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The Alarming Actuality of the 18th Century

Actualidad, El American

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For starters, we must highlight a thought by Louis XIV, who reigned until 1715, and the entanglements of his immediate follower. The first was his “I am the State” (his great-grandson and successor to the throne would follow along the same lines with his phrase “after me, the flood”). All this is very dear to the authoritarians of our time, in the midst of a brutal falsification of democracy turned into kleptocracy, and the second is about Scotsman John Law who inaugurated his monetary inflation experiments in France, in the middle of the eighteenth century.

Hans Sennholz has rightly said that “entrusting the management of money to the government is the same as handing a canary to a hungry cat.” It is curious but there are still those who seriously propose that the state apparatus should manage the currency “but manage it well” without realizing that, in the end, they are putting in the hands of the politicians in office the patrimony of the people who can never file a lawsuit in the face of government plundering. And let us bear in mind that the so-called independence of the central bank is totally irrelevant in the face of this problem, due to the dilemmas I will point out next remain.

This is so since central bankers are always, and in all circumstances, faced with the inexorable decision to choose among three possible paths: to expand, contract or leave the monetary base unchanged, and whichever of the three avenues is chosen, relative prices are altered with respect to what they would have been had there been no state intervention. This deterioration in relative prices necessarily leads to a misallocation of scarce productive factors, thus reducing wages and incomes in real terms.

The alchemists of fine tuning and other nonsense are incapable of even imagining the possibility of people expressing their preferences regarding the financial assets they wish to use in their transactions.

I refer again to the Nobel laureates in economics Friedrich Hayek who wrote the book entitled The Privatization of Money and Milton Friedman who in Currency and Economic Development states that: “I conclude that the only way to refrain from using inflation as a method of taxation isn’t to have a central bank. Once a central bank is created, the machine is ready for inflation to begin” and in the last thing he wrote on monetary matters, Money Mischief, he concludes that “currency is too serious a matter to be left in the hands of central bankers.”

And this is not a secondary question of economic policy, but a matter of elementary respect for the right to the fruits of other people’s labor, and especially worthy of consideration for the moral and material integrity of the most needy. From Aristotle’s Nicomacheayn Ethics, the importance of money has been emphasized to the arrogance of authoritarians who see in monetary manipulation a very powerful source of control over their subjects.

Money is not a minor issue: it is a matter of respect for private property, as the Founding Fathers saw it in the United States, which is why they originally opposed the idea of a central bank (only in what was called the revolution of 1913 was it created, for which a constitutional reform was required).

Since ancient times governments have been counterfeiting currency for their own benefit, the stories of Marco Polo about what was considered the unusual discovery that there was paper money in China, eclipsed the fact that they were pioneers in the printing press.

But the systematic and methodical way of manufacturing fiat currency on the basis of long reasoning was set out in extensive writings with academic pretensions with the appearance on the scene of John Law. A Scotsman, heir to considerable resources, an inveterate gambler but a scholar of banking and credit systems, he first proposed a central bank to the Scottish Parliament based on the counterpart of the value of land, which was not accepted and, in addition, he finally escaped from the Scottish justice system, which condemned him for having killed a person in a duel.

He presented his project again, this time on the European continent to the regent – Duke of Orleans, in the name of Louis XV – after the death of Louis XIV in the midst of fiscal and monetary disorder. On this occasion he succeeded and personally founded and directed the “Banque Generale” in 1716 as a central bank with the monopoly to issue money in France, which soon became the “Banque Royale” with the imposition of its compulsory acceptance and, at the same time, the government entrusted him with leading the Mississippi company conceived by Law himself, theoretically backed by the land in American Louisiana.

The results of the execution of these projects exploded in 1720 with the hyperinflation provoked by central banking and the financial bubble of the Mississippi scheme, all very detailed in the bibliography I mention below. An explosion that swept away the “sovereignty” of the counterfeit paper on a large scale and further compromised the “sovereign”, and, above all, intensified the liquidation of the only genuine sovereignty that there is, which is that of the governed (considered de jure subjects by the government of the time and de facto subjects by those of our times).

But what is interesting for the purposes of this article is to highlight the arguments and terminology used by John Law and its correlation with that used today by “monetary authorities” and their apologists. Law stressed the importance of “taking care of the value of the currency” and in this sense of being attentive to “the key ratios” in a context of “absolute independence of the central bank and its careful management of the fractional reserve system.” It is worthwhile to dwell on some passages from Law’s writings in order to illustrate the above.

In his Money and Trade Considered with a Proposal for Supplying the Nation with Money he writes that “it will be recognized that there is no other means of improving our condition than the increase of our numeraire […] Objects depend on trade and trade depends on numeraire and so, to be powerful and rich in relation to other nations, we should have face value in the same proportion [as in those nations and production].”

In Considérations sur le Commerce et sur l’Argent he states that “the credit which promises a payment in metallic currency cannot extend beyond a certain proportion which it must observe with this metallic currency and of such currency we have only so modest a quantity that the credit which it could serve would be very little considerable.”

