I read again his recommendations made to the Scottish Parliament. He suggested to issue banknotes backed by lands, this practice is actually the same as today's money creation backed by MBS, just one more layer of complexity has been added in between

In fact, if anyone have some fixed assets, these assets can be used as collateral to issue money. It does not matter if those assets are gold, silver or land, factory. Therefore, government bonds also can be used as a collateral to issue money

Generally, once the money is issued, the collateral behind it must be freezed (value must remain fixed), because there is always a risk of demand for payment. Once these assets are devalued or lost, then the outstanding money will lose their collateral, if the user requires payment of assets, the money issuer will go bankrupt

But the interesting thing is, if the money in circulation reached widespread popularity, many businesses accept it as a means of payment, then the value of these money will be backed by all merchants that accept this payment medium

This is a very special character of money that Law found, namely: The value of money is actually a consensus, "depends on constitution and agreement", it can be completely decoupled from the value of original collateral, as long as everyone's consensus about its value don't change. This indicates that the value of money is more of a psychological phenomenon rather than an economic phenomenon




This consensus seldom changes with the money supply. For example, if manufacturer see a lot of orders coming in (increased money supply), they will increase the production in order to make more money, rather than increase the sale price to express their concern about the added money supply

Most manufacturers will only increase the price when the cost rise, not when the central bank's money supply increased. Because in the opinion of most people, money is issued by authorities such as the government and the central bank, it should be able to maintain its value

Based on such principle, it is not difficult to understand why 1% of people will have 99% of the wealth. Because money supply increased so much, but the value of money is a consensus and it did not change a lot. So 1% of people get 99% of the added money supply, and these money will naturally become their wealth. If they spend these money, it will certainly trigger serious inflation, so they prefer to hoard a large number of these money to keep the demand high (Tax havens account deposits up to $32 trillion, twice the U.S. GDP)

What will cause this consensus to change? Usually some kind of external factors, such as war or regime change, leading to a credit crisis of the government issued currency. Or, the added money supply released too much too fast and caused serious inflation. once people have expectations for inflation , they will begin to hoard physical goods, which will accelerate the pace of inflation

While science and technology advanced so much, money and banking basically had no change in 300 years

"There is not enough gold for the world economy to grow" is the same as "There is not enough bitcoin to carry the world's trade", it is simply not true, you can always use a fraction of a gold coin to represent its previous value, and there is silver too, which has much higher quantity for trades

The reason that central banks always lift this excuse is because they want to totally eliminate the obligation of exchanging of gold for each fiat dollar, so that they won't have a risk of bank run any more

But the interesting thing is, after the gold that backed the USD have been removed, the USD did not crash, it still worth something. This proved Law's theory that money's value could be arbitrary set by law or contract, as long as there is a consensus about its value in trading, it will keep its value

I have reorganized some of the Adam Smith's view on him here:
https://bitcointalk.org/index.php?topic=263267.0

I can imagine that the whole scheme is well planned, at some point on the way, people thought that he created the financial miracle of France and there were booms around Paris area

There are different reasons for his failure, but I think the main reason is that there were silver/gold coins in circulation, so when there was a panic, people would run for silver/gold coins and create a bank run for his central bank. He is the first one bring out the idea of fiat money, people don't trust it enough. But today, fiat money is the only medium of transaction in any country (until we have bitcoin), so the possibility of that kind of bank run on central bank is permemantly eliminated

That John Law's scheme is worth studying. He successfully erased nations debt by exchange those government bonds using stocks of a state owned company, since those stocks had higher dividend, those previous bond holders happily gave up their bonds in exchange for stocks

Same could happen for bitcoin, if somehow the government claim the bitcoin will be officially supported in all transaction and establish a state owned investment company to invest in bitcoins, that investment company will have superior return. Those government bonds will all flow back into this state owned investment company, and the state can happily destroy these collected bonds

Luckily I had a master degree in economics, but I have to say that all those I learned from school are not consistent with my real life experience/reasoning

If you are good at macro economics, please answer this question:

We all know that fiat money is created out of thin air, but who get the ownership of those newly created money?

This question is important, since if you don't have the ownership of those money (they belong to someone else), you can't use them. Only when you have the ownership of those money, you can use these money to buy other things like government bonds and MBS

http://www.npg.org/facts/world_pop_year.htm

Population increase average 1.2% per year and the rate is decreasing year over year, but the US debt increase average 9% per year and the rate is accelerating year over year. Of course average Joe will always be the last one to feel the problem, and when he did its already too late

And, exchanging one currency for another is the result of the collapsing of current monetary system, not the remedy

I suggest everyone to read that story about John Law's paper money scheme 300 years ago, it is the origin of the central banks and fiat money today
https://bitcointalk.org/index.php?topic=263267.0

The main reason that his grand scheme failed is because people still had other alternative payment medium like gold and silver coins. When there was an over supply of fiat money, people just ran for gold/silver coins

Currently the fiat system did not fail because the fiat money is the only medium of transaction and its flow are carefully controlled to not cause inflation. Even you know that FED has printed 4x more money since 2008, you have to use dollar anyway because you have no other alternative

It works like this: 99% of newly printed money goes to those 1% people, who in turn hoard them and keep the inflation in check (Offshore bank accounts holds amount of USD equals to 2x US GDP )

On the other end of the spectrum, are those people who have to work hard but never be able to payback the debt which is used to create those new money

How come such kind of a slavery system could continue to operate if everyone knows how it works?

