In deducing the principles of credit, I have it chiefly in view, to set in a fair light, the security upon which paper-money is established: and as I imagine, this important branch of my subject will still be rendered more intelligible, by an example of the abuse to which this great engine of commerce is exposed, I now propose to give my reader a short account of the famous bank of circulation first established in France by Mr. Law; but afterwards prostituted (whether by design, or by fatality, I shall not here determine) to serve the worst of purposes; the defrauding the creditors of the state, and a multitude of private persons.
So dreadful a calamity brought upon that nation, by the abuse of paper credit, may be a warning to all states to beware of the like. The best way to guard against it, is to be apprised of the delusion of it, and to see through the springs and motives by which the Missisippi bank was conducted.
After the death of the late King of France, Louis XIV. the debts contracted by that Monarch were found to extend to 2000 millions of livres, that is, to upwards of 140 millions sterling.
It was proposed to the Duke of Orleans, regent of the kingdom, to expunge the debts by a total bankruptcy. This proposal he rejected nobly; and instead of it, established a commission (called the Visa) to inquire into the claims of such of the nation’s creditors as were not then properly liquidated, nor secured by the appropriation of any fund for the payment of the interest.
In the course of this commission, many exorbitant frauds were discovered; by which it appeared, that vast sums of debt had been contracted, for no adequate value paid to the King.
After many arbitrary proceedings, this commission threw the King’s debts, at last, into a kind of order.
Those formerly provided for were all put at 4 per cent. The creditors to the amount of six hundred millions, which had not been liquidated, nor provided for, had their claims reduced, by the commission, to two hundred and fifty millions; for which they obtained notes of state, (Billets d’etat, as they were called) bearing an interest of 4 per cent. also.
These operations performed, the total debts of the late King were reduced to the sum above mentioned; to wit, two thousand millions; bearing an interest of 4 per cent. or eighty millions per annum.
From the necessities of government, and the distressed situation of the kingdom, this interest was ill paid: and there hardly remained, out of an ill paid revenue, wherewith to defray the expence of the civil government.
About this time Mr. Law presented to the Regent the plan of a bank of circulation.
For the better understanding this affair of Mr. Law’s bank, and the views he had in establishing it at that time, I must give a short account of the most material variations of the French coin, before and after the King’s death, 1st September 1715; which I shall make as short as possible, consistently with perspicuity.
In 1709, there was a new general coinage in France; by which operation the King gained 231⁄13 per cent. upon all the specie coined. (Dutot, vol. i. p. 104.)
Out of the marc of standard gold were coined 30 louis d’ors, of 20 livres denomination each. Out of the marc of standard silver, 8 crowns, of 5 livres denomination each: so that the silver was put at 40 livres the marc.—But,
By edict of the month of September 1713, the old King appointed a diminution of the denomination of silver and gold coins; by which, after eleven successive changes, the coin of France was ordered to be brought down, from 40 livres the marc, to 28: so that the 8 crowns, which were called 40 livres in the month of September 1713, by the 2d day of September 1715, (the day after the King’s death) were to be called only 28 livres. I say called, because certainly the crowns had suffered no variation but in their name.
On the 13th of August 1715, (a few days before the King’s death) he issued a declaration; ordering that for the future the coin should remain at 28 livres per marc.
From this I conclude, that his intention was to leave, at his death, the coin of his kingdom of the same standard he had found it to be at the beginning of his reign, and at which he had preserved it invariably, during the flourishing state of his kingdom, for the space of 46 years; that is, until the year 1689.
He could not fail to be sensible of the infinite prejudice occasioned to debtors and creditors by the variations he had practised upon the coin from 1689.
To this standard, then, it was brought the very day after his death, and no sooner: therefore his debt of two thousand millions of livres should regularly be estimated according to that rate; or at about 40 shillings sterling for every 28 livres: 40 shillings being, within a trifle, the value of 8 ounces or one marc of standard silver, Paris weight.
At this rate of conversion, the two thousand millions were equal to 142,857,140l. sterling.
Soon after the King’s death, on the 2d of January 1716, the new ministry issued an edict, which totally destroyed all. This was the most extraordinary operation, I believe, ever invented; and to it was owing the establishment of Mr. Law’s bank: I must therefore explain it.
