How An 18th Century Gambler Paved The Way For Central Banks, And Necessitated Bitcoin

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I always love writing about the bridge between current events and their (often entertaining) counterparts or parallels in history. The current “war-on-cash” we see by the nation states along with the planned economy of the Amazons, Googles, Alibabas and Facebooks of the world, is interesting enough in and of itself. According to me, it’s a product of our world moving from post-industrialism to post-scarcity (very slowly).

The rise of bitcoin especially added fuel to the fire, advancing the fight to get money out of states’ hands, and in control of the individuals themselves.

I’m from a generation (Gen X) that saw the rise of computer use, internet, cellphones, smartphones, mass media, live news reporting, social media, strong encryption, peer-to-peer networking and, not to forget, the most important invention of the last 250 years: Bitcoin. My generation usually forgets how all of these wonders rapidly changed our world and surrounded us with Twitter influencers, YouTube stars, Instagram yoga pants models and things like NFTs.

We sometimes forget that all of this technology and progress once found their equivalents in history — the first idea to get images from a distance transferred over a wire, or the idea of having computers connected to each other in order to survive a nuclear attack that never happened.

In the long list of technological advancements, there’s also monetary progress which has gone on for a few centuries now: banking and later, central banking, alongside fiat money.

The first paper money (jiaozi) was invented as a bearer (signed by hand by a government official) in order to overcome coinage for a short while while it was “out of stock,” promising the holder of such a document to have a certain amount being paid back by the government during the Song Dynasty.

On the European side, the introduction of some paper money equivalent — at least the one with the most impact — came during the rule of Louis XIII in 18th century France with all its turmoil, bloodshed and government experiments with money supply.

Louis, Louis And Louis

That more recent experiment — historically speaking, at least — can serve as a lesson in many respects. I’m especially eying the many experiments in the crypto space these days, also known as shitcoins, or “altcoins” to most people.

What France saw happen in the 18th century, has some interesting aspects related to our current fiat and crypto world.

Let’s first introduce the French currency at that time: le livre. This French coinage and official denomination existed from 781 to 1794 and had a few derived names — the name was derived from West-Francia roots and Roman influence (the word “libra” for weight measurements). Before that, there was a Spanish coin, of which their livre was a copy, design wise.

These coins were irregular at first, as they were minted by manual labor (something the French really like). This made these pre-1640 coins more irregular, and open to counterfeiting and the practice of shaving of some of the precious metals, a very common practice in France.

In came Jean Varin, a Liège-born engraver and medalist, who devised a system to make it much, much harder to shave off some metal from the coins without anyone noticing, a practice that was severely punished in 18th century France, but largely went unpunished. This way of manufacturing coinage would make it also more difficult for imitations to be reproduced, especially for the lighter form of le livre (as was also common practice).

The new coin for le livre was the Louis d’or, created with detailed engravings, depicting the king of France in more detail and having a very innovative row of small grains in relief, located on the edges of the coins, a true marvel of coinage at the time.

I make some parallels here with bitcoin, as the step forward from the old, irregular livre coins to the Louis d’or can be seen as an equivalent to the move from central bank fiat paper money to the invention of Bitcoin’s ledger in 2009. All of a sudden, something appeared on the market uplifting the whole sector, by technology and/or innovation.

The engraved, perfectly-round Louis d’or was not only a step forward in thwarting counterfeits, it was also a restoration of confidence for many citizens. You could easily trust and verify the coin, as you could inspect it with your own eyes and check if some “cutter” had chipped off some of the metal, or tried to replace it with a fake.

Again, this is the same with Bitcoin: a transaction is checked for its validity, and people’s transactions where they have tried to cheat the system or “chip off” some value will simply be rejected, just like a Parisian would reject a Louis d’or coin if parts were missing or the engravings were not intact.

The 23-carat gold coin that was used before also had the problem of being exported because it had a higher value than the 22-carat de facto standard of that time, dating back a century earlier. The French left that standard to do their own thing (as they often did throughout history) and this made them prone to a special form of capital flight. The Louis d’or fixed that problem as well, by going for the 22-carat gold initially, putting it on par with the Spanish coins used in trade.