In my view, his failure largely due to two facts:

1. There were other transaction medium (Livre coins)

When his central bank issued too much paper notes, those paper notes will come back to his bank in exchange for livre coins (which made from gold and silver). To prevent this, he tried to devalue Livre coins constantly in order to discourage people to use Livre coins. He also published laws to prohibit people from holding too much gold at home. What he wanted to achieve was very clear: To make his paper note the only medium of transaction, thus increase the demand for those notes. But since the gold and silver coin still are the main stream transaction medium, he finally had a bank run


2. He tried to manipulate the stock price of Mississippi company by printing lots of money, thus made all those money flew into average household

He successfully exchanged back most of the government debt by the stock of Mississippi company - a state owned multinational enterprise, in order to attract the public's interest for this company's stock, he tried to produce lots of money to bid up the stock price of the company. He succeeded, butmany average household earned lots of money in the process, thus generated a national level of inflation and caused his paper money lose credit




If you look at how central banks are operated today, they are all doing the same as Law did 300 years ago. But they have learned from his lesson and improved at these two area:

1. They removed the gold and silver coin from circulation, thus the fiat money became the only medium of transaction, so no matter how much money they print, they won't get a bank run, in the worst case they just need to print more money

2. They tried to control the money flow more carefully so that it won't let average household receive the excessive amount of money supply. On the contrary, since there are no guaranteed way of making money (buying stocks of state owned Mississippi company), average household's income decreased over time due to centralization of production, no matter how much money they print, the inflation level for daily consumptions are kept minimal

At last, however, after a great number of expedients, he found it was impracticable. By paying out great sums, he kept off ruin for some months, but at last published an edict that all bank notes were to be paid only in half of their original designated value: and indeed if he had stood to this, as some imagined he might have done, it would have been far better than to have suffered the after consequences. Upon this edict the credit of his bank was entirely broken, and the bank notes all on a sudden sunk to nothing. This ruined an immense number of people. Britain can never be much hurt by the breaking of a bank, because few people keep notes by them to any value. A man worth 40,000 will scarce ever have 500 of notes by him. But the breaking of this bank in France occasioned the most dreadful confusion. The greatest part of people had their whole fortunes in notes, and were reduced to a state of beggary. The only people who were safe were the stock-jobbers who had sold out in time, or with their bank notes had purchased all the valuable goods and a great deal of land, though at the highest prices. They made immense fortunes by it

The South Sea scheme incur own country was nothing to this. Nobody was under any obligations of going into it, the government had no share in it, and the loss was but a trifle in comparison. The clamour which Law's last edict made caused it soon to be rescinded, and the notes were again declared to be paid at value, but the bank never recovered its credit, and this had no effect. However, by raising the coin and other expedients, he kept it from May to October, and then was obliged to leave France, which with difficulty he accomplished ; his goods were confiscated and he died several years after

This amazing scheme was founded on these two principles, that public opulence consists in money, and that the value of money is arbitrary, founded upon the common consent of mankind. Consistent with these principles he thought he might easily increase the public opulence if he could annex the idea of money to paper, and the government could never be at any loss to produce any effect that money could do. This scheme of Mr. Law's was by no means contemptible; he really believed in it, and was the dupe of it himself. It was thought he had provided well for himself, but it was found to be otherwise. If the Duke of Orleans had lived only a few days longer it was agreed upon that he was to have been re-established. After his death it was not thought expedient to have it put in execution

This scheme of Law's was imitated all over Europe. It gave occasion to the South Sea Company in England, which turned out at last a mere fraud, and, could it have been carried to as great an extent as Law's, would have been productive of the same consequences. It was erected in the latter end of Queen Anne's reign, and the intention of it was to carry on a trade to the South Seas. For this purpose they bought up the greater part of the debts of the nation. Their stock, however, was not great, and the profits which could be expected from it were very inconsiderable ; the expectations of the people were never greatly raised, and its fall was not very prejudicial to the nation

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As the company he erected seemed to be in a very flourishing condition, shares were purchased in it at a very considerable rate. He opened a subscription to it at 500 livres, so that a navy ticket or billet d etat purchased a share into it, which raised them to a par, as they had for a long time been far below it

