The Origin of Money 10 – The Birth of Modern Finance

 Money Becomes Metal

It is one of the great ironies of history that at the same time the modern financial system and banking was being invented, Enlightenment thinkers discarded thousands of years of monetary history and declared money to be based on the intrinsic value of precious metals alone.

Events like the Kipper and Wipperzeit had convinced scholars in Europe that a stable value of coins depended on issuing coins with constant and fixed amounts of precious metal. This, they reasoned, would prevent the rapid hyperinflation and deflation that were wreaking havoc on monetary systems throughout Europe.

…This monetary terrorism had its roots in the economic problems of the late 16th century and lasted long enough to merge into the general crisis of the 1620s caused by the outbreak of the Thirty Years’ War, which killed roughly 20 percent of the population of Germany. While it lasted, the madness infected large swaths of German-speaking Europe, from the Swiss Alps to the Baltic coast, and it resulted in some surreal scenes: Bishops took over nunneries and turned them into makeshift mints, the better to pump out debased coinage; princes indulged in the tit-for-tat unleashing of hordes of crooked money-changers, who crossed into neighboring territories equipped with mobile bureaux de change, bags full of dodgy money, and a roving commission to seek out gullible peasants who would swap their good money for bad. By the time it stuttered to a halt, the kipper- und wipperzeit had undermined economies as far apart as Britain and Muscovy, and—just as in 1923—it was possible to tell how badly things were going from the sight of children playing in the streets with piles of worthless currency.

“Kipper und Wipper”: Rogue Traders, Rogue Princes, Rogue Bishops and the German Financial Meltdown of 1621-23 (Smithsonian Magazine)

In England, this concept was most forcibly argued by John Locke. A pound was a specific amount of silver, he declared, and should be held inviolable.

The reason he did this was because he wanted to argue that property rights were natural and absolute phenomena, and did not rest on any sort of monarchial authority or social contract. In line with this reasoning, he needed money to also be a “natural thing” not anchored in social relations and certainly not under the control of a sovereign.

At this time, England’s coinage was in rough shape. Much of the coinage had remained unchanged in a hundred years and clipped coins circulated alongside newer issues. People tended to save the good coins and spend the clipped ones, causing a loss of faith in the currency.

It was increasingly clear that the Mint had to offer recoinage …But at what rate? Mercantilists, who tended to be inflationist, clamoured for debasement, that is, recoinage at the lighter weight, devaluating silver coin and increasing the supply of money. In the meanwhile, the monetary problem was aggravated by a burst of bank credit inflation created by the new Bank of England, founded in 1694 to inflate the money supply and finance the government’s deficit. As the coinage problem came to a head in that same year, William Lowndes (1652–1724), secretary of the treasury and the government’s main monetary expert, issued a “Report on the Amendment of Silver Coin” in 1695, calling for accepting the extant debasement and for officially debasing the coinage by 25 percent, lightening the currency name by a 25 percent lower weight of silver.

[John] Locke had denounced debasement as deceitful and illusionist: what determined the real value of a coin, he declared, was the amount of silver in the coin, and not the name granted to it by the authorities. Debasement, Locke warned…is illusory and inflationist: if coins, for example, are devalued by one-twentieth, “when men go to market to buy any other commodities with their new, but lighter money, they will find 20s of their new money will buy no more than 19 would before.” Debasement merely dilutes the real value, the purchasing power, of each currency unit.

Threatened by the Lowndes report, Locke’s patron, John Somers, who had been made Lord Keeper of the Great Seal in a new Whig ministry in 1694, asked Locke to rebut Lowndes’s position before the Privy Council. Locke published his rebuttal later in the year 1695…Locke superbly put his finger on the supposed function of the Mint: to maintain the currency as purely a definition, or standard of weight of silver; any debasement, any change of standards, would be as arbitrary, fraudulent, and unjust as the government’s changing the definition of a foot or a yard. Locke put it dramatically: “one may as rationally hope to lengthen a foot by dividing it into fifteen parts instead of twelve, and calling them inches.”

…Locke’s view triumphed, and the recoinage was decided and carried out in 1696 on Lockean lines: the integrity of the weight of the silver denomination of currency was preserved. In the same year, Locke became the dominant commissioner of the newly constituted board of trade. Locke was appointed by his champion Sir John Somers, who had become chief minister from 1697 to 1700. When the Somers regime fell in 1700, Locke was ousted from the board of trade, to retire until his death four years later. The Lockean recoinage was assisted by Locke’s old friend, the great physicist Sir Isaac Newton (1642–1727) who, while still a professor of mathematics at Cambridge from 1669 on, also became warden of the Mint in 1696, and rose to master of the Mint three years later, continuing in that post until his death in 1727. Newton agreed with Locke’s hard-money views of recoinage.

John Locke vs. the Mercantilists and Inflationists (Mises Institute)

Because the price paid by the Royal Mint for gold and silver was fixed and no longer allowed to adjust freely based on supply and demand, the effect this had was for gold to be shipped to England, where the Mint paid a premium for it, and silver to leave the country for continental Europe, where it was worth more. This led to a shortage of silver coins in England, causing economic contraction.

…the Bank of England’s formation also coincided with the reconceptualization of money as simply precious metal in another form—a fable told most prominently by John Locke. In earlier centuries, everyone accepted that kings could reduce the metal content of coins and, indeed, there were good economic reasons to do so. Devaluing coins (raising the nominal price of silver) increased the money supply, a constant concern in the medieval and early modern periods, while revaluing coins (keeping the nominal price of silver but calling in all old coins to be reminted) imposed deflation on the economy. But Locke was the most prominent spokesperson for hard money—maintaining the metal content of coins inviolate. The theory was that money was simply metal by another name, since each could be converted into the other at a constant rate.

The practice, however, was that the vast majority of money—Bank of England notes, bills of exchange issued by London banks, and bank notes issued by country banks—could only function as fiat money. This had to be the case because the very policy of a constant mint price had the effect of driving silver out of coin form, vacuuming up the coin supply. If people actually wanted to convert their paper money into silver or gold, a financial crisis could be prevented only through a debt-financed expansion of the money supply by the Bank of England—or by simply suspending convertibility, as England did in the 1790s.

… at the same time that the English political system invented the modern monetary system, liberal theorists like Locke obscured it behind a simplistic fetishization of gold. The fable that money was simply transmutated gold went hand in hand with the fable that the economy was simply a neutral market populated by households and firms seeking material gain. This primacy of the economic over the political—the idea that government policy should simply set the conditions for the operation of private interests—is, of course, one of the central pillars of the capitalist ethos. Among other things, it justified the practice of allowing private banks to make profits by selling liquidity to individuals (that’s what happens when you deposit money at a low or zero interest rate)—a privilege that once belonged to sovereign governments.

