Chap 13-15: John Law, Interest

Chap 13: Mr. Law’s Scheme

 

  • The last bad effect of the idea that public opulence consists in money is the notion of Mr. Law, a Scotch merchant.
    • He thought that:
      • the value of gold and silver is arbitrary and depends on constitution and agreement.
      • the idea of value can be brought to paper and preferred to money.
    • If this could be done, he thought it would be a great convenience.
    • The government could then do what it pleased:
      • raise armies,
      • pay soldiers, and
      • be at any expense.
  • He proposed his scheme to the Scotch parliament in 1701.
    • It was rejected.
    • He went to France, where his project was relished by the Duke of Orleans.
  • In this book, he agrees with the fore-mentioned writers that when the balance of trade is against a nation, it must soon be drained of its money.
    • To turn the balance of trade in our favour, he proposed the following scheme to the Scotch Parliament:

[212]

  • There was little gold or silver in this country.
    • He thought they could find some other way to create money by paper, independent of gold and silver.
    • He proposed a land bank at Edinburgh.
      • He falls into many blunders on tenures and the nature of property.
    • At this bank, they were:
      • to keep only 20,000 or 30,000 pounds to answer small demands, and
      • to give out notes for land.
  • For two acres of arable land, they were to issue out a note of equal value.
    • If any extraordinary demand was made on them, they would pay so much of it in money, and so much in land.
    • Through this, the whole land of Scotland would go from hand to hand in a very short time, as a 20 shilling note does.

 

  • This project was never executed.
  • It is hard to say what the consequence might have been.
  • It is obviously liable to the following inconveniences:
    • The land rent of Scotland at 5 million per annum.
    • After 20 years’ purchase it amounts to 100 million.
    • There would then be just so much currency in the country.
    • If 1 million was then necessary for circulation, there would just be 99 million for no purpose, as none of it could go abroad.
    • They would not have been able to maintain one man more than before.
    • Their food, clothes, and lodging would not have been increased.
    • Every commodity would have risen to 99 times its present value.

 

  • Mr. Law went over to France in 1714.
    • He found favour with the Duke of Orleans, then Regent.
  • He got liberty to create a bank [213] there.
    • At first, it only had 6 million livres or £320,000 sterling.
    • From this beginning, he carried it on to a very great height.
    • He issued many notes.
    • In a short time, he engrossed France’s whole circulation.
  • Mr. Law’s notes were received in payment of the government revenue.
    • This contributed to the success of the scheme.
    • This also had a greater effect in France than it could have had here, because of:
      • the number of taxes, and
      • how they are levied.
  • By this and other circumstances, his notes were always at par with gold and silver, especially as they were making continual changes in their coin.
    • Around that time, 28 livres were equal to 8 ounces of pure silver.
    • 8 ounces were raised to 60 livres.
    • Thus, a diminution of coin was expected daily.
    • Mr. Law made his notes payable in ‘the money of the day’.
  • Instead of promising to pay his notes, in pounds sterling, as we would say, he did it in crowns and half-crowns.
    • This was a very proper method to make them par with gold and silver.
  • Suppose that our coin were raised to double.
    • A half-crown would become a crown.
    • In this way, the bank notes and money would rise and fall together.

[214]

  • Mr. Law wanted to make his notes above par.
    • He issued out his bank notes payable in livres tournois.
    • When the coin was diminished, he would not be obliged to pay above half.
  • The coin was not received in the market or elsewhere since the diminution was still expected and did not come for some time.
    • This favoured his design.
    • He kept the notes above par.
    • This established the credit of his bank.

 

  • His next step was to relieve the public debts of 200[0] million.
    • He saw the diminution must come and took another method to keep up his notes.
  • He got a grant of the exclusive privilege of trading to Canada and established the Mississippi Company.
    • He joined the African, Turkey, and East India companies to this.
  • He also taxed the tobacco and all the public revenues of France at 52 million.
    • In France, the whole [215] revenue is farmed by one man.
    • He undertakes it and levies it without excisemen.
    • The farmers there are the richest in the country.
    • They must be skilled in finances and public revenues.
  • Mr. Law undertook this.
    • He had the country’s whole trade monopolized.
    • It was difficult to say what profits he would make.
    • He wanted to lend the government 80 or 90 million [sterling].
    • He could easily do this by issuing notes to that value.
    • But then he saw that they would soon return on him.
  • To prevent this, his invention was set on work.
    • The company he started seemed to be in a very flourishing condition.
    • Shares were bought in it at a very considerable rate.
  • He opened a subscription to it at 500 livres.
    • A navy ticket or billet d’état bought a share into it.
    • This raised them to a par, just as they had been far below it for a long time.
  • The government of France was in its most miserable condition.
    • The interest of the money which should have paid the billets d’état was seized upon for other purposes.
  • Never was monarch more degraded than Lewis XIV.
  • After the treaty of Utrecht he had occasion to borrow 8 million livres from Holland.
  • not only to give them his bond for 32 millions, but to get some merchants to be security for him.
  • We should not be surprised that the billets d’état sold at great discount as:
    • they bore no interest, and
    • it was uncertain when they would be paid.
  • Law published a declaration that one of these, which was granted for 500 livres, should purchase a share in the company.
    • Thus. they came again to par.
  • The people still continued to have great expectations of profit.
  • In a few days, he opened a new subscription at 5000 livres [216].
    • Afterwards another at 10,000.
  • At this time, he was enabled to lend the government 1,600 million livres at 3%.

