On the First of May in the year 1716, a swashbuckling Scottish entrepreneur was making this pitch of his lifetime to the head of the French government in Paris.
The entrepreneur’s name was John Law. By all accounts he was incredibly charismatic and had a flamboyant, larger than life personality. He was something like Adam Neumann, formerly of WeWork… the kind of person who could talk anyone into anything.
And John Law’s pitch that day was to launch an entirely new financial system.
King Louis XIV had just died eight months before, leaving France in terrible financial ruin. Decades of endless wars, palaces, and profligate spending had bankrupted the French government.
The situation was so dire, in fact, that there was hardly any gold left in the French treasury. So the new head regent of the government, Duke Philippe II of Orleans, was desperate for a solution.
Law made him a bold proposal: the Duke would provide Law with a special banking license. And in exchange, Law would create a new system of paper money that would bring more gold into France and help pay off the crippling national debt.
Philippe agreed. And, only a few weeks later, John Law’s new Banque Generale Privee was in business.
It turned out that people loved the idea of paper money. And within a year, his paper bank notes were circulating widely throughout the French economy, and the government even accepted them for tax payments.
Law made his paper money even more valuable in late 1717, after he had taken control of the Mississippi Company.
The French Mississippi Company was something like the Dutch East India Company; it was a private enterprise that had received a royal monopoly over all the land and resources in France’s American colonies.
Almost immediately after securing rights to the monopoly, Law offered shares of the Mississippi Company to the public; it was like a giant IPO.
But Law sweetened the deal by allowing people to pay up to 75% of the share price using his bank’s paper money.
The Mississippi Company IPO was a smashing success. It was so popular that Law was offered bribes, sex, and political favors from French nobles in exchange for the opportunity to buy a few extra shares.
The famous philosopher Voltaire was eye witness to this, and wrote, “I myself saw him pass through the galleries of the Palais-Royal followed by dukes and peers, Marshalls of France, bishops of the Church.”
And at first, the share price soared. Bear in mind the Mississippi Company had zero activity. Hardly anyone was living in France’s southern colonies in America, and there was virtually no trade or commerce going on.
The government even tried deporting criminals to America, trying to increase the population of the colonies. They offered hundreds of acres of land for free to anyone who would go. Yet economic activity still failed to transpire.
Eventually, the French public realized the truth; there would be no gold, no gems, and no riches coming from the Mississippi Company. And the stock price began to quickly collapse.
Law tried to prop up the stock price by creating more paper money (backed by absolutely nothing), and using that new money to buy shares of the Mississippi Company.
But all he ended up doing was creating inflation; with so much new paper money circulating in the economy, prices everywhere rose.
By May 1720, retail prices in France had doubled. It was full-blown hyperinflation, and people panicked. They feverishly began selling off their Mississippi Company shares and trading their paper money, for any real asset they could get their hands on.
One nobleman, Duke Henri-Jacques de Caumont, dumped all of his paper in exchange for a warehouse full of candles. A Parisian merchant sold his in exchange for crates of chocolate and coffee.
(This is one of many examples of history showing that real assets tend to do well in times of inflation.)
Shortly after, Law officially suspended the conversion of his bank notes into gold and silver, and the paper money instantly became worthless.
At the peak of all this insanity, if you can even believe it, the French government made John Law its Comptroller-General.
In other words, the guy who created the biggest financial bubble in French history was put in charge of government finances.
I couldn’t help but think of this story when I watched a group of central bankers talking about cryptocurrency at a conference in Paris last week.
Among others, the heads of the US Federal Reserve and the European Central Bank participated in a panel discussion that, for anyone who actually understands crypto, can only be described as hilarious.
Naturally, they started with the old anti-crypto tropes, talking about “the lack of transparency” and how criminals use crypto.
These are completely laughable points. Criminals use iPhones, American Express, and JP Morgan Chase as well. Should we cancel those too?
And as for crypto’s lack of transparency, the opposite is true. Every Bitcoin transaction is traceable on the blockchain for the entire world to see.
Yet with every passing sentence, these bankers demonstrated that they know absolutely nothing about crypto… and quite possibly banking too.
At one point they slammed stablecoins that didn’t have a 1:1 backing; stablecoins are specialized tokens that represent, for example, 1 US dollar per token. So there is supposed to be at least one US dollar in reserve for every token in circulation.
Lately there have been a handful of high profile stable coins that didn’t have sufficient reserves. So their criticism is fair.
But this leads to an obvious question: if a 1 to 1 reserve standard for stable coins is so critical, why don’t we demand the same of our banking system?
Central Banks are among the most prominent regulators in banking. And they have completely condoned a fractional reserve system whereby commercial banks are only required to keep 10% (or less) in reserve.
In other words, these people are perfectly fine that commercial banks gamble most of their customers’ money on the latest investment fad of the day.
It’s fine to be outraged when a few stablecoins aren’t 100% reserved. But they should be equally outraged that commercial banks aren’t even 10% reserved.
The biggest laughs, though, took place when these central bankers started talking about rolling out their own digital currencies.
The Fed wants to create a DollarCoin. And the European Central Bank wants a EuroToken.
This is truly rolling on the floor, laugh out loud funny given that these people have no clue about technology.
The Federal Reserve’s most important payment system, FedACH, which processes over 50 million transactions per day, still takes 2-3 days for payments to clear. It’s so outdated, it’s as if they’re still sending satchels full of cash via Pony Express.
It’s also ridiculous that the people who have failed in every possible aspect of their responsibility think that they’re qualified to administer a brand new financial system.
These Central Banks failed to anticipate inflation. They failed to recognize it. They failed to do anything about it for more than a year. And now they’re hellbent on causing a recession.
They’ve pretty much been a complete disaster. Yet now they want to be in charge of crypto too. Are these people serious??
To me this is really one of the great benefits of crypto, and of real assets. Holding paper money is ultimately a vote in favor of central bankers, an expression of confidence that they know what they’re doing.
Personally I have little confidence in these people. And that’s why I think it makes sense to hold other types of assets that they don’t control, including real assets (real estate, commodities, productive businesses, etc.) and decentralized crypto assets.
Copyright © 2022 Simon Black All rights reserved
