventeenth-century Ma.s.sachusetts, and in New York, the building of the citadel was paid for with a loan of wampum. The currency was noted by European settlers to have a convenient additional purpose-as well as buying and selling it, you could use it to stop nosebleeds.

By the time that John Law of Waterfut apprenticed his sons to goldsmiths, money dealing had grown sophisticated and the most successful goldsmith bankers commanded notable power and influence, parading the chilly, malodorous streets of Edinburgh clad conspicuously in scarlet cloaks and c.o.c.ked hats. To the recently impoverished father, life as goldsmiths promised his sons financial security and elevated social status. William, the younger, was apprenticed to George Cleghorne and seems quickly to have made the most of his opportunities; in 1661, as he was nearing the end of his training, the bond between master and favored pupil was formally acknowledged when William married Cleghorne's nineteen-year-old daughter, Violet. A few months later William qualified as a goldsmith and set up his own business.

William Law's new shop was surrounded by similar premises and stood close by the Goldsmiths' Hall, to the south of St. Giles, the hub of Edinburgh's commercial district. s.p.a.ce was at a premium. "In no city in the world," Defoe wrote, "do so many people live in so little room as at Edinburgh." Goldsmiths' shops to the north of the square were little more than tall narrow buildings, known as luckenbooths, made of wood with projecting superstructures that hung out over the street. Law's was grander, but still cramped. Ground-floor s.p.a.ce might have measured only seven feet square, yet this and similar buildings telescoped up several stories. Family life went on in upper rooms, while below pride of place was given to the tools of the trade: the forge, bellows, and crucibles where the precious molten metal would be raised and wrought into spoons, tankards, rings, church plate, or intricate drinking cups formed from silver-mounted nautilus sh.e.l.ls.

The Laws' nuptial bliss was short-lived. Within a year of their marriage Violet died giving birth to a baby son, who died not long after; a mortal legacy, perhaps, of Edinburgh's unsanitary conditions. A year later, the widowed William's affections were recaptured by Jean Campbell, the formidably intelligent and robust twenty-three-year-old daughter of a prosperous merchant from Ayrs.h.i.+re; she became his second wife. With her dowry William expanded his business and acquired a second shop. He and Jean had twelve children-seven sons and five daughters-only four of whom survived childhood. John Law, the child destined to become the financial wizard of his age, was their fifth child and eldest surviving son. He was born, l.u.s.ty, large, and bonny, in April 1671, in one of the cramped rooms perched high above the goldsmith shop in Edinburgh.

For his father, the arrival of a healthy heir must have seemed a crowning moment in a stellar career. A year before John was born, William's preeminence among goldsmiths had been acknowledged when he was appointed a.s.say master for Edinburgh, responsible for supervising the testing and hallmarking of silver and gold objects made within the city precincts. In 1674, when the Scottish Parliament tasked a commission to report on the Royal Mint, he was called in to advise-further evidence of the esteem in which he was held in the city; the following year he was promoted to Dean of the Goldsmiths of Edinburgh.

William Law was as ambitious for his children as for himself. Adamant that John should have every opportunity that his father's misfortunes had denied him, William ensured that John was raised and educated as a gentleman. According to John's early biographers-who may have been following the fas.h.i.+on for investing the famous with special qualities as young children-he was noted almost immediately for his intelligence and outstanding apt.i.tude for numbers.

He grew up in a rapidly changing city. When John Law was eight, he was witness to the pomp and ceremony that attended the appointment of the King's brother, James, Duke of York, as viceroy of Scotland. With James's arrival, the city savored a limited period of renewal. Holyrood Palace became the focus of grand entertainments: "vast numbers of n.o.bility and gentry . . . flocked around the Duke and filled the town with gaiety and splendour," recorded the historian Robert Chambers. As young John learned to read and solve elementary mathematical problems, James pushed the city toward modernity: the Merchant Company was founded, the physic garden extended, coffeehouses opened, an attempt made at street lighting, and, in the following years, a new Exchange in Parliament Square was built.