The government of France was never in such a miserable condition as then. The interest of the money which should have paid the billets d etat was seized upon for other purposes. Never was monarch more degraded than Lewis XIV. After the treaty of Utrecht he had occasion to borrow 8 millions of livres from Holland, and not only to give them his bond for 32 millions, but to get some merchants to be security for him. Since that was the case, we need not be surprised that the billets d etat sold at great discount, as they bore no interest, and it was quite uncertain when they would be paid

Law published a declaration that one of these, which was granted for 500 livres, should purchase a share in the company, and thus they came again to par. The people still continuing in great expectations of profit, he in a few days opened a new subscription at 5000 livres, and afterwards another at 10,000. At this time he was enabled to lend the government 1600 millions of livres at 3 percent

Had he stopped here, it is probable that he would have answered all engagements, but his future proceedings ruined all. It was impossible that the value of shares could long continue at such a high rate. He thought, however, that it was necessary to do all that he could to keep them up, as the whole fortunes of many people were in the bank. He had issued out notes to double the circulation of the country, which raised the price of everything to an enormous pitch, and consequently the exchange was against France in all foreign trade. This was principally occasioned by his opening an office to purchase 500 livres shares at 9000 livres, which obliged him to issue out many notes. People of prudence who were concerned opposed this scheme, and indeed it was the first thing that made his bank lose credit, and occasioned its dissolution. As he was not obliged to pay the capital sums, only the annual dividend of 200 livres arising from the profits, he might have let them fall to their original 500 without any great loss but that of reputation; but his buying up the shares occasioned his issuing out so many notes that they must of necessity return upon him

This was so much the case that he was obliged to open offices in different parts of Paris for the payment of them. When in this manner oppressed, he was making continual changes on the coin, in order to dissuade people from returning on the bank, and disgust them at gold and silver coins. He cried up gold, but as coin cannot be kept much above the level of the metal, when it was so much depreciated, it was not taken. If a person had 20,000 Livre coins, as he was afraid that the coin would not continue at that value, he went to the bank and got it exchanged for notes. The same consideration prevented them from returning upon the bank, as they would there be paid in coin. By this means he not only prevented his notes from coming upon him, but filled his coffers with almost all the gold in the country

In order to accomplish this part of his scheme more perfectly, he most arbitrarily published an edict prohibiting any persons from keeping by them gold or silver, beyond a certain sum. He also took away the severe penalties that were in force against the exportation of coin, and every person was allowed to export money free from duty. By this means much of it went to Holland. He reasoned with himself, some instrument of change is necessary, paper, gold, and silver, at present are the medium; if gold and silver be utterly exported, paper only remains, and may be rendered the sole instrument of commerce. This he thought he had done effectually when by an edict he had swept a part into his coffers, and cleared the country of the remainder. They would therefore be obliged to take paper

Mr. Law, not meeting with the encouragement he expected, went over to France in the year 1714, and, as was before mentioned, found favour with the Duke of Orleans, then Regent, and got liberty to erect a bank there, which at first was only to the extent of six millions of livres or 32o,ooo sterling. From this beginning he carried it on to a very great height, issued out many notes, and in a short time engrossed the whole circulation of France

As Mr. Law s notes were received in payment of the revenue (tax), this contributed to the success of the scheme. This, too, had a greater effect in France than it could have had here, considering the number of taxes, and the manner in which they are levied. By this and other circumstances, his notes were always at par with gold and silver, especially as they were making continual changes in their coin. About that time twenty-eight livres, which were equal to eight ounces of pure silver, were raised to sixty, and as a diminution of coin is always the consequent of a sudden rise , this was daily expected. Mr. Law made his notes payable in what was called the money of the day. Instead of promising to pay his notes, as we would say, in pounds sterling, he did it in crowns and half-crowns (old gold coin), which was a very proper method to make them par with gold and silver. Suppose that our coin were raised to double, a half-crown would become a crown, and so in this manner the bank notes and money would rise and fall together

As Law wanted to make his notes above par, he fell upon the following scheme. He issued out his bank notes payable in livres tournois, by which, when the coin came to be diminished, he would not be obliged to pay above one-half crown worth of coins. This favoured his design, and kept the notes above par, by which the credit of his bank was established.

The next step Mr. Law fell upon was the relieving of the public debts, which amounted to 2oo millions . As he saw the diminution must needs come, he took another method to keep up his notes. He got a grant of the exclusive privilege of trading to Canada, and established the Mississippi Company. To this he joined the African, the Turkey, and the East India companies. He also farmed the tobacco and all the public revenues of France at 52 millions , for in France the whole revenue is farmed by one man, who undertakes it and levies it without excisemen, and the farmers there are the richest in the country, and must be skilled in the finances and public revenues.