Mysteries of Money (The Baseline Scenario)

The Great Monetary Settlement

By the late 1600’s two major forms of currency circulated: the government money issued in coin form, and the capitalist credit money issued by private bankers. Both were forms of transferable debt, but were used in very different spheres of exchange:

By the late seventeenth century, the two forms of money were available but unevenly spread across Europe – private credit and public metallic coinage. However, they remained structurally distinct and their respective producers – that is, states and capitalist traders – remained in conflict…England was best placed…to effect any integration of the different interests that were tied to the different moneys…[1]

Unlike its cousins on the continent, England’s finances were fairly stable, and its debt manageable. That is until 1672, when the Stop of the Exchequer was declared by King James II. This was essentially a default by England on its debts. The crown refuted the tallies owed to them, causing tally sticks to fall into disrepute and clearing the way for paper instruments to replace them as signifiers of state debt:

Charles II’s debt default in 1672 was critically important in hastening the adoption of public banking as a means of state finance and credit money creation. Since the fourteenth century, English kings had borrowed, on a small scale, against future tax revenues. The tally stick receipts for these loans achieved a limited degree of liquidity ‘which effectively increased the money supply beyond the limits of minting’.

However, compared with state borrowing in the Italian and Dutch republics, English kings, like all monarchs, were disadvantaged by the very despotic power of their sovereignty. Potential creditors were deterred by the monarch’s immunity from legal action for default and their successors’ insistence that they could not be held liable for any debts that a dynasty might have accumulated. [2]

The rising Whig merchant class wanted a monarch who would put the country’s finances on a more sound basis. Since they were overwhelmingly Protestant, they decided that putting a Protestant on the throne in place of the Catholic James Stuart would be the perfect excuse for overthrowing the monarchy. It was, in essence, a coup d’etat by the banking and merchant classes.

With an impending war with the Dutch, an annual Crown income of less than £2 million, and accumulated debts of over £1.3 million, Charles II defaulted on repayment to the tally holders in the Exchequer Stop of 1672. This event…culminated in the invitation to William of Orange to invade and claim the throne…[3]

An alliance of the Whigs and Tories got the husband of James’ sister Mary, the Dutch prince William of Orange, for the job. William and Mary took the throne in the last major invasion of England. It was a mostly bloodless revolution, but not entirely peaceful, and all sorts of rebellions would roil parts of the British Isles for decades (the Jacobite risings), mainly in the outer regions of the empire (e.g. Scotland, Ireland, etc.)

The bloodless coup would have profound effects for the history of the financial system. William brought “Dutch finance” across the channel to England, where it would be used to reorganize the state’s finances.

Because the revolution had been backed and funded by Whig parliamentarians, they called the shots. It was the end of England’s absolute monarchy and the beginning of the “king-in-parliament,” an unusual fusion of monarchial power and public accountability. They made William sign a “Bill of Rights” in 1689 and one of the things it specified was that the ability to raise funds would be strictly delegated to parliament. In other words, no more arbitrary taxes or defaults.

William subsequently dragged England into several wars on the continent:

Roey Sweet: “So the reason why the national debt is rising at this time, and by 1714 it’s about 48 million [pounds], is that Britain’s been involved in two long and expensive wars. Following the Glorious Revolution, William of Orange brings Britain into the Nine Years War against Louis the 14th, and then from 1701 Britain’s been involved in the War of the Spanish Succession which is a battle essentially to try and prevent the Bourbons from gaining ascendancy in Europe by uniting the Spanish and the French empires. So Britain has been fighting this, and it’s seen as a Whig war…and there’s a suspicion that it’s being prolonged purely for Whig interests. And so [Chancellor of the Exchequer Robert] Harley wants to try and end the war and also to get the debt into manageable proportions.” [4]

William needed to borrow to fight his wars, and his credit score was awful. His debt load from conducting the Glorious Revolution was already very high, meaning that no one wanted to loan to him. The interest rates he was looking at were in the neighborhood of modern-day credit cards—18-20 percent.

The prevention of any recurrence of default was a paramount consideration which parliament put to the new Dutch king in the constitutional settlement of 1689. In the first place, William was intentionally provided with insufficient revenues for normal expenditure and, consequently, was forced to accept dependence on parliament for additional funds. Second with William’s approval, and the expertise of his Dutch financial advisors, the government adopted long-term borrowing in the form of annuities (Tontines). These were funded by setting aside specific tax revenues for the interest payments. [5]

England managed its debt in a variety of ways, many of them similar to the methods used on the continent. But one new technique was coming to bear. By this time, in order to exploit the resources of the New Word and conduct trading operations where long-term investments were required, Europeans had invented the joint-stock company—a company where ownership was diversified among a group of unrelated individuals and ownership could be bought and sold at will.

The legal ingredients that comprise a corporation came together in a form we would recognise in England, on New Year’s Eve, in 1600. Back then, creating a corporation didn’t simply involve filing in some routine forms – you needed a royal charter. And you couldn’t incorporate with the general aim of doing business and making profits – a corporation’s charter specifically said what it was allowed to do, and often also stipulated that nobody else was allowed to do it. The legal body created that New Year’s Eve was the Honourable East India Company, charged with handling all of England’s shipping trade east of the Cape of Good Hope. [6]

Joint-stock companies had been originally formed to undertake long-distance trading expeditions and to exploit the resources of the New World. Now they would be pressed into service to reorganize and manage the nation’s debt. The idea was to use such  companies to manage the state’s finances. They would be chartered for this purpose:

Melvin Bragg: How was the government handling its debt before the South Sea Company was set up?

Anne Murphy: The government is handling its debt in three ways.

It’s created lottery schemes which are very popular, and they’re attractive to a broad spectrum of individuals. So it can raise money that way.

It sells annuities which again are very popular, but they’re very costly, and they’re quite inflexible.

And the government is also using the moneyed companies to support its debt raising activities. The first one of those is called the Bank of England which is set up in 1694. The Bank of England does two things: it lends to government, and also it’s one of the first companies that does the debt for equity swaps that the South Sea Company is to become so famous for, later.

[…]

Melvin Bragg: Was that seen at the time as something that was okay; that a private company taking over part of a national debt was fine?

Anne Murphy: It’s actually just a change of lender, really. What’s being switched here is the many, many lenders–the individuals who bought annuities or who bought lottery tickets from the government–for one lender: the Bank of England or the South Sea Company. So it’s not that a private company is in essence taking over the debt. What it’s doing is just consolidating the debt in one set of hands rather than many sets of hands.

