A forgotten 300-year-old-solution to Alex Salmond's money problems

Adam Smith or David Hume were no slouches when it came to economics but on the subject of monetary policy, the palm goes not to those superstars of the Scottish Enlightenment but to a man born a generation before them and much less well known.

One of the centrepieces of the SNP’s manifesto for Scottish independence is a pledge to keep the British pound. As far as Alex Salmond is concerned, the future of money is the status quo. Meanwhile, on 18 November, Ben Bernanke, the chairman of the US Federal Reserve, endorsed the viability of digital money in a letter to the US Congress. Within a week, the price of a single Bitcoin – the best-known web-based currency – had passed $1,200 (11 months ago, it was worth just $13.50). For the technocracy of Silicon Valley, the future of money is in the cloud.

These two seemingly unrelated developments are linked. They represent alternative answers to the questions at the centre of all monetary history: who should govern our money and how? The remarkable thing is that both answers were exposed as dangerous errors centuries ago. While the geeks behind Bitcoin can be excused their ignorance of this, the history-loving Scottish First Minister most definitely cannot – because the man who first explained these answers’ failings was none other than the greatest monetary thinker that Scotland has ever produced.

I don’t mean Adam Smith or David Hume. They were no slouches when it came to economics but on the subject of monetary policy, the palm goes not to those superstars of the Scottish Enlightenment but to a man born a generation before them and much less well known: John Law of Lauriston.

While Smith and Hume spent their formative years swotting in the libraries of Oxford and Edinburgh, respectively, Law – the mathematically gifted son of a prosperous Edinburgh goldsmith – hightailed it down to London to learn the practical business of modern banking from the entrepreneurs, inventors, gamblers and quacks who were busy fomenting the financial revolution that was sweeping London in the 1690s.

When he returned to Edinburgh, all the talk was of a possible union with England. The key economic question, then as now, was what to do about the currency. The conventional answer was the one that Alex Salmond echoes today: to adopt the pound sterling, under the control of the then newly founded Bank of England.

John Law was having none of it. He had discovered an economic truth that we know only too well today – that monetary policy has profound effects on employment, output and the distribution of wealth. As a result, he concluded, it would be “contrair to reason to limit the industry of the people” by acquiescing in the use of a currency “not in our power, but in the power of our enemies”.

How many citizens of Spain, where unemployment is at 27 per cent, or of Italy, where GDP today has fallen to the level of 13 years ago, wish their leaders had listened to the laird of Lauriston’s 300-year-old advice that letting other people manage your money is sheer madness? Yet the SNP’s plan, bizarrely, is to re-create the eurozone within the British Isles.

If letting other people decide the value of your currency is daft, what is the alternative? Law first toyed with the idea of creating a national currency with a value that would be linked to Scotland’s stock of land. That was a similar idea to the solution the English were to settle on in time – a gold standard that fixed the value of the pound to that of precious metal.

The principle behind such commodity-based systems is that the simplest way of avoiding a monetary standard controlled by one’s enemies is to plump for one controlled by nobody at all. No one, after all, can conjure up gold, or land, out of nothing.

That is also the logic of Bitcoin. A physical commodity in fixed supply is replaced by a virtual one subject to a preprogrammed ceiling – but the principle is the same. Don’t let someone else manipulate the supply of the money you use; better that it should be free from manipulation by anyone at all.

This second answer to the perennial question of monetary governance is also flawed. The problem – learned the hard way over the course of two centuries under the operation of the gold standard – is that an arbitrary monetary standard is just that: arbitrary.

There is no reason whatsoever to expect gold discoveries to keep pace with economic growth. The supply of land – let alone of Bitcoins – is even less flexible. The result is a ruinous tendency to deflation. The flip side of the relentless rise in price of a single Bitcoin is the relentless fall in the price of everything else, as measured in Bitcoins.

So John Law jettisoned this second answer, too. Having failed to convince his fellow Scots to reject the Acts of Union, he went to France. There, his avant-garde ideas found a readier audience and he engineered an unlikely ascent that culminated in his appointment as the country’s minister of finance.

In 1719, he took France off its gold standard and introduced paper money, issued at the discretion of the national government. It was the first European fiat currency regime, regulated by the world’s first deliberate monetary policy.

Thus Law furnished a third answer to the central question of monetary history – and it is one for the ages. Rather than ceding the control of one’s money to someone else – the Alex Salmond solution – or abandoning it to the vagaries of blind chance – the Bitcoin solution – the ideal way is to manage one’s money oneself and in one’s own national interest.

