The Story of Real Money (Entry 195)
What John Law proposed in his own treatise in dialogue with his own countrymen was little different than what Jean-Baptiste Colbert had put into practice in France already a half-century earlier.
In effect, the free, voluntary exchange of goods and services was recognized by all to be a good thing, and money was clearly understood to be the medium that brought this good to fruition. This did not change the fact, however, that a shortage of money was highly probable, if not unavoidable during war and very likely from time to time during times of peace. For trade imbalances were the result of market variation over which no single individual, government, or other political or economic entity had sufficient control.
A storm at sea could wipe out an entire fleet of ships, and those who insured the ships’ owners and the cargoes that their ships carried would be compelled to pay. This would require a massive transfer of money with no receipt of goods in exchange. Unless the owners of the boats, the owners of the boats’ cargoes, and the insurers of both the ships and their cargoes were all of the same flag and currency, there was no guarantee that this transfer of money would remain in the hands of those engaged in the trade.
Then too, maritime disaster was only one of the many potential sources of market variation. Drought, flooding, pestilence, technological innovation, and discovery were perhaps the most important sources of natural market variation that were entirely separate from the risk of maritime travel. There were also important sources of direct human intervention including less than scrupulous private sector market manipulations and more overt governmental intervention implemented — but, of course — to make everything better.
Important in all of these regards was always the fear of too little money and a certain respect for the need of monetary integrity.
Indeed, John Law heartily recommended that his own government — rather than interfere with the flow of money that would surely be rectified in the market place with a change in the foreign exchange rate — control the supply and flow of specified goods in an effort to maintain the balance of trade and thus a steady domestic supply of money. He wrote,
“Nations finding the export of money or bullion to pay the balance due by trade, a loss of so much riches, and very hurtful to trade, might have discharged the import of such goods as the people could best want; or laid a duty on them, such as might have lessened their consumption; they might have given encouragement to industry, whereby the product would have been [i]ncreased and improved, or discouraged extravagant consumption, whereby the overplus to export would have been greater; any one of these methods would have brought trade and exchange equal, and have made a balance due them, but in place of these measures, they prohibit bullion and money to be exported, which could not well have any other effect, than to raise the exchange equal to the hazard, such laws added to the export of money or bullion, …” (Pages 45 and 46)
It was surely the impatience of government and the stubbornness of its advisors about the true nature of real money that led to the myriad of trade and price restrictions at the border of every — with few exceptions — European nation during the 18th century.
The introduction of paper was clearly the solution to the chronic money shortage, but the inability of the governments of Europe and their best advisors to free themselves from the established coin and move to easily divisible paper tied directly to the value of the metal would only come later and unfortunately far too late. For, the bad habit of import and export price and quantity controls quickly became a highly developed, poorly conceived, playground for politicians, intellectuals, and government bureaucrats each catering to his own respective economic, financial, bureaucratic, or political constituency — a playground that no enlightened political leader would ever be able to defy except with brute force and the risk of war. Napoléon Bonaparte was perhaps the most successful among these latter, but his financial story is beyond the humble reach of this work.
As always, where there is turmoil, the thieves of our world become rife, for turmoil begets injustice and injustice begets the need for rectification — what provides the moral justification that thieves require to impose their own sense of right and wrong.
John Law captured well the dilemma with which all political leaders would eventually be faced and all manner of banker would eventually exploit — some better than others, but none to the lasting benefit of any nation. He began with the following
“Banks where the money is pledged equal to the credit give, are sure; for, though demands are made of the whole, the bank does not fail in payment."
And, ended with …
Will you still be there, tomorrow?
In liberty, or not at all,
Roddy A. Stegemann
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