The First Historical Example Of A Pyramid Scheme…

December 14, 2014

Was a scam carried out by the government of France? Oops!

The first famous pyramid scheme occurred in the early eighteenth century in France. What you’re about to read goes down as one of the greatest deceptions in history.

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Near the end of King Louis’ XIV reign (1643 to 1715) the economy of France was on a steep decline. The country was 3 billion livres in debt. Officials debated whether the government should just declare bankruptcy and start from scratch, but the politicians of the time feared revolution and looked instead for a more expedient solution.

Their first attempt to remedy the problem was to devalue the currency through recoinage (the making of new coins). New gold and silver coins were issued weighing 20% less than coins already in circulation but with the same face value, and the public was ordered by law to make the exchange.

The government planned to use the extra gold and silver they saved from the new coins to pay
off the nation’s debt.

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But the people of France weren’t to be fooled by devalued coins. They refused to exchange their gold and silver for currency that was intrinsically less valuable. This foiled scheme greatly discredited the government of France and worsened the economic depression.

After King Louis’ XIV death, the Regent Duc d’Orleans appointed Scottish economist John Law as Controller General of France. (A Regent is someone who rules a country temporarily due to the absence of a Monarch.) Together the Regent and Law formulated a brilliant scheme to pay off the national debt.

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First, the Regent of France authorized Law to establish a central bank under the name of Law and Company. (A central bank is a nation’s principal monetary authority: in the United States it’s known as the Federal Reserve, while in the United Kingdom it’s called the Bank of England.)

Second, the Regent authorized Law’s bank to issue bank notes (paper money) INSTEAD of real gold and silver coins and decreed that the paper money would be accepted for the payment of taxes. This gave Law and his bank notes a measure of credibility.

Third, Law knew he had to gain public confidence in his bank notes for the entire scheme to work. He immediately announced that all notes from his bank were payable in coin, meaning that his bank notes could be exchanged for their face value in gold or silver. This gave the appearance that the paper money was the same value of the gold coin! This was perhaps the greatest deception of the 18th century.

Because of the discomfort of carrying coins around in their pocket, people preferred to carry the paper currency. Therefore, the public would deposit their gold and silver into the bank in exchange for a piece of paper. This practice is just as common today – people put their coins in a jar because the coins are too heavy to carry around. Once the jar gets full, they take it to the bank
(or even the local grocery store) and cash in their coins for paper money.

The entire scheme required people to believe in the credibility of Law’s bank and his ability to redeem his notes in coins. Once that belief was established, the paper money was literally “as good as gold.”

As more and more people cashed in their gold in exchange for paper, the bank’s vault filled with gold.

Now I need to explain how banking began in order to complete this explanation.

In the early days, there was no such thing as credit. If you wanted to buy something, you carried your gold or silver coins to the store and paid in coin. People didn’t want to have their coins in their home or on their person when traveling for fear of being robbed, so they would keep their coins in a bank’s vault. As more and more people put their coins in banks, the bank’s vault would
fill up.

Banks recognized that at no time did EVERYONE pull ALL their gold out of the bank simultaneously, so they loaned out depositors’ gold for short periods of time. This was the birth of “credit & loans.”

John Law learned of “credit & loans” working in his father’s bank. Now, for the first time we have “credit” as a financial tool.

This is where the pyramid concept comes into play. Because of my divergence into banking and credit, let me recap to ensure you’re still following all of this…

The country of France wanted to pay its debt through recoinage, which failed. Economist John Law, a man with extensive banking experience, encouraged citizens to deposit their gold and silver in his bank in exchange for paper money. The government added credibility to the paper money by declaring Law’s bank a central bank and accepting the paper money as payment for tax debts..

The scheme worked… for a while.

The Law and Company’s bank received enormous sums of gold to store in its vault. With all that gold in the vault the bank could issue loans…but the loans would be made in paper money rather than in coin. This was the magician’s act. The real product, gold and silver, vanished and the fake product, paper money, was now in the spotlight. This seems a lot like current times, doesn’t it?

THE BANK BECOMES A PYRAMID SCHEME

The Regent made Law’s bank a publicly-traded company and declared it the Royal Bank of France. Now people could buy stock in the government’s bank as well as receive credit in the form of bank loans. Over the course of a few years, the bank issued over one billion livres in paper currency to the public.

Keep in mind that all of these paper loans and paper stocks were based on the real product of gold and silver coins in the vault. You see, once the magician got you to believe that the paper was as good as gold, he didn’t need to show you the gold any more.

Businesses rushed to the Royal Bank of France to secure loans, with which they expanded commerce both at home and abroad. Foreign countries could not cash the paper money from France, so they required payment in gold and silver.