Such enlightenment, it seems, can be fleeting. David Hume has his statue on Edinbugh’s Royal Mile and there is one of Adam Smith on the High Street. John Law, on the other hand, hasn’t even made it into the Scottish National Portrait Gallery. Much worse than this is that his teachings, too, have been utterly forgotten by those who claim to be the staunchest defenders of his beloved homeland.

Scottish First Minister Alex Salmond at the launch of the White Paper for Scottish Independence in November 2013. Photo: Getty.

Macroeconomist, bond trader and author of Money

This article first appeared in the 04 December 2013 issue of the New Statesman, Burnout Britain

Anoosh Chakelian
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A view from Brexitland: Boston, the town that voted strongest to leave the EU

This little pocket of Lincolnshire is waking up to the realisation that its voice has finally been heard.

It’s market day in Boston. Stall owners are setting up, chattering and squinting in the crisp morning sunshine. Trade yawns into life amid the stands of fruit, squat pots of begonias, secondhand comics and pet supplies, as it does every Saturday.

But this isn’t every Saturday. The little Lincolnshire town is waking up to the realisation that its voice has finally been heard. It has returned the highest Brexit vote in Britain, with 75.6 per cent voting to leave the European Union. An aim that has boiled beneath its quiet, quaint surface for years.

Described by the Mail three years ago as “the town that’s had enough”, Boston is home to the highest concentration of EU migrants after London. In the period between 2004 and 2014, the migrant population increased by 460 per cent. Of the 64,000 people now living in the borough (some officials believe the real figure could be 10,000 more), about 12 per cent were born in EU countries.

This is a monumental demographic change for a sleepy farming town that was almost entirely classed as “white British” in 2001 (the constituency of Boston & Skegness is now 86 per cent white British, and 10.8 per cent “white other”).


West Street, Boston. Photos: Anoosh Chakelian

The new Bostonians are chiefly Polish, Latvian and Lithuanian – I also hear smatterings of Russian as I wander around. The market square is filled with elderly English people, gossiping and enjoying cooked breakfasts in the sun, young men excited about the Poland v Switzerland match that afternoon, and families of all backgrounds. It’s a mix, but anxiety about people speaking different languages is voiced by nearly every born-and-bred Bostonian I meet.

“If you close your eyes, you can sometimes only hear eastern European voices, and that can be scary,” remarks Paul, a 59-year-old engineer perusing the fruit stands. “Because of the language barrier, they all stay together, almost like a ghetto. People are people wherever they come from, and we wouldn’t have a maternity unit without them, but it’s been too fast. Integration takes time; you can’t do it instantly.”

“People joke here that you can walk through the town and not hear a single English person,” adds Chrissie Redford, a chief reporter at the Boston Standard, during a coffee break from reporting. “And that’s happened to me. My concern is now so many people have voted, whether that rift will get deeper.”

Three Latvian men in their thirties are sharing a beer in the nearby churchyard. Boston’s tall, distinctive medieval church tower, known affectionately as the Stump, looms over them. “What happens now?” asks Vitels, who is rolling a cigarette. He has been working factory shifts here. “I can’t go back to Latvia, there are big problems there. Romania, Bulgaria, everywhere there has been war. Nobody wants to live like that. [Brexit] makes me feel bad. People think I’m difficult, because I’m foreign.”

“The economy in Latvia is not good, but in Britain it’s very good,” frowns Gatis, who is self-employed. “Why are we here? Because we live much better here. It’s nicer.”

The English agree, which is part of the problem. “It’s a really good way of life in this area, and that is why it went so heavily for Out,” Mike Cooper, the tweed-clad owner of a local car museum, and Tory borough councillor, tells me, as we weave between the market stalls. “People feel that the massive influx is eroding their way of life. We’re not being racially intolerant; we’re living with it day to day.”

Cooper voted to leave, but there is no spring in his step. The local politicians and farm and factory owners know that this town relies on migration. Eastern Europeans settle in Boston because there is such a demand for agricultural labour, and for food manufacturing workers. Most of the vegetables we buy in our supermarkets are grown in Lincolnshire.

The perception persists among some I meet that migrants are “taking jobs from our own people”, but unemployment here is comfortably below the national average. The council estimates that around 20,000 economic migrants work in the Boston area, whereas the current number of people claiming unemployment benefits was just 630 on the last count, according to Office of National Statistics figures from May.


