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Andrew Henderson

Founder of Nomad Capitalist and the world’s most sought-after expert on global citizenship.

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Finance

The history of fiat currency – and why it’s still worthless

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Dateline: Paris, France

John Law was lucky to escape with his life.

The year is 1720 and the bad boy of finance and mathematics (he managed to escape a prison sentence after killing a romantic rival in a duel) was making off for Belgium with an enormous diamond – his last worldly possession after personally bankrupting France.

Five years earlier in 1715, Louix XIV, the “Sun King” ordained by God to rule the kingdom, passed away. Louis had spent lavishly on his palace at Versailles, and fought numerous wars across Europe. In the process, he had racked up a tab of three billion livers.

Tax revenues were a meager 142 million livres, a 20:1 discrepancy. France was on the edge of a cliff.

Upon Louis’ death, the Duke of Orleans assumed the powers of the throne as the new king was only five. The Duke had met John Law years earlier, before Law’s exile from Paris, and was fascinated with his mathematical mind and grasp of the new science of probability.

He summoned Law to Paris.

While Law’s proposals to issue paper currency backed by nation’s land fell on deaf ears in Scotland and Saxony, the new ruler of France was desperate for a solution to the fiscal nightmare thrust upon him.

Law proposed to expand the money supply with bank notes issued by his Banque Generale. The metal-based currency circulating in France was “restrictive”, he claimed, and his new bank notes could be backed by gold coins frequently “clipped”, or shaved off, by authorities.

The public bought the scheme and began trading the banknotes at a premium. Trade and employment flourished.

John Law went on to assume the status of de facto ruler of France as controller of its finances. His most ambitious project, the Mississippi Company, created a total trade monopoly and eventually combined all of France’s worldwide assets and sovereign debt into one entity. Shares in the company were in great demand as aristocracy and workers alike beat a path to Law’s door for their piece of the action.

When one share issue was oversubscribed, another was issued at twice, the ten times, the original price. Riches were created overnight and the word “millionaire” was born. Law’s paper wealth had saved France.

But his theory neglected the impact of continued money printing had on supply and on inflation. As notes in circulation ballooned, Law began to lose control of his scheme when one prince cashed in his notes for coins. Once word got out, there was a run on the shares, the banks, and paper money. Royal edict after royal edict was issued to shut people up now that the word was out that their banknotes were a dying fiat currency.

First, gold was outlawed as a method of exchange. Then, ownership of even the tiniest sums became illegal. In a last desperate attempt to salvage his house of cards, Law closed down the borders and demanded a full search of all carriages traveling internationally. Authorities who tipped off border guards shared in the bounty of large fines assessed on those who intended to flee.

While the smart money had already fled earlier to Holland, Belgium, and England, the masses were left with worthless means of exchange – the end of a four-year experiment that made John Law the most hated man in France. He managed to escape, but the ruin was unavoidable. Fortunes were lost. The once-rich became poor and the poor became poorer. Prices and crime soared.

More edicts were issued to convince the suicidal population to trust in Law’s fraud, but to no avail. When the government opened a gold buying window to quell crime, the mad dash that ensued caused fifteen people to be trampled to death. France plunged into a decades-long depression marred by further economic scares in the years to come.

Today, John Law is still credited as the founder of modern banking. And in his wake are many of modern history’s central bankers who have yet to learn the lessons of his history.

As a sophisticated investor, you understand the value in seeking out more stable means of exchange. But the aftermath of John Law’s disastrous experiment shows how guarded you must be with your capital.

Just as those who were wise to his scam moved their gold abroad, those who learn the lesson’s of today’s economy will be in the best position to prosper. Because the government wants to keep the party going, they’ll try and stop you – at any cost – once word gets out enough.

For example, in modern day France, cash sales of gold over 450 euros are illegal. Payments must be made as a bank transfer so the government can track you and keep your money on the radar for its future draconian edicts. With the Eurozone in turmoil, do you think the modern day John Laws want French citizens dumping euros for precious metals out of their control?

Three hundred years have passed in France and the economic manipulation and control the citizentry has not changed. Of course, with the condescension of royalty, French officials have insisted that the ban is to prevent copper thieves from cashing in.

Other countries are putting their own restrictions on gold. And while we no longer carry our gold in horse-drawn coaches across land borders, government has also sought to restrict or even forbid its transport.

Even if you have the opportunity to pack your gold and take it with you, authorities in western countries are asking a lot of questions and treating you like a rogue for doing so.

While they haven’t found a politically expedient way to put an outright ban on transactions or transportation yet, their modern-day royal edicts use endless work-around restrictions and government agent intimidation to shut down as much of the threat as they can. You’d think owning gold actually was illegal again considering how many bureaucrats treat you.

One thing I encourage you to do is hold money in an overseas bank account. While stable currencies are increasingly hard to find, there are some that stand above the rest. It’s perfectly legal and easy to do.

Of course, you can also hold gold and silver either directly or as part of allocated storage based in another country. In places like Singapore or Hong Kong, your gold can be held GST-free. There are places in Europe where you can open an anonymous box at a private vault.

And places around the world where your gold – or money – can be held out of the grubby palms of your local bureaucrats.

So ask yourself: will you wait until it’s too late to move your money to a safe haven? My free crash course is a great place to start.

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