A lesson from the Mississippi Bubble

Two of the most celebrated (and denounced) figures in the history of economic analysis are Adam Smith and John Maynard Keynes. Most people believe that Smith single-handedly invented the modern science of economics and that Keynes revolutionized the field with the idea that prosperity comes from spending. Great thinkers, however, do not spring out in a vacuum of ideas. Most of the concepts and theories in Smith's The Wealth of Nations, for example, were "borrowed" from his teachers and predecessors (notably Francis Hutcheson and Richard Cantillon).

And before Keynes, FDR, Krugman, or Obama there was John Law. When, after a reign of 72 years, the Sun King Luis XIV finally died in 1715, he left the French economy ruined by wars and burdened with heavy debt. The new government appointed Law in charge of its finances. The enthusiastic Scottish economist began by investing in infrastructure, subsidizing domestic businesses through low-interest loans, and "spreading the wealth around" in the agricultural sector. Law proceeded by replacing gold with paper credit, swapping the national debt for a promise of increased future earnings from a revived economy. It took about four years for the flood of counterfeit money to run its course and the giant Mississippi Bubble to burst. The rest is history.

The question for us is not whether the new government-subsidized bubble will burst. We'd better start preparing our exit strategies. It is not unthinkable that, when the poop hits the fan, our crafty politicians and their omniscient economic advisors would consider defaulting on our national debt or a further expansion in the supply of money. The first "solution" was tried by King Philip II in the 1500s, leading to credit stringencies and a wave of bankruptcies in the private sector. It ruined the chances of the Spanish Empire to dominate Europe and the world in the centuries to come.

Inflating the money supply to deal with an oppressive fiscal burden was the path walked by the democratically elected government of the Weimar Republic in the 1920s. Wiping out the savings of their middle class, German "liberals" paved the way for Adolf Hitler's reign of terror. Where will our own "liberals" take us if we leave them in charge? I hope that we will not give Friedrich von Hayek an opportunity to tell us from the grave: "I warned you 65 years ago that you were going down the road to serfdom. You laughed at me. Who's laughing now?"