Louis d’or. Source.

17th Century French Altcoins

The appearance of the Louis d’or also gave way to another history lesson, one about trust.

These marvelous new coins were innovative and beautiful at the same time, they had one major flaw though: they required trust in the French monarchy and later, the French revolutionary government.

Upon introduction, they first devalued the real-life use of the much more eroded and old silver-based livre coins. These were less desirable than the equivalent in the Louis d’or coins, effectively making the denominations “less” than their face or even metal value. The government realized this and began to take these old coins out of circulation to be weighted (even foreign coins) for their silver value.

In the meantime, the different gold Louis d’or coins were minted in different places as well, creating two origin factories at first.

Although the French authority was centralized to ridiculous levels, we got some differences in valuations to their seemingly “identical” coins with the same denomination. With the different King Louises as the main stakeholders — as we would call them these days — the French still managed to have differences derived from real economic situations. Their real economy did not always reflect the coinage and without going into the very complex structure of the French state and the brewing revolution much later, there was an order to things when it came to monetary policy, which often clashed with the reality on the local markets within France.

So, with these “perfect” coins being minted at different locations, it also meant there would be different “mints” with different policies on deciding the production and inflation. You see where this is going.

The fact that one area had other minting rules from the next, in a different area with different economic performance and policies, tells a lot. The devaluation, coming from either loans taken out by the king or from changing the percentage of gold and silver in the coins over time, all played a role in the fluctuating real-life value.

The silver Louis d’argent was introduced in 1641 by Louis XIII, to compete with the German thaler, and it contained about 25 grams of fine silver. This would make things complicated, as there was yet another coin, the livre tournois, which was an accounting unit pegged to one pound of silver originally dating back to the 13th century. It was eventually abolished and brought back, only to be left as an accounting unit in 1667.

To make things even more complicated, another accounting unit based on the Parisian Louis d’or was introduced as well. (No wonder these people started to revolt).

The Introduction Of Paper

It’s here that another solution was devised, not only for the coinage and the numeration, but also with the rising debt as a result of the loans that the French king took out, mostly for waging wars or building projects.

That solution, or an attempt at least, would be the introduction of paper money — a relative novelty, certainly in France up to then.

The main contributor to the introduction of paper money (as well as its subsequent, spectacular downfall) would be called “dodgy bookkeeping” (also something not entirely alien to the French). The practice of cooking the books would be rather obvious, since the one taking out all of the loans, was the same person with all of the power to keep things under wraps. This would even last until the Assemblée des Notables in 1787, where the nobility decided on things like the monetary policy, just had to accept that the books were “seen by the king… très bien.”

Of course they were.

The same French nobility that later would be overtaken by greed, by printing massive amounts of paper money to capitalize on a European stock frenzy following its own French-owned Mississippi Company, later called the Company of the West, stock.

This was an important experiment, as it would turn out that the bank behind all of this had John Law as its de facto head. Law was a smart guy, who could calculate odds and was a high-stakes gambler, but also had tremendous insight into derivatives and eventually kind of invented central banking (without realizing it).

The private bank he would oversee to back this paper money would also be functioning as a more trustworthy entity than the debt-laden French government. On top of that, the colonial efforts and their perceived or promised great returns would function as an underlying asset for the bank notes. The paper money itself would, in that way, be backed by a profitable company (on paper, literally and figuratively). That backing was of course necessary to incite trust with the public, which was used to having real coins with real 22-carat gold in their hands.

Even if the king was broke, or the government went bust, they still would have their gold coins. With paper money, this trust had to be earned another way.

Go West, Go broke

The two companies — Compagnie du Mississippi and the later Compagnie d’Occident — aided by a monopoly granted by the French government for trade in the West Indies and North America, would form the backbone of this trust. The paper money was printed, and pegged to this Mississippi endeavor. The majority of the financial backing came from the French government itself and the nobility.

Law managed to talk the regent of the French king into giving him more privileges as well. Not only would he introduce paper money, he would give something far, far more valuable to the state: trust.