WEBVTT NOTE From Law to Volcker: Consequences of Fiat Money 1 00:00:00.000 --> 00:00:04.200 I was delighted when Lew Rockwell asked me to speak on John Law. I can't imagine why 2 00:00:04.200 --> 00:00:11.440 he did, although I do know why he did, because I often refer to John Law as just an informal 3 00:00:11.440 --> 00:00:17.560 conversation. It is said that if you want to change a society, there are two best approaches. 4 00:00:17.560 --> 00:00:23.440 One is the pulpit and the other is the theater. I would not assume to take over the pulpit, 5 00:00:23.440 --> 00:00:28.820 but I would like to suggest that some of us in this crowd ought to do a Broadway show 6 00:00:28.820 --> 00:00:50.180 on John Law. 7 00:00:50.180 --> 00:00:58.180 Now the scene might open in 1976 with a distinguished former Secretary of the Treasury saying to 8 00:00:58.180 --> 00:01:04.900 an assembled group in New York City, you don't need gold to back the dollar, the industrial 9 00:01:04.900 --> 00:01:08.460 might of the nation backs the dollar. 10 00:01:08.460 --> 00:01:13.300 Now taking an admonition from Murray Rothbard, I'll tell you that that Secretary of the Treasury 11 00:01:13.300 --> 00:01:18.720 had been a successful bond man before he became Secretary of the Treasury and since then he's 12 00:01:18.720 --> 00:01:46.760 The Federal Open Market Committee, according to the Federal Reserve Bulletin in 1971, its 13 00:01:46.760 --> 00:01:53.800 Its basic concern is with the real economy, production, employment, prices, balance of 14 00:01:53.800 --> 00:01:56.280 payments, etc. 15 00:01:56.280 --> 00:02:02.040 The same message could have been found in an introduction to a book written in 1705 16 00:02:02.040 --> 00:02:08.560 entitled Money and Trade Considered with a Proposal for Supplying the Nation with Money 17 00:02:08.560 --> 00:02:12.840 by Young John Law. 18 00:02:12.840 --> 00:02:20.680 Banking in the Rue King-Campoy in 1719 and 1720 may not have had its 100 million-share 19 00:02:20.680 --> 00:02:27.840 days, but it had an awful lot of excitement, so much so that Adam Smith wrote that it was 20 00:02:27.840 --> 00:02:34.440 the most extravagant project both of banking and stop-jobbing that perhaps the world ever 21 00:02:34.440 --> 00:02:38.240 saw. 22 00:02:38.240 --> 00:02:48.140 Elgin Grossclose has written that in Law's bank, in his Mississippi company and his system, 23 00:02:48.140 --> 00:02:55.360 we see Adam braided the modern system of complex interrelationships among industry, commerce, 24 00:02:55.360 --> 00:03:01.240 capital and the money mechanism, the system in which money derives its validity from the 25 00:03:01.240 --> 00:03:10.800 The State of Trade is intricately and precariously balanced upon the state of money. 26 00:03:10.800 --> 00:03:15.080 To refer to John Law's episode in history as simply the Mississippi bubble I think is 27 00:03:15.080 --> 00:03:22.320 to trivialize a very important episode and one that has major lessons for us to learn. 28 00:03:22.320 --> 00:03:30.240 I'll quote at length today, or from time to time today, with Charles Rees' book, The History 29 00:03:30.240 --> 00:03:40.240 And I like what Charles Reist has to say about my opening remarks about John Law's lessons for our time. 30 00:03:40.240 --> 00:03:50.240 Now the 18th century wasn't all that taken with John Law, despite his success and despite his becoming probably the most prominent figure in Europe. 31 00:03:50.240 --> 00:04:03.520 The 19th and 20th centuries have been at times less critical of law. Certain passages written 32 00:04:03.520 --> 00:04:10.000 in restrained and reasonable manner are quoted as expressing the real essence of law's thoughts. 33 00:04:10.000 --> 00:04:15.280 Actually they are tactical concessions to the necessities of the moment. It has also 34 00:04:15.280 --> 00:04:20.920 It has also been said that he was an unrecognized forerunner because certain bankers today have 35 00:04:20.920 --> 00:04:24.560 taken up some of his most debatable formulas. 36 00:04:24.560 --> 00:04:30.300 It would be more correct to regard these belated disciples as backsliders. 37 00:04:30.300 --> 00:04:34.260 The eighteenth century was not mistaken in its attitude. 38 00:04:34.260 --> 00:04:41.280 It saw through the fundamental confusion between credit and money that law deliberately and 39 00:04:41.280 --> 00:04:54.180 I would go further, says Charles Rist. Credit had no interest for him except as a means 40 00:04:54.180 --> 00:05:09.200 of making the public familiar with paper money. His four years in France bring together all 41 00:05:09.200 --> 00:05:14.960 All of the drama and all of the causes and consequences of this economic theory in bold 42 00:05:14.960 --> 00:05:21.360 relief. You see the beneficiaries and the victims, and as I say, the causes and the 43 00:05:21.360 --> 00:05:29.280 consequences all telescoped in four years, which is why the episode to me is so fascinating. 44 00:05:29.280 --> 00:05:34.340 When the future historians write the history of Paul Volcker's time, it will take forever 45 00:05:34.340 --> 00:05:58.500 We are dealing with a monetary crisis which, if it is not properly solved, will mean the 46 00:05:58.500 --> 00:06:01.280 and the shattering of the world. 47 00:06:01.280 --> 00:06:07.400 So we see it as sort of the bionic man moving out slowly, the waves going out very slowly, 48 00:06:07.400 --> 00:06:13.680 but in Law's time you see it all happening in a four years' episode. 49 00:06:13.680 --> 00:06:20.560 And certainly John Law was a more exciting figure than an Arthur Burns or a Paul Volcker. 50 00:06:20.560 --> 00:06:24.680 One has yet to see women falling out of their cars in front of the Federal Reserve just 51 00:06:24.680 --> 00:06:30.880 to get Paul Volcker's attention, or a kiss from Paul Volcker, or making all sorts of 52 00:06:30.880 --> 00:06:36.280 intimate passes at him, which the women of Paris did do to John Law. 53 00:06:36.280 --> 00:06:39.040 But then John Law was quite a dashing figure. 54 00:06:39.040 --> 00:06:47.340 He was a son of a goldsmith, and he was familiar with and a gambler, a very successful gambler. 