Topic: Very nice story about John Law - page 4. (Read 10201 times)

This question is impossible to answer in any meaningful way.

Money, as it is really used in daily life, is hard to define.  If you walk in to a bank and get a loan, say $1000, the bank just adds $1000 to one of your accounts, and adds a new account with negative $1000 in it.  Which of those is money?  Was anything really created?  What was it, and when?

If you withdraw that $1000, that could be the moment that new money is created, because that is when the books no longer balance, and that $1000 is now in circulation.  On the other hand, the bank just physically moved ten $100 bills from their cash drawer into your hand.  Does this suggest that the actual money that was created is the debt?  Still, hard to say.

If your bank was previously at their reserve limit, they now need to borrow more reserves.  The fed can snap their fingers and add $100 to your bank's account (and a corresponding negative $100 loan).  Is that money?  Which one?  Is that the moment of creation?

How about when your bank orders physical banknotes to replenish their stock?  How about when the paper is actually printed?

In my view, all of those things are money.  The money in your account, the negative money in your loan, the physical paper money, the money in your bank's account with their reserve branch, etc.  Typically when I have this discussion with academic economists, they pick the one slice of the picture that they prefer, and call that slice "money" and everything else is "money substitutes".

The problem with that approach is that it defines away virtually everything that is actually used as money in practice by real human beings as being something that is not-money.  It sure makes the study of economics easier to have careful definitions, but the exercise provides no real insight into how anything actually works.

I want to analyze a little bit deeper following this good observation

Mathematically, added money supply will correspond to added price level, (GDP increase by 2% per year but money supply increase by 100% per year, in principle there should be a 50x increase in price of everything),  but in reality it does not work like this, because people are all adaptive and short sighted

Even they know that FED has printed 4x more money, they still tends to believe that the value of money is a constant. As a result, when they see more money, they will work more and produce more products, instead of raising the price of their product. More products will increase the demand for transaction thus reduce the inflation pressure, so that added money supply indeed can generate some stimulative effect and create more wealth without causing heavy inflation, this is especially true in a recession

But there are 3 flaws in this approach

1. Efficiency problem
The effect of the money printing is dependant on who get those money and how do they spend it, if they just hoard all the newly added money, there will be no stimulus effect. Currently banks successfully unloaded their cheap MBS in exchange for money from FED, but their spending is heavily cut and they don't loan out much, so only banks' balance sheet were improved, not average people. For each 10 dollar banks receive, there might be only 1 dollar actually reached out to average people. If banks are cunning, they will limit the number of money flow into the market to artificially extend recession in order to receive more money from FED

2. Adaptive problem
As people adapt to the newly added fictive demand from money printing, their business will expand and reach a new balance. Once the stimulus is removed, they will fall back into an even deeper trouble. Because the original problem is caused by over invest, and now the problem become even worse. Once started, people become addicted to stimulus

3. Ownership problem
FED rightfully claimed the ownership of newly created money, bought countless assets and bonds, now federal reserve banks becomes the biggest owner of the country, but people do not own federal reserve banks, they belong to a small group of private person, that unfairness created a huge gap in personal wealth (If everyone can own FED through buying their shares, I'm sure the same thing as John Law's Mississippi company will happen again, because every dollar FED printed would become their profit, they would made a fortune in the process)

I'm very glad you guys do though and that we have at least some of this  discourse

Yes, you should blame the educational system, why none of the economy books tell you who get the ownership of those newly created money? They just keep repeating trivial technical details about everthing happened afterwards, if you find any economic book that tell you the answer of this basic question, please give me a reference. (You can not even find the answer on google, isn't it amazing?)

I just try to find the answer through my own observation and research. I'm not saying I'm 100% correct, but just like a bit in computer, things usually are extremely simple if you look from the right angle. Please give some facts and reasoning for a constructive discussion

This kind of response is why I generally do not post on threads like this, the amount of bogus monetary propaganda in your head that I would need to break down to even begin to have my words understood without flippant responses or hyperbole is just beyond my attention span, nor do you show any kind of intellectual humility necessary to learn as demonstrated by your trotting out of a "masters degree in economics" a claim I find unbelievable and or a tragic inditement of our educational system.  I reiterate my recommendation that you do basic research rather then consume Austrian propaganda.