And this helps because it makes administration easier and it brings costs down, and that’s what the government wants. So it’s a desirable thing to do. [7]

The modern money system began when governments started using joint-stock corporations to manage their finances in exchange for “special” privileges–specifically the privilege of extending credit denominated in the government’s official currency. The government, in essence, became a debtor to these private corporations, which are the ancestors of our modern banks. The debt was then monetized and circulates to this day as money. The Bank of England, funded by the subscribers from the merchant classes, bought the state’s debt and used it as backing for their banking operations. The merchant bankers, in essence, kidnapped the state’s money for their own uses.

From 1694 to 1697, the directors of the new Bank of England laid the true foundations for the financial revolution by lending the government £1.2 million, at the then attractive rate of 8 per cent, in order to secure their monopoly on joint-stock banking, raising the funds by selling Bank stock. Though redeemable on one year’s notice from 1706, the loan was in fact perpetual. In 1698, the New East India Company made a similar 8 per cent perpetual loan to secure its charter, as did the newly merged United East India Company in 1709.

From 1704 to 1710, the exchequer also issued irredeemable annuities…and…a series of highly popular lottery loans. Meanwhile, in 1711, the newly formed South Sea Company bought up…short-term floating debts and converted them into so-called perpetual stock with a 5 per cent return; and in 1720, it converted another £13.99 million in other loans and annuities into 5 per cent perpetual stock, a venture that led to its collapse in 1721 in the famous ‘Bubble’. Thereafter, while redeeming £6.5 million in South Sea stock and annuities, the Bank of England, on behalf of the government, issued several series of redeemable ‘stock’, many containing the popular lottery provisions, with generally lower rates of interest…

The Bank of England wasn’t the world’s oldest bank, nor even was it the first state bank. But what made it unique was the idea of the merchant classes loaning to the government, and in return gaining a measure of control over the nation’s finances. The multiple and conflicting systems of money and borrowing would be fused together for the first time in one supranational institution. Felix Martin calls this “The Great Monetary Settlement:”

…The Bank’s primary role would … be to put the sovereign’s credit and finances on a surer footing. Indeed, its design, governance, and management were to be delegated to the mercantile classes precisely in order to ensure confidence in its operations and credit control. But in return the sovereign was to grant important privileges. Above all, the Bank was to enjoy the right to issue banknote-a licence to put into circulation paper currency representing its own liabilities, which could circulate as money. There was to be, quite literally, a quid pro quo. [8]
… the idea of the hybrid Bank of England found a powerful group of supporters in the circle of ambitious Whig grandees who were soon to dominate the first party-political administration of the country. They realised that [Projector William] Paterson’s Project could deliver a Great Monetary Settlement.

If they and the private money interest they represented would agree to fund the king on terms over which they, as the Directors of the new Bank, would have a statutory say, then the king would in tum allow them a statutory share in his most ancient and jealously guarded prerogative: the creation of money and the management of its standard. To be granted the privilege of note issue by the crown, which would anoint the liabilities of a private bank with the authority of the sovereign-this, they realised, was the Philosopher’s Stone of money. It was the endorsement that could liberate private bank money from its parochial bounds. They would lend their credit to the sovereign-he would lend his authority to their bank. What they would sow by agreeing to lend, they would reap a hundredfold in being allowed to create private money with the sovereign’ s endorsement. Henceforth, the seigniorage would be shared. [9]

With the foundation of the Bank of England, the money interest and the sovereign had found an historic accommodation…This compromise is the direct ancestor of the monetary systems that dominate the world today: systems in which the creation and man agement of money are almost entirely delegated to private banks, but in which sovereign money remains the “final settlement asset, the only credit balance with which the banks on the penultimate tier of the pyramid can be certain of settling payments to one another or to the state. Likewise, cash remains strictly a token of a credit held against the sovereign, but the overwhelming majority of the money in circulation consists of credit balances on accounts at private banks. The fusion of sovereign and private money born of the political compromise struck in 1694 remains the bedrock of the modern monetary world.  [10]

This effectively created modern finance. The state’s debt was monetized by private banks, who gained the ability to loan the state’s “official” money through the extension private credit. No longer would money creation and manipulation be exclusively a tool of the sovereign. The two different money systems—government coinage and bills of exchange, were fused into one here for the first time. Because it was backed by state debt (and ultimately tax revenue), the bank’s money became by far the most trustworthy legal means of settlement, and soon it became the predominant one—the final “money thing” at the apex of the pyramid.

In effect, the privately owned Bank of England transformed the sovereign’s personal debt into a public debt and, eventually in turn, into a public currency.

This fusion of the two moneys, which England’s political settlement and rejection of absolutist monetary sovereignty had made possible, resolved two significant problems that had been encountered in the earlier applications of the credit-money social technology.

First, the private money of the bill of exchange was ‘lifted out’ from the private mercantile network and given a wider and more abstract monetary space based on an impersonal trust and legitimacy…

Second, parliament sanctioned the collection of future revenue from taxation and excise duty to service the interest on loans…The new monetary techniques conferred a distinct competitive advantage, which, in turn, eventually ensured the acceptability of England’s high levels of taxation and duties for the service of the interest on the national debt.

The most important, but unintended, longer-term consequence of the establishment of the Bank of England was its monopoly to deal in bills of exchange. Ostensibly, the purchase of bills at a discount before maturity was a source of monopoly profits for the Bank. But it also proved to be the means by which the banking system as a whole became integrated and the supply of credit money (bills and notes), influenced by the Bank’s discount rate.

The two main sources of capitalist credit money that had originated in Italian banking practice -that is, the public debt in the form of state bonds and private debt in the form of bills of exchange – were now combined for the first time in the operation of a single institution. But of critical importance, these forms of money were introduced into an existing sovereign monetary space defined by an integrated money of account and means of payment based on the metallic standard. [11]

The bank of England would issue banknotes, which were liabilities of the bank that could circulate as money. Banknotes were originally records of deposits of coin (sterling) redeemable at the banks. Eventually banknotes simply became records of deposits unlinked to any other coins or commodities. They circulated as paper records of debits and credits, similar to the tally sticks which they replaced (the old tallies were burned en masse):

In 1694, the Bank of England stepped in. Originally a private company, it was founded to create money backed by its gold holdings that could be exchanged for Treasury pledges over future taxes. In contrast to the old tally stick system, these pledges, known as ‘gilt-edged’ stock, or gilts, came with redemption dates and paid a fixed rate of interest.

These changed characteristics of a fixed date and rate of return made the pledges resemble debts. However, the difference is that these pledges are ownership claims created by an individual over his own income, whereas a debt claim is created by one individual over another individual’s income. The correct analogy is to think of gilt-edged stock as akin to interest-bearing shares or equity bought by investors in UK Incorporated, with a redemption date.

