Posted Apr 7, 2021 by Martin Armstrong
COMMENT: Hi Mr. Armstrong…..this is a surprising (to me) summary, on John Law. Every piece I ever read about him, cast him as a complete scoundrel, yet you obviously write with admiration. Just another example of history depending on someone’s perspective. You never cease to surprise. And that’s good.
REPLY: John Law was actually a brilliant man. His legacy is not so different from John Maynard Keynes. He advocated deficit spending ONLY in times of recession, but governments have spent relentlessly with deficits that never end. We call this “Keynesian economics” when in fact he never advocated such a system. Likewise, John Law never advocated what the French government did in creating the Mississippi Bubble.
It is true that John Law fled to Amsterdam, but this is when he studied real banking operations and saw that money was actually virtual. Because coins were counterfeited or their edges shaved, bank money was more valuable than coins. Once the coins were deposited, each had to be inspected. So the bank became a sort of guarantor of the validity of the coins. Here is an ancient coin from Lydia with numerous banking marks applied, verifying that the coin had been inspected by them before for the same reasons.
It was this first-hand observation that led John Law to see that money was actually virtual, whereby people preferred bank money to actual coins. John then returned to Scotland, where he published in 1705 his Money and Trade Considered, with a Proposal for Supplying the Nation with Money. Law would later publish a second edition in 1720. He attempted to use his writing to convince the Scottish Parliament to adopt his ideas about money, but they declined, giving rise to the adage that a genius is never acknowledged in his native land (i.e. Columbus, Einstein to just mention two). Law had captured a glimpse of the virtual money supply as he was fascinated with the development of “bank money” that was displacing bullion in circulation.
Therefore, John Law has been hated by hard money people because they fail to understand that coins became second-best to actual paper money, for it relieved the problem of having to test every coin in a large transaction. Where Scotland refused to listen to John Law, France took him up on his observations. In 1716, John Law was invited by France to give it a shot. King Louis XIV (1643-1715) had squandered France’s resources on numerous wars and the construction of the Palace at Versailles. The idea of borrowing to fund wars and expansion had ruined the governments of men. Louis XIV had also adopted the theory that it was a divine right of kings to act as a dictator. This idea has persisted behind the curtain for centuries and dominates even American politics where you cannot sue the government without its permission.
For 54 years, Louis XIV worked daily for 8 hours, where he concerned himself with the very smallest of all details of state. He controlled everything from troop movements, infrastructure construction, court etiquette, and even theological disputes. He subordinated the nobles who had often instigated civil wars. Over the previous 40 years, there had been about 11 such civil wars.
The cost of this construction of his Palace at Versailles was far beyond the imagination. He effectively ran the country from Versailles and distanced himself from the people and Paris. Yet for all his extravagance, through the assistance of Jean-Baptiste Colbert (1619-1683), he was responsible more than anyone else for forging France into a more modern country.
John Law has been blamed for the Mississippi Bubble when, in fact, France was on the brink of its third bankruptcy when it contacted him. The government entered a partial default by consolidating its debt and changing its terms. Its new issue of billets d’etat was still required for more funding. The shortage of gold and silver coinage was plunging the economy into a depression. Law’s first proposal for a national bank issuing bank money was rejected. The second proposal to create a private bank was accepted and thus Banque Generale was established in May 1716.
The bank began to lend on its own shares, and the government intervened to support the price of its share by decree. Like the US government ordering the Federal Reserve to provide a floor to US bonds during World War II, likewise, the French government tried to maintain the value of the shares at 9,000 liver. Law begged the government to reduce the floor to 5,000, but they refused. They ended up blaming Law and arresting him not so unlike how the Democrats charged owners of S&Ls which failed when it was Congress who was changing the laws and creating a one-way market where everyone tried to sell. Those in power ALWAYS blame those in the private sector for their own failure and corruption.
“No man’s life, liberty or property are safe while the Legislature is in session.”
That’s how Gideon Tucker put it back in 1866, a New Yorker who knew Albany as a former legislator, secretary of state, and judge. Nothing ever changes because history repeats solely because the passions of politicians never change throughout the centuries.