The History of Paper Money – Lay Down the Law – Extra History – #4

The History of Paper Money – Lay Down the Law – Extra History – #4


Last we left off, paper money doctrine was just starting to be established, with people like Nicholas Barbon beginning to explore the radical idea that gold and silver didn’t have any inherent value only the value we gave them. Which leads inevitably to the argument that in using gold and silver, we tie ourselves to a system that has all the disadvantages of a commodity currency without really securing for ourselves anything more tangible than what we get with paper bills. Today we get to watch what happens the first time someone really tries to put paper money doctrine into practice. John Law, the son of wealthy Scottish goldsmiths turned bankers. Until his 17th year, he followed the family trade. But when his father died, he decided that banking was too honest of an employment for him and moved to the seedier side of London. There, he rapidly found that women and cards were far more to his liking than ledgers and receipts. He lived it up as the rake and rogue of lower London. But between the vast women, the high fashion and the low cards, he more than once ended up having to run home and ask mum for a loan just to get by. But it all came to a head one foggy evening in Bloomsbury Square. Law had a rival for one of his Lady Loves. A drunken quarrel turned into a duel. Blades were drawn. A step, a thrust, one man fell, red between the pavers. Before he could flee, Law was apprehended. He was hauled before the famous hanging judge Salathiel Lovell and sentenced to death. As he awaited the gallows though, his friends and benefactors got his sentence commuted to manslaughter and he was slapped with a fine and released. But the family of his rival was pulling strings too, and they appealed the decision. This time, Law knew to flee. He hightailed it to the Dutch Republic, enjoying the coffee houses, the gambling and, perhaps most of all, the stock market of Amsterdam. While he had always been of an intellectual advent, it’s here he started to really refine his ideas, both about gambling and finance. Watching this small republic with none of the natural resources of the other great countries of Europe dominate the world’s economic landscape galvanized his thoughts. He reasoned that if he could just understand what had created such an economic revolution there, he could export it to nations with more natural advantages. So he spent half a decade considering the problem. And all this reasoning led him to one conclusion. It was the supply of money and the availability of credit that made the Dutch Republic such a powerhouse. And where did he see the bottleneck in the availability of money and thus the availability of credit? The supply of gold and silver. If you’re only gonna lend out gold and silver, you have to HAVE the gold and silver to lend. And THAT puts a ceiling on the size of your economy which, while not absolute, is a lot more rigid than paper. And so he began to formulate his treatise, “Money and Trade Considered: With a Proposal for Supplying the Nation with Money”, with the aim of getting his native Scotland to create a national bank. Unfortunately, Scotland was destitute from risky Central American ventures and a failed harvest. The Scots were in no mood to take a risk on some theory. To cap the whole thing off, the Acts of Union in 1707 not only crushed any chance Law had of convincing the Scottish Parliament of his plan, but also made him an outLAW in Scotland as well as England. So, once more, our ironically named hero fled back to the Continent. For the next 10 years, he moved between France and the Dutch Republic, speculating, gambling and socializing. But Law was always one to learn from his mistakes. He no longer gambled simply as a gamble. Now it was a system. He put into practice the many ideas that translated from the financial world. He deconstructed the games he played and worked out great tables of outcomes. He was renowned for being able to calculate precise odds on the fly and hold them all in his head. And soon it paid off. This time, instead of gambling his way to the poorhouse, he became one of the richest men in Europe, amassing what today would probably be hundreds of millions of dollars just from cards and market speculation. But his gambling did one other thing for him. It opened doors. He was affable, charming and very well dressed. As he gambled across Europe, he worked his way up to playing at private, very-high-stakes games in Paris. Games which included some of the most powerful men of the land. And in these smoky rooms, he had far more opportunity to persuade them of his ideas than he had in Scotland. And the truth is those men were primed to BE persuaded. The wars of Louis XIV had left the French Treasury empty, and the state burden with insurmountable debt. The new regent and his council were looking for a way out. So when Law said that he had a plan, they listened. The plan was ambitious. He would form a central bank which would take over many of the economic functions of the state, right down to issuing money, which of course would take the form of his beloved banknotes. Most importantly, though, his plan to bankroll it was genius. He allowed people to buy stock at the bank, paying only 1/6 of the stock’s value in cash, and paying the rest by trading in their government bonds, the debts the government owed them. This scheme was genius, because the population of France knew that these government bonds were currently worthless, because the government was too broke to repay them. Yet at the same time, much of the debt which the government had been crippled trying to service was the very debt the people of France held. So in having everybody trade it in, this debt magically disappeared. And people who previously thought that they had been ruined by purchasing worthless government bonds now had something of worth that they could sell or trade. Stock in the new bank. Because everybody was confident in the new bank. Genius. And as John’s bank began to tick away, it all seemed to work. The paper currency was far more stable than the old silver currency, nobody could clip its edges, and forgeries were… well, punishable by death. Now with this first part of his economic system in hand, Law initiated the second part of his plan. He would form a trading company. With complete control of the economy, he established a monopoly on trade with the French territory of Louisiana and gave that monopoly to a company he established called The Company of The West. The plan here was simple: issue shares at 500 Livres a share, taking 15% down payment, and the rest in installments; and sell enough of these shares to pay off the remainder of the government’s debt. Soon, buoyed by some of Law’s own investing in the company, the stock price began to grow and word got out. This opportunity in Louisiana was too good to miss. Law was made the Duke of Arkansas and soon the stock jumped 100% then 1000% then 3000%. The problem was, there wasn’t any wealth coming out of Louisiana. When this all started, there were a mere 800 Europeans living in the whole territory. And soon Law had to resort to the expedient of offering criminals a pardon if they would marry a prostitute and move to Louisiana. Meanwhile, the stock price had created even more demand for paper currency. As people borrowed and spent against their stock that was now worth 30x what they had paid for it, inflation ran rampant. Now if this all sounds kinda familiar for some reason, you’re not wrong. Something very similar was happening right across the Channel. Soon Law’s system, which he had thought incorruptible, was forced to bend. He had to recall some of the paper money, slash the value of the currency, and outlaw the sale or possession of large quantities of gold. But all this did was let people know just how bad a shape The Company of The West and, by extension, the bank was in. Soon it would not hold. Mobs formed. There were rushes on the bank. And Law found himself, yet again, in a carriage in the night fleeing yet another country. But unlike his counterparts across the channel, Law wasn’t operationg out of greed, but rather out of a desire to prove the idea that he had burning within him. And while his bank and his trading company were a disaster from which France barely recovered, they were a failure in execution more than in concept. And so despite such a catastrophic misfortune, there were those in Europe who heeded what was perhaps his most famous conjecture: that money is the value BY which goods are exchanged and not the value FOR which goods are exchanged. Join us next time as we take the final step toward modern money. By getting off of the Gold Standard. Tis the gift to be simple tis the gift to be free tis the gift to come down to where we ought to be…