Amid these developments William Law's moneylending business flourished. Alert, quick-witted, and perceptive, John was fascinated by the lucrative financial business his father was building, as he watched deals struck over stoops of ale supped within the shadowy confines of John's coffee shop or the ancient baker's Baijen Hole. His curiosity was sparked by the skills of the craftsmen his father employed, while his love of the arts and patronage of craftsmen perhaps sprang from watching sheet metal formed into works of exquisite beauty.

By 1683, when John was twelve, his father's wealth was enough to establish him as a man of substance. He acquired Lauriston Castle, a three-story fortified building with two corbeled turrets that had been built by Archibald Napier in the late sixteenth century, and 180 acres of land fringing the southern sh.o.r.e of the Firth of Forth. But before the family could move from the confines of Parliament Close and take up residence on their estate, tragedy struck.

Years of hard work had taken their toll on William's health. Now in his middle years and at the peak of his success, he was stricken by agonizing abdominal pains, which occurred with increasing regularity, and he was diagnosed as suffering from stones in his bladder, a common seventeenth-century complaint. Soon after he had bought Lauriston he left Edinburgh for Paris, a city so famous for pioneering advances in this field and "men well practised in the cutting for it" that several leading hospitals displayed chests filled with the stones they had removed-one such trophy was apparently as large as a child's head. The French surgeon advised a lithotomy, one of the oldest surgical procedures known to man-vividly described by Dr. Martin Lister, a zoologist and later physician to Queen Anne who watched an expert surgeon perform the operation: "He boldly thrusts in a broad lancet or stiletto into the middle of the muscle of the thigh near the a.n.u.s, till he joins the catheter or staff, or the stone betwixt his fingers; then he widens his incision of the bladder in proportion to the stone with a silver oval hoop . . . then with the duck's bill [a surgical implement] he draws it out." Nine similar operations, Lister observed, were "very dexterously" performed within three-quarters of an hour.

The speed with which experts could complete the procedure did little to reduce the risk. Samuel Pepys, who was "cut of the stone" in London, celebrated his recovery from the operation with an anniversary party. In William Law's case, the procedure proved fatal. He died without seeing his family or homeland again, and was buried in the Scots College in Paris, in the heart of the city that his eldest son would hold one day in his thrall.

It was left to Jean Law to unravel the complexities of her husband's will. The doc.u.ment revealed the extent of his financial business, which totaled over 25,000 of outstanding loans. There were pages of debtors' names, among them many from Scotland's most eminent families. This intricate web of indebtedness was evidently not easy to resolve: many were slow to repay the sums outstanding, and letters from Jean to her debtors were still being exchanged years after her husband's death.

According to the terms of William Law's will, the newly acquired estate of Lauriston and its rental income was bequeathed to his twelve-year-old son John. He also left ample provision for his children to be educated as their mother deemed appropriate to their status. Perhaps because John was already displaying a worrying waywardness as well as mathematical brilliance, Jean removed him from his school in Edinburgh and sent him "far away from the temptations of the city," to Eaglesham in Renfrews.h.i.+re, a distant boarding school run by a relative. In this remote but pleasant environment John Law completed his formal education. Along with his remarkable ability in mathematics he also emerged as a skilled exponent of "manly pursuits." These included fencing, which was soon to play a pivotal role in his career, and tennis, which was popular all over Europe and particularly in Scotland. By now he had matured into a strikingly attractive man-contemporaries euphemistically characterized him as of "marked individuality." A description of him by a later acquaintance recalls his "oval face, high forehead, well placed eyes, a gentle expression, aquiline nose, and an agreeable mouth." He took such keen interest in his clothes and appearance that friends dubbed him "Beau Law" or "Jessamy [meaning fop or dandy] John."

