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.