There had been no general coinage since 1709; the louis d’or had then been coined at 20 livres, and the crowns at 5, as has been said. The edict of 2d January 1716, ordered a new general coinage, on the same footing, both as to weight, fineness, and denomination, as that of 1709: the only difference was, that the first had an old man’s head upon it; the other had that of a child of six years old.
By this first operation, there was an end put to the former diminutions on the denomination of the coin; which was now raised again to 40 livres the marc, as in 1709[14]. This is nothing:
14. Here is also an operation upon debts. The day before this edict, that is, the 1st of January 1716, the value of the King’s debts was (as has been said) above 142 millions sterling: but an edict comes, raising the coin to 40 livres per marc; and consequently, reducing the debts to the value of 100 millions sterling.
There being no difference between the old coin and the new, except the stamp, the old coin was called in, and a new face was stamped on the very same pieces. But when the louis d’ors were called in, they were received at the mint at no more than 16 livres; and by a stroke of the wheel, they were, in an instant, converted into 20 livres, the denomination of the new coin.
Thus a person who brought 20 old louis d’ors to the mint, received back 16 of his own 20, new stamped, and no injustice was said to be done, from this demonstration of ministerial algebra, viz. 16 × 20 = 20 × 16. Can any thing be more clear and instructive! Some of my readers may not give credit to this; but it is true nevertheless.
Under these circumstances, it was natural for the inhabitants to wish to dispose of their old coin, at any other market than at the King’s mint. They did what they could to smuggle it to Holland; where the industrious Dutchman stamped a 16 livre piece with the head of a child, as well as the King of France could do, and sent it back to France for a 20 livre piece. These operations were prevented as well as government could; and every method was tried to force in the old coin to the mint.
Mr. Law judged this a very proper occasion to form the plan of a bank of circulation, upon the principles we have already explained.
He gave in his scheme to the Duke of Orleans; by whom it was approved of; and the bank was established the 2d of May of the same year 1716.
The first thing Mr. Law did, was to buy up with bank notes this old coin, at a price above what the mint gave, but many per cent. below the proportion of its value: his paper (payable in the new coin at 40 livres per marc) was run upon for this, as well as other reasons; and an immense profit ensued.
This anecdote, I think, is curious, and tends to unfold Mr. Law’s combinations, in the proposal he made to the Duke of Orleans for erecting a bank at this period of time.
The bank accordingly was established in favour of Law and Company, by letters patent, of the 2d of May 1716. The Company was called, the General Bank; and the note run thus:
The bank promises to pay to the bearer at sight — livres, in coin of the same weight and fineness with the coin of this day, value received at Paris.
The first fund of this bank consisted in 1200 actions (or shares) of one thousand crowns, (or 5000 livres) bank money; in all six millions; the crown being then 5 livres, 8 to the marc; silver coin at 40 livres per marc, as has been said; which makes this livre just worth one shilling sterling: consequently, the shares were worth 250l. sterling, and the bank stock worth 300,000l. sterling.
By the clause in the note, by which the bank was obliged to pay according to the then weight and fineness of the coin, those who received their paper were secured against the arbitrary measures common in France of raising the denomination of the coin; and the bank was secured against the lowering of it. In a short time, most people preferred the notes to the coin; and accordingly they passed for 1 per cent. more than the coin itself.
This bank subsisted, and obtained great credit, until the 1st of January 1719: at which time the King reimbursed all the proprietors of the shares, and took the bank into his own hand, under the name of the Royal Bank[15].
15. Here the bank departed from the principles of private and mercantile credit, upon which Law had formed it, and proceeded upon those of public credit. Public credit in France is the credit of the Sovereign; the solidity of which depends upon the maxims which he follows in the course of his administration.
Upon this revolution, the tenor of the note was changed. It ran thus: The bank promises to pay to the bearer, at sight, — livres, in silver coin, value received at Paris.
By this alteration, the money in the notes was made to keep pace with the money in the coin; and both were equally affected by every arbitrary variation upon it. This was called, rendring the paper monnoie fixe; because the denominations contained in it did not vary according to the variations of the coin: I should have called it monnoie variable; because it was exposed to changes with respect to its real value.