55 00:06:47.340 --> 00:06:52.940 He was familiar with money and numbers and studied assiduously what was known then as 56 00:06:52.940 --> 00:07:07.940 Political Arithmetic. Contrary to Paul Volcker's background, John Law was a refugee from the 57 00:07:07.940 --> 00:07:15.900 English courts, having slain an opponent in a duel over an affair of the heart. His escape 58 00:07:15.900 --> 00:07:20.860 from England took him across the Channel to Amsterdam and into the midst of the Amsterdam 59 00:07:20.860 --> 00:07:23.060 and Banking Center. 60 00:07:23.060 --> 00:07:27.540 It also brought him into friendship with a very nice Dutch banker. 61 00:07:27.540 --> 00:07:32.860 And it was the banker's wife, according to one biographer, who provided the dashing John 62 00:07:32.860 --> 00:07:37.220 Law with a bit more than normal generous hospitality. 63 00:07:37.220 --> 00:07:41.620 And it was on the occasion that she provided John Law to be present in the banker's home 64 00:07:41.620 --> 00:07:49.500 one morning when a courier, the banker was out of town, 65 00:07:49.500 --> 00:07:57.840 A military courier arrived with news that a French town had fallen to the English. While 66 00:07:57.840 --> 00:08:03.620 most bankers then did have their couriers to bring them news, banker Mercous was one 67 00:08:03.620 --> 00:08:09.900 who had a military courier who came in. And from that moment on, that morning on, John 68 00:08:09.900 --> 00:08:15.820 Law was keenly aware of the importance, the profitable business of arbitrage and foreign 69 00:08:15.820 --> 00:08:22.460 and Exchange. 70 00:08:22.460 --> 00:08:28.000 It was with that zeal, wit and charm that John Law went into France in the spring of 71 00:08:28.000 --> 00:08:35.720 1714. He had been there before and was well known in the gambling halls. But he couldn't 72 00:08:35.720 --> 00:08:42.820 go back to England. He had seen that Amsterdam was doing all right. His field was going to 73 00:08:42.820 --> 00:08:51.820 I will, he said, coin the very soil of France. Now he had recommended to Scotland that they 74 00:08:51.820 --> 00:08:58.260 base their money on land, but he really did not recommend that to the regent. That idea 75 00:08:58.260 --> 00:09:02.500 was saved about another 70 years later when they had the French revolutions and based 76 00:09:02.500 --> 00:09:08.820 the assignats on the land, the expropriated church land. And that was also a consequence, 77 00:09:08.820 --> 00:09:16.060 I'm sure of the fact that John Law's writings from his early years on land-based money was 78 00:09:16.060 --> 00:09:18.140 translated into French. 79 00:09:18.140 --> 00:09:23.620 So his memory lived on even though he did not try for the money-land combination in 80 00:09:23.620 --> 00:09:26.980 his original episode. 81 00:09:26.980 --> 00:09:30.860 He also said, I will make gold out of paper. 82 00:09:30.860 --> 00:09:36.220 Well, he didn't really quite do that, but his mistake probably was that he didn't call 83 00:10:06.220 --> 00:10:15.660 on every block in every city. So the bank did take hold. And like a politician, John 84 00:10:15.660 --> 00:10:23.060 Locke came into France promising jobs. I should be able to say that the way Geraldine Ferraro 85 00:10:23.060 --> 00:10:52.700 There are 18 million people in France, he said, to make so many people react productively, 86 00:10:52.700 --> 00:10:58.240 requires immense sums for daily expenditures and perpetual circulation of a very large 87 00:10:58.240 --> 00:10:59.980 amount of money. 88 00:10:59.980 --> 00:11:05.180 Good laws may bring the money to the full circulation it is capable of and force it 89 00:11:05.180 --> 00:11:08.820 to those employments that are most profitable to the country. 90 00:11:08.820 --> 00:11:16.060 But no laws can make it go further, nor can more people be set to work without more money 91 00:11:16.060 --> 00:11:21.620 to circulate so as to pay the wages of a greater number. 92 00:11:21.620 --> 00:11:29.220 Howard Keynes could not have said it better. Money is a creature of politics, it must circulate, 93 00:11:29.220 --> 00:11:34.760 and it is the provider of employment. Now having seen Holland's world trade bringing 94 00:11:34.760 --> 00:11:41.460 in great wealth to that little country, law was going to do the same for debt ridden France. 95 00:11:41.460 --> 00:11:49.940 To him an abundance of money was not a symptom, but a source of wealth. He did not bother 96 00:11:49.940 --> 00:11:55.340 with the idea that metallic money enters a country only as a result of goods and services 97 00:11:55.340 --> 00:11:58.500 that have been provided for others. 98 00:11:58.500 --> 00:12:03.900 The Dutch loved to see John Law come a cropper, which he eventually did, and they put out 99 00:12:03.900 --> 00:12:06.580 a lot of lithographs. 100 00:12:06.580 --> 00:12:11.140 My attention was drawn to John Law a few years ago when the Smithsonian Institution put out 101 00:12:11.140 --> 00:12:15.180 a double centerfold, actually, of one of those lithographs. 102 00:12:15.180 --> 00:12:19.680 And it was Pallas Athene driving through the streets of Paris, with harlequin throwing 103 00:12:19.680 --> 00:12:20.680 out chits. 104 00:12:20.680 --> 00:12:26.220 Well, the greedy mobs of Paris thought that it was more money or more stock. 105 00:12:26.220 --> 00:12:31.500 What they turned out to be were chits for jobs. 106 00:12:31.500 --> 00:12:41.780 Now, for John Law, though, credit or real bills, such banknotes, were too limited, and 107 00:12:41.780 --> 00:12:48.220 The process of increasing wealth by credit alone was too slow. What was needed, held 108 00:12:48.220 --> 00:12:57.220 law, was a new form of money, money that had no intrinsic value whatsoever, paper. He talked 109 00:12:57.220 --> 00:13:04.460 of coining notes. Money, he said, is not the value for which goods are exchanged, but the 110 00:13:04.460 --> 00:13:12.020 The value by which goods are exchanged. In other words, money was nothing but a voucher 111 00:13:12.020 --> 00:13:18.120 for purchase. And here I'd like to quote you Charles Wriste again. He says, Here we reach 112 00:13:18.120 --> 00:13:23.660 the cardinal point of law's theory. Money is only a voucher for buying goods. It is 113 00:13:23.660 --> 00:13:29.980 a formula which is provided, says Wriste, the starting point for all currency cranks. 