Slowly but surely, the gold and silver that backed the paper-money loans began to drain out of France and into other countries. With the bank issuing so many loans, the people of France began to suspect that the gold and silver backing their paper money was disappearing. Depositors quietly began converting their paper money to coins and transporting the coins to foreign banks.

By 1720 the scarcity of coin began to increase. The vaults, once filled with gold and silver, were becoming empty, but the paper money was still being loaned out.

In an effort to stop people from converting their paper money into gold and silver coins, the government depreciated the coin’s value to 10% below the paper, and the bank continued to limit the amount of coins any one person could receive. The limit was 100 livres in gold and 10 livres in silver. The government was now claiming that gold and silver was worth less than the paper!

In February of 1720 John Law made a fatal error. At his suggestion to the Regent, a decree was issued forbidding anyone to hold more than 500 livres in coin and prohibiting people from buying up precious stones, jewelry, silver settings, and so forth. The penalty was a heavy fine and confiscation of the holdings. The government was desperate to hold onto the gold and silver that
backed the currency loaned out and sold as stock. This enraged the public.

In May of 1720, the bank was out of gold and silver in the vaults and was forced to stop making payments in coin. The bubble burst and the pyramid collapsed.

John Law, once a national hero, became the scapegoat for the entire crisis. The government of France blamed him for the whole debacle and he was nearly murdered by angry crowds.

To prevent another such crisis, most countries adopted the gold standard and required that banks have sufficient gold to back the paper currency they lent out.

However, today no well-established currencies (US Dollar, Pound, Yen, etc.) are backed by gold or any other real product. Their worth is based on “belief.” The governments can – and do – create money out of thin air by simply printing more. The governments can – and do – devalue their currency at will. This is no different then the famous financial scam you’ve just read about.

Oops.

What’s the point is sharing this with you?

I want to show you that pyramid schemes have nothing to do with MLM.

A scam is a scam because the person perpetrating it is trying to trick someone. In what you just read, the government was trying to trick the people into believing that paper money was the same as gold. The government’s intention was to create money with no production or product.

The basis of legitimate business is products consumed by customers that make their lives better. If you understand this at its fundamental level, you will never fall victim to a pyramid scheme because you can recognize it for what it is.

Tim Sales

About the Author

Tim Sales

Tim’s experience in building his own downline of 56,000 network marketers helped him develop his signature training series. A public relations ambassador for the network marketing industry, Tim has also dedicated his time to debunking the false information spread about the network marketing industry.

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Jennifer Valencia

I like this article! Never knew this before…pretty interesting to read.

Patti Roney

It’s about time we understand this article and learn the value of true MLM without the pyramid concern! Of course, it is good to be knowledgable and watchful, but learn the obvious differences! Thank you!

Lesa in Wisconsin

This is a very interesting article,another sad point made, the working class people have always and always will be, the scapegoats of the politicians.

Juan Alvaro Cepeda

If you like this article , you may want to read the book “The Creature from Jekyll Island” A Second Look at the Federal Reserve, written by G. Edward Griffin.

Gerda van der Elst

Thank you for this article. I allways knew that the pyramide sceem was something bad, but no one could ever explain me, WHY!. Now I understand.

Gerda van der Elst

Thank you for this article. I allways knew that the pyramide sceem was bad, but no one could ever explain me,WHY!. Now I do understand.

Joe Kresser

Good history lesson. As we all know history repeats it’s self. With education from sites like this people may find a way to gain enough knowledge to at leat have the ability to protect themselves. Joe K

Steve Stearns

The Government part is always a bit scary. Thanks for helping folks see the difference between a scam and a real business.

Mary Jo Leonard

Thank you, Tim,
You are the voice of reason in a storm of mis-information. I can see a lot of value in the new web site. I am sure I will be sending people here for solid, substantiated information.

Carol Smith

Very interesting background. Its nice to see the air cleared, even if only briefly, with facts and solid information.

Kon Hofstetter, Sydney

How interesting! A government as the instigator of the first pyramid scam…

Valencia Burton

Well, now we know!
Thank you Tim!

Gavin Chapman

Fascinating! Illuminatingly so.

Shirley K., California

Verrrry interesting stuff. I appreciate your historical look at financial “goings on”.

Andreas Bodin

Thank you Tim for sharing this information in a very “simple” way so it is clear to understand.

Cass Osborn

We will be sending eveybody to this website for information and education. We have already linked it to our website so it can be accesed at a click. Thank you for a great service to the industry!

Ulf Paxby. Sweden

I will be sending eveybody to this website for information and education. I have already linked it to my website. Thank you for a great service to netmarketing!

Patty Jones

Thank you Tim.

