F.D. Roosevelt’s, President of the USA, confiscation of gold and silver in the USA in 1933 is a relatively well known historical event.

Partially banished from the history books, however, but well known to many Gold Bugs, through articles on the internet and historical texts, is the story of gold and silver confiscation in France in 1720 by the legendary John Law (baptised

 21 April 1671 – died 21 March 1729).

There are several reference works on John Law, of which one of the older and best known ones is Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay first published in 1841.  However some extremely interesting details on the gold and silver aspects are available in a more recent well researched book; Millionaire by Janet Gleeson published in 1999.

John Law’s brilliant mathematical mind enabled him to be a successful gambler in his early days by calculating the odds, and often taking the bank in various forms of card games and dice.

John Law, by Casimir Balthazar

He was also way ahead of his European contemporaries in developing new theories on banking, involving the issue of paper money alongside the gold and silver coins which were the monetary systems of his epoch.

Law, a Scot,  eventually rose to become the Minister of Finance in France, appointed by the Regent Duc d’ Orléans, governing on behalf of the dauphin, later Louis XV, who inherited the throne as a young child.

Law was also Founder and President of the Royal Bank and the    Mississippi Company.

The Bank issued paper money which was in competition with gold and silver coin... and therein lies the tale.

This short essay has no intention of repeating the whole history of Law’s rise and fall from monetary stardom, which can be pursued in the above quoted works and elsewhere.

The author’s aim here is to concentrate solely on the legal and other measures that Law took as Finance Minister of France around 1720 in order to try and save his monetary paper empire versus gold and silver.

Law was very well aware that a loss of confidence in paper, (bank notes and shares in the Mississippi Company) would result in a flight to safety into gold and silver. The following sequence of events in 1719/20 is sourced from Janet Gleeson’s book, Millionaire referenced above.

1.       In Dec. 1719 the share price of the Mississippi Company, which had risen in a bubble from 150 to 10,000 Livres descended to 7,500.

2.      Law declared a dividend for shareholders of Livres 200 per share and the price recovered to 9,000.

3.      Future markets developed at 15,000 Livres, but Law refused credit to finance futures, whereupon the price fell. He then revoked his credit ban and the price recovered.

4.      Company sales offices were opened in Paris to try and curb “unregulated” sales and control the market.

5.      ”Primes”, equivalent to today’s options, were launched with leverage of 10 to 1.

6.      Investors sold shares in order to buy Primes, crashing the share price from 10,000 to 7,000 Livres.

7.      Physical silver and gold were draining from the bank’s coffers as investors, anticipating an end to the bubble, sold shares and cashed out into physical.

8.     By the end of 1720, some 500 million Livres in silver and gold had been taken out of the country to London and elsewhere.

9.      Inflation in France escalated and the price of land rose 400% in some areas. The price of staples rose with bread up 500% from 1 to 5 sous within a year.

10. Law, although a free marketeer by philosophy, decided the time had come for swift and devastating intervention.
    

·         On Feb 27th measures for 'hoarders.'

·         Informers were rewarded for any hoarding information, which included the right for the government’s agents to search any private property for silver and gold.

·         Some 2 weeks later Law reversed his decision, re-opened the company sales offices and supported the sales price at 9,000 Livres. There was a rush to sell shares for paper Livres.

·         Law decided to fade out silver and gold coin by reducing their value to zero over several months - turning to a total paper monetary system.

·         Law had gone one step too far and his political support started to collapse.

·         A huge crime wave developed simultaneously as losses led to penury, hardship and hunger.

·         By May 1720 some 2.6 billion Livres banknotes had been printed.

·         Law decided to reduce the price of the shares from 9,000 to 5,000 Livres.

·         The value of Livre banknotes would also be reduced by 50%.

·         After 3 days of riots, Law resigned, and Orleans restored the value of the shares and banknotes to their previous levels.

·         A few days later the limits of owning gold and silver were lifted, but nobody had any left.

·         Only 2% of the money still circulating was in silver and gold.

·         Coins were rationed and vast public bonfires of paper shares and Livres bank notes were organized by the government to try and restore faith in paper, by demonstrating to the public that they were reducing the quantity in circulation, which needless to say did not work.

·         On the foreign exchange market a pound sterling rose from 39 Livres to 92 Livres in 6 months.

·         Finally vast quantities of copper coins were minted to replace the lack of coins in circulation.

·         Banks however opened only sporadically and to huge queues of people trying to exchange paper for gold and silver.

Law went into exile and his fortunes ebbed and flowed for the rest of his life.

The parallels with today’s global fiat monetary system, now arguably close to  the verge of collapse in October 2010, are so amazing as to warrant this short essay as a heads-up, and to provide a template as to how events might play out in the next couple of years.

The intention is to allow the readers to draw their own conclusions as to how they might or might not save themselves from a similar potential collapse in fiat paper monetary system.

One can, of course, imagine that many of Law’s measures would not be acceptable in the 21st century, but a global monetary system collapse may well lead to surprises?

History seldom repeats, but it often rhymes, to paraphrase the famous bonmot of Mark Twain.

CAVEAT POSSESSOR CHARTA

Alan Leishman

email: dalhn@freesurf.ch

Disclaimer: This essay is not intended to be a recommendation for an investment in any asset class, but is merely an attempt to compare a previous period in history to the present day.  The author would like to thank Janet Gleeson for the permission to use the above referenced information from her book, Millionaire.