114 00:13:29.980 --> 00:13:35.020 and apparently self-evident axiom on which have been based all systems which deny the 115 00:13:35.020 --> 00:13:38.940 citizen the right to a means of storing value. 116 00:13:38.940 --> 00:13:41.400 Money is made to purchase with. 117 00:13:41.400 --> 00:13:46.800 Money is not the durable and indestructible good of stable value and unlimited acceptability 118 00:13:46.800 --> 00:13:52.720 with the help of which man has been able to put by the product of his labor, the instrument 119 00:13:52.720 --> 00:13:59.440 for saving by means of which a bridge is built between the present and the future and without 120 00:13:59.440 --> 00:14:05.640 In which all provision for the future would become impossible. 121 00:14:05.640 --> 00:14:10.400 But I suggest you ask someone today, what is a dollar? 122 00:14:10.400 --> 00:14:12.880 And they will tell you, a dollar? 123 00:14:12.880 --> 00:14:13.880 What's it worth? 124 00:14:13.880 --> 00:14:15.960 It's worth what you can get for it. 125 00:14:15.960 --> 00:14:21.680 In other words, the dollar is nothing but a voucher for purchase, just as John Law wanted 126 00:14:21.680 --> 00:14:24.140 it to be. 127 00:14:24.140 --> 00:14:30.660 All of these ideas convinced the duke d'Orleans, the regent of France, who agreed to be law's 128 00:14:30.660 --> 00:14:35.700 patron and gained approval from the Finance Council for Law's private bank, the Banque 129 00:14:35.700 --> 00:14:42.100 Generale, started in June 1716. It is also probably worth pointing out, and remember 130 00:14:42.100 --> 00:14:48.360 this when we write our stage play, that the regent also consulted fortune tellers and 131 00:14:48.360 --> 00:14:59.620 The Regent and Law put their gold libra in the bank and others soon followed. Law was 132 00:14:59.620 --> 00:15:05.680 establishing a monopoly bank, not just to serve the King and his government, but all 133 00:15:05.680 --> 00:15:12.760 the people, if need be, all would be forced to join the enterprise through the use of 134 00:15:12.760 --> 00:15:17.680 of Paper Money, and so the drama began. 135 00:15:17.680 --> 00:15:21.960 Within a few months, law had the good fortune to have the region instruct the provisional 136 00:15:21.960 --> 00:15:28.320 governors to pay their tax revenues to Paris in the notes of the bank general, thus forcing 137 00:15:28.320 --> 00:15:39.960 circulation of the paper throughout the nation and giving the bank a quasi-governmental character. 138 00:15:39.960 --> 00:15:45.160 The next year by government decree the taxpayers themselves could pay their taxes directly 139 00:15:45.160 --> 00:15:51.820 with paper. Law was launched and the signs of prosperity appeared as usual with the first 140 00:15:51.820 --> 00:16:01.200 infusion of created money. The notion, however, that it is enough to create paper money, the 141 00:16:01.200 --> 00:16:06.700 only kind that is created and not acquired, in a poor country and thereby develop industry 142 00:16:06.700 --> 00:16:13.300 The theory of natural resources, says Rist again, is an idea that affronts common sense. 143 00:16:13.300 --> 00:16:19.460 But law had written extensively on instances in which money created and spent in one section 144 00:16:19.460 --> 00:16:23.940 then comes into the possession of another group who spend it and bring possession to 145 00:16:23.940 --> 00:16:30.860 another part of the population, who use it for purchases, et cetera, et cetera, et cetera. 146 00:16:30.860 --> 00:16:37.060 If the idea, according to RISP, is an affront to common sense, it hasn't bothered many 147 00:16:37.060 --> 00:16:41.540 policymakers in the United States in recent years. 148 00:16:41.540 --> 00:16:46.840 I with three of my colleagues called on Bill Seidman in the White House. 149 00:16:46.840 --> 00:16:51.180 He was the financial advisor to Gerald Ford. 150 00:16:51.180 --> 00:16:57.060 This was 1975, and we pointed out that the nation was on a bad course of spending and 151 00:16:57.060 --> 00:16:59.720 giveaways. 152 00:16:59.720 --> 00:17:04.680 We also mentioned gold, and I know he thought he had seen four ETs. I think he probably 153 00:17:04.680 --> 00:17:11.360 fired his secretary for giving us the appointment. But he looked so bewildered that we were suggesting 154 00:17:11.360 --> 00:17:16.240 that too much money was going abroad on easy terms and giveaways. And he said, Why, we 155 00:17:16.240 --> 00:17:21.560 are coming out of a depression. We need the business. How will these countries buy from 156 00:17:21.560 --> 00:17:40.280 In the spring of 1717, Law took over the royal charter of the miserable Mississippi colony. 157 00:17:40.280 --> 00:17:44.720 His paper money would no longer generate trade unless he started a trading company of his 158 00:17:44.720 --> 00:17:45.720 own. 159 00:17:45.720 --> 00:17:49.960 The stories coming out of Mississippi were full of the glories of the natural resources 160 00:17:49.960 --> 00:18:03.320 and the Wealth of the Area. Law looked to a vast investment of capital, a large migration 161 00:18:03.320 --> 00:18:11.600 of slaves, for which he got an authorization of 100 million Leroy. The capital would be 162 00:18:11.600 --> 00:18:17.640 raised by public subscription. He had already been successful in raising money for his bank 163 00:18:17.640 --> 00:18:25.960 by accepting depreciated state bonds at face value, fine form of venture capital. 164 00:18:25.960 --> 00:18:28.600 And he proposed to do it again. 165 00:18:28.600 --> 00:18:31.000 He added a new feature to the project. 166 00:18:31.000 --> 00:18:34.800 Once the bonds had been turned over to the new company, he would burn them and save the 167 00:18:34.800 --> 00:18:37.840 government the necessity of paying interest. 168 00:18:37.840 --> 00:18:44.720 The Western Company would assume the obligations in perpetuity, presumably paying four percent 169 00:18:44.720 --> 00:18:48.640 and the Anticipated Profits. 170 00:18:48.640 --> 00:18:56.080 To crown the blessings of getting the Mississippi contract, law named the new capital, a trading 171 00:18:56.080 --> 00:19:00.080 post in a miserable village, New Orleans. 