Between Independence and Impunity: The Theory of Proto-Central Banking After the Crisis of 1720

Abstract

While traveling through Italy in August of 1728, Montesquieu paid a visit to John Law in his Venetian exile. Law was a Scottish gambler and convicted murderer who had risen to briefly serve as Contrôleur général des finances, and in that capacity had launched an unprecedented attempt to centralize and reform the French financial and fiscal order, which ended in the world's first international financial crisis in 1720. 1 That centralization project, which he called his "System," hinged on two components: first, swapping government debt for equity in his Mississippi Company, which centered around his bank and which increasingly consolidated more and more components of the French state; and second, the printing of paper money from his bank, which he used partly to buy up other monopolies, and partly to support the price of his company's stock. His project collapsed in the summer of 1720 amid hyperinflation and a run on his bank. The flight of capital from France helped inflate a stock market bubble in London, centering around the South Sea Company's own debt-for-equity swap. That bubble collapsed in the winter when the South Sea Company was exposed as a fraud and a pyramid scheme. Though often separated in national historiographies, the bubbles in Paris and London were linked by practices, people, and capital into a single financial event, with repercussions from Louisiana to Lisbon to Leipzig. 2 The year after the crisis, Montesquieu had portrayed Law in the Lettres persanes as a manipulative wizard-king and as the profligate son of the wind god Aeolus, which have since become the canonical representations of Law in historical memory. 3 Law must have forgiven him, because Montesquieu reports that they