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Does Bitcoin Need a John Law?

Op-ed - Does Bitcoin Need a John Law?

Jamie Dimon opened his mouth in Davos about bitcoin and nonsense came out. “It’s a terrible store of value,” Dimon told CNBC’s Andrew Ross Sorkin. “It could be replicated over and over.”

“It doesn’t have the standing of a government,” added Dimon. “And honestly, a lot of it — what I’ve read from you guys — a lot of it is being used for illicit purposes.”

Evidently Dimon hasn’t heard only 21 million bitcoin can be produced and it gets harder and harder to create new bitcoin, with only a few produced each hour. We can’t say the same for the Federal Reserve and its partners in money creation, the commercial banks.

The lack of government standing means there would be no bitcoin bailout for JP Morgan should the need arise. No wonder Dimon hates it. As far as being used for illicit purposes, that’s rich coming from a guy whose bank was just fined two billion dollars for not alerting the authorities to the activities of one of their customers, Bernie Madoff.

These days, Dimon is viewed as the smartest banker in any room he enters. In 1716 France John Law was that guy. Way more interesting than Dimon, Law was James Bond-like — a suave, debonair, womanizing gambler who (like Dimon) always seemed to come out on top. Law had plenty of friends in high places and worked the party circuit throughout Europe, as Dimon works Davos today.

However, Law had a skeleton in his closet in the form of Edward Wilson, whom he killed in a duel for which details remain sketchy. (Did the two men duel over Elizabeth Villiers, “the king’s boss-eyed, unattractive mistress,” or a certain Mrs. Lawrence, or money Wilson had received from a homosexual lover?) Dimon’s skeletons are all in the open as JPMorgan pays various fines for the bank’s running afoul of the regulators.

This collision of Dimon, Law, and bitcoin was created by Joel Dietz with his piece in the November Bitcoin magazine entitled, “Why John Law Gambles with Bitcoins.” Dietz, 300 years after the fact, presents a thought experiment with the question, “What would [Law] say about Bitcoin and other digital currencies.”

While Dietz gets many of the juicy anecdotes about the Scotsman correct, he starts spinning the Law legacy from his opening sentence, “Today, John Law is often hailed as one of the greatest financial innovators of all time.”

I’m not sure who Dietz thinks has been hailing Law for greatness. Charles Rist, in his book History of Money and Credit: From John Law to the Present Day, wrote of Law’s theories,

Law’s writings . . . already contain all the ideas which constitute the equipment of currency cranks—fluctuations in the value of the precious metals as an obstacle to their use as a standard . . . the ease with which they can be replaced by paper money, money defined simply as an instrument of circulation (its function of serving as a store of value being ignored), and the conclusion drawn from this definition that any object can be used for such an instrument, the hoarding of money as an offence on the part of the citizens, the right of the government to take legal action against such an offence, and to take charge of the money reserves of individuals as they do of the main roads, the costliness of the precious metals compared with the cheapness of paper money.

Only Keynesians have a soft spot in their hearts for Law. Law biographer and Mississippi Bubble expert Antoin Murphy said it best. “Keynes can be termed as post-Lawian!”

Followers of the Fed and Keynesian policies will find this John Law quote familiar.

An abundance of money which would lower the interest rate to 2% would, in reducing the financing costs of the debts and public offices etc. relieve the King. It would lighten the burden of the indebted noble landowners. This latter group would be enriched because agricultural goods would be sold at higher prices. It would enrich traders who would then be able to borrow at a lower interest rate and give employment to the people.

In Choice in Currency F.A. Hayek linked Law and Keynes.

LORD KEYNES has always appeared to me as a new John Law. Like Law, Keynes was a financial genius who made some real contributions to the theory of money…But Keynes could never free himself from the popular false belief that, as Law expressed it, “as the additional money will give work to the people who were idled and enabled those already working to earn more, the output will increase and industry will proper.”

Joe Salerno weighs in on Law’s legacy in his book Money: Sound and Unsound.

as the founder and head of what, in effect, was one of the first national central banks in history, the Banque Generale (later, the Banque Royale) of France, Law almost singlehandedly destroyed the French monetary system in the course of four short years (1716-1720). As a monetary theorist, Law has been called the “ancestor of the idea of a managed currency” by no less an authority on economic doctrine than Joseph Schumpeter.

Diest gives the impression that Law started what would become the Mississippi Company to raise money to settle the Louisiana Purchase and bring “back the great riches of the new world.

While the company’s sole asset was government-granted trading rights with this new territory, the use of funds raised through stock sales was to refinance France’s burdensome debt.

While Law’s system relieved the government’s debt service, the resulting inflation, in the words of economic historian Earl Hamilton, “was a catastrophe to the labouring class.” Overall, prices more than doubled for the working class and the prices of some food items (like bread) soared 300 to 400 percent.

These facts fly in the face of Dietz’s comment, “Law’s primary flaw was that he was too successful.”

Dietz takes a big leap when he writes, “It should be clear that Law would see digital money as the future.” The value of bitcoin and successful cryptocurrencies is in their limited number. Dimon may think bitcoin can be reproduced ad infinitum but Satoshi put a lid on bitcoin issuance for a reason. His creation of the best known cybercurrency was a direct response to the mismanagement of money by central banks that endlessly create money. The result being distractive booms, busts and inflation.

Law was the sole person who decided how much money Banque Generale would create. He did not want to be hemmed in by limits to his money issuance. He believed his system was saving France, its government, and creating prosperity. While its possible Law learned something from the debacle he created, assuming he’d embrace the strictures of Satoshi's structure is far-fetched.

Dietz is more likely to be right that Law “would almost certainly be running the circuit talking to central bankers.” Law believed as central bankers believe today, that economies can be managed if the right smart people are in charge, what Jim Grant calls the PHD standard. But competing crypto-currencies are the antithesis of central planning in money.

“Cryptocurrency is the future,” Dietz concludes. “It just calls for a bit of vision and boldness to pull it off on the scale needed. It needs another John Law.” What Dietz dreams of is Law sliding into the shoes of Janet Yellen or Mario Draghi and turning all government paper and coin into government digits.

However, cryptocurrency is the future for the exact opposite reason. The vision needed is not Law’s but Hayek’s, who wrote, “It seems to me that if we could prevent governments from meddling with money, we would do more good than any government has done in this regard. And private enterprise would probably have done better than the best they have ever done.”

Technology and private enterprise have arrived just in time to compete with government in the monetary arena. The last thing needed is a currency crank with friends in government to derail the prosperity private money can bring.