France's financial disaster became the blueprint for the modern world. The failure reinforced the idea that those with merit and skill should hold power, not people by tradition of birth. The collapse was not just John Law's fault, but also the failure of the unelected Regents. The young king's son, Louis XVI, would eventually pay with his head for his father's handlers mistakes. Today, in both business and government, people are routinely replaced because of economic pressures. Heads still roll when profit expectations are not met.
Cognitive Dissonance in America
Ben Franklin, like John Law, was interested in solving problems, and correctly saw money as an obstacle for society. His essay, A Modest Enquiry into the Nature and Necessity of a Paper Currency (1729) frames his views.
The beginning of the essay argues that credit and risk-taking are necessary for a society to advance materially. We still hear the same arguments in defense of Wall Street. Like John Law, he was arguing Keynesian economics 200 years before Keynes: a shortage of money stifles trade.
Franklin was astutely critical about the role of interest. He argued that a guaranteed return from lending creates a disincentive for taking a risk in commerce. Loaning money for a mortgage had a guaranteed profit, but did not materially advance society. In his view, artisans and tradesmen were more useful to society than bankers. They needed the credit which was difficult to acquire. Local banks could alleviate the money shortage by providing its own paper currency to merchants.
He draws the conclusion that if there were more money in circulation, then there would be more mercantile-type trade, which would be advantageous for everyone. Paper would be an ideal substitute for metal. He blames the Crown, which was true, of restricting the amount of hard currency available in the colonies. He does not recognize that they are also struggling with a short supply.
Franklin's gets attacked on the idea of a paper currency because he will be the one to supply the printing, but there were no better ideas being offered. In retrospect, Franklin was very wrong. A money shortage was not the problem. If merchants issue credit to one another, which undoubtedly was already the case, the amount of currency in circulation was moot. His goal, like every merchant, was to get paid. Having money on the books was not as useful as real cash flow. It was certainly a win-win for him. Not only would he get the job printing the money, but there would also be enough money circulating so he could collect debts and pay his creditors. However, this self-interest is not dissonance.
His dissonance was that at the beginning of the essay he complained about how money was handled. At the end of the essay he suggests only changing what money was made from. He fails to recognize that more money in circulation would not change the behavior, but make the same behavior more prevalent. He sensed the problem, but did not manage to solve it.
Robert Morris: America's version of John Law and Solon
Besides Franklin, the other key figure in American history was Robert Morris Jr. He was one of two people that signed all three founding documents. He was a true merchant, a gatekeeper of goods moving in and out of the country. He was the richest man in America. Logically, he should have been a loyalist, but he was repulsed by the violence of the government against the citizens, and instead sided with the rebels.
At the start of the American Revolution, the first act of the Continental Congress was to issue a new currency. Morris was the financier of the revolution. He used his personal fortune and credit to fund the fledgling government. He contracted the building of the US Navy while living in British-occupied Philadelphia. At one point he issued his own currency, Morris Notes, which were more readily accepted than the Continentals. His home served as the first White House. He launched the first trade ship to China. On one of the ships, the commodity was ginseng. Ginseng at one point grew abundantly wild in the colonies. Its price became so astronomically high that it was harvested to the brink of extinction. China is now a major producer and consumer of American Ginseng, while domestically only Wisconsin has a mature supply.
The export of the natural resources to elsewhere was the promise of settling the colonies. Free-market pressures, even in colonial times, prevented the proper management of natural resources. The Magna Carta, written 300 years earlier, struggles with the same issues of natural resources depletion. In the same way that more currency did not change how money was handled, more land (colonies) did not change how the land was treated. All the same problems with money and the stewardship of society existed prior to and after modern finance.
Power and personal opportunity
Shifting political power did not change how people treated one another, or what they considered important. The habits of Kings, nobles and the Founding Fathers were similar. They ran the country as if it were their personal property. Just as Tsar Peter would poach ideas for his gardens from King Louis XIV, George Washington poached ideas for an ice cellar from Robert Morris. An underground patronage system of cronyism continues in modern government. Partisan politics may fuel the prejudices of class, race, income and nationality, but alliances formed based on the nature of hierarchy (as discussed in the previous chapter) are stronger.
One day, Robert Morris learned of an impending flour shortage. He immediately set about purchasing as much flour as he could. When the shortage arrived, he increased the prices, and made a handsome profit. There was an outcry that he manipulated the market and was gouging the citizenry. As today, personal choices impact the public mood and eventually policy. An investigation was ordered. Thomas Paine was appointed to audit Morris' books, and he concluded that no manipulation or gouging had occurred.
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