Very well said! It is an illusion that money always have a fixed and stable value, but people like this, because it will make their daily counting easier, so all the FED is doing is trying to strengthen this illusion (FED's mandate of maintain price stability)

Anyway, the biggest problem now is not related to money supply, but the ownership. Under a gold standard, the reason that money supply can not increase very fast is not because lacking of gold, it is because banks have to work honestly to buy gold, and they just can't earn that much gold by normal business operation (Actually they could let gold freely flow into market to solve the liquidity problem, but they don't want to give up their monopoly position in money issuing)

I don't know what you are against, first you say money will lose its value with the underlying asset, and then you say money will keep its value without any underlying asset

You mentioned the seigniorage, so you think FED is like the old princes and kings, and your finance should better be managed by FED since they are expected to manage the quantity properly? Did you learned this by facts (financial crisis and huge gap in personal wealth) or by books?  

Maybe you didn't pay enough attention to the real meaning of the answer to my question: If FED is the rightful owner of every newly created dollar, since all the money is created by FED, they essentially own everything in this financial system. This is not seigniorage, but 100% taxation, all your work belongs to FED (They claim all your work through money printing). But before, under a gold standard, they could only own the gold they have, and they have to pay equal value of goods/service to get those gold, so the banks are more or less the same as any other business. From when they changed from gold smith to king?

John Law's father were also gold smith and banker, and he tried this theory (money's value is decided by transaction demand) with the regent of France, but people seems were much wiser than today, they quickly recognized his scheme and exchaged his paper money for gold/siver coin, thus ruined his grand plan

Today thinking of money being a fixed unit of measure for value is akin to thinking of electricity as magic.

The sticky value of money in the marketplace is a measure of ignorance to how money works nothing else; my 5 year old has a concept of Money, and over 99% of the population thinks of it the same way.  

It is dishonest to manipulate the unit of measure based on that ignorance.  

Inflation and Deflation in the economy should be nothing more than market feedback to supply and demand, being able to spot the trend is the job of economists. Manipulating the Money supply to manage the trend is criminal. Holding the belief the money supply should grow and contract is akin to believing that reducing the supply or increasing supply of electricity to manage productivity is of benefit to all.

/\ THIS

I'm for 21m bitcoins

I once read a proposal that said the FED should get in the credit card business and just give everyone a 0% interest card, this would instantaneously inject thouse billions into the pockets of real people and cause inflation.  In essence this is how the euphemistic "helicopter drop" might actually be done by a central bank in a real world setting (when the IRS sends tax refunds it has a similar effect but it is the Treasury not the central bank that pays for it).

In any case the fair distribution of new money is a key question, if we need new money to create inflation and thus cause money to circulate then we must punish savers.  To distribute new money proportional to existing balances would do nothing to existing savers, just look at PPC, savers have no incentive to make that coin circulate, qite the opposite actually.

Simply giving everyone an equal sized check every time the money supply was increased it would indeed punish savers and encourage circulation but if or when the relative savings diminish and the society becomes more equal in wealth distribution the circulation compulsion would weaken.  This is why I and the others in Freicoin believe that demurrage is a superior mechanism to inflation, when all balances decline nominally over time the compulsion to circulate is maintained regardless of the wealth distribution and the underlying relative wealth distribution is unchanged.  New money created is given to charity, though it will never actually be very significant, roughly 1-2% of GDP because of high monetary velocity.

The error I was referring too was your assumption that money that is backed by land (or any physical asset) will always retain value, this is incorrect, the underlying asset might drop in value relative to other goods (though in the case of land its unlikely to reach zero) which would cause the money to drop along with the underlying asset.  But your also neglecting that money even without any backing IS a demanded and has a value, the value is from it's liquidity any this is perfectly capable of giving money value without any underlying asset.