With no father to guide him, John Law, who later confessed that he always hated work, did not attend university but succ.u.mbed to adolescent indolence, happily pa.s.sing the days in the pleasurable pursuits of gaming and womanizing. There had always been a daredevil strand to his personality, and the risk taking of gambling perhaps appealed as much as, if not more than, any money he might win. The poker-faced gamesmans.h.i.+p necessary to do well in games of chance must also have become second nature to him. Perhaps it was in these early days that he learned the chameleon knack of playing his cards close, shrouding his feelings, and having the confidence to follow a hunch. With women, his handsome face, sartorial finery, and nonchalant charm apparently combined to yield innumerable easy conquests. One of his friends from these Edinburgh days, George Lockhart of Carnwarth, said, with a tinge of jealousy as well as reluctant admiration, that he was already "nicely expert in all manner of debaucheries," although frustratingly he did not record any in detail.

Before long, however, the life of self-indulgence palled, and John Law began to hanker for new challenges and the world beyond Edinburgh's city walls. London-ten uncomfortable days distant by coach-drew him. His mother probably raised no objection when he told her of his wish to travel, perhaps hopeful that a change of environment might entice her son to involve himself in something other than hedonistic pursuits. Perhaps it was with a small sigh of relief as well as a s.h.i.+ver of foreboding that she bade him farewell as he set out on his long, hazardous journey south.

3.

LONDON.

Some in clandestine companies combine, Erect new stocks to trade beyond the line; With air and empty names beguile the town, And raise new credits first, then cry'em down: Divide the empty nothing into shares, To set the town together by the ears.

The sham projectors and the brokers join, And both the cully merchant undermine; First he must be drawn in and then betrayed, And they demolish the machine they made: So conjuring chymists, with their charm and spell, Some wondrous liquid wondrously exhale; But when the gaping mob their money pay, The cheat's dissolved, the vapour flies away.

Daniel Defoe, Reformation of Manners (1702)

LONDON WAS A REVELATION. LARGER THAN ANY OTHER Western European capital (only Paris could come close), it was home to some 750,000 inhabitants, many of whom, like Law, had gravitated from elsewhere. The streets were thronged with markets, shops, and hawkers noisily touting oysters, oranges, whalebone stays, patch boxes, gla.s.s eyes, ivory teeth, and mandrake potions. Amid the bustling street life, workmen toiled to complete vast building programs begun after the Great Fire. A grand new Royal Exchange had already replaced the old one founded by Gresham, a new Dutch-style custom house now flanked the Thames, while forty-five livery company halls, fifty-one city churches, and innumerable private houses were emerging to replace those that had been destroyed. It was an energetic, exciting milieu, but one in which the gulf between affluence and poverty was starkly evident. To the north and east, factories and workshops drew workers who lived in stinking, insanitary shantytown hovels. Westward, framed by green fields, St. James's, the Strand, and Piccadilly were inhabited by aristocrats and entrepreneurs who were transforming once rural sites into elegant piazzas, arcades of shops, and avenues of grandiose mansions. Western European capital (only Paris could come close), it was home to some 750,000 inhabitants, many of whom, like Law, had gravitated from elsewhere. The streets were thronged with markets, shops, and hawkers noisily touting oysters, oranges, whalebone stays, patch boxes, gla.s.s eyes, ivory teeth, and mandrake potions. Amid the bustling street life, workmen toiled to complete vast building programs begun after the Great Fire. A grand new Royal Exchange had already replaced the old one founded by Gresham, a new Dutch-style custom house now flanked the Thames, while forty-five livery company halls, fifty-one city churches, and innumerable private houses were emerging to replace those that had been destroyed. It was an energetic, exciting milieu, but one in which the gulf between affluence and poverty was starkly evident. To the north and east, factories and workshops drew workers who lived in stinking, insanitary shantytown hovels. Westward, framed by green fields, St. James's, the Strand, and Piccadilly were inhabited by aristocrats and entrepreneurs who were transforming once rural sites into elegant piazzas, arcades of shops, and avenues of grandiose mansions.