Kit G

Great history lesson, Tim. Just proves that a scam is a scam whether it is instigated by a government, by a company, or an individual. We all need to be aware and business savvy enough to avoid any project, investment, or
company that uses deception in their marketing. MLM industry
is grateful for your contributions.

Hamid Mat Sain

Excellent research into history and world of business

Chuck P., Florida

Governments seem to be exempt from the golden rule.

Rolf Hefti

Kind of ironic how lots of people look at MLM like it’s per se an illegal operation when probably most of those people either engage in lotteries and gambling (which are true scams!), and/or believe in social security (another scam) and the current money system (yet another scam) “approved” by the US government.

George

The Bank of France reminds me of the US Federal Reserve. However, many people may not know that the Reserve is a private entity that is not connected per se with the Federal government and that it’s function is to help maintain the stability, value and ‘belief’ in the greenback.

I thouroughly enjoyed the history lesson. I am a new member and believe this is the start of a beautiful friendship. Thanks

Patrick Hilliard

Very informative article. The more things change the more they stay the same!

Patrick Hilliard

Very informative article. This provides relevance to the saying, “The more things change the more they stay the same!” Thanks for all you do.

rose hantos

Oh Tim Sales you are exquisite and eloquent in your communication skills. Thank you

willie shonga

remember every organisation or company is led by one or more individual who are trusted to bring success.lets look at some of the sports clubs they are owned by individuals who control them for life,but the same people use different people if not players every season by inticing them in signing contracts based on perfomance,but the bottom line is they are promised huge sums of money thats even before walking into the field of play as well,so that means they have to get into the JUNGLE first.

Karen Harris

Another great explanation, as usual, Tim!
And your discussion of modern currency systems is a frightening, but powerful example of the power of “belief”.

Linda

We do have a fiat monetary system. This article helped to have pieces of my in debt study of the banking system of the world fall more fully into place. Also, to see more clearly what America fell prey to from the beginning of her existence.

This article helps my confidence in explaining MLM’s ethical procedures.

Thank you so much for more insight.

Nawal Kumar Roongta

My search, research and thrust to get complete info about MLM fulfilled here.

Jarman Bryant

Great info. It’s amazing, when you think something is to complicated to understand and find the truth is always simple and easy to understand.

Gary Robbins

Great explanation!

Simon Koh

I had always suspected governments are not the cleanest of authorities as perceived by the public. Never trust politicians and businessmen for their face value. I find this article a great revelation and a turning point in the way I share MLM with anyone. Thanks for your priceless article & God Bless…

Tom Doiron

Tim,

Debt as money is the root cause for the USA’s economic crisis. When the Federal Reserve took us off the gold standard back in the 1970’s; the stage was set for what we see today.

Thank you for taking your time to research and present this to us.

Dave Thompson

Tim,

I’m sure you know that the Federal Reserve is actually a private corporation and the biggest scam ever foisted upon the American citizenry! The Federal Reserve Act of 1913 was the day America was robbed of much liberty. Anyone who dobuts this should read “The Creature from Jekyll Island” by G. Edward Griffin for the truth about the Federal Reserve and the I.R.S. that control America today!

Dave Thompson
Nashville, TN

Isabella

I bought a book on how to begin a MLM business, the book was more a “motivator tool” rather a specific learning tool – this site really shows how and why… the do and don’ts… and in a very simple way!!!! Great!!!

Anthony

Tim is Great! The minute I get a new person or prospect who has doubts of our industry, I send them links to Tim’s videos. The biggest sceptic can not argue, he brings valid points and facts to the table. He makes my job a lot easier. Thank you Tim. Come join another winning team Tim =)

Anthony Rivera
Miami, FL

PSatyanarayana

This is a great business who wants success without investment and can become a millinaire who have confidence in MLM.

PSatyanarayana

It is good opportunity to become somebody without pain.

SP Singh

wow, Tim your exelent & great research show me the another part of MLM.

mohd

thanks for the information ,glad to read this ….(Will share to others )

(malaysia fans)

shei

this is what not a simple information, this is education! THANKS!

Viv

I get this comment “sounds like a pyramid to me” and I feel as though whenever I explain that my business actually has goods and services that people need, use and want they simply switch off anyhow…which tells me you cannot say the right thing to the wrong person anyhow!

Shirley

Wow Tim, this was great information and at the same time great education. Thanks a lot!

L K Jayasinghe

Network Marketing is a great sales system in the world. I think It is our Religion leaders methodical system. So, I respect that system and I commit to achieve my friend dreams any time. That about I am also win to my dreams and goals.

Shawn Ghani

If I had only come across this great information in my younger years who knows where I would be now. But it has been said that “whenever you catch the fish, it is fresh”.
Thank you for this information Tim. I am reading and learning about everyhting in your website.

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