Mr. Law strenuously opposed this change in the bank notes. No wonder! it was diametrically opposite to all principles of credit. It took place, however; and no body seemed dissatisfied: the nation was rather pleased: so familiar were the variations of the coin in those days, that no body ever considered any thing with regard to coin or money, but its denomination: the consequences of the variations in the value of denominations, upon the accompts between debtors and creditors, were not then attended to; and the credit of the notes of the royal bank continued just as good as that of Mr. Law; although the livres in this contained a determinate value; and the livres in that could have been reduced at any time to the value of halfpence, by an act of the King’s authority, who was the debtor in them. Nay more, they in fact stood many variations during the course of the system, without suffering the smallest discredit. This appears wonderful; and yet it is a fact.
Political writers upon the affairs of France at this period, such as De Melon, Savarie, Dutot, and others, abundantly certify the incredible advantage produced by the operations of Mr. Law’s bank; and the chain of events which followed, in the years 1719, and 1720, when it was in the King’s hands, shew to what a prodigious height credit arose upon the firm foundation laid by Mr. Law[16].
16. Dutot, speaking of the great value of paper in notes and actions, throws out several reflections, in the passage I am now to transcribe from him, which, at the same time that they prove the great advantages resulting to France from the establishment of credit among them, abundantly evince how lame this author’s ideas were concerning the principles of paper credit, and of circulation. He says, (vol. ii. p. 200.) “This paper was indeed just so much real value, which credit and confidence had created, in favour of the state: and by this sum was circulation augmented, independently of all the coin which was then in France.”
"Upon this revolution, Plenty immediately displayed herself through all the towns, and all the country. She there relieved our citizens and labourers from the oppression of debts, which indigence had obliged them to contract: she revived industry: she restored that value to every fund, which had been suspended by those debts: she enabled the King to liberate himself, and to make over to his subjects, for more than fifty-two millions of taxes, which had been imposed in the years preceeding 1719; and for more than thirty-five millions of other duties, extinguished during the regency. This plenty sunk the rate of interest; crushed the usurer; carried the value of lands to eighty and a hundred years purchase; raised up stately edifices both in town and country; repaired the old, which were falling to ruin; improved the soil; gave a value to every fruit produced by the earth, which before that time had none at all. Plenty recalled those citizens, whom misery had forced to seek their livelihood abroad. In a word, riches flowed in from every quarter. Gold, silver, precious stones, ornaments of all kinds, which contribute to luxury and magnificence, came to us from every country in Europe. Whether these prodigies, or marvellous effects, were produced by art, by confidence, by fear, or by whim if you please, one must agree, that that art, that confidence, that fear, or that whim, had operated all these realities which the antient administration never could have produced.
"What a difference in the situation of France at the beginning of the regency, and the situation in which she was in November 1719!
“Thus far the system had produced nothing but good: every thing was commendable, and worthy of admiration.” These are the sentiments of Dutot, concerning this system of paper credit.
But alas! the superstructure, then, became so far beyond the proportion of the foundation, that the whole fabric fell to ruin, and involved a nation, just emerging from bankruptcy and inanition, into new calamities, almost equal to the former.
As long as the credit of this bank subsisted, it appeared to the French to be perfectly solid. The bubble no sooner burst, than the whole nation was thrown into astonishment and consternation. No body could conceive from whence the credit had sprung; what had created such mountains of wealth in so short a time; and by what witchcraft and fascination it had been made to disappear in an instant, in the short period of one day.
Volumes have been since writ in France, by men of speculation, in order to prove, that it was a want of confidence in the public, and not the want of a proper security for the paper, which occasioned this downfal.
This, if we judge by what has been writ, has been the general opinion of that nation to this day: and since it was found impossible, in France, to create confidence in circulating paper, which had no security for its value, many people there, and some even among ourselves, conclude, that a great part of the wealth of Great Britain, which consists in paper, well secured, is false and fictitious.
I shall now proceed to set before my reader the great lines of the royal Mississippi bank of France, from the 1st of January 1719, to the total overthrow of all credit, upon the fatal 21st day of May 1720. This was a golden dream, in which the French nation, and a great part of Europe was plunged, for the short space of 506 days.