 

  • Had he stopped here, he would have answered all engagements.
    • But his future proceedings ruined all.
  • It was impossible that the value of shares could long continue at such a high rate.
    • However, he thought that it was necessary to do all that he could to keep them up, as the whole fortunes of many people were in the bank.
    • He had issued notes to double the country’s circulation.
    • It raised the price of everything.
    • Consequently, the exchange was against France in all foreign trade.
  • This was principally caused by his opening an office to purchase 500 livres shares at 9,000 livres.
    • This obliged him to issue many notes.
  • Prudent people opposed this scheme.
    • It was the first thing that made his bank lose credit and cause its dissolution.
  • He was not obliged to pay the capital sums, only the annual dividend of 200 livres arising from the profits.
    • He might have let them fall to their original 500 lives without any great loss but that of reputation.
    • But his buying up the shares caused his issuing out so many notes that they must of necessity return on him.
    • This was so much the case that he was obliged to open offices in different parts of Paris for their payment.
  • When in this manner oppressed, he was making continual changes on the coin to dissuade people from returning on the bank, and disgust them at gold and silver.
    • He cried up gold.
    • But coin [217] cannot be kept much above the metal’s level when it was so much depreciated, it was not taken.
    • If a person had 20,000 guineas, he would exchange them for notes as he was afraid that the coin would not keep that value.
    • The same consideration prevented them from returning on the bank, as they would there be paid in coin.
  • Through this, he prevented his notes from returning to him.
    • He filled his coffers with almost all the gold in France.
  • To accomplish this part of his scheme more perfectly, he most arbitrarily published an edict banning anyone from keeping gold or silver beyond a certain sum.
    • He also took away the severe penalties that were in force against coin exportation.
    • Everyone was allowed to export money duty free.
    • Much of it went to Holland.
  • He reasoned with himself that some instrument of change is necessary, paper, gold, and silver, at present are the medium.
    • If all the gold and silver were exported, only paper would remain and would be the sole instrument of commerce.
  • He thought this was done effectually when he had swept a part into his coffers and cleared France of the remainder, by an edict.
    • They would therefore be obliged to take paper.
  • However, after many expedients, he found this was impracticable.
    • By paying out great sums, he kept off ruin for some months.
  • But finally, he published an edict that all bank notes were to be paid only in half.
    • If he had stood to this, it would have been far better than to have suffered the consequences after.
    • Upon this edict, the bank’s credit was entirely broken.
    • The bank notes suddenly sunk to nothing.
  • This ruined many people.
  • Britain can never be much hurt by [218] the breaking of a bank, because few people keep notes by them to any value.
    • A man worth £40,000 will scarce ever have £500 of notes by him.
    • But the breaking of this bank in France created the most dreadful confusion.
  • Most of the people had their whole fortunes in notes.
  • They were reduced to a state of beggary.
  • The only people who were safe were the stock-jobbers who had sold out in time.
  • With their bank notes, they had bought all the valuable goods and a lot of land, though at the highest prices.
  • They made immense fortunes by it.

 

  • The South Sea scheme in our own country was nothing to this.
    • Nobody was under any obligations of going into it.
    • The government had no share in it.
    • The loss was but a trifle in comparison.
  • The clamour from Law’s last edict made it rescinded.
    • The notes were again declared to be paid at value.
    • But the bank never recovered its credit and this had no effect.
  • However, by raising the coin and other expedients, he kept it from May to October.
  • He was then obliged to leave France which he accomplished with difficulty.
    • His goods were confiscated and he died soon after.
  • This amazing scheme was founded on these two principles:
    1. That public opulence consists in money
    2. That the value of money is arbitrary, founded on the common consent of mankind.
  • Consistent with these principles, he thought he might easily increase the public opulence:
    • if he could annex the idea of money to paper, and
    • if the government could never be at any loss to produce any effect that money could do.
  • This scheme of Mr. Law’s was not contemptible.
    • He really believed in it.
    • He duped himself.
    • It was thought he had provided well for himself, but it was found to be otherwise.
  • If the Duke of Orleans had lived only [219] a few days longer, it was agreed upon that he was to have been re-established.
    • After his death, it was not thought expedient to have it put in execution.