As for the ownership of newly created money, that profit (creating physical paper notes generally has some nominal cost which must be subtracted from the face value of the money to yield a profit) is called seigniorage.  I medieval Europe princes and kings aka 'sovereigns' would perform this function and yes they would simply spend this money as they saw fit, seemingly allowing unlimited inflation.  But these sovereigns already had taxing authority so seigniorage and indeed money in general was seen as nothing more then a line of credit between him and the public and it's stable valuation and circulation amongst the public was a benefit he provided and the sovereign was expected to manage the quantity properly.  When more was needed he could simply make it and spend it, but if money was in excess he would buy up the money (by selling goods) and simply destroy it to contract the supply.  The reciprocity is what makes it fair and makes it work, the upside of profit was balanced by a downside of future loss when contraction was necessary (and in an agrarian society the yearly harvest and volatile seasonal trade volumes required money to grow and shrink every single year).

Is it because instead, the money will flow from the central bank versus directly into our hands? My proposition was ideally, the most fair way to inflate the money base is to give every USD holder the same amount.




I do think that money should not be created without work because in essence it'd be stealing from all the preexisting work seeing as work is something typically exchanged for money. Can you explain the mechanism by which the FED is allowed to create more money in such a way?

We all know that FED is printing 2.8 billion dollar every day, obviously most of the people have not even seen a dime of it. How come it will cause inflation if most of the people did not receive them in their pocket



Let's skip the interest rate for a while, just look at the principles

When you borrow money from someone else, he should have the ownership of those money, right? If those money do not belong to him, he should not be able to lend those money to you, that will be crime

Look at what happened in reality: When government borrow money from FED, they give bonds (IOU notes) to FED in exchange for money, which means the money they borrowed belongs to FED

But FED have not done any work to earn those money like anyone else in the society, they just print them and legally get the ownership of those money

This is very different than the government issuing money backed by their bonds, in that case, they have the ownership of both bonds and issued money. Of course if FED and government are the same entity, this will not be a problem, but in reality government changes from time to time and the FED do not have direct responsibility to government

The core question here is: Should someone get the ownership of money without doing any work, or money is the same as other commodities, you have to work to create it?

Notice that under a gold standard, every piece of gold is created by work, so the money is created by work from the beginning

If money was created out of this air, to be fair, the ownership should go to everyone equilaterally if liquidity was that much of a "problem". this wouldn't do much in the long run, just simple inflation that wouldn't hurt savers.

BUT... in our case, when we "print money" to address perceived liquidity problems, money is borrowed from the future, right?  The ownership is given to whoever the Fed gives the money to, the bankers (who coincidentally are also the money printers). So when the fed lends money, i imagine it is given at a rate where it is cheaper to borrow that money than it is to not borrow it, either by zero to negative interest rates, or by a flow of money injection that perpetually outpaces interest costs, if there are not enough credit-worthy debtors. Or, when the Federal Reserve buys MSBs etc, banks get liquidity instead of worthless debt because the debt is then transferred to the Federal Reserve, of which we as citizens are responsible for in the long run as constituents of the US because that is what government debt is backed by, the taxpayers.

either way, debt inflates, but typically doesn't  really get a chance to deflate until it does (ouch). they can do this because they created an external body (Federal Reserve) that bubbles the bankers from the real cost of borrowing, whereby the costs are passed on to literally everyone.

hopefully at some point, people will refuse to trade bad paper money for good hard assets

*just took an online summer intro macro class for my university econ minor, how'd i do though I wish I did before, I didn't read this topic at all until after  writing my attempt.

