Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

110 Money, Bank Credit, and Economic Cyclesinterventionism in general, arose from three different, thoughinterconnected factors. First, disregard for traditional legaland moral principles, particularly the requirement for continualsafekeeping of 100 percent of deposited money. Second, areasoning error that appears to justify violating legal principlesto attain seemingly beneficial goals quickly. Third, thefact that there will always be certain agents who view in proposedreforms an opportunity to make huge profits. The combinationof these three factors allowed a political dreamer likeLaw to launch his “banking system” in France at the beginningof the eighteenth century. In fact, once the bank hadearned people’s trust, it began to issue banknotes far exceedingdeposits on hand and to extend loans against deposits.The quantity of bills in circulation increased very rapidly, andas is logical, a significant artificial economic boom resulted. In1718 the bank was nationalized (becoming the royal bank) andbegan churning out even more bills and granting more loans.This encouraged stock market speculation in general, and inparticular speculative buying and selling of shares of Law’sCompagnie de la Lousiane ou d’Occident or Mississippi TradingCompany, aimed at fostering trade and advancing colonizationof this French territory in America. By 1720 the absurdproportions of the financial bubble had become clear. Lawtried desperately to stabilize the price of the company’s stockand the value of his bank’s paper money: the bank and tradingcompany were merged, company stock was declared legaltender, coins lost part of their weight in an attempt to restoretheir relationship to bills, etc. However, all was in vain and theinflationary bubble burst, bringing financial ruin not only tothe bank but also to many French investors who had placedtheir trust in it and in the trading company. The losses were soheavy and the suffering so immense that for over a hundredyears it was even considered a faux pas in France to utter theword “bank,” a term which for a time was synonymous with“fraud.” 119 The ravages of inflation plagued France again a119 A detailed account of Law’s notorious bank failure in France by ascholar with first-hand knowledge of the events can be found in thebook Della moneta by Ferdinando Galiani, pp. 329–34; and in chapter23 through 35 of volume 2 of An Enquiry into the Principles of Political