The position today is quite similar, except that the Bank of England is now State owned and the pound sterling is not backed by gold but by faith alone.

The fiscal myth of tax and spend shared by virtually all schools of economics is that tax is first collected and then spent. This has never been the case: the reality… has always been that government spending has come first and taxation later. The reality is that taxation acts to remove money from circulation and to prevent inflation: it does not fund and never has funded public spending.

The Myth of Debt (UCL)

The second method to finance the debt mentioned above was a debt-for-equity swap. This was tried in both England and France. While it failed in a bursting stock bubble in both countries, the differences would have profound consequences for world history.

In England, the monetary system would remain fairly intact. In France, by contrast, it would take down the entire financial system and cripple the nation economically for a generation. The end result would be an Industrial Revolution in England, and revolt, revolution and dictatorship in France.

Remarkably, this would all take place in just 4 years–from 1716 to 1720. One result would be the issuance of the first true paper money in Europe. The other would be the first major stock bubble and collapse.

John Law’s System

John Law was the son of an Edenborough goldsmith. Goldsmiths, like pawnbrokers before them, functioned as low-level proto-bankers. The issued receipts against the gold deposited with them. Occasionally they would issue receipts in excess of the gold stored in their vaults, knowing that not everyone would wish to redeem their gold at the same time. These receipts circulated as proto-money, but are not the direct ancestor of the banknotes we use today as some have claimed.

In 1694, when the Bank of England was being founded, John Law killed a man in a duel over a woman. Law was living large in England at the time. Now an outlaw, he first went to hide out in Scotland, and when the Acts of Union were passed in 1707, he fled for the continent. He made his way to Genoa, and then to Amsterdam, where he was able to observe their financial systems and banking practices first hand.

Eventually he made his way to France where he became a professional gambler, dandy, and bon-vivant. Through an unlikely series of circumstances and networking, he wound up being a personal friend of Phillip II, the Duc de Orleans, a high-ranking aristocrat who was the regent of France for Louis 15th, the future heir to the throne of France, who was still a teenager.

Just as in England, the finances of the French state were a disaster due to funding  wars all over the continent and the profligacy of the king. Versailles didn’t come cheap.

Europe’s most powerful nation had several major financial problems: 1.) There was not enough money in circulation because of a shortage of coins (a ‘liquidity crisis’) 2.) The French government’s debt was effectively unpayable. The interest rates were staggering and the billets d’etat were what we might today call “junk bonds” and 3.) The privatized and localized tax system was horribly inefficient, preventing the state from collecting taxes effectively. It was riddled with graft and corruption—only a fraction of what was collected made its way into state coffers. The rest ended up in the hands of a corrupt money interest, who resisted any attempts at reform.

When Louis the 14th, the “Sun King,” died, France was in a state of bankruptcy. Continuous warfare had left France short of money and facing a sizeable state debt. Furthermore, the tax revenue collection system had been farmed out to the private sector, leaving the financiers (gens de finance)…the veritable controllers of the financial system. They exerted control by managing the tax farms and lending money to the state. In effect, the state was heavily mortgaged to the financiers. [12]

Law used his friendship with the regent to propose a radical reorganization of the French state finances. Law had seen the English system at work. When he fled Scotland, he spent time in both Genoa and Amsterdam and was able to observe up-close the functioning of their banking and financial systems. This gave him the foundation for his own ideas.

[Law’s] theory consisted in two propositions. One was that the world had insufficient supplies of metal money to do business with. The other was that, by means of a bank discount, a nation could create all the money it required, without depending on the inadequate metallic resources of the world…Law did not invent this idea. He found the germs of it in a bank then in existence— the Bank of Amsterdam. This Law got the opportunity to observe when he was a fugitive from England.

The Bank of Amsterdam, established in 1609, was owned by the city. Amsterdam was the great port of the world. In its marts circulated the coins of innumerable states and cities. Every nation, many princes and lords, many trading cities minted their own coins. The merchant who sold a shipment of wool might get in payment a bag full of guilders, drachmas, gulden, marks, ducats, livres, pistoles, ducatoons, piscatoons, and a miscellany of coins he had never heard of.

This is what made the business of the moneychanger so essential. Every moneychanger carried a manual kept up to date listing all these coins. The manual contained the names and valuations of 500 gold coins and 340 silver ones minted all over Europe. No man could know the value of these coins, for they were being devalued continually by princes and clipped by merchants. To remedy this situation the Bank of Amsterdam was established.

Here is how it worked. A merchant could bring his money to the bank. The bank would weigh and assay all the coins and give him a credit on its books for the honest value in guilders. Thereafter that deposit remained steadfast in value. It was in fact a deposit. Checks were not in use. But it was treated as a loan by the bank with the coins as security. The bank loaned the merchant what it called the bank credit. Thereafter if he wished to pay a bill he could transfer to his creditor a part of his bank credit. The creditor preferred this to money. He would rather have a payment in a medium the value of which was fixed and guaranteed than in a hatful of suspicious, fluctuating coins from a score of countries. So much was this true that a man who was willing to sell an article for a hundred guilders would take a hundred in bank credit but demand a hundred and five in cash.

One effect of this was that once coin or bullion went into this bank it tended to remain there. All merchants, even foreigners, kept their cash there. When one merchant paid another, the transaction was effected by transfer on the books of the bank and the metal remained in its vaults. Why should a merchant withdraw cash when the cash would buy for him only 95 per cent of what he could purchase with the bank credit? And so in time most of the metal in Europe tended to flow into this bank.

It was…a one hundred percent bank–[f]or every guilder of bank credit or deposits there was a guilder of metal money in the vaults. In 1672 when the armies of Louis XIV approached Amsterdam and the terrified merchants ran to the bank for their funds, the bank was able to honor every demand. This established its reputation upon a high plane. The bank was not supposed to make loans. It was supported by the fees it charged for receiving deposits, warehousing the cash, and making the transfers.

There was in Amsterdam another corporation—the East India Company. A great trading corporation, it was considered of vital importance to the city’s business. The city owned half its stock. The time came when the East India Company needed money to build ships. In the bank lay that great pool of cash. The trading company’s managers itched to get hold of some of it. The mayor, who named the bank commissioners, put pressure on them to make loans to the company—loans without any deposit of money or bullion. It was done in absolute secrecy. It was against the law of the bank. But the bank was powerless to resist.

