For all the folly and plain bad
thinking at work in the world - all of which works to hinder wealth creation -
there is one special breed of man who can offer us hope: that of the
Holding out for a hero
In our work today, we are constantly confronted with
the struggle to determine who exactly it is who is prospering honestly and
who only seems to be doing well.
The first, of course, might be a suitable man in
whom to invest – assuming that the price for a participation in his endeavours is right and that he, or his current
shareholders, needs our money in the first place.
In contrast, the second type – the apparent
success story - is to be avoided at all costs, either because his boat is
simply being borne higher (along with all the others on the river) on a
rising tide of hot money - or because he is riding on the coat-tails of
government interference in the free market.
In this latter case, he is unlikely to be adding any
definable real value even while he still manages to retain his patrons’
support: all too often he is merely a kind of legalized pirate. Not
infrequently, he is involved in outright corruption, to boot.
More to the point, we can never be wholly sure that
he has a genuine underlying business, at all. Our risk is, therefore, that,
if he falls out of favour with the incumbents - or
they with the voters - he may be done for and, with him, our clients’
In a curious historical coincidence, we find that
there was a personification of this difference nearly three hundred years
ago, right at the point where the modern age of finance began.
For, in the Paris of the 1720s, there took place a
duel – a contest of both wills and intellects - between a man who represented the destructive influences of an
inflationism wedded to government intervention, and his antagonist, who
exemplified the constructive energies of individual acumen and worthy
The former was John Law; a man who can lay a
justifiable claim to being the father of modern central banking, even though
his Banque Royale was neither the
first such institution, nor was it long to survive Law’s eventual
To avoid further preamble, Law – a Scots
émigré, a fugitive from English justice, and a truly legendary
gambler – persuaded himself that through a programme
of issuing bank notes he could regenerate a French economy wracked with debt
and default, the bitter legacy of the dead Sun King’s vainglory.
The initial issues of Law’s notes were fully
convertible upon demand into gold coin and so were, assuredly, a blessing.
This was because early 18th century France was a place where crime
and dishonesty meant the transport of money was fraught with danger and where
– more importantly - the quality of the coinage in use was so degraded
that it was widely distrusted.
Thus, the nation’s gold was being hoarded
instead of being freely circulated and trade was languishing for want of a
genuine medium through which to conduct it.
Law’s banknotes made up for that lack and, at
first, they even traded at a premium to the old, clipped and adulterated
coinage which they came to replace.
Law, however, had more grandiose ideas than to
restrict his bank to this least objectionable of functions. Among them, was a
scheme to supplant reserves of gold specie with titles to the much more
widely available land, its relative profusion so allowing him to
"provide greater liquidity to the market", as we might say
Austrians would recognize that the attempt to
promote trade by increasing the supply of money was enough of an error, but
Law turned out to be much more than just a proto-Alan Greenspan: he was also
part Long Term Capital Management rocket scientist and part Russian oligarch.
Without going into all the complexities of what is
an oft-told tale, Law was so flushed with his own early success,
that he soon mixed his initially sound banking activities up with a more
ambitious project to restructure the whole of the French state’s
Here, he used – in modern financial parlance -
a debt-for-equity swap, based upon the privatization proceeds of an IPO in a
national champion, monopoly industry, complete with an exotic flavour of emerging markets about it.
This was the notorious Compagnie
Suffice to say that, soon, a horrendous outbreak of financial
speculation had occurred, both fuelled by and feeding fuel to a
rapid and ultimately disastrous hyperinflation – a pathology
replicated, moreover (with a more blatantly fraudulent intent) by a
well-connected group of insiders, led by John Blunt, at the South Sea
company, on the other side of the Channel, in England.
It is highly revealing that the modern age, in fact,
views Law not so much as a charlatan, but as a sound theorist who sadly
besmirched his reputation by succumbing to political pressure, despite his
own best instincts.
Informed opinion further draws the conclusion that
the application of his methods today is eminently sound policy, albeit to be
undertaken in a much more prudent manner under the aegis of our supposedly
more sage manipulators of the nation’s money.
What Law’s present day apologists signally
fail to note, of course, is that the true lesson to be drawn from this
little morality tale is the one dealing with the power, rather than with the
economic, relationships involved.
This is, namely, that the crucial, practical
flaw of Law’s "System" – whatever could be argued were
its underlying, theoretical merits - is precisely that it could be so
readily corrupted by the state and that even a giant like Law could find
himself so swiftly and helplessly caught in the swirling currents of a
maelstrom, to the ruin of all concerned.
It is a testimony to the nature of the times that
this was the era which first coined the term "millionaires"
– Old Money France’s snooty epithet for the brash, new class of
stock market winners – and "bubble" – the
contemptuous phrase applied to the rash of start-ups which flooded the London
market as inflation fever took hold of England, too.
But what is not so well known is that this was also
the time when the phrase "entrepreneur" was first used; the
term appearing in a posthumously published work written by a man who first
collaborated with Law, then exploited the situation created by him, and
finally fell irrevocably out with him.
We are talking of the Irish-born financier, Richard Cantillon.
In this, his dull-sounding "Essay on the
Nature of Trade in General", Cantillon, in fact, set
out a masterly and anachronistically modern treatment of economics, markets,
This included much in the field of monetary thinking
that was not to be rivalled - especially in regard
to that aforementioned political context - for a good century or more after
his untimely death at the hands of his thieving servants, a crime which
robbed us of his genius while he was still only in his late forties.