I read again his recommendations made to the Scottish Parliament. He suggested to issue banknotes backed by lands, this practice is actually the same as today's money creation backed by MBS, just one more layer of complexity has been added in between

In fact, if anyone have some fixed assets, these assets can be used as collateral to issue money. It does not matter if those assets are gold, silver or land, factory. Therefore, government bonds also can be used as a collateral to issue money

Generally, once the money is issued, the collateral behind it must be freezed (value must remain fixed), because there is always a risk of demand for payment. Once these assets are devalued or lost, then the outstanding money will lose their collateral, if the user requires payment of assets, the money issuer will go bankrupt

But the interesting thing is, if the money in circulation reached widespread popularity, many businesses accept it as a means of payment, then the value of these money will be backed by all merchants that accept this payment medium

This is a very special character of money that Law found, namely: The value of money is actually a consensus, "depends on constitution and agreement", it can be completely decoupled from the value of original collateral, as long as everyone's consensus about its value don't change. This indicates that the value of money is more of a psychological phenomenon rather than an economic phenomenon




This consensus seldom changes with the money supply. For example, if manufacturer see a lot of orders coming in (increased money supply), they will increase the production in order to make more money, rather than increase the sale price to express their concern about the added money supply

Most manufacturers will only increase the price when the cost rise, not when the central bank's money supply increased. Because in the opinion of most people, money is issued by authorities such as the government and the central bank, it should be able to maintain its value

Based on such principle, it is not difficult to understand why 1% of people will have 99% of the wealth. Because money supply increased so much, but the value of money is a consensus and it did not change a lot. So 1% of people get 99% of the added money supply, and these money will naturally become their wealth. If they spend these money, it will certainly trigger serious inflation, so they prefer to hoard a large number of these money to keep the demand high (Tax havens account deposits up to $32 trillion, twice the U.S. GDP)

What will cause this consensus to change? Usually some kind of external factors, such as war or regime change, leading to a credit crisis of the government issued currency. Or, the added money supply released too much too fast and caused serious inflation. once people have expectations for inflation , they will begin to hoard physical goods, which will accelerate the pace of inflation

While science and technology advanced so much, money and banking basically had no change in 300 years

Luckily I had a master degree in economics, but I have to say that all those I learned from school are not consistent with my real life experience/reasoning

If you are good at macro economics, please answer this question:

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

johnyj, I've been reading your post for some time now and I must say

They are the most consistently naive and misguided set of economic beliefs I have ever read, you seem to genuinely be searching for answers at times and are not too dogmatic about your beliefs which is a credit too you but your just completely backwards on everything, I suspect your foundations are weak.  I recommend you study the basics of economics more intently before trying to get into higher concepts, perhaps some kind of macro economics course at a local community college would be a good idea.

In my view, his failure largely due to two facts:

1. There were other transaction medium (Livre coins)

When his central bank issued too much paper notes, those paper notes will come back to his bank in exchange for livre coins (which made from gold and silver). To prevent this, he tried to devalue Livre coins constantly in order to discourage people to use Livre coins. He also published laws to prohibit people from holding too much gold at home. What he wanted to achieve was very clear: To make his paper note the only medium of transaction, thus increase the demand for those notes. But since the gold and silver coin still are the main stream transaction medium, he finally had a bank run


2. He tried to manipulate the stock price of Mississippi company by printing lots of money, thus made all those money flew into average household

He successfully exchanged back most of the government debt by the stock of Mississippi company - a state owned multinational enterprise, in order to attract the public's interest for this company's stock, he tried to produce lots of money to bid up the stock price of the company. He succeeded, butmany average household earned lots of money in the process, thus generated a national level of inflation and caused his paper money lose credit




If you look at how central banks are operated today, they are all doing the same as Law did 300 years ago. But they have learned from his lesson and improved at these two area:

1. They removed the gold and silver coin from circulation, thus the fiat money became the only medium of transaction, so no matter how much money they print, they won't get a bank run, in the worst case they just need to print more money

2. They tried to control the money flow more carefully so that it won't let average household receive the excessive amount of money supply. On the contrary, since there are no guaranteed way of making money (buying stocks of state owned Mississippi company), average household's income decreased over time due to centralization of production, no matter how much money they print, the inflation level for daily consumptions are kept minimal

