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.

Felix Martin is a macroeconomist, bond trader and the author of Money: the Unauthorised Biography

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

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David had taken the same tablets for years. Why the sudden side effects?

Long-term medication keeps changing its appearance – round white tablets one month, red ovals the next, with different packaging to boot.

David had been getting bouts of faintness and dizziness for the past week. He said it was exactly like the turns he used to get before he’d had his pacemaker inserted. A malfunctioning pacemaker didn’t sound too good, so I told him I’d pop in at lunchtime.

Everything was in good order. He was recovering from a nasty cough, though, so I wondered aloud if, at the age of 82, he might just be feeling weak from having fought that off. I suggested he let me know if things didn’t settle.

I imagined he would give it a week or two, but the following day there was another visit request. Apparently he’d had a further turn that morning. The carer hadn’t liked the look of him so she’d rung the surgery.

Once again, he was back to normal by the time I got there. I quizzed him further. The symptoms came on when he got up from the sofa, or if bending down for something, suggesting his blood pressure might be falling with the change in posture. I checked the medication listed in his notes: eight different drugs, at least two of which could cause that problem. But David had been taking the same tablets for years; why would he suddenly develop side effects now?

I thought I’d better establish if his blood pressure was dropping. I got him to stand, and measured it repeatedly over a period of several minutes. Not a hint of a fall. And nor did he now feel in the slightest bit unwell. I was stumped. David’s wife had been watching proceedings from her armchair. “Mind you,” she said, “it only happens mid-morning.”

The specific timing made me pause. I asked to see his tablets. David passed me a carrier bag of boxes. I went through them methodically, cross-referencing each one to his notes.

“Well, there’s your trouble,” I said, holding out a couple of the packets. One was emblazoned with the name “Diffundox”, the other “Prosurin”. “They’re actually the same thing.”

Every medication has two names, a brand name and a generic one – both Diffundox and Prosurin are brand names of a medication known generically as tamsulosin, which improves weak urinary flow in men with enlarged prostates. Doctors are encouraged to prescribe generically in almost all circumstances – if I put “tamsulosin” on a prescription, the pharmacist can supply the best value generic available at that time, but if I specify a brand name they’re obliged to dispense that particular one irrespective of cost.

Generic prescribing is good for the NHS drug budget, but it can be horribly confusing for patients. Long-term medication keeps changing its appearance – round white tablets one month, red ovals the next, with different packaging to boot. And while the box always has the generic name on it somewhere, it’s much less prominent than the brand name. With so many patients on multiple medications, all of which are subject to chopping and changing between generics, it’s no wonder mix-ups occur. Couple that with doctors forever stopping and starting drugs and adjusting doses, and you start to get some inkling of quite how much potential there is for error.

I said to David that, at some point the previous week, two different brands of tamsulosin must have found their way into his bag. They looked for all the world like different medications to him, with the result that he was inadvertently taking a double dose every morning. The postural drops in his blood pressure were making him distinctly unwell, but were wearing off after a few hours.

Even though I tried to explain things clearly, David looked baffled that I, an apparently sane and rational being, seemed to be suggesting that two self-evidently different tablets were somehow the same. The arcane world of drug pricing and generic substitution was clearly not something he had much interest in exploring. So, I pocketed one of the aberrant packets of pills, returned the rest, and told him he would feel much better the next day. I’m glad to say he did. 

This article first appeared in the 13 March 2018 issue of the New Statesman, Putin’s spy game