 

  • Mr. Law’s scheme was imitated all over Europe.
  • It created the South Sea Company in England.
  • In the end, it turned out to be a mere fraud.
  • If it had been carried to as great an extent as Law’s, it would have had the same consequences.
  • It was built in the latter end of Queen Anne’s reign.
  • Its intention was to carry on a trade to the South Seas.
  • For this purpose, they bought up the greater part of the debts of the nation.
  • However, their stock was not great.
  • The profits expected from it were very inconsiderable.
  • The people’s expectations were never greatly raised.
  • Its fall was not very prejudicial to the nation.

Chap 14: Interest

  • We have only two things further to mention relating to the price of commodities:
    1. Interest
    2. Exchange
  • It is commonly supposed that the premium of interest depends on the value of gold and silver.
    • The value of these are regulated by their quantity.
    • As the quantity increases, the value diminishes.
    • As the quantity decreases, [220] the value rises.
  • However, the premium of interest is regulated by the quantity of stock.
    • Around the time of the discovery of the West Indies, the common interest was at 10% or 12%.
    • Since that time, it has gradually diminished.
  • The plain reason is this.
    • Under the feudal constitution, there could be very little accumulation of stock.
    • which will appear from considering the situation of those three orders of men, which made up the whole body of the people: the peasants, the landlords, and the merchants.
    • The peasants had leases which depended on their masters’ caprice.
      • They could never increase in wealth because the landlord was ready to squeeze it all from them.
      • Therefore, they had no motive to acquire it.
    • The landlords’ wealth could only be increased a little.
      • So they lived an indolent life and were involved in perpetual wars.
    • The merchants were again oppressed by all ranks.
      • They were not able to secure the produce of their industry from rapine and violence.
  • Thus, there could be little accumulation of wealth at all.
    • But after the fall of the feudal government, these obstacles to industry were removed.
    • The stock of commodities began to increase gradually.

 

  • What one trade lends to another is not so much to be considered as money, as commodities2.
    • No doubt it is generally money which one man delivers another in loan.
    • But then it is immediately turned into stock, and thus the quantity of stock enables you to make more loans.
  • The price of interest is entirely regulated by this circumstance.
  • If only a few were able to lend money, and many people wanted to borrow it, interest would be high.
  • But if the amount of stock on hand were so great as to enable many to lend, it must fall proportionably.

[221]


 

Chap 15: Exchange

  • Exchange is a method invented by merchants to facilitate the payment of money at a distance.
    • Suppose I owe £100 to a merchant at London.
    • I apply to a banker in Glasgow for a bill upon another merchant in London, payable to my creditor.
    • For this, I must give the banker £100 and reward him for his trouble.
      • This reward is called the price or premium of exchange.
  • Between Glasgow and London it is sometimes at 2%, sometimes more, sometimes less.
    • Between London and Glasgow again it is sometimes 4% or 5% below par.
    • Between Glasgow and the West India colonies, it is often at 50 % below par.
  • The value of exchange is always regulated by the risk of sending money between two places.
    • However, it is often greater than the risk.
    • This is owing to paper circulation.
  • Between Glasgow and London, one can easily get £100 carried for 15 or 16 shillings.
    • But paper in Scotland makes a great part of the currency.
    • There is an inconveniency in getting bank notes exchanged for gold and silver.
    • A merchant chooses rather to pay 2% than take the trouble of changing the notes for cash and sending the money.
  • This is also the cause of the high price of exchange between Virginia and Glasgow.
  • In the American colonies, the currency is paper.
    • Their notes are 40 or 50% below par because the funds are insufficient.
  • In every exchange, you must pay:
    • the price,
    • the risk,
    • some profit to the banker, and
    • the degradation of money in notes.
  • This is the cause of the rise of exchange.
    • Whenever it rises beyond the price of insurance, it is owing to the money of one country being lower than that of another.
    • This was the cause of the high price of [222] exchange between France and Holland around the time of the Mississippi Company.
      • It was then at 80 or 90%.
      • All the money had been expelled from France by Mr. Law.
      • The whole circulation was paper.
      • The credit of the bank had fallen.
    • All these reasons conspired to raise the exchange to such an enormous pitch.

Words: 2750

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