172 00:19:00.080 --> 00:19:04.120 Despite his great power, the region had its enemies who objected to the royal treasury's 173 00:19:04.120 --> 00:19:07.720 support of law's private bank. 174 00:19:07.720 --> 00:19:16.360 France's attempt to limit an autocratic government by holding the purse strings failed largely 175 00:19:16.360 --> 00:19:21.560 because of France's love of monarchy and disdain of the British model of parliamentary control 176 00:19:21.560 --> 00:19:33.600 over the King. Under the Regency, there were to be no legislative checks, when the Congress 177 00:19:33.600 --> 00:19:44.320 The Regent and John Law had carte blanche. 178 00:19:44.320 --> 00:19:49.080 Law went on to diversify the assets of the Western Mississippi Company. 179 00:19:49.080 --> 00:19:52.660 He acquired the monopoly of tobacco manufacture and marketing. 180 00:19:52.660 --> 00:19:56.880 He agreed to pay the government four million L. a year for nine years. 181 00:19:56.880 --> 00:20:01.200 His generous terms strengthened confidence in the Western Company, which by the spring 182 00:20:01.200 --> 00:20:07.820 The beginning of 1718 was being called the system, the word anticipated law's dominion 183 00:20:07.820 --> 00:20:14.980 of the country's entire economy and trade. In November 1718, the decision was made to 184 00:20:14.980 --> 00:20:25.140 turn the bank general into the bank royal on the first day of the New Year. Law may 185 00:20:25.140 --> 00:20:30.220 have been willing to settle for a private bank. It was going pretty well. But after 186 00:20:30.220 --> 00:20:33.940 After all, the regent and his secretary of state did have an idea there might be another 187 00:20:33.940 --> 00:20:36.300 war to come along. 188 00:20:36.300 --> 00:20:44.020 And so they moved John Law to go on to his original idea, which was to have a royal bank, 189 00:20:44.020 --> 00:20:49.560 which would also give them free access to unlimited resources and certainly the revenue 190 00:20:49.560 --> 00:20:57.060 to finance a war, the same sort of opportunity that politicians have had since 1913 in the 191 00:20:57.060 --> 00:20:58.980 United States. 192 00:20:58.980 --> 00:21:07.500 The Royal Bank began with 120 million livre in paper circulating. But there was one distinct 193 00:21:07.500 --> 00:21:13.900 difference between the livre of the new bank and the private bank. The livre of the first 194 00:21:13.900 --> 00:21:21.820 bank had been convertible. Now the livre were livre-ternoir, notes of account only, which 195 00:21:21.820 --> 00:21:27.340 Which is essentially what the dollar is today. 196 00:21:27.340 --> 00:21:35.740 By making this move, law sort of wipes out that whole idea that he was naive or he had 197 00:21:35.740 --> 00:21:37.380 good motives in mind. 198 00:21:37.380 --> 00:21:43.300 All along he had wanted to move the nation to pure paper money, the kind that people 199 00:21:43.300 --> 00:21:49.300 would not even be tempted to hoard because it would have no intrinsic value. 200 00:21:49.300 --> 00:21:53.340 In a sense it's a similar process that we have seen with the dollar as it has moved 201 00:21:53.340 --> 00:21:59.820 from being one twentieth of an ounce of gold, then it was no longer convertible, then the 202 00:21:59.820 --> 00:22:04.920 reserves were removed and then finally it is a dollar turn wide, it is simply a Federal 203 00:22:04.920 --> 00:22:10.900 Reserve note, a note of account. 204 00:22:10.900 --> 00:22:15.960 The system and the bank became a catalyst for bringing the social and economic classes 205 00:22:15.960 --> 00:22:42.920 The creation of un-earned paper money brought about a psychology of pleasure and great 206 00:22:42.920 --> 00:22:47.640 expectations among thousands in Paris. Men and women were throwing discretion to the 207 00:22:47.640 --> 00:22:52.360 winds and were prepared to support a venture that would carry them farther along the path 208 00:22:52.360 --> 00:22:59.120 of hedonism than they themselves believed possible. All that was required is capital. 209 00:22:59.120 --> 00:23:03.200 Law now began to expand geometrically and to bring the public into its enterprise on 210 00:23:03.200 --> 00:23:12.000 a scale never before anticipated. And added to the maelstrom of social and economic chaos, 211 00:23:12.000 --> 00:23:34.000 The figure Cartouche, a sort of Mack the Knife figure, comes out of this time in Paris. Parts of bodies were found in the river, and not to mention the pickpockets and the swindlers, and all of the degenerates that come around where there is easy money. 212 00:23:34.000 --> 00:23:41.000 Then of course added to this scene were those who were being shipped off to the glories of Louisiana. 213 00:23:41.000 --> 00:23:47.500 Often they would be paraded down the streets in chains, but garlands of flowers would be hiding the chains. 214 00:23:47.500 --> 00:24:01.500 It was a good way to get rid of children who were difficult wives, mistresses who were obsolete, shall we say, criminals, degenerates of all sorts. 215 00:24:01.500 --> 00:24:09.500 The good people didn't go. Why go to Louisiana when the good times were rolling in Paris? 216 00:24:09.500 --> 00:24:19.500 Law added to his conglomerate of the Royal Bank, the East India Company, the China Company, and the Senegal Company. 217 00:24:19.500 --> 00:24:24.500 The Senegal Company dealt in the slave trade. 218 00:24:24.500 --> 00:24:29.500 Now, Law's methods of stock promotion would have been understood by any Merrill Lynch broker. 219 00:24:29.500 --> 00:24:32.500 Deals were made in futures, puts and calls. 220 00:24:32.500 --> 00:24:38.500 Law himself took options on shares at 200 lira over the market, 221 00:24:38.500 --> 00:24:44.940 A move that brought in the amazed public and moved the shares to extravagantly higher prices. 222 00:24:44.940 --> 00:24:50.320 As new companies were brought into the conglomerate, new shares were offered to previous owners 223 00:24:50.320 --> 00:24:51.780 at discount. 224 00:24:51.780 --> 00:24:56.900 To buy one daughter, you had to have four mothers. 