The sharp-witted, rapacious Law must have greeted the city as James Boswell, a fellow Scotsman, did when he caught his first glimpse almost a century later: "When we came to Highgate Hill and had a view of London, I was all life and joy . . . my soul bounded forth to a certain prospect of happy futurity. I sung all manner of songs, and began to make one about an amorous meeting with a pretty girl."

Law set himself up in lodgings in London's newly fas.h.i.+onable suburb of St. Giles. Surrounded by countryside, it was virtually a village, on higher ground than the city and encompa.s.sing Holborn, Covent Garden, Seven Dials, and Blooms bury. The area was renowned for its verdant surroundings; the grand Bloomsbury Square, the bustling, flower-filled Covent Garden market with its church-well known as a meeting place for unfaithful wives-and its "sweating house," the Hummums Bagnio, where for five s.h.i.+llings one could find oneself "as warm as a cricket at an oven's mouth."

From the outset Law was determined to make his social and intellectual mark. Immaculately dressed, he presented himself as a new young man about town. He visited theaters such as the Drury Lane to enjoy the latest drama and admire the most celebrated actresses, strolled in the elegant walks of St. James's and Vauxhall Gardens, shopped in the fas.h.i.+onable New Exchange-a favorite with beaux who, according to Ned Ward, a chronicler of London's less well-publicized customs, were happy to "pay a double price for linen, gloves or sword-knots, to the prettiest of the women, that they might go from thence and boast among their brother fops what singular favours and great encouragement they had received." He ate in taverns such as the Half Moon or Lockets-notorious for charging such high prices that "many fools' estates have been squandered away"-breakfasting perhaps on ale, toast, and cheese, or dining on roasted pigeons, goose, boiled calf 's head and dumplings, or mutton steak. Alternatively, he might visit famous coffeehouses such as Will's in Covent Garden, the Royal near Charing Cross, or the British in c.o.c.kspur Street-a favorite with visiting Scots, where he could catch up on foreign news, exchange ideas . . . and, if so inclined, procure the services of a prost.i.tute.

London life was not without its pitfalls. Neither his fondness for female company nor his penchant for gambling had deserted John Law on his journey south. Gambling provided his entree to society, women a refuge from its demands and disappointments. Both were to lead him astray. At some point after his arrival in London he was joined in his lodgings by his mistress, a Mrs. Lawrence. Little is known of the woman who was to play a crucial part in his future career. What were her circ.u.mstances? Who kept whom? Perhaps they met in Duke Humphrey's Walk, St. James's Park, "a rare place for a woman who is rich enough to furnish herself with a gallant that will stick close, if she will allow him good clothes, three meals a day and a little money for usquebaugh [whisky]." In which case she probably provided for Law, who though reasonably affluent, did not have the means to support an expensive mistress.

He also encountered many of London's most ill.u.s.trious inhabitants. Although doc.u.mentary evidence of this period of his life is spa.r.s.e, among his probable acquaintances was Thomas Neale, the seedy Master of the Mint and Groom Porter to the King, and a keen property speculator. As part of his royal responsibilities Neale provided the cards, dice, and other gambling equipment for the royal palaces, settled squabbles at the card table, and licensed and supervised gaming houses. He was not well suited to the role. Neale was a compulsive gambler who is said to have run through two fortunes at cards. Like Neale, Law quickly discovered the seamier side of London. The prevailing pa.s.sion for gambling had created an entire social group, of gamesters whose fortunes depended on the roll of the dice or the cut of a pack. It was a life "subject to more revolutions than a weatherc.o.c.k" in which, according to Ward, most "die intestate, and go as poor out of the world as they came into it." At Christmas Neale was allowed to keep an open gaming table, a chaotic and disorderly scrum where "Curses were as profusely scattered as lies among travellers . . . money was tossed about as if a useless commodity . . . every man changed countenance according to the fortune of the cast, and some of them . . . in half an hour showed all the pa.s.sions incident to human nature." Already drawn to gambling in Edinburgh, Law was mesmerized by this frenetic, dangerous existence. Mingling with aristocrats and opportunists, he joined in high-rolling games of hazard, brag, primero, and ba.s.set-and predictably found himself dogged by ill fortune. Bad luck and bad company took rapid toll. By early 1692, before his twenty-first birthday, Law's inheritance was exhausted and debts had mounted. Incarceration in a debtor's prison loomed, unless he could raise money. He had no option but to ask his mother to sell the Lauriston estate.

