Could the US Dollar hyperinflate?
“If the debt which the banking companies owe be a blessing to anybody, it is to themselves alone, who are realizing a solid interest of eight or ten per cent on it. As to the public, these companies have banished all our gold and silver medium, which, before their institution, we had without interest, which never could have perished in our hands, and would have been our salvation now in the hour of war; instead of which they have given us two hundred million of froth and bubble, on which we are to pay them heavy interest, until it shall vanish into air… We are warranted, then, in affirming that this parody on the principle of ‘a public debt being a public blessing,’ and its mutation into the blessing of private instead of public debts, is as ridiculous as the original principle itself. In both cases, the truth is, that capital may be produced by industry, and accumulated by economy; but jugglers only will propose to create it by legerdemain tricks with paper.”
–Thomas Jefferson to John W. Eppes, 1813. ME 13:423”
In the early 18th century, France was in a depressed state, characterized by high debt and taxes. Louis XIV, who died in 1715, left his country a failed economy, attributable to several conflicts, including four major wars during his reign, from 1661 to 1715.
John Law, a foolhardy Scottish financier and economist, born in Edinburgh to a wealthy banking family, was an advocate for central banking and paper money.
In 1705 he proposed the creation of a Scottish central bank, a somewhat new development for the time, the first modern central bank in history having started in 1688 (the Swedish Riksbank). To his disappointment, the proposal was rejected by the Scottish Parliament.
Thereafter, he went to France, where he was involved in a number of financial exploits. Eventually, he acquainted himself with the Regent of France and subsequently created Banque Générale, a private bank that could issue its own paper banknotes, backed by the assets of the bank: gold and silver. Two years later, in 1718, the notes were officially guaranteed by the King of France, and the bank was renamed to Banque Royale.
To fix the French Economy, the premise of Law’s plan was simple: improve the circulation, liquidity, or velocity of the currency, thereby boosting the economy of France. Paper currency is ideal for this purpose, and he impressed French leaders with his apparent financial prowess.
During this time, France had an untapped and potentially lucrative asset to the west, which could serve vital for the rejuvenation of the French Economy. Nouvelle-France (New France).
To leverage this opportunity, using his contacts and resources, Law organized the Compagnie d’Occident or “Company of the West”, which would then control trade (including fur and metals) between France and the French Colony. The Mississippi River located within gave rise to the more common name, The Mississippi Company.
At this point, Law effectively had total control of trade over this massive land area, with a vision to exploit the heralded massive amounts of precious metals and other resources. This vision attracted investors from across France and Europe – from the upper echelon all the way to the middle class – as well as an extreme allocation of control granted by the French Government.
France had a problem: massive debts, and little foreseeable way to pay them off in the near term due to their stagnant economy. Law had the apparent solution: a modern monetary and banking system, and to incur massive profits from trade and colonial resources. France bought in so much so that Law’s company was granted control of the French mint and national revenues for nine years, in exchange for an agreement to pay off the large debts of the French economy. His company, and by extent Law himself, were now at the steering wheel.
The two companies Law had created, The Mississippi Company and the bank, merged in 1720, creating a conglomerate with massive control. Law’s several actions in the prior years gave the company control of most trade between France and the outside world, other than Europe, including regions in Africa and Asia.
This vision of Law and his subsequent organizational wins sparked a near-unprecedented speculative bubble, with share prices rising 3600%.
With control over the money supply, Law could print notes, which would thereafter be invested into the company by eager investors.
Now, let’s draw some comparisons to the Federal Reserve of today. Law purchased French Government bonds with his printed money. Sound familiar? Quantitative Easing does something similar, not to draw too much emphasis to this point.
Both today and then, the money supply increased absent of price inflation, because velocity is muted. The inflation occurred within the share price of the Mississippi Company. Inflation occurred within the financial markets (for today). Once that bubble pops, the subsequent outflow leads to dramatic inflation. The current monetary and economic system share a similar fate to France of the early 18th century.
In 18th century France, new millionaires were common. Not due to general inflation like in Zimbabwe or Weimar Germany, which creates millionaires outside the stock market. Rather, investors became millionaires. Hence, it is unreasonable to expect high inflation just yet, as the money has relatively low velocity outside of the stock market, and many people simply aren’t investors. But most of all, it’s simply because people aren’t selling and spending that money, yet.
At a certain point, Law was not willing to issue significantly more bank notes, similar to the Federal Reserve ending QE and increasing interest rates in 2022. Because of this constriction in liquidity and expectations, stock prices began falling in January of 1720 (which is coincidentally the same time the stock market started its downtrend in 2022 that continues).
The point of this exercise is to draw certain parallels between the two situations, as certain fundamental pillars that make the bubbles, bubbles are the same. As often, history serves as an important lesson, and allows us to draw these parallels. However, at the same time, the situations are markedly different in several crucial ways, meaning you can’t expect the collapse of both systems to be overtly similar.
A difference? The banknotes of then were backed by precious metals. To prevent a further sell-off, which would risk his empire and threaten an economic downfall for France, Law halted the redeemability of bank notes for gold for sums above 100 Livres. One must think there was more currency than gold as well, providing another reason to cancel the redeemability. Instead of gold, the paper currency was backed by shares of the company, at a rate of 10,000 livres a share.
A debauchment of the money supply eventually led to its downfall, with the popping of the bubble and an outflow of currency from the once isolated spaces in the economy, where it has little ability to circulate and cause price inflation (in tangibles), into tangible prices. Therefore, before, velocity was decreasing due to an increase in the money supply with that money being placed in effective “safe-deposit boxes”. Once the bubble popped, and the dam broke, unleashing a hoard of currency, there was no solution to prevent total economic havoc. Paper money was not yet reintroduced to France before 80 years had passed since the incident.
How does this relate to 2022 and the Federal Reserve? Several differences in the financial systems from then to now exist. Today’s system is much more advanced and complex, with countless technical and systems advancements (an understatement, to say the least).
The principle for what will occur is the same. When you excessively create currency, and it is stagnant outside of intangibles, you don’t have inflation. Today, debt backs the value of the currency, and serves the role of money (in the money currency system). In today’s economy, there are excessive levels of debt, and the value is inflated, thus making hyperinflation possible. In John Law’s economy, shares of the Mississippi company, an inflated asset, were made the “money”, whereas his bank notes were the “currency”. If the money is inflated and the inherent value at that said point is worth much less than the currency is currently trading at, hyperinflation ensues.
In this sense, the hyperinflation resulting from the Mississippi company and today’s imminent hyperinflation are very similar.
Another important point: excess money supply and liquidity leads to a prioritization of investment in unproductive bubbles, and thus a minimization of capital allocation towards actual industry and production occurs. Alas, this is no novel issue, though indeed the scale is.
A look into the minds of actors of certain times in history can be telling.
“Our public credit is good, but the abundance of paper has produced a spirit of gambling in the funds, which has laid up our ships at the wharves as too slow instruments of profit and has even disarmed the hand of the tailor of his needle and thimble. They say the evil will cure itself. I wish it may; but I have rarely seen a gamester cured, even by the disasters of his vocation.”
–Thomas Jefferson to Gouverneur Morris, 1791. ME 8:241”
The Federal Reserve, over-securitization, and hyper-expansion in credit have permitted the (nearly) everything-bubble. John Law’s economic and monetary collapse are potentially less extensive in proportion to what we await today.