225 00:24:56.900 --> 00:25:00.660 Obviously, you went out and bought the old shares so you could get some of the new ones. 226 00:25:00.660 --> 00:25:06.100 And then there was a new company brought out, and they were called granddaughters, so you 227 00:25:06.100 --> 00:25:12.380 He bought mothers and daughters to get granddaughters. It was a marvelous stock-jobbing operation, 228 00:25:12.380 --> 00:25:18.060 as Adam Smith has said. Subscriptions could be paid on installments. Shares could be bought 229 00:25:18.060 --> 00:25:24.980 with 5% paid in and the rest in 19 monthly installments. And especially appealing was 230 00:25:24.980 --> 00:25:32.180 law's technique by declaring dividends which had not been earned. And law continued on 231 00:25:32.180 --> 00:25:44.180 In April 1719 the Royal Decree went out, as the circulation of banknotes is more useful 232 00:25:44.180 --> 00:25:50.700 to His Majesty's subjects than gold or silver coin, and as they merit special protection 233 00:25:50.700 --> 00:25:57.260 because of the preference of metal money abroad, His Majesty intends that these notes stipulated 234 00:25:57.260 --> 00:26:03.140 and Current Money cannot be subject to diminutions, which might happen to coins and they are always 235 00:26:03.140 --> 00:26:09.460 to be paid in full. In other words, let the foreigners have the gold and silver, the pay 236 00:26:09.460 --> 00:26:14.940 for money was really better for the home folks. That's an episode that we went through from 237 00:26:14.940 --> 00:26:22.080 1934 to 1974, did we not? 238 00:26:22.080 --> 00:26:26.700 In July 1719, when Law's Company outbid the Paris brothers, that was the name for some 239 00:26:26.700 --> 00:26:35.900 For the monopoly of the tax collection, he dealt a fatal blow to what was then being 240 00:26:35.900 --> 00:26:42.040 organized or tried to be organized for a year, a group known as the anti-system. They wanted 241 00:26:42.040 --> 00:26:49.500 to bring law down. But by bringing in the collection of the taxes, he really put almost 242 00:26:49.500 --> 00:26:56.460 the final brick in place. He was well on his way toward paper money and a planned economy. 243 00:26:56.460 --> 00:27:03.660 In September 1719, law made its last great move, and that was to take over the entire 244 00:27:03.660 --> 00:27:05.540 national debt. 245 00:27:05.540 --> 00:27:12.020 The state had been paying its bondholders a steady 4 percent. 246 00:27:12.020 --> 00:27:16.380 Law's company would assume the debt and charge the government only 3 percent. 247 00:27:16.380 --> 00:27:23.220 The bondholders got the option of taking cash, investing in law's stock and awaiting a dividend 248 00:27:23.220 --> 00:27:25.840 or becoming speculators. 249 00:27:25.840 --> 00:27:31.400 The gesture to benefit the state of financial condition had predictable, dire consequences. 250 00:27:31.400 --> 00:27:39.600 Law activated an enormous amount of dormant capital for his system, without regard to 251 00:27:39.600 --> 00:27:44.320 the consequences for those conservative people who had loaned their money to the government 252 00:27:44.320 --> 00:27:48.800 in good faith, expecting a modest but steady return. 253 00:27:48.800 --> 00:27:53.480 In essence, law had monetized the national debt. 254 00:27:53.480 --> 00:27:59.080 He may have thought he found a way to breathe life into what he called dead capital. 255 00:27:59.080 --> 00:28:05.880 Economically, Elgin Grossgross explained, it was a great effort to give currency liquidity 256 00:28:05.880 --> 00:28:09.440 to all forms of wealth. 257 00:28:09.440 --> 00:28:13.480 You see that sort of action everywhere in our world today. 258 00:28:13.480 --> 00:28:18.080 And when I left Greenwich yesterday, I got one of those efforts in the mail. 259 00:28:18.080 --> 00:28:36.920 Dear Mr. Bricker, now you can enjoy the opportunity of having the house that you have been paying 260 00:28:36.920 --> 00:28:41.480 for and taking care of and have it do something for you. 261 00:28:41.480 --> 00:28:47.520 With a home equity loan from Irving Trust, you can free thousands of dollars that are 262 00:28:47.520 --> 00:28:54.520 are presently tied up in equity in your home. You'll be able to use this currently dormant 263 00:28:54.520 --> 00:29:00.600 asset to improve your home and property, or perhaps by building a tennis court, a greenhouse, 264 00:29:00.600 --> 00:29:10.360 a pool, or invest in art and other collectibles. Very interesting of the Irving Trust. Or to 265 00:29:10.360 --> 00:29:17.160 purchase a luxurious car. Any servant who made a lot of money went right out and bought a 266 00:29:17.160 --> 00:29:27.160 or a bigger boat, a second home. You can even use those funds to finance a business venture on the side. 267 00:29:27.160 --> 00:29:37.160 Well, and so the Irving Trust, like John Law, is breathing life into dead equity, dead capital. 268 00:29:37.160 --> 00:29:46.160 Now to do all of these things that Law had undertaken, the conglomerate, by taking over the national debt, he had to issue more cash. 269 00:29:46.160 --> 00:30:00.040 In January 1720, the people began doing what John Law wanted them to do with paper money, 270 00:30:00.040 --> 00:30:03.280 to spend it, much like the Irving Trust. 271 00:30:03.280 --> 00:30:06.880 They bought real estate, jewelry, carriages and clothes. 272 00:30:06.880 --> 00:30:10.680 They traveled, they went to the theater, they dined out. 273 00:30:10.680 --> 00:30:16.340 As John Law said, banknotes should not be regarded as a simple promise to furnish gold 274 00:30:16.340 --> 00:30:23.680 and silver equivalent to the denomination, but as a reciprocal agreement between the 275 00:30:23.680 --> 00:30:29.000 king and his subjects to give and take mutually through the circulation of this paper money, 276 00:30:29.000 --> 00:30:32.760 not just BC, but things of real value. 277 00:30:32.760 --> 00:30:35.620 The people then were doing their half of the job. 278 00:30:35.620 --> 00:30:38.900 They were out after things of real value. 279 00:30:38.900 --> 00:30:46.840 But the cautious began to take their paper livre and buy jewelry and deposit it abroad. 280 00:30:46.840 --> 00:30:52.120 Or they sold their paper bills to foreigners for coins, which could also be conveniently 281 00:30:52.120 --> 00:30:54.580 stored abroad. 