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The
lovely Miss Puddy accompanied me to France this
past June. We went to Normandy
for a conference and then onto Paris for a week. Our daughter and her boyfriend met us
in Paris and we encamped in an apartment one block NE of the Louvre.
One
day we all went to Versailles and toured the palace and the grounds. I tried to explain how it all came to
be to my daughter. I showed her
where the peasants stormed the palace and entered the queen’s
bedroom. Can you imagine what the
starving peasants of Paris must have thought upon seeing the excesses at the
palace of Versailles? How exactly
do you explain how one of the greatest powers in the world at the time
arrived at that point? A rich
aristocracy living in the most lavish of circumstances while the general
population starved.
I
thought about it for a while and as usual it all made more sense when viewed
through the lens of money; or to be more exact, money mischief.
Most
people are familiar with the Scotsman, John Law (1671-1729). He was a mathematical genius and
gambler. In 1715 after the death
of the Sun King or King Louis XIV his great grandson was named King Louis XV
at the age of 5. His first
cousin, the Duke of Orleans served as regent. The following year in 1716 John Law
established Banque Generale,
the first central bank of France.
I am sure that John Law told the Duke that the coffers of France would
overflow with paper money and the people would not have to pay extra taxes
(sound familiar). At the
time the Mississippi Company, founded in 1684, was in financial trouble. The Banque
tried to prop up the failing company.
In 1717 the company was renamed Company of the West and after more
trouble was renamed in 1719 Company of the Indies. In 1718 the central bank was renamed Banque Royale, which allowed it to act under royal
decree. As you might imagine,
things started out quite well for everyone. There was more money for the Duke to
spend and the economy got quite a boost.
However, after a while inflation reared its ugly head. Law implemented all sorts of laws with
the Duke’s permission to fight this inflation of his paper money;
1. First he
banned gold and silver ownership over a token amount (equal to about 5.5 oz of gold or 78 oz of silver).
2. Next he
ordered all payment over 100 livres (about 1 oz of gold or 15 oz of silver)
to be paid only with his bank notes.
3. As things got
worse and wealth started to flow out of the country he implemented currency
controls and banned the export of all gold and silver bullion.
4. As things got
even worse he offered generous rewards for people who turned in their
neighbors who violated items 1-3 above.
(Reminds you of Homeland Security’s squealer program.)
5. Finally his
banknotes depreciated so much that he decreed that if a merchant even asked
if the customer intended to pay in gold or in banknotes prior to quoting a
price the merchant was to be put to death. (The logic was that the merchant
doubted the value of the King’s chartered bank’s note’s
value and was therefore guilty of treason to his king.) Of course the penalty for a merchant
not to ask was bankruptcy.
At
last the final scene in this farce was predictable. In 1720, in spite of all the decrees
by Law, there was a run of Banque Royal that could
not be stopped. The Duke
dismissed John Law and he fled the country. In 1723 King Louis XV reached his
majority at age 13 and he took control of France. A large portion of the country had
lost their savings and a hatred for paper money existed for a generation.
In
1774 King Louis died and his grandson King Louis XVI became king at the age
of 20. Fifty-four years had
passed since the run of the bank that killed Banque
Royale. Most people were long
dead with any direct memory of the bank.
However, France was fighting several wars and draining its treasury. There is nothing like war when it
comes to spending blood and money.
The Palace of Versailles was under construction since Louis XIV and
continued to be expanded under Louis XV and Louis XVI. France was arguably the greatest power
in the world and was spending itself into bankruptcy in grand style. The King was aloof from the general
population that was starving while he was tucked away in one of the greatest
palaces ever built for a sovereign several miles outside of Paris (away from
the unwashed masses).
In
1789 a mob from Paris marched to the palace and stormed the gates. The French revolution lasted from 1789
to 1799 and threw the country into chaos. In 1793 King Louis XVI and Marie
Antoinette were beheaded in Paris along with several others. The citizens were mad and were taking
out their frustrations on anyone and everyone (that they considered wealthy)
in general. In 1790 the
government (National Assembly) confiscated church properties. Shortly thereafter they issued a bond
representing the value of the confiscated church properties. The assignat
became a currency. As you can
only expect, they were over issued and hyperinflation (a loss of confidence)
resulted. By 1792 they were
virtually worthless. More paper
money schemes were tried and failed.
Food riots broke out as there was no stable money and the economy
collapsed. The Maximum Price Act
of 1793 was passed. It declared
price controls that only caused even greater shortages. After all a merchant could not expect
to sell something for less than he paid for it. Farmers refused to plant and sell
crops at a loss. Goods simply
disappeared as stores shut down or were sold on the black market (the same
thing happened in Zimbabwe 200+ years later). As a result of the price controls and
the resultant shortages, even more food riots broke out.
Napoleon
became First Consul after a coup d’état in 1799. During the coup of 1799, no one seemed
to care. The citizens were tired
after 10 years of revolution and chaos and they simply wanted a stable
government. Napoleon appointed a
senate that rubber stamped his decrees.
In 1803 Napoleon sold Louisiana to the US for a mere $15 million
dollars or $.03/acre in order to generate cash for the debt ridden
France. After 5 years of political
and military maneuvers, in 1804 he crowned himself Emperor of France thereby
assuming total power.
In
1803 Napoleon finally put an end to the paper money experiment that plagued
France for decades when he introduced the germinal* franc as the new
currency. The new franc contained
0.29032 grams of gold. The 20
franc French gold coin has 0.1867 troy oz of gold
and was minted for over 100 years until 1915. The 20 franc gold coin provided a
welcome monetary stability in France that had been lacking since John Law
appeared on the scene. The Latin
Monetary Union met in 1865 and fixed the French franc, the Belgium franc, the
Swiss franc, the Italian lira and the Greek drachma all at a fixed quantity
of gold, which provided even further monetary stability throughout much of
Europe up until WWI.
It
finally took a dictator or emperor to seize power through a coup as a means
to restore order to the economy by going back to gold as a stable form of
money. I wonder what it will take
in today’s modern world?
How long will we suffer inflation (and then hyperinflation) until we
agree to cede political power to anyone who will fix the problem by
emasculating the bankers and re-establishing a gold standard for the
people? Who will we willingly
surrender the republic to in exchange for a promise to end the banker’s
fractional reserve currency chaos?
Rest assured that the bankers will not go quietly into the night. Power is never surrendered without a
fight. When it comes to greed and
power I am reminded of King Solomon who said there is nothing new under the
sun, human nature never changes.
A fight of epic proportions is coming. As Marc Faber says, “opt out of
the fractional reserve system, buy gold and become your own central
banker”.
Larry Laborde
Silver Trading Company
www.silvertrading.net
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