In studying monetary history to identify cycles, it is necessary to examine both sides of the coin so to speak. The temptation is for people to blame all their woes on their government. Certainly, governments are often at fault when it comes to inflation through fiat monetary policy, but one must never forget that in the end, we are ultimately the ones who consent to our government’s rule. History is full of examples of greed leading a populace to do incredibly stupid things. Indeed, we don’t need the government to ruin our economy. We can get by just fine by ourselves, thank you.
John Law and Central Banking
Another great example of a society replacing its money with an ever-inflating currency supply is the story of John Law. Johns Law’s life was a true roller-coaster ride of epic proportions. He got into a fight over a woman and his opponent challenged him to a duel. He shot his opponent dead, was arrested, tried, and sentenced to hang. Being the knave that he was Law escaped from prison and fled to France.
Meanwhile, Louis XIV was running France deeply into debt due to warmongering and his lavish lifestyle. John Law, who was now living in Paris, became a gambling buddy with the Duke d’ Orleans, and it was at about this time that Law published an economic paper promoting the benefits of paper currency.
When Louis XIV died, his successor, Louis XV was only eleven years old. The Duke d’Orleans was placed as regent (Temporary king), and to his horror he found out that France was so deep in debt that taxes didn’t even cover the interest payments on that debt. Law, sensing opportunity, showed up at the royal court with two papers for his friend blaming the problems of France on insufficient currency and expounding the virtues of paper currency. On May 15, 1716, John Law was given a bank (Banque Generale) and the right to issue paper currency, and there began Europe’s foray into paper currency.
The slightly increased currency supply brought a new vitality to the economy; John Law was hailed as a financial genius. As a reward, the Duke d’Orleans granted Law the rights to all trade from France’s Louisiana Territory in America. John Law wasted no time capitalizing on the public’s confidence in his company’s prospects and issued 200,000 company shares. Shortly after that share priced exploded, rising by more than 30times in a period of months. Just imagine, in a few short years, Law went from a gambling addict and penniless murderer to one of the most powerful financial figures in Europe. Again, Law was rewarded.
Law was now at the helm of France’s central bank. Now that his bank was the royal bank of France it meant that the government backed his new paper notes, just as our government backs the Federal Reverse’s paper notes. And since everything was going so well, the Duke asked John Law to issue even more notes, Law, agreeing that there is no such thing as too much of a good thing, obliged. The government spent foolishly and recklessly while Law was specified with gifts, honours, and titles.
Paris was booming due to rampant stock speculation and the increased currency supply. All the shops were full; there was an abundance of new luxury goods, and the streets were bustling. As Charles Mackay puts it in his book Extraordinary Popular Delusions and The Madness of Crowd, “ New houses were built in every direction, and an illusory prosperity shone over the land, and so dazzled the eyes of the whole nation, that none could see the dark cloud on the horizon announcing the storm that was too rapidly approaching”.
Soon, however, problems started to crop up. Due to the inflation of the currency supply, prices started to skyrocket. Real estate values and rents, for instance, increased 20-fold. The ‘smart money’ began to exit fast. People started converting their notes to coins and bought anything of transportable value. Jewellery, silverware, gemstones, and coins were bought and sent abroad or hoarded.
In order to stop the bleeding, in February of 1720 the banks discontinued note redemption for gold and silver, and it was declared illegal to use gold and silver coins in payment. Buying jewellery, precious stones, or silverware was sold outlawed. Rewards were offered of 50 percent of any gold and silver confiscated from those found in possession of such goods (payable in banknotes of course). The borders were closed and carriages were searched. The prisons filled and heads rolled, literally.
Finally, the financial crisis came ahead. On May 27, the banks were closed and Law was dismissed from the ministry. Banknotes were devalued by 50 percent, and on June 10 banks reopened and resumed redemption of the notes for gold at the new value. When the gold ran out, people were paid in silver. When the silver ran out, people were paid in copper. As you can imagine, the frenzy to convert paper back to coin was so intense that near riot conditions ensued. Gold and silver had delivered a knockout blow.
By then John Law was now the most reviled man in France. In a matter of months, he went from arguably the most powerful and influential force in society back to the nobody he was before. Law fled to Venice where he resumed his life as a gambler, lamenting, “Last year I was the richest individual who ever lived. Today I have nothing, not even enough to keep alive, “he died broke, in Venice, in 1729.
The collapse of the Mississippi Company and Law’s fiat currency system plunged France and most of Europe into a horrible depression, which lasted for decades. But what astounds me most is that this all transpired in just four short years.
From the book “Guide to Investing in Gold & Silver” by Michael Maloney