282 00:30:54.580 --> 00:31:00.980 The makers of valuable objects, collectibles, stopped raising prices and refused to sell 283 00:31:00.980 --> 00:31:03.140 at all. 284 00:31:03.140 --> 00:31:07.920 The decrease in the demand for the paper livre had begun. 285 00:31:07.920 --> 00:31:16.040 The wise began to play the short side of the market. Richard Cantillon knew all along the 286 00:31:16.040 --> 00:31:22.400 folly of John Law's system, and he made his fortune by loaning money to the greedy so 287 00:31:22.400 --> 00:31:30.320 that they could buy shares for speculation. Cantillon sold the shares that he held as 288 00:31:30.320 --> 00:31:42.800 The payment was due, and the shares were worthless, but it was time to pay off Richard Cantillon. 289 00:31:42.800 --> 00:31:49.160 He insisted that the debtors pay him in specie. 290 00:31:49.160 --> 00:31:53.520 By the way, Richard Cantillon is also the man who said that a country that has an awful 291 00:31:53.520 --> 00:32:03.520 A lot of external debt is a nation that has in its midst fires of straw and is about to go bankrupt. 292 00:32:03.520 --> 00:32:10.520 So when we do our drama with John Law, we have to cast a very smart man. 293 00:32:10.520 --> 00:32:18.520 Murray says they have to be stout, as Richard Cantillon. 294 00:32:18.520 --> 00:32:23.480 The Realizers, as they were known for turning in the paper leaver for specie, brought John 295 00:32:23.480 --> 00:32:28.080 Law's personal wrath against old enemies and former friends. 296 00:32:28.080 --> 00:32:32.920 Law considered hoarding unsocial and sought to eradicate it by edict. 297 00:32:32.920 --> 00:32:37.920 Those who want to amass and retain wealth are like parts or extremities of the human 298 00:32:37.920 --> 00:32:44.720 body which would want to stop the flow of blood that irrigates and nourishes them. 299 00:32:44.720 --> 00:33:00.560 In order to protect the system, law struck out at those who were still unwilling to accept 300 00:33:00.560 --> 00:33:04.720 the idea that wealth and paper were coterminous and indistinguishable. 301 00:33:04.720 --> 00:33:18.680 John Law declared, it is necessary to have recourse to authority to induce the public 302 00:33:18.680 --> 00:33:24.720 to contribute to their own happiness. 303 00:33:24.720 --> 00:33:29.960 Thus John Law had his paper money declared exclusive legal tender of the realm. 304 00:33:29.960 --> 00:33:35.600 Through a series of edicts in January and February of 1720, no one was to wear diamonds 305 00:33:35.600 --> 00:33:37.800 and precious stones without permission. 306 00:33:37.800 --> 00:33:43.000 Didn't somebody tell us recently that we were supposed to lower our standard of living? 307 00:33:43.000 --> 00:33:47.040 Goldsmiths were not to make gold-plate objects, and no one was to import them. 308 00:33:47.040 --> 00:33:50.240 No payment in excess of 100 gold livers was allowed. 309 00:33:50.240 --> 00:33:55.160 The holding of gold and silver was restricted to the equivalent of 500 livers. 310 00:33:55.160 --> 00:34:01.080 To enforce these edicts, law imposed search and seizure measures. Rewards were offered 311 00:34:01.080 --> 00:34:08.080 to informers. Homes were torn apart and churches were forced to turn in coin from poor boxes. 312 00:34:08.920 --> 00:34:15.920 You should have given the gold to the poor, was the Judas-like cry from the police. The 313 00:34:16.220 --> 00:34:23.220 joy of 1719 turned into chaos and ruin for thousands in 1720. 314 00:34:23.220 --> 00:34:28.740 Along the way to power, John Law had given up his Scotch Presbyterianism to become a 315 00:34:28.740 --> 00:34:30.500 Roman Catholic. 316 00:34:30.500 --> 00:34:35.740 In the midst of the misery, the British ambassador to France, the Earl of Stare, observed that 317 00:34:35.740 --> 00:34:42.260 he could not now doubt that Law was a Catholic because he established the Inquisition after 318 00:34:42.260 --> 00:34:49.260 proving transubstantiation by changing species into paper. 319 00:34:49.260 --> 00:34:54.140 Now John Law saw the need to dampen down the speculation that he had come to believe was 320 00:34:54.140 --> 00:34:59.760 a curse, despite his own responsibility for creating and encouraging the mania. 321 00:34:59.760 --> 00:35:06.300 He blamed the cupidity of the consciousless traders for damaging his system. 322 00:35:06.300 --> 00:35:08.360 Of course he blamed the businessmen. 323 00:35:08.360 --> 00:35:13.700 The butchers were overpricing, so he brought cattle into Paris and personally provided 324 00:35:13.700 --> 00:35:14.700 cheaper meat. 325 00:35:14.700 --> 00:35:28.020 In a letter to a Parisian newspaper, Law explained that there had been a misunderstanding that 326 00:35:28.020 --> 00:35:29.740 threatened his system. 327 00:35:29.740 --> 00:35:34.380 He says the rave to pile up money came from the extraordinary growth of securities. 328 00:35:34.380 --> 00:35:37.720 Most people, surprised at their own profits, believed that they ought to turn them into 329 00:35:37.720 --> 00:35:41.800 gold and silver pieces, which they called profit-taking. 330 00:35:41.800 --> 00:35:47.880 law, they had not realized that the appreciated shares represent less actual money than capital, 331 00:35:47.880 --> 00:35:52.360 with many times more than their old contracts, but the truth of this should have been evident 332 00:35:52.360 --> 00:35:57.680 from the astonishing heights to which these shares had risen, for they actually surpassed 333 00:35:57.680 --> 00:36:04.720 in value all the gold and silver that will ever be in the kingdom. 334 00:36:04.720 --> 00:36:10.080 In his desperation, law finally turned to something he said he would never do, manipulating 335 00:36:10.080 --> 00:36:14.000 Reducing the Value of Specie Having issued the state money as the money 336 00:36:14.000 --> 00:36:21.140 of account, law was able to adjust its value by manipulating the value of the specie according 337 00:36:21.140 --> 00:36:28.720 to Levera, making the notes appear more valuable than gold. 338 00:36:28.720 --> 00:36:32.440 So he reduced the value of gold. 339 00:36:32.440 --> 00:36:38.200 Some specie came into the bank and people traded in specie for notes, but still he had 340 00:36:38.200 --> 00:36:43.840 had to issue more paper to redeem this species, and the money supply was definitely out of 341 00:36:43.840 --> 00:36:44.840 control. 