In Lettres sur le Nouveau Systéme des Monnaies he says that “it is as if they had subtracted a part of the wool or silk in the Kingdom to convert them into symbols of transactions: would it not be easier that they should be returned to their natural uses and that what should be used as transaction symbols be products having no use by themselves? There would still be a greater advantage in the use of these symbols using this kind of materials, and that is that no one would ever be tempted to divert them from their true use, which is to circulate […] Why use metallic currency? Any paper will serve the same purpose and more cheaply”.

In Mémoires sur les Banques he points out that “all the coins of the Kingdom belong to the State, represented in France by the King, and belong to him precisely as the highways and great roads do, not to enclose them in his domains, but, on the contrary, to prevent anyone from enclosing them in his.” Finally, in Troisiéme Letrre sur le Nouveau Systéme des Finances he explains that “forced acceptance is superior to the free acceptance.”

“L’État, c’est moi”, famously said Louis XIV.

Charles Gide, in the work I quote below, concludes with respect to Law’s work that “Never has the right of ownership of currency been rejected with more complete cynicism, nor has the eminent right of the State over the property of its subjects been asserted with less hypocrisy.”

In short, as Juan Bautista Alberdi has written in Economic Studies: “There is but one hope that the paper currency of the State, once established and converted into a habit, will disappear, and that is that it will ruin and bury the government that created it.”

John Law’s most outstanding disciple was undoubtedly John Maynard Keynes. It is therefore appropriate to review his key ideas, and Keynes made his affiliation crystal clear when he wrote the preface to the German edition of his General Theory of Employment, Interest and Money in 1936, in the midst of the Nazi era: “The theory of global production, which is the aim of the present book, can be applied much more easily to the conditions of a totalitarian state than to the production and distribution of a given volume of goods obtained under conditions of free competition and an appreciable degree of laissez-faire.” Confession relieves the need for proof.

Given Keynes renewed enthusiasm, it is worth returning to some thoughts that appear in that work, where, among other things, he advocates for “the euthanasia of the rentier and, consequently, the euthanasia of the cumulative oppressive power of capitalists to exploit the scarcity value of capital.”

Likewise, regarding customs barriers, he proclaims in the same book “the element of scientific truth in Mercantilist doctrine” and, in times of capital consumption he advises the deterioration of wages through inflation maintaining nominal levels so that the recipients believe they maintain their income: “the solution will normally be found by altering the monetary pattern or the monetary system in such a way as to raise the quantity of money”.

It is truly curious and one of the most striking myths of our time that Keynesianism saved capitalism from collapse in the 1930s, when it was exactly the opposite: because of those policies the crisis arose and because of the insistence on continuing with those prescriptions, the crisis was prolonged. The crisis arose as a consequence of the monetary disorder caused by the de facto abandonment of the gold standard that imposed discipline (“the old relic”, according to Keynes). This occurred in the “Genoa and Brussels Agreements” of the 1920s, which established a system in which the issuance of dollars was allowed free rein.

In this way, the United States entered into a policy of erratic expansion (and contraction) which provoked the boom of the 1920s with the consequent crash of 1929, followed by the rest of the world which at that time had the dollar as its reserve currency and, therefore, expanded its local currencies against the rise of the American currency.

As explained by Milton Friedman and Anna Schwartz, Benjamin Anderson, Lionel Robbins, Murray Rothbard, Jim Powell and so many other thinkers, Roosevelt, contrary to what he promised in his campaign to oust Hoover, and in the best Keynesian style, chose to accentuate irresponsible monetary policy and excessive government spending, adding to his attempt to tame the Supreme Court with legislation that ultimately created absurdly regulatory entities for industry, commerce and banking that intensified bankruptcies and wage fixing.

Measures which, in the midst of the debacle, led to fourteen million unemployed which were then somewhat disguised by the war and finally resolved when Truman eliminated price and wage controls.

In chapter 22 of his best known work, Keynes summarizes his idea when he writes that “in conclusion, I submit that the duty of ordering the present volume of investment cannot safely be left in the hands of individuals”, which he reiterates and expands in his persuasive Essays, especially in chapter 2 where his faulty analysis of employment and productivity as releasing resources for new purposes and their allocation where wages are the result of free contractual arrangements for the purpose of using those factors indispensable for the provision of services and the production of goods is made evident.

Keynes is then the modern version of John Law, but with an even greater charge against free society.

For further bibliographical references on Law and, especially his link with Keynes, see Charles Rist’s Historia de las doctrinas relativas al crédito y la moneda.

From John Law to the present day, by José Antonio Aguirre El poder de emitir dinero. From J. Law to J. M. Keynes, by Elgin Groseclose Money and Man. A Survey of Monetary Experience, Charles Mackay’s essay “The Mississippi Scheme” and Martin A. Larson’s The Federal Reserve and our Manipulated Dollar. Any current overlap with John Law is not coincidental but rather causal.

In short, those dominated by the monotony of always doing it wrong end up crushed by their own prescriptions, and are characters who live entangled in heavy mental cobwebs, incapable of imagining anything different.

Alberto Benegas Lynch (h)

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