Among his many startling and original insights, Cantillon signally drew attention to the essential
characteristics of the kind of man the Austrians apotheosize as the driving
force of all material progress, writing:
"The circulation and exchange of goods and
merchandise as well as their production are carried on in Europe by
Entrepreneurs - and at a risk." (Emphasis mine)
"All the Inhabitants of a State… can be
divided into two classes, Entrepreneurs and Hired people; and that all the
Entrepreneurs are, as it were, on unfixed wages and the others on
wages fixed (so long as they receive them), though their functions and
ranks may be very unequal. The General who has his pay, the Courtier his
pension, and the Domestic servant who has wages all fall into this last
"All the rest are Entrepreneurs, whether they
set up with a capital to conduct their enterprise, or are Entrepreneurs of their
own labour without capital, and they may be
regarded as living at uncertainty."(Ditto)
"All these Entrepreneurs become consumers and
customers, one in regard to the other; the Draper of the Wine Merchant and
vice versa. They proportion themselves in a State to the Customers or
"If there are too many Hatters in a City or in
a street for the number of people who buy hats there, some who are least patronised must become bankrupt: if they be too few, it
will be a profitable Enterprise which will encourage new Hatters to open
shops there - and so it is that the Entrepreneurs of all kinds adjust
themselves to risks in a State. " (Again)
What Cantillon is telling
us in these passages is that the Entrepreneur – the man who lives by
his wits, by making an estimate of what the customer demands, of how much it
will cost to provide, of what price the traffic will bear and, therefore, of
what profit there is to be had – is the man who is at the very heart of
It is the entrepreneur’s talent for what we
can call productive speculation – rather than for the idle,
financial kind, that glorified form of gambling, to which we tend now to
confine our use of the word – which is what comprises the mechanism by
which the market itself functions, by which "the circulation and
exchange of goods and merchandise as well as their production are carried
More than this, the entrepreneurs are the agents of
a society’s material advance.
They make progress through discovery; they are
naturally weeded out, good from bad, by the market process itself; and, best
of all, the reach of the profitable is subsequently reinforced at the expense
of the unprofitable, who therefore cannot continue indefinitely to
misallocate scarce resources. ("They proportion themselves… to the
Customers…. [They] adjust themselves to risks ").
Clearly, this last is nothing we can ever expect the
state to encompass.
Here, bureaucracy is usually self-perpetuating and
– as the case of bodies as diverse as NASA and the CIA have amply
illustrated these past few years – screw-ups are not punished, but
instead are rewarded with an even bigger serving of the poor
Fifty years after Cantillon,
Adam Smith struck an optimistic note, opining that the forces of good can usually be
relied upon to prevail:
"The uniform, constant, and uninterrupted
effort of every man to better his condition . . . is frequently powerful
enough to maintain the natural progress of things toward improvement, in
spite of the extravagance of government, and of the greatest errors of
But it is a question of more than just "every
man" beating back predators and promoters, and of foiling the spoliation
of crooks and congressmen.
What Cantillon explains is
that we really should be seeking a remedy for the damage done by funny money
and by government heavy-handedness by appealing to one particular kind of man
above all others – to the Entrepreneur - to the man living at
risk; the man making a living by serving his customers better than his
Men now retired to seek a well-deserved ease - but
who were themselves successful entrepreneurs in the days of their youth and
strength - should be rightly proud to recognize their own portraits hanging
in this 300-year old Hall of Fame.
But what they should also never fail to reflect upon
is that their own wealth, once earned, can only be preserved by employing it in
the same fashion as that in which it was first won – by entrusting it
(with the aid of conscientious intermediaries, perhaps) to other
entrepreneurs; to younger, still eager men who, like they once did, live
"at risk", but only by "adjusting themselves" continually
to those risks.
That way neither the John Laws of the modern world,
nor the greedy Regents who support them, will be able to destroy the
life’s work to which that accumulated wealth bears testimony.
As for Law himself, he died, alone and disgraced,
and was buried in a pauper’s grave.
Just before he fell, he summoned Cantillon
– who was threatening the "System" by converting his profits
to cash and taking them out of both market and bank--to attend upon him
There, Baron von Grimm relates, Law imperiously told the Irishman:
"If we were in England, we would have to
negotiate with one another and come to some arrangement; in France, however,
as you know, I can say to you that you will spend the night in the Bastille
if you don't give me your word that you will have left the Kingdom within
twice twenty-four hours."
Cantillon mulled this over for a moment replied:
"Very well, I shall not go, but shall help your
system to success."
In fact, knowing this summary treatment signalled Law’s desperation and that the end of the
mania was at hand, Grimm’s version has it that what Cantillon
did next was immediately to lend all his existing holdings of stock out to the
Cashing in the paper money he received in lieu of
his securities, he redeemed it for gold once more and then promptly quit the
country with it, to watch the unfolding collapse – and Law’s
final discomfort - in ease and safety.
Cantillon may have died prematurely, but, unlike Law the
Inflationist, Law the Politician – finally, Law the Destitute - he also
left a substantial monetary legacy to his surviving family, as well as an
illuminating intellectual one to his posterity at large.
For Cantillon, you see,
was nothing, if not an Entrepreneur!
Sean Corrigan is Chief Investment Strategist at Diapason Commodities Management
(Lausanne and London)
by Sean Corrigan
2006 - Copyright © Diapason Commodities Management - Sean Corrigan