a revolution............

 

Law's reputation as a brilliant economist rests on some pamphlets he authored a decade or so after his escape to the Continent.  In his Essay on a Land Bank (c. 1703-4) and Money and Trade Considered (1705), the fugitive Scot displayed novel insights about the nature of money.  Money, he said, did not derive its value from precious metals, as people like Locke believed.  Rather, money was simply a yardstick of value; or, as he put it, "Money is not the Value for which Goods are exchanged, but the Value by which they are exchanged."  This clever switching of the prepositions—by in place of for—amounted to a monetary revolution.  In essence, he was saying that since money lacked intrinsic value it need not be backed by gold or other precious metals.

     A constant theme in Law's writings is that trade depends on the circulation of credit, and that credit was "only lost by a scarcity of Money."  Here Law anticipates later monetarists.  He argued that prosperity could be achieved by establishing a bank that issued paper money, collateralized with land rather than gold and silver.  By severing the link between money and precious metals, Law opened the possibility of a managed currency.

-Edward Chancellor, The Price of Time: The Real Story of Interest