Extraordinary Popular Delusions and the Madness of Crowds

Historians could never decide whether John Law was a knave or a madman, so in his lifetime he was called both. His name still stands for the man who printed a country into ruin.

Mackay refuses both labels. He calls Law "neither knave nor madman, but one more deceived than deceiving," a man who understood money better than any man of his day.

Hold on to that verdict, because it changes the whole story. If Law was a plain crook, the Mississippi Scheme is a crime, and you can feel safely superior to its victims. If he was right about credit and still went over the edge, the story is far less comfortable: clever people, acting in good faith, with a plan that genuinely worked at first.

He was born in Edinburgh in 1671, the son of a goldsmith and banker, and was working in his father's counting-house at fourteen. His gift for mathematics struck everyone who knew him.

At seventeen he inherited, went to London and found the gaming-houses. He did not play blind: he won by a calculation of chances, and other gamblers copied his bets. Then the habit outgrew the arithmetic. Bigger losses demanded bigger stakes, until he had to mortgage the family estate.

A flirtation led to a duel with a Mr Wilson, whom Law shot dead. He was sentenced to death, had the sentence reduced, was held in the King's Bench prison, and escaped to the Continent. Keep both men in view, the mathematician and the gambler. The Mississippi story is what happens when they share one head.

Abroad, he gave his mornings to finance and trade and his evenings to the tables. Back in Scotland around 1700 he proposed a Land-bank, issuing paper notes that would never exceed the value of the country's land.

The Scottish Parliament turned it down, resolving that forcing paper credit on a nation was improper. The wits of the day nicknamed it a sand-bank that would wreck the state.

Law went back on the road for fourteen years: Flanders, Holland, Germany, Hungary, Italy, France. He lived mostly on his winnings, and Venice and Genoa expelled him as too dangerous for their young men. Yet with every country he studied, he grew more certain that no nation could prosper without paper money. Rejection did not shake the idea. Each year abroad only confirmed it for him.

What did Law's fourteen years of wandering do to his central idea, as Mackay tells it?

• They made him drop the Land-bank after Scotland rejected it
• They persuaded him to give up finance and live purely as a gambler
• They convinced him no country could prosper without paper money✓Correct answer
• They convinced him that gold and silver were safer than any paper

Mackay says Law became daily more confirmed that paper currency was essential. He did live mostly on gambling, but he never stopped studying trade and offering his scheme to any ruler who would listen.

Louis XIV died in 1715 and left France close to bankrupt. Mackay gives the numbers: a debt of 3,000 million livres, a revenue of 145 million, and running costs of 142 million. That left three million a year to pay interest on the entire debt.

The Duke de St Simon advised declaring a national bankruptcy outright. The Regent, the Duke of Orleans, rejected that as dishonest, then tried remedies that were dishonest more slowly. A recoinage handed people back coins of the same face value with a fifth less metal. A Chamber of Justice squeezed the corrupt tax-farmers, but most of the fines ended up with courtiers.

Mackay passes on a story, admitting it may be too good to be true. A count offered a financier the remission of his fine for a hundred thousand crowns. Too late, came the reply: he had already struck a bargain with the count's wife for fifty thousand.

The Regent knew Law from the Paris salons, and Mackay's portrait of him matters. He saw that France needed rescuing but disliked business. He signed papers without reading them and left to others what he should have done himself. A ruler like that is the ideal audience for a mighty project that sounds easy.

Law had been turned away before. Louis XIV's finance minister refused his scheme, reportedly because Law was not a Catholic. The Duke of Savoy declined too, saying he was far too poor a prince to be ruined, and advised Law to try France again.

Now Law laid two memorials before the Regent. Metal coin alone, he argued, could never serve a trading nation; Britain and Holland showed what paper credit could do. Mackay grants that the arguments were sound. The risk lay less in the idea than in the hands it was about to fall into.