Another sign that shadow money “is as auld as the hills”  comes from Niall Ferguson’s recent book “The Ascent of Money.”

In a chapter on bubbles, Ferguson amusingly describes “renegade Scotsman” John Law’s adventures in briefly controlling France’s treasury, monetary authorities, and entire stock market (which admittedly was just one company) at the time of the Mississippi bubble.

Inflation, however, was now accelerating alarmingly outside the stock market. At their peak in September 1720, prices in Paris were roughly double what they had been two years before, with most of the increase coming in the previous eleven months. This was a reflection of the extraordinary increase in note circulation Law had caused. In the space of little more than a year he had more than doubled the volume of paper currency. By May 1720 the total money supply (banknotes and shares held by the republic, since the latter could be turned into cash at will) was roughly four times larger in livre terms than the gold and silver coinage France had previously used.

So, yes: we could in principle create demand and ultimately inflation through printing loads of  conventional money and expanding shadow money to its limits.

We just don’t seem to be anywhere close to doing it yet.

Jonathan Wilmot, chief global strategist at Credit Suisse Investment Bank, is blogging at FT Alphaville for the day.

Please read this Credit Suisse small print

This entry was posted by Jonathan Wilmot on Tuesday, December 1st, 2009 at 16:00 and is filed under Capital markets. Edit this entry.