The bank and the company did this surreptitiously. They did not realize the nature of the powerful instrument they had forged. They did not realize they were laying foundations of modern finance capitalism. It was Law who saw this…Here is what Law saw. It is an operation that takes place in our own banks daily. The First National Bank of Middletown has on deposit a million dollars. Mr. Smith walks into the bank and asks for a loan of $10,000. The bank makes the loan. But it does not give him ten thousand in cash. Instead the cashier writes in his deposit book a record of a deposit of $10,000. Mr. Smith has not deposited ten thousand. The bank has loaned him a deposit. The cashier also writes upon the bank’s books the record of this deposit of Mr. Smith. When Mr. Smith walks out of the bank he has a deposit of ten thousand that he did not have when he entered. The bank has deposits of a million dollars when Mr. Smith enters. When he leaves it has deposits of a million and ten thousand dollars. Its deposits have been increased ten thousand dollars by the mere act of making the loan to Mr. Smith. Mr. Smith uses this deposit as money. It is bank money.

That is why we have today in the United States about a billion dollars in actual currency in the banks but fifty billion in deposits or bank money. This bank money has been created not by depositing cash but by loans to the bank depositors. This is what the Bank of Amsterdam did by its secret loans to the East India Company, which it hoped would never be found out. This is what Law saw, but more important, he saw the social uses of it. It became the foundation of his system…[13]

He argued that money was not any particular object, in his words, it was not the value for which goods are exchanged but by which goods are exchanged. For that reason, it could be anything. Law reasoned that the demand for money was greater than the supply, and like any other commodity the supply needed to be increased. An increase in the money supply would cause economic expansion and drive down interest rates. To get around the supply and demand problems encountered with gold and silver, he would retire them and replace them with paper instead.Phase one of Law’s plan would increase the amount of money circulating by introducing paper money in place of metal. Law’s bank would take the coins and issue paper money based on the deposits. The paper money would then retain its value. This was the beginning of true paper money as we know it today:

…his new proposal laid out plans for a private bank, funded by himself and other willing investors, which would issue notes backed by deposits of gold and silver coins and redeemable at all times in coins equivalent to the value of the coin at the time of the notes’ issue, “which could not be subject to any variation.” Thus, Law pledged, his notes would be more secure than metal money, a hedge against currency vacillations, and therefore a help to commerce. Moreover, paper notes would increase the amount of circulating money and trade would be boosted. In short, he vowed, his bank would offer hope and the promise of a better future. [14]

The regent helped by making his well-publicized deposits and ensured that everyone knew he was using the bank for foreign transactions. Foreigners followed his lead, and at last found somewhere in Paris to discount their bills of exchange with ease and at reasonable prices. The influx of foreign cur rency alleviated the shortage of coins, and, with the slow trickle of banknotes Law printed and issued to depositors, boosted the money supply sufficiently for commerce to begin to pick up. Traders liked the banknotes because the guarantee of being paid in coin of fixed value meant that they knew exactly what something would cost or what price they would receive. The notes began to command a premium, like those issued by the Bank of Amsterdam. [15]

The bank was a success, expanding the money supply and goosing the French economy as planned. In 1717 the regent ordered that all public funds be deposited in the Banque Generale. The notes of the bank became authorized for payment of taxes. The center of French finance moved from Lyon to Paris. Law controlled the issuance of banknotes so that at least 25 percent of the circulating value of the notes could be redeemed in gold or silver. To further remove the link with metal, it was forbidden for most people to own specie or use it for transactions. The Bank was eventually bought out by the government and renamed the royal bank (Banque Royale).

In December 17 18, the Banque Generale became the Banque Royale, the equivalent of a nationalized industry today. Law continued to direct it, and under his leadership over the next months, the finances of France leaned more heavily on it. New branches opened in Lyon, La Rochelle, Tours, Orleans, and Amiens. To ensure that everyone made use of paper money, any transactions of more than 600 livres were ordered to be made in paper notes or gold. Since gold was in short supply, this obliged nearly everyone to use paper for all major transactions. Meanwhile. for the leap of confidence they had shown in purchasing shares in the bank in its early uncertain days, and perhaps to buy his way into their world, Law rewarded investors lavishly. Shares that they had partly bought with devalued government bonds were paid out in coin. Both he and the regent had been major shareholders and were among those who profited greatly from the bank’s takeover.

Few recognized the dangers signaled by the bank’s new royal status. Hitherto Law had kept careful control of the numbers of notes issued. There had always been coin reserves of around 25 percent against circulating paper notes. Now, with royal ownership and no shareholders to ask awkward questions, the bank became less controllable. The issuing and quantity of printed notes and the size of reserves would be decided by the regent and his advisers. The temptation to print too much paper money too quickly would thus be virtually unchecked.

Within five months of its royal takeover…eight printers, each of whom earned only 500 livres a year, were employed around the clock printing 100-, 50- and 10· livre notes. A further ominous change followed: notes were no longer redeemable by value at date of issue but according to the face value, which would change along with coins if the currency was devalued: the principle that underpinned public confidence in paper had been discarded and one of Law’s most basic tenets breached. But as the eminent eighteenth-century economist Sir James Steuart later incredulously remarked, “nobody seemed dissatisfied: the nation was rather pleased; so familiar were the variations of the coin in those days, that nobody ever considered anything with regard to coin or money, but its denomination… this appears wonderful; and yet it is a fact.” [16]

Once the bank was established, phase two was to create a joint-stock company to acquire, manage, and ultimately retire, the state’s debt. It would also take over tax collection and the management of state monopolies.

The growing success of the General Bank enabled Law to address the second crisis, management of the national debt. A new radical plan was necessary to restructure France’s financial situation. Law decided that the best way to accomplish this was to convert the government debt into the equity of a huge conglomerate trading company. To do so he needed to establish a trading company along the lines of British trading companies such as the East India Company and the South Sea Company. [17]

While the monarchy was cash poor, it did possess one major asset whose value was almost limitless—a huge chunk of the North American continent. Law’s solution for the debt problem was to use that to create a monopoly company with exclusive rights over the settlement and development of North America, and have investors trade their debt for equity in that company; what today is called a “debt for equity swap.” Instead of unpayable debt, investors could trade that in for shares in a company that offered seemingly unlimited potential. Once again Law and the royal court would be early investors, prompting everyone else to jump on the bandwagon. To make the shares more attractive, Law initiated a “buy now pay later’ scheme—only 10% down would get you a share. Even the general public could buy in, and an informal stock market in trading Mississippi Company shares sprang up on the Rue Quincampoix in Paris outside Law’s apartment.

The company went on a mergers-and-acquisitions spree, buying up all the rival trading companies. It also bought the rights to collect the taxes from the rival financiers. It gained permission to run several state monopolies.

