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John Law and the Fundamentals of the Mississippi and South Sea Bubbles
John Law’s Financial System Both the Mississippi and South Sea Bubbles can best be understood in the context of the monetary theory and system created by John Law.17 Law is not well known today, but Schumpeter (1954, 295), for example, is unreserved in praising him: “He worked out the economics of his projects with a brilliance and, yes, profundity which places him in the front ranks of monetary theorists of all times.” Law sketched a monetary theory in an environment of unemployed resources. In such an environment, he argued ([1705] 1760, 190–191), an emission of paper currency would expand real commerce permanently, thereby increasing the demand for the new currency sufficiently to preclude pressure on prices. To finance a great economic project, an entrepreneur needed only the power to create claims that served as a means of payment. Once financed, the project would profit