Jean Law now knew that her son was continuing his life of recklessness, but she did not despair. With keen business ac.u.men she used her own well-managed legacy from her husband to buy the tenancy of the estates from her son and could congratulate herself that his reputation was salvaged, debtor's prison avoided, and her husband's money preserved.

The episode marked a turning point in Law's approach to gambling. Always intensely proud and private, he must have hated having to ask his mother for help. He began to see how easily he, like Neale, could lose all he possessed at the tables. And unlike Neale, he had no lucrative royal position with which to rebuild his fortune. At the same time abstention from gambling was impossible. The pastime was almost de rigueur in polite society and provided a sociable young man such as Law with an easy way to infiltrate the glamorous circles to which he was drawn. To reduce the risk, without losing the frisson, he began to search for ways of loading the chances of success in his favor.

He became circ.u.mspect, almost academic in his approach to gambling. He studied various newly published pamphlets detailing theories of probability. Study in this field had long preoccupied scientists: Gerolamo Cardano had studied the science of dice throwing at Padua University in the sixteenth century and had worked out that the reason it was easier to throw a nine than a ten with two dice was a matter of probability (1 in 9 for nine: 1 in 12 for ten). Galileo had also, reluctantly, tackled similar problems for his employer, and a century later new ground had been broken in France when mathematician Pascal was able to explain to his friend the Chevalier de Mere that to have a marginally better than even chance of throwing a double six with two dice he would need to allow twenty-five throws. One of the first books on the subject was published anonymously in 1662 at a French monastery patronized by Pascal. La logique ou l'art de penser La logique ou l'art de penser contained four chapters on probability and was widely translated and disseminated throughout Europe. The Swiss mathematician Jakob Bernoulli, whose contained four chapters on probability and was widely translated and disseminated throughout Europe. The Swiss mathematician Jakob Bernoulli, whose Art of Conjecturing, Art of Conjecturing, a pioneering study of combinations and a.n.a.lysis of profit expectations from various games of chance, would be published posthumously in 1713, had also visited London at around this time, and Law may have known about Bernoulli's research. a pioneering study of combinations and a.n.a.lysis of profit expectations from various games of chance, would be published posthumously in 1713, had also visited London at around this time, and Law may have known about Bernoulli's research.

Law's formidable mathematical talents made it easy for him to absorb the "science" of chance, and he began to try out his new skill at the gaming salon. Over games of dice and cards he taught himself to calculate, often at incredible speed, the odds on a certain sequence of numbers being rolled at dice or a certain card appearing in the deck. "No man understood calculation and numbers better than he; he was the first man in England that was at the pains to find out why seven to four or ten was two to one at hazard, seven to eight six to five, and so on in all the other chances of the dice, which he bringing to demonstration, was received amongst the most eminent gamesters, and grew a noted man that way," recalled Gray, an acquaintance and Law's earliest biographer. The approach rapidly paid off, and Law's luck turned. He ceased to be the stereotypical compulsive gambler, addicted to the frisson of gain but invariably losing. He had mastered the art of risk in much the same way a statistician is able to calculate odds. Betting became a serious business.

Nevertheless, even a master of odds cannot be guaranteed to win as much as Law seemed to do, without cheating or drawing on some other advantage. Law's friends and contemporaries invariably describe him as a gambler, and either suspected him of card sharping or were simply amazed by his luck. How did he manage it? With hindsight, most biographers now feel that Law's wins were not a result of luck but of wiliness. His large gains were made when he was able to adopt the role of banker-where the odds were stacked heavily in his favor-rather than gambler. Most of the time when not playing banker he was presumably canny enough not to bet excessively. He is also known to have invented his own gambling games-where again he could ensure the odds were stacked in his favor.

