Max Keiser: Hi I’m Max Keiser, here with James Turk director of GoldMoney Foundation. Today we are going to take a look at the history of fiat money inflation and economic collapse here in France.
James Turk: We’re going to look at two specific episodes where the currency collapsed.
Max Keiser: Twice, hard to believe.
John Law and the Mississipi Bubble
Max Keiser:Frances first experiment with fiat money lasted only 5 years but it left deep scars. In 1715, Scottish financier John Law found a willing sucker in French regent Philippe d’Orleans. Louis XIV, the Sun King’s wars and extravagance had left France heavily in debt. His successor tried in vain to square the budget, but expenses doubled incomes. Drastic cuts would have to be made unless another solution was found. John Law, heading the Banque Générale, started issuing banknotes. He said this would guarantee liquidity and increase commerce. The bank invested in some hot properties, including the Mississippi company, whose shares traded right here, in the Rue Quincampoix. The shares jumped as did the value of the banknotes… and then in 1718 the Banque Générale became the Banque Royale and they issued even more shares. The economy boomed as paper wealth became widespread and in 1720 John Law was made Minister of Finance.. but that same year the bubble popped and the shares started to fall. Law’s solution was to issue more banknotes, to attempt to prop up the share price, in rapidly increasing amounts. The notes started to trade at a discount to metal money. The government started to panic, he issued more shares and forced the State Pension account to buy more shares. That didn’t work. People started to hoard more gold and silver. The State went door to door and confiscated it. In just a few short months the shares and the bank notes, now held by everyone in France and held in all the pension accounts, became worthless. The entire country went down the drain. Oh, and by the way, if you really wanted to insult someone? You called them a banker.
James Turk: I’m James Turk, director of the GoldMoney Foundation; it’s my pleasure to be speaking with Pierre Jovanovic, bestselling author and noted historian. It’s a flaw in human nature that we’re always thinking that there’s a free lunch in this world. A free lunch comes one way from printing money, but in reality there is no free lunch and fiat money ultimately leads to a financial or monetary crisis and that’s what happened with the Mississippi bubble. The shares of the Mississippi company rose, the eventually collapsed. What where the consequences of that collapse?
Pierre Jovanovic: These where tremendous, first of all people never believed too much in paper, they thought it was nonsense.. paper instead of physical gold or silver and then there was a kind of mini revolution.. the Mississippi company was in Rue Quincampoix in Paris and there where like thousands of people coming and striking just in front, they wanted their money back.. there were like…
James Turk: It was a bank run?
Pierre Jovanovic: Yeah, it was a bank run. The bank run started with the people who were very well informed, the people around the king and then progressively, it took 3 or 4 days, information went down to the people..
James Turk:So what they were doing is, they were trying to take this paper based on nothing but promises to redeem them for actual physical gold and physical silver, because the tangible asset ultimately has value, whereas paper is only based on someone’s promise and people were fearful that those promises were worth nothing.. and in fact they were worth nothing.
Pierre Jovanovic:Don’t forget that in the beginning they said that the Mississippi was like the promised land, filled like some biblical city, filled with gold mines and silver mines and golden apples growing on trees… people really fantasised about it, so everyone wanted the shares of the company and it was such a success that John Law issued more actions.. more shares than available. That’s a very common thing through history..
James Turk: After the collapse of the Mississippi bubble.. what was the impact on the French people? Was it throughout the entire country or just in Paris?
Pierre Jovanovic: No, it was definitely throughout the whole country because; don’t forget the law which forbade the French people from using gold and silver coins were extremely active. People all over France were thrown in jail and at the time jail was very specific.. it was really a nightmare.. so people were really scared. Everybody went nuts. There was just this anger against the politicians.. we cannot use the term politician because at the time it was the aristocracy…
James Turk: The monarchy.
Pierre Jovanovic: ..but the anger of the people was already there. This anger was going to be multiplied until the French Revolution and The Terror… when they would take everyone and just send them to the guillotine. It’s like a maelstrom of anger of people who have been stolen… their wealth for which they had worked all their life.
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