John Law's Bank

Banknote issued by Law's Bank and signed by Law, 1718

John Law's Bank (French : la banque de John Law) was a short-lived but highly consequential financial institution in the Kingdom of France, started by John Law in May 1716 and absorbed into his Company of the Indies in February 1720. Initially a private-sector joint-stock company, it was nationalized in late 1718. It was France's first bank of issue, and has also been referred to as the country's first central bank.

Name

The bank was formally known as the Banque Générale upon establishment in 1716, and renamed the Royal Bank of Banque Royale upon nationalization in late 1718. It was commonly associated with its founder and thus widely referred to as John Law's Bank. ^[1]

Overview

Louis XIV's long reign and wars had bankrupted the French monarchy. Rather than reduce spending, the regent Philippe II, Duke of Orléans embraced Law's monetary theories and put him practically in charge of France's finances. On 2 May 1716, Law established the Banque Générale, one of the first European financial institutions to develop the use of fiat money. ^{[2] [3] [4]} The Banque Générale was a private bank, with its capital split into 1,200 shares offered at 5,000 French livres each, payable mostly in government bills at face value (which was highly advantageous to subscribers, since these forms of state debt traded at a 60 percent market discount at the time). Law bought 25 percent of the shares, while the king owned 380 shares. ^{[5] : 11}

The bank became the Banque Royale (Royal Bank) on 4 December 1718, when it was announced that the French state would buy out all private shareholder at face value, namely 5,000 livres per share - which, given the discount at the time of subscription, represented a typical annualized return of 64 percent. By then, the bank had banknotes in circulation for a total 39.5 million livres, which were trusted and circulated at par. From then the bank remained managed by Law on behalf of the King, and all its profits were transferred to the Royal Treasury. ^{[5] : 13} It began issuing notes that were not backed by reserves of specie. After the bank was merged into John Law's Company in early 1720, this eventually led to a bank run when the value of the new paper currency was halved. ^{[6] [7]}

See also

• Money creation

References

1. Guillaume Perrault (18 March 2023). "L'incroyable faillite de la banque de John Law : histoire d'un traumatisme français". Le Figaro.
2. Nevin, Seamus (2013). "Richard cantillon – The Father of Economics". History Ireland. 21 (2): 20–23. JSTOR   41827152.
3. Backhosue, Roger. Economists and the economy: the evolution of economic ideas, Transaction Publishers, 1994, ISBN   978-1-56000-715-9, p. 118
4. http://libertystreeteconomics.newyorkfed.org/2014/01/crisis-chronicles-the-mississippi-bubble-of-1720-and-the-european-debt-crisis.html NY Federal Reserve: Mississippi Bubble of 1720
5. François R. Velde (17 May 2004), Government Equity and Money: John Law’s System in 1720 France
6. Sheeran, Paul and Spain, Amber. The international political economy of investment bubbles, Ashgate Publishing, Ltd., 2004, ISBN   978-0-7546-1997-0, p. 95
7. Davies, Roy and Davies, Glyn. "A Comparative Chronology of Money: Monetary History from Ancient Times to the Present Day: 1700–1749" (1996 and 1999)