Saturday, August 22, 2009

A 300-year-old Example of Quantitative Easing

From the Economist:

“IF FIVE hundred millions of paper had been of such advantage, five hundred millions additional would be of still greater advantage.” So Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds, described the “quantitative easing” tactics of the French regent and his economic adviser, John Law, at the time of the Mississippi bubble in the early 18th century. The Mississippi scheme was a precursor of modern attempts to reflate the economy with unorthodox monetary policies. It is hard not to be struck by parallels with recent events.

Law was a brilliant mathematician who used his understanding of probability to help his gambling habit. Escaping from his native Scotland after killing a rival in a duel, he made friends with the Duke of Orleans, the regent of the young king Louis XV.

The finances of the French government were in a terrible mess. Louis XIV had spent much of his long reign fighting expensive wars. Tax collection was in the hands of various agents, who were more concerned with enriching themselves than the state. Not only was the monarchy struggling to pay the interest on its debt, there was also a credit crunch in the form of a shortage of the gold and silver coins needed to fund economic activity.

Law’s insight was that economic activity could be boosted by the use of paper money that was not backed by gold and silver. He was well ahead of his time. . . . (more)

3 comments:

  1. I just finished reading Fiat Money Inflation by Andrew White. It talks about the second round of fiat money after John Law's first round. Very interesting book.

    www.gutenberg.org/etext/6949

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