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100 thoughts on “The History of Paper Money – Lay Down the Law – Extra History – #4

  1. Why am I getting south sea bubble vibes from this? Maybe its the economic scheming and huge amounts of money?

  2. You show a portrait of Louis XIV, you show an opened safe, you realize it looks like the portrait was in front of the safe, you add "designed by: Portrait Safes Inc"

  3. So if you're ancestor was a criminal in France he married a prostitute which means your existence in America is because your great grandfather (x4 or x5) well that's one story to talk about with your family XD

  4. having the ability to calculate chance in your head at such a fast rate is very rare. and I also just so just happen to have that ability yayyyyyyyyyy

  5. You mean Law and his Company of the West in one side and Walpole of South Sea Bubble on the other side?

  6. Historical figures always have weird names. A guy who makes swords is named Blunt and a guy who was arrested is named Law.

  7. If we pause the inflation rate we can keep increasing the amount of paper money the government has without the value lowering its so easy but i keep being told that it wouldn't work

  8. 6:47 Check out the Gulf of California on the left on the map. Back when Mojave desert area was filled with water Spanish explorers assumed that area was a huge gulf instead of a smaller lake and river system.

  9. I can’t understand the inflation and how people borrowed and spent against their stock. ( from 6:40)
    Can someone please explain ???

  10. “And soon, Law had to resort to the expedient of offering criminals a pardon if they would marry a prostitute and move to Louisiana”

  11. Was reading a paper about the financial situation of France for an extra class project and the writer mentioned that in 1789 a bank run happened in the caísse d'escompete an the bank suspended payments, turning it's notes into fiat currency. He then said that people feared inflation because of John law's experiment, I would not have ane idea of what he was talking about was not this video that I already saw a couple of times.

  12. You used the wrong Union Jack when talking about the Act of Union. You included the Cross of Saint Patrick in the flag, when only the cross of St. Andrew and St. George should have been on the flag.

  13. i find it hilarious how capitalism gets away with this much failure for hundreds of years but socialism dares to fail for 50 and it is suddenly unviable.

  14. John Law and the Company of the West did a lot to help make France's financial problems even worse, a contributing factor of the French Revolution.

  15. A side lesson here is how men born into a certain style/level of privilege are very resistant to consequences of their dumb/badly-executed/evil/immature actions.

  16. Why would the supply of gold and silver be a cap on the size of the economy? Would not deflation allow for the same amount of currency to serve a larger economy with a larger real GDP? Or was downwards sticky prices a thing then also?

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