Boston voted for Brexit by 75.6 per cent.

But such a large low-paid workforce does cause difficulties. The average wage here has been forced down (£9.13 an hour, compared with the £13.33 national average) by employment agencies hiring cheap, flexible labourers. Similarly, rents have been driven up disproportionately by landlords taking advantage of the newcomers’ willingness to live ten to a house.

But migrants complain that they receive the blame for this, rather than those abusing their vulnerability. “It’s quite sad, because it looks like [politicians] aren’t interested in these things,” says a 40-year-old construction worker, Zee Barbaks, who campaigns against exploitative gangmasters. He and his wife, both Latvian, arrived in Boston 11 years ago. Before their two young children were of school age, they alternated factory shifts in order to look after them, “swapping them over in the car park”. I sit on a park bench with him while his son scampers around the playground.

“Agencies keep people out of holiday money and sick pay, they make them pay their wages on accommodation,” Barbaks says. “When women get pregnant they don’t give them work. Sometimes they use three people for one job – so those people are getting nothing.”

He is saddened by the huge local Brexit vote: “Ten years ago, Boston was empty. Before, every second shop was closed on West Street,” he says. “If you look now, there are loads of changes in a good way, eastern Europeans starting businesses. But now, if they stay out of Europe, in ten years’ time, it’s going to be like it was ten years ago. They’ve just done ten steps back.

“I understand that it is loads of people who have moved in, but if the agencies were sorted out, there would probably be less people here. This is what the government should be looking at.”

But it’s a perceived cultural divide, rather than material concern, which has driven Boston so strongly towards Brexit. Even the Ukip deputy leader of Boston Borough Council, Jonathan Noble, concedes that West Street was a ghost street when recession hit before the migrants set up shop (“so they have done some good here”).


Councillor Noble thanks Boston for voting Leave.

Although people worry about pressure on public services – difficulty getting school places and GP appointments, in particular – the local economy is healthy. The message they have sent to Westminster is a plea for identity.

“We’re British,” shrugs Mike, a 66-year-old retired lorry driver sitting outside a café. “I don’t care if prices go up; at least we’ll be running ourselves. We’re top of the league for wanting them [migrants] out. Some of the Polish people are nice, but there are too many.

“Barack Obama, flipping David Beckham, Bob Geldof, Cameron saying it’s good to have them here – that made me more determined, I got fed up with it. All the money is down in London, it’s disgusting. [Immigration’s] gone too far anyway, I doubt much will change. We should’ve listened to Enoch Powell. Good old Enoch,” he chuckles. His wife gives him a stern look.

“I’ve heard there’s a sign on a shop in West Street that says ‘No English’,” adds his friend Fred. “I might want to buy a Polish cake. But they don’t want to mix with us.”

Walking up and down West Street – where there are numerous eastern European restaurants, Baltic food stores, a Latvian bakery and Polish pub, and roars of “Polska!” from football fans – I can’t find that ‘No English’ sign. I doubt it exists. But it’s the perception that’s telling. English locals are the ones who feel unwelcome, far more so than their European neighbours (those I speak to are overwhelmingly positive about their hometown). They also feel their views are unwelcome in Westminster.

“We’re the ones living it,” says Chris Pain, who has owned a number of businesses in Boston and sits as an independent on Lincolnshire County Council. “When in London they say ‘we need more people’, we know that’s not true. They like it [immigration] because they can eat in nice restaurants and have people from abroad doing their menial work.”

There is hope for integration in a post-Brexit Boston, however. Young people I speak to are far more positive about their foreign neighbours. “I’ve grown up with knowing the EU,” says Kirsty, a 21-year-old graduate training to become a teacher. “I have no problem with the other communities. I’ve worked in McDonald’s and cafés around here with people from Poland, Lithuania and Latvia and they’re absolutely wonderful. People need to learn to understand each other more – actually communicate. And they don’t; that’s why there’s a misunderstanding.”

Also hinting at a more harmonious future is Sylvia Giza, 38, who has lived in Boston for 12 years. She works behind the counter of a Polish butcher’s off West Street. “We pay tax, we are educated, we buy a house. We’re not scary. I have three children, they go to school and learn English, and now they are speaking in English to me at home! So I take the book and try working and reading,” she grins, turning to her next customer – an English woman surveying the array of Polish sausages.

Anoosh Chakelian is deputy web editor at the New Statesman.