Law was granted a charter to create the Compagnie de la Louisiane ou d’Occident (Company of Louisiana and the West). This company was given a twenty-five year exclusive lease to develop the vast French territories along the Mississippi in North America. This meant exploitation of the Mississippi region, which in the French point of view, represented all of North America watered by the Mississippi River and its tributaries. As part of the deal, Law was required to settle 6,000 French citizens and 3,000 slaves in the territory. To sweeten the transaction the company was awarded a monopoly for the growing and selling of tobacco. [18]

In May 1719 [the Company of the West] took over the East India and China companies, to form the Company of the Indies (Compagnie des Indes), butter known as the Mississippi company. In July Law secured the profits of the royal mint for a nine-year term. In August he wrested the lease of the indirect tax farms from a rival financier, who had been granted it a year before. In September the Company agreed to lend 1.2 billion livres to the crown to pay off the entire royal debt. A month later law took control of the collection (‘farm’) of direct taxes. [19]

Finally, the Banque Royale and the Mississippi Company merged. Essentially all of the French state’s finances were managed by this one huge conglomerate, owned by the government, with Law at the helm. It issued money, collected the taxes, managed the state’s debt, and owned much of North America.

In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in nineteen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second installment was even due, and ordinary citizens flocked to Paris to participate. Based on this success, Law offered to pay off the national debt of 1.5 billion livres by issuing an additional 300,000 shares at 500 livres paid in ten monthly installments.

Law also purchased the right to collect taxes for 52 million livres and sought to replace various taxes with a single tax. The tax scheme was a boon to efficiency, and the price of some products fell by a third. The stock price increases and the tax efficiency gains spurred foreigners to Paris to buy stock in the Mississippi Company.

By mid-1719, the Mississippi Company had issued more than 600,000 shares and the par value of the company stood at 300 million livres. That summer, the share price skyrocketed from 1,000 to 5,000 livres and it continued to rise through year-end, ultimately reaching dizzying heights of 15,000 livres per share. [20]

Law’s System reached its apex, and the price of the Company’s share peaked, at the beginning of 1720. Two main elements crowned the system. The first was a virtual takeover of the French government, by which the Company substituted the liabilities (shares) for the national debt. The second was the substitution of the Company’s other liabilities (notes) for metallic currency. At the end of the operation, the Company, owned by the former creditors of the State, collected all the taxes, owned or managed most overseas colonies, monopolized all overseas trade, and freely issued fiat money which was sole legal tender. Its CEO also became minister of finance on January 5, 1720. [21]

The government debt was retired, the money supply was expanded, and interest rates fell. But there was a problem.

Pop Go The Bubbles

John Law’s newly nationalized state bank was extending credit in order to buy Mississippi Company shares far in excess of the amount of gold and silver it had stashed in its vaults, and his enemies knew it. The excess money from all the shares floating around began to leak into the wider financial system, causing inflation. The value of the banknotes was no longer fixed but allowed to float. Confidence in the system was always thin.

The old guard sensed their opportunity. They demanded the gold and silver back in return for their paper money, causing a run on the bank. When faith in the Bank disintegrated, so too did faith in Mississippi Company stock (since both were now one in the same institution).

Some early investors, realizing that their hopes of getting rich in Mississippi were greatly exaggerated, began to sell their shares and exchange their paper currency for gold, silver and land. As share prices soared throughout the summer of 1719 some of the more level-headed realized that the bull market was based on little more than “smoke and mirrors” and the ever increasing production of paper notes. Feeling that a crash would sooner or later be inevitable, they cashed in.

… When in early 1720 two royal princes decided to cash in their shares of the Mississippi Company, others followed their example. The downward spiral had begun. Law had to print 1,500,000 livres in paper money to try to stem the tide. By late 1720 a sudden decline in confidence occurred which sent share prices down as rapidly as they had risen. When panic set in, investors sought to redeem their bank and promissory notes en masse and convert them into specie. The “bubble” burst when the Banque Royale could no longer redeem their notes for lack of gold and silver coin. Bankruptcy followed. Political intrigue and the actions of rival bankers contributed to the downfall of the scheme. Those not quick enough to redeem their shares were ruined.

In an effort to slow the run on the Bank Royale, officials resorted to various nefarious schemes. These included counting the money out slowly and only in small denomination coins, inserting clerks in the line who would return the money they withdrew, and by shortening banking hours. At one point the bank refused to accept anything but 10 livre notes. None of these expedients were able to build confidence or to slow the panic-stricken investors for long. In a last-ditch effort to restore confidence in the bank, Law ordered the public burning of bank notes as they came in for redemption. This was meant to convince the public, that because of their growing scarcity, they would be worth more. A huge enclosure was set up outside the bank for this purpose. Several times a day, with great ceremony, the notes were consigned to the flames. This went on during the months of July and August 1720 while paper money continued to lose its value throughout the Summer.

The general public turned on Law and would have lynched him if they could. He was burned in effigy and the mere mentioning of his name could arouse a fury. In October, a coachman was slapped by a passenger during an argument over a disputed fare. The cabbie had the wit to denounce his fare as John Law, whereupon the crowd pounced upon the passenger. The poor man barely saved himself by hiding from his pursuers in a church. [22]

The fall of the company managing the government’s finances caused massive damage to the French economy. Money went back to being metal.

By June 1720 the note issue of the Banque Royale had reached a staggering 2,696,000,000 livres. This sum was approximately twice the money in circulation before Law’s bank opened its doors. The increase in the money in circulation created an inflationary spiral which could not be reversed once the population became leery of Law’s Mississippi Scheme. The entire complex development of the bank’s other schemes for colonial companies, monopolies and tax collection came into question. Law’s plan for his bank and the issue of paper money was sound in and of itself; however, the issue was carried to tremendous sums that Law had never anticipated.

At the end in 1721 the notes had ceased to circulate and specie gradually took their place. The country painfully returned to a specie footing as in years past. This severe lesson in paper money inflation had permanent and long lasting effects upon France. The popular distrust of paper money and big banks kept France financially backward for many years thereafter. France was not to see circulating paper money again until the French Revolution of 1789-1795 necessitated it. [24]

Because France’s finances were not on a firm foundation, it could no longer borrow to expand the money supply. The only remaining option was to raise taxes. But in order to do this, they needed to call a meeting of France’s “parliament,”–a body which did not meet on a regular basis. While English nobility remained primarily in their own estates in the countryside, most of the French nobility was in the French court, totally segregated from the commoners. They had no idea what they were unleashing:

“The immediate precipitating cause of the French Revolution is a lot of political grandstanding around the monarchy’s debt and deficit. This is very much like the debt ceiling crisis that we saw in 2011. The issue was less about whether the monarchy’s finances were actually viable, and more about people using the subject of money to push their political point.”