Showpiece routines for the rich reaped hefty rewards, but they were not demanding enough to satisfy him for long. Law's study of probability reawakened his natural mathematical talent, and the urge to use it drew him to one of the new obsessions of the age: the science of economics.

At the time London was poised on the brink of economic and financial revolution. A flurry of publications had recently appeared penned by writers such as Sir William Petty, Nicholas Barbon, and Hugh Chamberlen, who had debated monetary theory, commodities, and currencies. There were two strands to the emerging material: some writers concentrated on ways of a.s.sisting mercantile trade, usually for their own profit; others blended the role of the state and issues of morality with the theme of money. All were anxious to solve, or at least explain, the nation's overwhelming shortage of cash and suggest ways of making it more prosperous.

William III was frantic for money to pursue his war in Europe, but the royal record for failing to repay loans made London's goldsmiths and moneylenders reluctant to help. Memories lingered of Charles II's unreliability. And there was such an acute lack of coins that money was hard to come by. The treasury had tried threats and bribes but could raise only a paltry 70,000 (US$112,000). It was not nearly enough to prop up the desperate king.

In 1694 Neale partly saved the day by inst.i.tuting a government lottery that would provide a sixteen-year loan for the Crown. His scheme, something like today's premium bonds, sold tickets for 10 (US$16) each, paid annual interest of 10 percent, and also ent.i.tled the holder to a chance of winning some of the 40,000 (US$64,000) annual prize money. The idea, borrowed from Venice, captured Londoners' imaginations-there were much-publicized stories of big wins-but failed to reach its target of raising 1 million (US$1.6 million). The diarist John Evelyn's coachman was one of the lucky ones: he won 40 (US$64).

Law, perhaps surprisingly, deplored the use of lotteries to raise money. A few years later, when Victor Amadeus of Savoy asked for his advice on the subject, Law's disapproval was unmistakable: "Public lotteries are less bad than private ones, but they are injurious to a state. They do harm to the people, take the paltry sums they earn by their labour, make them dissatisfied with their lot, and give them a desire to grow rich by gambling and luck. Servants lacking money are tempted to steal from their masters to obtain means to play in the lottery." What inspired such strongly voiced censure of "gambling and luck"? It could have been the humiliation of having to ask his mother to help him out with his gaming debts, or revulsion at recalling his seedy life as a London gamester.

Law's fascination with money taught him other crucial lessons. The Crown's checkered track record on repayment was only part of the reason William found it hard to raise money. Equally to blame was the fact that the coinage was in disarray. At the Tower of London, Neale, in his role as mint master, was supervising a ma.s.sive upheaval. Minting had remained virtually unchanged since the Middle Ages, and much of the currency in circulation was over a century old. Coins varied hugely in weight and size because shavings of gold or silver had been pared from their middle or edges-a crime known as clipping-and used to make counterfeit coins or sold as bullion. All in all, by the late seventeenth century the diarist John Evelyn reckoned that England's coins contained less than half the silver or gold of their face value. The penalty for counterfeiting or clipping was death, but many were desperate enough to try it.

The unreliable coinage created difficulties for everyone: Ward was typically enraged when his money dealer tried to pay him in debased coins that he thought only a rogue would dare offer and only a foolish man accept. At times the situation was so acute that traders returned to bartering or charging inflated prices to compensate for the dubious value of the money available, and civil unrest frequently erupted. One remedy was to introduce new coins with a metal content closer to their face value, and with clipperproof milled edges. At first the treasury circulated new coins without withdrawing the old ones and the situation grew even worse: money dealers rushed to melt down the old coins and smuggle the resulting bullion onto the European market, where it fetched a higher price than in England-which proved a theory put forward a century earlier by Gresham and immortalized as Gresham's Law, that bad money drives out good. The financial pandemonium taught Law a valuable lesson: he began to see that for a country to prosper and maintain its political status quo, sound money was essential.