342 00:36:44.840 --> 00:36:50.640 In March 1720, an edict banning the trading of securities throughout Paris was issued, 343 00:36:50.640 --> 00:36:58.840 and the Rue Quine-Quimpois was closed, and a week later a black market in securities 344 00:36:58.840 --> 00:37:06.400 and in coins sprang up, ironically in the Place Louis-Lagrange where Law lived and much 345 00:37:06.400 --> 00:37:15.400 On May 1720, in the name of the King, law decreed that in order to check inflation and 346 00:37:15.400 --> 00:37:21.560 reduce the amount of paper money in circulation, its value was to be diminished by 50 percent 347 00:37:21.560 --> 00:37:28.080 over a six-month period. That is, a 100-lever note would become by December a 50-lever note. 348 00:37:28.080 --> 00:37:33.180 The edict also stated that the shares of the Indies Company would be forced down from 9,000 349 00:37:33.180 --> 00:37:37.260 to $5,000 during the same period. 350 00:37:37.260 --> 00:37:42.740 Because this decline was less drastic than the currency devaluation, law actually expected 351 00:37:42.740 --> 00:37:46.620 the prosperous to turn in some of their paper for shares. 352 00:37:46.620 --> 00:37:51.580 That way he would retire some of the money that he had just printed. 353 00:37:51.580 --> 00:37:58.900 In theory, he thought the public would be losing nothing since the prices would presumably 354 00:37:58.900 --> 00:38:09.180 The Man in the street felt as if he had suddenly been robbed of half of his wealth. What hurt 355 00:38:09.180 --> 00:38:15.180 the most was the loss of faith in the immutability of banknotes, which law in the region had 356 00:38:15.180 --> 00:38:20.260 solemnly assured their holders would never lose their value, and which only a few months 357 00:38:20.260 --> 00:38:26.840 before had been worth more than the face value. This betrayal was fatal. Fatal to law, fatal 358 00:38:26.840 --> 00:38:44.520 Law's decree, however, was never put into effect. In May, he was relieved of his portfolio 359 00:38:44.520 --> 00:38:52.760 as Comptroller General of Finance. New edicts were issued permitting the use of specie again 360 00:38:52.760 --> 00:38:59.520 and Transactions. The limit of 500 lever personal possession of coin was removed. From June 361 00:38:59.520 --> 00:39:05.000 until December, Law remained in Paris, watching others undo in six months what he had created 362 00:39:05.000 --> 00:39:08.400 over a period of four years. 363 00:39:08.400 --> 00:39:13.080 On October 10, 1720, an edict decreed that after the 1st of November all paper money 364 00:39:13.080 --> 00:39:19.660 would be withdrawn from circulation and could be used only for conversion into state bonds. 365 00:39:19.660 --> 00:39:26.260 Its shares of the company were quoted at 2,000 L, which meant 400 L in hard money, money 366 00:39:26.260 --> 00:39:30.860 that had been devalued several times since the shares were first issued. 367 00:39:30.860 --> 00:39:35.940 So by the end of the fall, both paper currency and stock certificates were worth so little 368 00:39:35.940 --> 00:39:41.980 that only speculators who specialized in holding paper over long periods of time were interested 369 00:39:41.980 --> 00:39:46.540 in having either of law's creations. 370 00:39:46.540 --> 00:40:00.920 Paper money has now been restored to its intrinsic value. 371 00:40:00.920 --> 00:40:11.080 Charles Rist has said of John Law's theories that never before in the age-old struggle 372 00:40:11.080 --> 00:40:17.560 between the State, bent on making counterfeit money, and individuals defending their fortune 373 00:40:17.560 --> 00:40:23.120 against its exactions, have the implications of tyrannical ideas been followed up with 374 00:40:23.120 --> 00:40:29.440 greater logic. The right to ownership of money has never been denied with a more thorough 375 00:40:29.440 --> 00:40:35.440 cynicism, nor the rights of the State over the goods of its subjects affirmed with less 376 00:40:35.440 --> 00:40:36.440 hypocrisy. 377 00:40:36.440 --> 00:40:46.180 Now, if all the similarities that I've pointed out between our time and John Law are valid, 378 00:40:46.180 --> 00:40:54.680 then I suggest that the next good sign that we see will be a black market in sound money 379 00:40:54.680 --> 00:40:57.880 on 20th and Constitution Avenue. 380 00:40:58.880 --> 00:41:17.880 Thank you very much, Elizabeth. I hesitate to ask whether in this play you don't intend to cast the economist in the role of the fortune tellers and devil worshipers. 381 00:41:17.880 --> 00:41:24.880 We'll be happy to have questions or comments from the audience now. 382 00:41:24.880 --> 00:41:45.880 It is amazing and I will admit to a significant lack of knowledge of history of the Mississippi Bubble episode though that the parallels that Elizabeth drew with the John Law episode and what we have seen with regard to our monetary system, arrangements, banks and what not over the last 20 years or so. 383 00:41:45.880 --> 00:41:49.880 Do they know what the Constitution Avenue is? 384 00:41:49.880 --> 00:41:53.880 Perhaps you should tell them. 385 00:41:53.880 --> 00:41:56.380 That's where the Federal Reserve building is. 386 00:41:56.380 --> 00:41:58.880 Marble Palace, as we used to refer to it. 387 00:42:03.880 --> 00:42:09.880 If anybody will write the play, I'll get the venture capital all in paper. 388 00:42:09.880 --> 00:42:13.880 What's the best way to invest in the gold? 389 00:42:13.880 --> 00:42:19.880 Bonds, or stocks, or bullion? 390 00:42:19.880 --> 00:42:23.380 You can't get it by bonds, but I'd do it any way I could. 