At last, however, after a great number of expedients, he found it was impracticable. By paying out great sums, he kept off ruin for some months, but at last published an edict that all bank notes were to be paid only in half of their original designated value: and indeed if he had stood to this, as some imagined he might have done, it would have been far better than to have suffered the after consequences. Upon this edict the credit of his bank was entirely broken, and the bank notes all on a sudden sunk to nothing. This ruined an immense number of people. Britain can never be much hurt by 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 occasioned the most dreadful confusion. The greatest part of people had their whole fortunes in notes, and were reduced to a state of beggary. The only people who were safe were the stock-jobbers who had sold out in time, or with their bank notes had purchased all the valuable goods and a great deal of land, though at the highest prices. They made immense fortunes by it

The South Sea scheme incur own country was nothing to this. Nobody was under any obligations of going into it, the government had no share in it, and the loss was but a trifle in comparison. The clamour which Law's last edict made caused it soon to be rescinded, and 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, and then was obliged to leave France, which with difficulty he accomplished ; his goods were confiscated and he died several years after

This amazing scheme was founded on these two principles, that public opulence consists in money, and that the value of money is arbitrary, founded upon 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 the government could never be at any loss to produce any effect that money could do. This scheme of Mr. Law's was by no means contemptible; he really believed in it, and was the dupe of it 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 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

This scheme of Law's was imitated all over Europe. It gave occasion to the South Sea Company in England, which turned out at last a mere fraud, and, could it have been carried to as great an extent as Law's, would have been productive of the same consequences. It was erected in the latter end of Queen Anne's reign, and the intention of it 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. Their stock, however, was not great, and the profits which could be expected from it were very inconsiderable ; the expectations of the people were never greatly raised, and its fall was not very prejudicial to the nation

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As the company he erected seemed to be in a very flourishing condition, shares were purchased in it at a very considerable rate. He opened a subscription to it at 500 livres, so that a navy ticket or billet d etat purchased a share into it, which raised them to a par, as they had for a long time been far below it

The government of France was never in such a miserable condition as then. The interest of the money which should have paid the billets d etat 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 millions of livres from Holland, and not only to give them his bond for 32 millions, but to get some merchants to be security for him. Since that was the case, we need not be surprised that the billets d etat sold at great discount, as they bore no interest, and it was quite 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, and thus they came again to par. The people still continuing in great expectations of profit, he in a few days opened a new subscription at 5000 livres, and afterwards another at 10,000. At this time he was enabled to lend the government 1600 millions of livres at 3 percent

Had he stopped here, it is probable that 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. He thought, however, 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 out notes to double the circulation of the country, which raised the price of everything to an enormous pitch, and consequently the exchange was against France in all foreign trade. This was principally occasioned by his opening an office to purchase 500 livres shares at 9000 livres, which obliged him to issue out many notes. People of prudence who were concerned opposed this scheme, and indeed it was the first thing that made his bank lose credit, and occasioned its dissolution. As 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 without any great loss but that of reputation; but his buying up the shares occasioned his issuing out so many notes that they must of necessity return upon him

This was so much the case that he was obliged to open offices in different parts of Paris for the payment of them. When in this manner oppressed, he was making continual changes on the coin, in order to dissuade people from returning on the bank, and disgust them at gold and silver coins. He cried up gold, but as coin cannot be kept much above the level of the metal, when it was so much depreciated, it was not taken. If a person had 20,000 Livre coins, as he was afraid that the coin would not continue at that value, he went to the bank and got it exchanged for notes. The same consideration prevented them from returning upon the bank, as they would there be paid in coin. By this means he not only prevented his notes from coming upon him, but filled his coffers with almost all the gold in the country

In order to accomplish this part of his scheme more perfectly, he most arbitrarily published an edict prohibiting any persons from keeping by them gold or silver, beyond a certain sum. He also took away the severe penalties that were in force against the exportation of coin, and every person was allowed to export money free from duty. By this means much of it went to Holland. He reasoned with himself, some instrument of change is necessary, paper, gold, and silver, at present are the medium; if gold and silver be utterly exported, paper only remains, and may be rendered the sole instrument of commerce. This he thought he had done effectually when by an edict he had swept a part into his coffers, and cleared the country of the remainder. They would therefore be obliged to take paper