Mr. Law undertook this, and, having the whole trade of the country monopolized, it was difficult to say what profits he would make. He wanted to lend the government 80 or 90 millions [sterling], which he could easily do by issuing notes to that value, but then he saw that they would soon return upon him. To prevent this, his invention was set on work, and we shall see how far he succeeded

I was researching for that Mississippi Bubble, but found out the whole thing are much more complicated than we usually heard, it is actually the failure of the central bank. So I read some lengthy story of John Law in Adam Smith's lecture collections,  starting from page 212

http://archive.org/details/lecturesonjustic00smituoft

Mr. Law, a Scotch merchant. He thought that national opulence consists in money, and that the value of gold and silver is arbitrary, and depends on constitution and agreement. He imagined that the idea of value might be brought to paper, and it preferred to money. If this could be done, he thought it would be a great convenience, as the government then might do what it pleased, raise armies, pay soldiers, and be at any expense whatever.

Mr. Law proposed his scheme to the Scotch parliament in 1701. It was rejected, and he went over to France, where his project was relished by the Duke of Orleans. In this book he agrees with the fore-mentioned writers that, the balance of trade being against a nation, it must soon be drained of its money. In order to turn the balance of trade in our favours, he proposed to the Scotch Parliament the following scheme :

As there was little gold or silver in this country he thought they might fall upon some other method of creating money, independent of it, to wit, by paper. On this account he proposed the erecting of a land bank at Edinburgh, in which it is to be observed, he falls into many blunders concerning tenures and the nature of property. At this bank they were to keep by them only twenty or thirty thousand pounds to answer small demands, and to give out notes for land. For two acres of arable land they were to issue out a note of equal value, and if any extraordinary demand was made upon them, they would pay so much of it in money, and so much in land. By this means in a very short time the whole land of Scotland would go from hand to hand, as a twenty-shilling note does.

As this project never was executed, it is hard to say what the consequence might have been ; it is, however, obviously liable to the following inconveniences. Taking the land rent of Scotland at five millions per annum, though it be much more, at twenty years purchase it amounts to an hundred millions; there would then be just so much currency in the country, and if one million was then necessary for circulation there would just be ninety-nine millions for no purpose, as none of it could go abroad ; they would not have been able to maintain one man more than formerly, as their food, clothes, and lodging would not have been increased, and every commodity would have risen to ninety-nine times its present value.

...

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Acutally I disagree with Adam Smith here, John Law's reasoning is: As long as a money is backed by something valueable, it can hold its value. So even the money supply increased by 99 times because of the newly issued money, as long as they can be used to redeem valueable land, they will hold their value, will not cause inflation, because people still have to work to get those money, these money only belongs to previous land owners

It's clear that most of the central banks in the world operated in a very similar way of Law's experiment, but the interesting thing is why Law's plan failed, and how we could use his failure to forecast the future of today's financial situation

Somewhere in the mountain, near a water power plant, also good for cooling ASICs

Coin generating speed per GH is related to the time that an asic device enter the network, from BTC ROI point of view, some of the devices might never ROI if purchased use bitcoin

coin generating speed per GH is related to the time that an asic device enter the network, this chart does not show the exchange rate, obviously those who bought the mining equipment when BTC price was high will get a better ROI since most of the mining equipment is priced in USD (less bitcoin required for each Ghash purchased)

You don't need a physical form of such world, it can be totally network based. Any social structure is essentially a protocol that is agreed among its members

Fiat worth something because people have no other alternative payment medium, now there is bitcoin, people will comapre the two, and  they will realize that bitcoin will not let their wealth stolen by politicians and bankers

Just look at the U.S. national debt since gold standard abolished


Things are quite desperate on the top level for many countries, just normal people don't feel it, this is the biggest problem for today's social structure: Government is the single point of failure, if they become insolvent, then almost everything in the society will fail in a very short time. Bitcoin provided a way to diversify such risk

It is the fiat money overvalued (cost nothing to produce), because people have no choice for other transaction medium, when they have some alternative, you will see how fast fiat money will depreciate against everything

Like all industry revolution in human history, typically it is the smartest people pay attention to new things first, and others will just follow when it has reached mainstream

- People who want to diversify their investment portfolio

- People who want to have part of their retirement saving in a liquid form

- People who understand how theft is done by printing fiat money and the unavoidable long term inflation of fiat money

- People who understand that the current debt based money creation will eventually collapse (The ultimate reason) and they are moving their wealth out of the current system before it is too late

- Merchant who want to have a low fee for their transaction

- Merchant who frequently do international commerce

- Bank haters, don't trust a centralized authority oversee the society

- Ancap

- Geeks

And many more  

Governments have huge debts now, their only hope is to buy some bitcoin and sell them at a much higher price to pay back their debt, none other method will work