391 00:42:23.380 --> 00:42:28.760 And I learned from this myself, and who was it earlier today said that the purchasing 392 00:42:28.760 --> 00:42:35.900 power of gold held its own. Joe Peden said that, yes. That underscored what I gained 393 00:42:35.900 --> 00:42:46.340 from my expanded research. Isn't it interesting that gold was always the enemy of John Law? 394 00:42:46.340 --> 00:42:52.120 It's the one thing he wanted to eradicate, and it defeated him finally because that's 395 00:42:52.120 --> 00:43:01.200 That's what the people turn to. How to buy, how to hold gold? Very quietly, because you 396 00:43:01.200 --> 00:43:05.960 remember what they did, what they always seem to do, they come after it. But I would say 397 00:43:05.960 --> 00:43:17.960 coin, bullion, if that's the style you travel, and lots of shares, because I think it is 398 00:43:17.960 --> 00:43:33.040 Would you please use the microphone so we can get all of this on tape, please? 399 00:43:33.040 --> 00:43:38.960 Would you consider investing in gold or silver, if you had your choice? 400 00:43:38.960 --> 00:43:44.120 Well I think gold is money. Silver is a little bit more diverse. Now, should I say for the 401 00:43:44.120 --> 00:43:50.120 For the sake of the SEC that I am not a licensed investment advisor. 402 00:43:50.120 --> 00:43:52.520 But silver has industrial uses. 403 00:43:52.520 --> 00:43:57.200 It has a different supply factor to be considered. 404 00:43:57.200 --> 00:44:03.680 But I think either one will do in a crisis. 405 00:44:03.680 --> 00:44:08.080 But I would say that gold really is money. 406 00:44:08.080 --> 00:44:10.080 Silver does serve, too. 407 00:44:10.080 --> 00:44:12.560 It's the second, would be my second choice. 408 00:44:12.560 --> 00:44:14.560 All right, thank you. 409 00:44:20.300 --> 00:44:22.800 That it? Additional questions or comments, please? 410 00:44:31.920 --> 00:44:37.540 With some of the recent mining activity in gold, 411 00:44:38.160 --> 00:44:42.480 it looks as though the cost of mining gold may be dropping. 412 00:44:42.560 --> 00:44:49.560 and the value of money may drop in the future. That will have a direct bearing on the value of gold, of course. 413 00:44:49.560 --> 00:44:56.560 Well, I mean that if you invest in a company, your dividends will look better, too. You mean heap leaching and such as that? 414 00:44:56.560 --> 00:45:00.560 Yes, the new processes are bringing out more gold. 415 00:45:00.560 --> 00:45:08.560 And mines are being opened up several a day, so the supply is coming on. 416 00:45:08.560 --> 00:45:16.960 Yes, it's an exciting time for money, but I would think that the reducing the cost would 417 00:45:16.960 --> 00:45:19.400 mean better dividends. 418 00:45:19.400 --> 00:45:23.200 Well, you all come to my... 419 00:45:23.200 --> 00:45:24.200 Oh, Ralph. 420 00:45:24.200 --> 00:45:30.400 I was interested in your alluding to the Eva Perone movie. 421 00:45:30.400 --> 00:45:36.760 Are you suggesting that perhaps someone should indeed put together a movie about John Law? 422 00:45:36.760 --> 00:45:44.040 And if you are, how do you see the comparison between the hard-money people and the soft-money 423 00:45:44.040 --> 00:45:48.000 people in demonstrating their ideas through the theatre? 424 00:45:48.000 --> 00:45:54.800 Well, I don't think the hard-money people demonstrate their ideas at all in that art 425 00:45:54.800 --> 00:46:01.840 form. And I think it's too bad. I think we should use the art forms because certainly 426 00:46:01.840 --> 00:46:12.400 The others do, whoever they are. They use the theater, they use the graphic arts. Broadway 427 00:46:12.400 --> 00:46:20.800 is a very expensive medium. I do think this would make a very exciting show. Maybe we 428 00:46:20.800 --> 00:46:27.920 could just do it on the cheap with a couple of people and some films. I am thoroughly 429 00:46:27.920 --> 00:46:33.080 I'm very enjoying today and I'm taking too much time and I think it's wonderful to learn 430 00:46:33.080 --> 00:46:36.160 these lessons in this environment which we all enjoy. 431 00:46:36.160 --> 00:46:41.200 I mean, if you're like me, this is just meat and drink for you. 432 00:46:41.200 --> 00:46:48.240 But I think it would be interesting to use the other media that are available to us and 433 00:46:48.240 --> 00:46:53.280 I think I'd like to see us use the theater for stories as exciting as this. 434 00:46:53.280 --> 00:47:01.360 By the way, the word millionaire began at John Law's time, so you can feed out all sorts 435 00:47:01.360 --> 00:47:02.360 of little things. 436 00:47:02.360 --> 00:47:05.960 If they don't learn about money, they can go out with a few little ideas to tell at 437 00:47:05.960 --> 00:47:08.560 the next cocktail party. 438 00:47:08.560 --> 00:47:14.160 And then, you know, we started the word billionaire now. 439 00:47:14.160 --> 00:47:15.160 Any further questions? 440 00:47:15.160 --> 00:47:32.200 I'm not too familiar with the Mises Institute. I don't know just how you operate, but I'm 441 00:47:32.200 --> 00:47:43.480 wondering if you can explain to us what you propose doing to encourage this move to hard 442 00:47:43.480 --> 00:48:03.480 Well, certainly there's much that can be done and needs to be done to promote stable value for the U.S. dollar and sound currency and, to the extent possible, ensure a non-inflationary future, but I think we're of the view that ideas, to some extent, 443 00:48:03.480 --> 00:48:10.080 to the extent possible ensure a non-inflationary future but I think 444 00:48:10.080 --> 00:48:16.440 we're of the view that ideas to some extent do rule the world and so one must 445 00:48:16.440 --> 00:48:21.560 start and win on the intellectual front before any lasting changes can occur. 446 00:48:21.560 --> 00:48:30.400 Mises Institute views and I speak for it as a large element of education and 447 00:48:30.400 --> 00:48:37.600 and providing the climate and the resources to fund intellectual endeavors 448 00:48:37.600 --> 00:48:44.720 as they apply to issues, not just sound money, but issues of a free society in general. 449 00:48:44.720 --> 00:48:52.320 There are many complementary institutions, such as Mrs. Currier's Committee for Monetary Research and Education, 450 00:48:52.320 --> 00:48:57.320 who not only view themselves as providing educational and intellectual support, 451 00:48:57.320 --> 00:49:02.960 but also policy guidance, policy debates, and things of that nature. 452 00:49:02.960 --> 00:49:08.460 So viewed as a whole, certainly there are steps in place, certainly there's much to be done, 453 00:49:08.460 --> 00:49:11.460 but gatherings such as this are part of that process.