John Law: Paper Money & Inflation
Posted by Orrin Woodward on May 24, 2013
John Law has been called a knave, fool, and an evil genius. Probably all are true in some sense, but probably most accurately, he is another person who sought utopia in something for nothing (SFN). Printing money is not the same as producing goods. Somehow, however, the lure of SFN, continues tempting governments to print paper and call it real value by government fiat. Simply stated, this results in a devaluing of all the money in the system, making every productive citizen a loser by the government’s unconscionable actions. Nonetheless, inflationary policies, like printing fiat money along with the newer methods involving digits on the computer screen, continue to bilk billions from hard-working Americans.
Most Americans know little about the underlying principles of inflation, but intuitively, they wonder why they work harder every year and yet seem to get further behind. In an effort to educate North America on the evils of inflation, I will share a portion of an article from Adam Hamilton. This article wonderfully explains one of the best documented cases of inflation on record – John Law and France in the 18th century. To truly create a LeaderShift, we must learn what the State is doing to our money, economy, and freedoms. LIFE Leadership is monthly providing CDs, books, and seminars to educate North Americans on their history, liberties, and the need for leadership.
There are many fabulous examples of this phenomenon throughout history, including Germany after the First World War. One of the most entertaining ones surrounds the British rogue John Law in the early 1700s. John Law was forced to flee England in order to avoid prosecution for some alleged crimes. He traveled around Europe and eventually settled in France, where his powerful personality, incredible mind, and command presence ultimately brought him to the attention of the King of France.
Law convinced the King and the French monetary authorities that in order to have a perpetual business boom, all they needed to do was print enough fiat currency so that business was assured of having access to the capital it needed. Law stated that a stable gold-backed currency, which by its very nature stops meddlesome government bureaucrats from living beyond their means, was too archaic and far inferior to his new fiat currency theme. He assured the French ruling class that because the government would print money when more was needed and buy it back when there was a surplus of money, that there would not be inflation and business would have the optimum amount of capital to thrive. Unfortunately, the French powers that be bought into Law’s inflationist plan and executed the necessary monetary policy to make it happen.
Initially, Law’s plan seemed to be working brilliantly. In the 1720s, France experienced an incredible boom as vast amounts of new fiat capital flowed into the existing markets. Prosperity seemed to be everywhere, and the French stock market was exploding. Soon, ordinary folks were quitting their jobs to hang out on the street where securities were traded and they became day traders. Charles Mackay reports in his 1841 magnum opus “Extraordinary Popular Delusions and the Madness of Crowds” that one deformed hunch-backed man made large amounts of money renting out his slumped back as a mobile writing table for the frenzied stock jobbers buying and selling French equities on the street! The wild stories that came out of this particular mania are endlessly fascinating!
John Law became the most famous and loved man in France, accruing enormous wealth for himself.
He then convinced the French government to join him in forming a company to develop the fabled wealth of the Mississippi River, of which the French controlled the gateway with their colony of New Orleans. The Mississippi company was floated and everyone in France wanted to own shares of this hot new IPO. They were convinced that they would be able to retire in a year or two because of the legendary wealth that the Mississippi company would generate. Like hungry sharks boiling around a wounded whale, the people of France started a bidding war that propelled the Mississippi company stock and other French equities to dazzling heights.
Of course, since France was printing inherently worthless fiat money with both hands, the prices of everything in France were rising dramatically. Gresham’s Law, the timeless axiom that bad money drives good money out of circulation, came into full effect. Gold coins were hoarded and smuggled out of France, and paper fiat currency was spent as rapidly as it was received. Eventually the gold hemorrhage became so bad that the French government, on John Law’s advice, outlawed gold.
In the meantime, like all exponential parabolic manias, the French bubble soon collapsed. The aftermath of the disastrous inflationary policy of creating money out of nothing was brutal, and the Mississippi Scheme is one of the most widely studied speculative manias and bubbles in all of history. The country of France and the French people bore the consequences of this monetary inflationary nightmare for decades, and some would argue France has never regained the prominence it had before the greatest inflationist of all time, John Law, took the reigns.
The man whom kings used to wait to consult was widely known as the “eldest son of Satan” in France after the bitter fruit of rampant fiat monetary expansion became apparent. Provocatively, reading accounts of the Mississippi Mania in France and its sister South Sea Bubble in England, which arose at the same time, is eerie in that the parallels with the US NASDAQ tech bubble of early last year are startling and profound. The lessons of history are never learned by governments and they continually repeat these same mistakes.