“So at the point at which the king basically has no money left in the coffers, and can’t persuade the establishment to verify and approve new taxes, he called the first meeting of the Estates General, a body that hasn’t met in 175 years, so that they can produce some new taxes. And that’s really generally considered to be the beginning of the French Revolution. So the French Revolution starts in a crisis about budgets and taxes.” [25]

Much of the money fleeing Paris found its way to England where it inflated the South Sea Bubble. Like the Mississippi Company, it was also the use of a joint-stock company to consolidate, and ultimately retire, the state’s debt. Instead of taxes, it was backed by exclusive contracts from the government to conduct trade in the South Seas. It met a similar fate:

…after the re-coinage, silver continued to flow out of Britain to Amsterdam, where bankers and merchants exchanged the silver coin in the commodity markets, issuing promissory notes in return. The promissory notes in effect served as a form of paper currency and paved the way for banknotes to circulate widely in Britain. So when panicked depositors flocked to exchange banknotes for gold coin from the Sword Blade Bank (the South Sea Company’s bank), the bank was unable to meet demand and closed its doors on September 24. The panic turned to contagion and spread to other banks, many of which also failed. [26]

It’s shares also cratered in value, yet the bubble had “only” seen a tenfold rise in share prices instead of the twentyfold rise in France. Because the South Sea company remained separate from the Bank of England and the Treasury (unlike in France, where they were all one in the same), the damage to the British Economy was limited:

When stock prices finally came back to earth in London, there was no lasting systemic damage to the financial system, aside from the constraint on future joint-stock company formation represented by the Bubble Act. The South Sea Company itself continued to exist; the government debt conversion was not reverse; foreign investors did not turn away from English securities. Whereas all France was affected by the inflationary crisis Law had unleashed, provincial England seems to have been little affected by the South Sea crash. [24]

The Bank of England acquired the South Sea Company’s stock. Unlike France, Britain’s currency held its value, and it was able to pay back its debts. Money flowed into England, including from overseas. British debt was widely marketed and held both domestically and internationally:

Finally, between 1749 and 1752, the chancellor of the exchequer…began to convert all outstanding debt and annuity issues – those not held by the Bank of England, the East India Company, and the reconstituted South Sea Company – into the Consolidated Stock of the Nation, popularly known as Consols…

Consols were fully transferable and negotiable, marketed on both the London Stock Exchange and the Amsterdam bourse; along with Bank of England and East India Company stock, they were the major securities traded on the London Stock Exchange in the late eighteenth and early nineteenth centuries. Though Consols were both perpetual but redeemable annuities, thus identical to Dutch losrenten, their instant and longenduring popular success was attributable to the firmly held belief, abroad as well as at home, that the government would not exercise its option to redeem them…Unchanged to this day, they continue to trade on the London Stock Exchange…

The result of the financial revolution was a remarkably stable and continuously effective form of public finance, which achieved an unprecedented reduction in the costs of government borrowing: from 14 per cent in 1693 to 3 per cent in 1757. [25]

The Aftermath

Two things ensured Britain’s predominance in financial affairs: the last major pitched battle fought on British soil was the Battle of Culloden in 1746. Britain was peaceful, unified, and politically stable far longer than just about anywhere else on earth at the time. The second was the invention of the heat engine and the exploitation of England’s vast coal reserves. The triangular trade and vast amount of cotton allowed Britain to set up factories and industrialize. In fact, government debt may have funded the Industrial Revolution:

Only twice in the period from 1717 to 1931, did the British suspend the convertibility of their currency. Each time they needed more money to fight a war than the tight hand of convertibility would permit. They suspended the convertibility to fight Napoleon and to fight the Kaiser. Each war produced paper money and inflation, as wars tend to do.

After Waterloo, sterling met every test of a key currency. The government was stable, the institutions honored and intact. The Royal Navy sailed the world: trade followed the flag. Britain was first into the industrial revolution, so its manufactured goods spread over the world. The battles were always at the fringes of the empire.

Every time there was a small crisis about the pound, the monetary authorities would raise the interest rates sharply. That might depress the domestic economy, but the high interest rates would draw in foreign exchange, and the pound would retain its value. Britain bought the raw materials, the commodities. and sent back the manufactured goods; and since the price of raw materials gradually declined. The pound increased in value.

The British government issued “consols,” perpetual bonds. Fathers gave them to their sons, and those sons gave them to their sons, and the bonds actually increased in value as time went on. “Never sell consols,’ said Soames Forsyte, Galsworthy’s man of property.

The world brought its money to London and changed it into sterling. London banked it and insured it. Cartographers colored Britain pink on world maps, and the world was half pink, from the Cape to Cairo, from Suez to Australia, In 1897, at Victoria’s Diamond Jubilee, the fleet formed five lines, each five miles long, and it took. four hours for it to pass in review at Spithead.

British capital went everywhere. It financed American railroads and great ranches in the western United States. British investors held not only American ranches. but Argentine ones, too. Their companies mined gold in South Africa and tin in Malaya, grew hemp in Tanganyika and apples in Tasmania, drilled for oil in Mexico, and ran the trolley lines in Shanghai and the’ Moscow Power and Light Company. [26]

Carroll Quigley saw the Napoleonic Wars as a battle of the old mercantile, bullion-based monetary system, based around agriculture and handicrafts, versus the British system of commercial bank credit money and industrial manufacturing. With the final defeat of Napoleon, the British money system became the basis for all the money in the world today:

This new technique of monetary manipulation became one of the basic factors in the Age of Expansion in the nineteenth century and made the fluctuations of economic activity less responsive to the rate of bullion production from mines, by making it more responsive to new factors reflecting the demand for money (such as the interest rate). This new technique spread relatively slowly in the century between the founding of the Bank of England and Napoleon’s creation of the Bank of France in 1803. The Napoleonic Wars, because of the backward, specie-based, financial ideas of Napoleon were, on their fiscal side, a struggle between the older, bullionist, obsolete system favored by Napoleon and the new fractional-reserve banknote system of England. [27]

In order to facilitate international trade, Britain instituted the gold standard. The gold standard was an agreement among nations to convert their currencies to gold at fixed rates, thus ensuring money earned overseas would hold its value relative to domestic currencies. The idea was that shipping gold bars from trade deficit countries to trade surplus countries would allow domestic money supplies to “self-adjust.” Trade deficits would be settled by shipping gold from deficit countries to surplus ones. Since the amount of money in your economy was based on how much gold you had, countries shipping gold out would have less money circulating, leading to deflation. This would make their exports more attractive. On the other hand, countries gaining gold reserves would issue more money causing inflation making their exports less attractive relative to the deficit counties on the world market. Over time, everything would just sort of balance out. That was the theory, anyway:

Britain adopted the gold standard in 1844 and it became the common system regulating domestic economies and trade between them up until World War I. In this period, the leading economies of the world ran a pure gold standard and expressed their exchange rates accordingly. As an example, say the Australian Pound was worth 30 grains of gold and the USD was worth 15 grains, then the 2 USDs would be required for every AUD in trading exchanges.

