Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance (2 page)

G
ILDED
Y
OUTH

In an island near the Orcades a child was born, whose father was Aeolus god 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 brass, 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 god of chance.

Montesquieu,

Persian Letters
(1721)

T
HERE IS LITTLE IN
J
OHN
L
AW’ 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 Fifeshire, 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 Renfrewshire.

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 pass 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 fashioning 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 shells. 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.
, 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.
, 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 institutions were born in the great medieval Italian trading cities of Genoa, Turin, Pisa, and Milan. The word “bank” comes from the Italian
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.

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 ownership 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 God; 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 Grasshopper 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 accumulated 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 shells were instituted. Money made from a type of clamshell 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 Massachusetts, 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 cocked 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. Space 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 space 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 shells.

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 Ayrshire; 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, lusty, 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 assay 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 fashion for investing the famous with special qualities as young children—he was noted almost immediately for his intelligence and outstanding aptitude 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 nobility 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.