First,
what's a pyramid scheme? Why do people "run for the hills" at the
first indication of a pyramid scheme? If you really knew exactly
what a pyramid scheme was, would it be easier to handle this
objection from prospects?
To answer this so you really understand it, I need to take you back
to the origin of the pyramid scheme. No, it didn't start at the
pyramids of
Egypt in 2650 BC but it's a very interesting story. The first
famous pyramid scheme where money was the focus occurred in the
early eighteenth century in France. What you're about to read goes
down as one of the greatest deceptions of all times.
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 (the
currency at the time) in debt. There was a debate 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 (making new coins). New coins were issued
weighing 20% less than the old coin, but with the same face value,
and the public was ordered by law to make the exchange. So, if the
government "shaved off" 20% of every coin they could create enough
gold to pay off their national debt.
But the people of France weren't that dumb. They didn't want to hand
their full valued coin to the government and be handed back one that
weighed less, therefore worth less. This greatly discredited the
government of France and threw the economy into greater economic
depression.
After King Louis' XIV death, the Regent (temporary ruler) and a
Scotsman friend named John Law came up with a new idea to pay off
the national debt. John Law, whose father was a banker, understood
money and how banks worked. Together they devised a masterful plan
(scheme) whereby they could pay off the national debt.
First, the Regent (temporary ruler) of France authorized John 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
USA it's called Federal Reserve Bank. In the
UK 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 put into law that
the paper money would be accepted for the payment of taxes. This
would in effect give the bank and it's "paper money" credibility.
Third, John Law knew that he had to establish public confidence in
this bank's notes (paper money) for the entire scheme to work. He
immediately announced that all notes from his bank were payable in
coin. Meaning, if anyone received his paper money, they could walk
into the Law and Company bank and exchange it for real gold or
silver coins. 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. Just as 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 grocery store) and cash it in 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 banks 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 the coins (gold and silver) to the
store and paid in coin. A person 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 banks vault would fill
up.
Banks recognized that at no time did EVERYONE pull ALL their gold
out of the bank [at the same time]. So the banks started "loaning"
out someone else's 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 formation begins to take place. Because of
my divergence into banking and credit, let me recap to ensure you're
still following all of this...
We have the country of France wanting to pay its debt by simply
"changing the weight of the coins." We have a gentleman with banking
experience who knew that if they filled the vaults with gold then
they could make loans to the public because the probability of
everyone asking the bank for their gold at the same time was really
low. He established a central bank that was supported by the
government and which allowed people to pay their taxes with this
bank's paper money.
The scheme worked... for a while. The Law and Company's bank
received enormous sums of gold to put in their vault. Now, with all
that gold in their vault they could loan some of it out... but they
would loan it out with paper money instead of actual coins. This was
the magician's act. The real product (gold and silver) vanished and
the fake product "paper money" was now in the spot light.
--RIGHT HERE IS THE POINT THAT THIS BECAME A PYRAMID SCHEME--
The Regent made Law's bank a publicly traded company declaring it
the Royal Bank of France. Now people could buy stock in the
government's bank as well as receiving credit in the form of loans
from the bank. 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 stock were
based upon the "product" of gold and silver coins in the vaults. 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 went crazy trying to get this "free" money (loans).
Businesses began to grow very rapidly and they started selling their
goods and services to foreign consumers as well as setting up
businesses in foreign countries. Slowly but surely, the gold and
silver that backed this paper money began to drain out of France and
into foreign countries. People in India didn't want to receive a
piece of paper from France because they couldn't cash it at their
bank in India - so they required payment in real gold and silver
coins.
The people of France began to suspect that with all the currency
being loaned out, surely there wasn't enough gold and silver in the
bank vaults to back up all the currency that had been loaned out and
sold as stock. They quietly began converting paper 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 to 10% below the paper, and the bank
would limit the amount of coins any one person could receive. The
limit was 100 livres in gold and 10 livres in silver. So now the
government was 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 also prohibiting people from buying up
precious stones, jewelry, silver settings, and so forth, under
penalty of a heavy fine and confiscation of the holdings. The
government was trying to stop the public from buying up the gold
that the government needed to control in order to keep the bank
legitimate. 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 and the bubble burst, and
the pyramid tumbled.
John Law, once a national hero became the scapegoat for the entire
problem. The government of France blamed him for the whole debacle
and he was nearly murdered by angry crowds.
To prevent this from happening again and elsewhere, the policy
became - there has to be a "product" backing the currency.
Most countries adopted gold as the standard "product" or backing of
their currency. Meaning, every bank had to have a vault of gold to
back their currency.
However, today all well established currencies (US Dollar, Pound,
Yen, etc.) have NO PRODUCT that backs their currency. It's all
"belief." The governments can simply "create more money out of thin
air" just by simply printing more.
Oops. Uh, I think I'll just leave that alone and save further
comments for the conference call :)
You do not want to miss the upcoming conference call on Tuesday,
November 21!
In conclusion, you now understand how the perception of pyramids
began. You can also understand why people run from pyramid schemes.
But you can also see why M.L.M is not a pyramid... but could be. And
as you just read, any organization - government included - could be
operating as a pyramid scheme. In other words, a pyramid scheme is
NOT a method of doing business such as network marketing, but the detachment from a real product that makes
it a pyramid scheme.