The monetary authority agreed to maintain the “mint price” of gold fixed by standing ready to buy or sell gold to meet any supply or demand imbalance. Further, the central bank (or equivalent in those days) had to maintain stores of gold sufficient to back the circulating currency (at the agreed convertibility rate).

Gold was also considered to be the principle method of making international payments. Accordingly, as trade unfolded, imbalances in trade (imports and exports) arose and this necessitated that gold be transferred between nations (in boats) to fund these imbalances. Trade deficit countries had to ship gold to trade surplus countries. For example, assume Australia was exporting more than it was importing from New Zealand. In net terms, the demand for AUD (to buy the our exports) would thus be higher relative to supply (to buy NZD to purchase imports from NZ) and this would necessitate New Zealand shipping gold to us to fund the trade imbalance (their deficit with Australia).

This inflow of gold would allow the Australian government to expand the money supply (issue more notes) because they had more gold to back the currency. This expansion was in strict proportion to the set value of the AUD in terms of grains of gold. The rising money supply would push against the inflation barrier (given no increase in the real capacity of the economy) which would ultimately render exports less attractive to foreigners and the external deficit would decline.

From the New Zealand perspective, the loss of gold reserves to Australia forced their Government to withdraw paper currency which was deflationary – rising unemployment and falling output and prices. The latter improved the competitiveness of their economy which also helped resolve the trade imbalance. But it remains that the deficit nations were forced to bear rising unemployment and vice versa as the trade imbalances resolved.

The proponents of the gold standard focus on the way it prevents the government from issuing paper currency as a means of stimulating their economies. Under the gold standard, the government could not expand base money if the economy was in trade deficit. It was considered that the gold standard acted as a means to control the money supply and generate price levels in different trading countries which were consistent with trade balance. The domestic economy however was forced to make the adjustments to the trade imbalances.

Gold standard and fixed exchange rates – myths that still prevail (billy blog)

The gold standard, the self-regulating market, and haute finance were the foundations of the Hundred Year’s Peace lasting up until the First World War.The Hundred Year’s Peace ushered in the final transition from civil society to a fully-fledged market society. Rather than being a sideshow, all of society’s relations now became coordinated by the market. The moral economy was crushed (by force if necessary), and the market and money based capitalist one replaced it. Millions died in this transition, whitewashed from history as “moral failures” even as the suffering under Communism is constantly referred to. Money and banking were at the center of the nexus. Controlling the money supply became absolutely necessary to the smooth functioning of this system. Unfortunately, it was not managed well.

The prevention of providing adequate currency caused panics and depressions throughout the nineteenth century. However, it did engender a hundred years’ of relative peace between the great powers. Nations broke into trading spheres, and the violence was the violence of empire, as well as the institutional violence imposed by the market system itself (hunger, homelessness, starvation, poverty, prisons, jails, alienation, conscription, etc.). In wartime and depressions, however, the gold standard tended to be abandoned. It always rested on peaceful international relations and government agreements; in no was was gold ever “natural” money.

Nineteenth-century civilization rested on four institutions. The first was the balance-of-power system which for a century prevented the occurrence of any long and devastating war between the Great Powers. The second was the international gold standard which symbolized a unique organization of world economy. The third was the self-regulating market which produced an unheard-of material welfare. The fourth was the liberal state. Classified in one way, two of these institutions were economic, two political. Classified in another way, two of them were national, two international. Between them they determined the characteristic outlines of the history of our civilization.

Of these institutions the gold standard proved crucial; its fall was the proximate cause of the catastrophe. By the time it failed, most of the other institutions had been sacrificed in a vain effort to save it. [28]

Mismanagement of the “new” market society was the proximate cause of two World Wars and the Cold War, killing millions. Once again, it threatens to tear the world apart. But that’s a story for another time.

Next: Concluding notes.

[1] Wray, et. al.; Credit and State Theory of Money, p. 209

[2] ibid.

[3] ibid.

[4] In Our Time – The South Sea Bubble (BBC)

[5] Wray, et. al.; Credit and State Theory of Money, p. 210

[6] How a creative legal leap helped create vast wealth (BBC)

[7] In Our Time – The South Sea Bubble (BBC)

[8] Felix Martin; Money, the Unauthorized Biography, pp. 116-117

[9] Felix Martin; Money, the Unauthorized Biography, pp. pp. 117-118

[10] Felix Martin; Money, the Unauthorized Biography, p. 120

[11] Wray, et. al.; Credit and State Theory of Money, p. 211

[12] William N. Goetzmann and K. Geert Rouwenhorst, eds. The Origins of Value: The Financial Innovations that Created Modern Capital Markets, pp. 230-231

[13] John Flynn’s Biography of John Law http://www.devvy.com/pdf/biography_john_law.pdf, pp. 5-7

[14] Janet Gleeson; Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance, p. 113

[15] Janet Gleeson; Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance, p. 116-117

[16] Janet Gleeson; Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance,  pp. 132-133

[17] William N. Goetzmann and K. Geert Rouwenhorst, eds. The Origins of Value: The Financial Innovations that Created Modern Capital Markets, p. 231

[18] John Flynn’s Biography of John Law
http://www.devvy.com/pdf/biography_john_law.pdf, p. 5-6

[19] Niall Ferguson; The Ascent of Money, p. 141

[20] Crisis Chronicles: The Mississippi Bubble of 1720 and the European Debt Crisis (Liberty Street)

[21] Francois R. Velde; Government Equity and Money: John Law’s System in 1720 France, p. 21

[22] John E. Sandrock; John Law’s Banque Royale and the Mississippi Bubble, pp. 8-9

[23] Niall Ferguson; The Ascent of Money, p. 157

[24] John E. Sandrock; John Law’s Banque Royale and the Mississippi Bubble, p. 13

[25] Rebecca Spang: Stuff and Money in the Time of the French Revolution – MR Live – 2/21/17 (YouTube)

[26] Adam Smith; Paper Money, pp. 116-117

[27] Carroll Quigley; The Evolution of Civlizations, p. 377

[28] Karl Polanyi; The Great Transformation, chapter one.