In order to unravel the chaos of this affair in a proper manner, it will not be amiss to begin by giving the reader an idea of the plan which naturally might suggest itself to the Regent of France, from the hint of Mr. Law’s bank. By the help of this clue, he will be the better able to conduct himself through the operations of this system, as the French call it.
The Regent perceived, that in consequence of the credit of Law’s bank, people grew fond of paper-money. The consequence of this, he saw, was, to bring a great quantity of coin into the bank. The debts of France were very great, being, as has been said, above 2000 millions. The coin, at that time, in France, was reckoned at about 1200 millions, at 60 livres the marc, or 40 millions sterling. The Regent thought, that if he could draw either the whole, or even the greatest part of this 1200 millions of coin into his bank, and replace the use of it to the kingdom, by as much paper, secured upon his word, that he should then be able to pay off, with it, near one half of all the debts of France: and by thus throwing back the coin into circulation, in paying off the debts, that it would return of itself into the bank, in the course of payments made to the state; that credit would be thereby supported, as the bank would be enabled to pay in coin the notes as they happened to return, in the course of domestic circulation.
This was both a plausible and an honest scheme, relatively to a Duke of Orleans, whom we cannot suppose to have been master of the principles of credit; and very practicable in a country where there was so great a quantity of coin as 40 millions sterling, and a well established credit in the bank, which prevented all runs upon it from diffidence. Nothing but a wrong balance of trade could have occasioned any run for coin; because, for the reason already given, the paper bore for the most part a premium of 1 per cent. above it.
Accordingly, during the whole year 1719, the credit of the royal bank was without suspicion, although the Regent had, by the last day of December of that year, coined of bank paper, for no less a sum than 769 millions, reckoning in 59 millions of paper, which had been formerly issued by the general bank of Law and company; for which he had given value to the proprietors, when he took the bank into his own hands, as we have said above.
I must here observe, that by this plan of the Regent, there was, in one sense, a kind of security for the notes issued. So far as they were issued for coin brought in from the advanced value of the paper, this coin was the security: in the second place, when the coin was paid away to the creditors of the state, the Regent withdrew the obligations which had been granted to them; and although I allow that the King’s own obligation withdrawn, was no security to the public, who had received bank notes for the payment; yet still the interest formerly paid to the creditors, was a fund out of which, upon the principles of public credit, the annual interest for the notes was secured. Had, indeed, the French nation perceived upon what bottom the security for the paper stood, during the year 1719, perhaps the credit of the bank might have been rendred precarious; but they neither saw it or sought after it: and the men of speculation were all of opinion, that as long as there was no more paper issued by the bank than there was coin in the kingdom, there could be no harm done. Of this any person who has read Dutot, de Melon, Savarie, and others, will be perfectly satisfied[17]. And I desire no farther proof of the total ignorance of the French in matters of this kind, than to find them agreeing, that bank paper is always good, providing there be coin in the nation to realize it, although that coin be not the property of the bank. [Dutot, p. 132, 133.] On the contrary, it is very evident from what has been said, that although there should be a thousand times more coin in a country than the bank paper, still that bank paper must be a mere delusion, and, in fact, of no value whatsoever, except so far as the bank is possessed of the value of it in one species of property or another.
17. It is astonishing to find how gravely Messrs. de Melon and Dutot reasoned concerning the nature of paper money, and the effects of changing the value of the coin. They both seemed to agree that a livre was a livre whether it was the 28th or the 50th part of a marc of silver, whether it was a denomination upon paper, well or ill secured, no matter which.
The whole reasoning turned merely on the question, who were robbed, and who fantastically enriched by such absurd operations upon the coin of a country?
The jargon of such men certainly contributed a great deal to darken the understandings of the ministry at this time; and to make them believe that the affairs of money were infinitely more obscure and more difficult to be understood than they really are.
There are thousands of examples where mankind, with their learning and reasoning, have turned common sense into inextricable science; this I think is a famous instance of it: and it is rendring no small service to the world, to destroy, in a manner, what others have been at so much pains to establish. This is restoring common sense to its native dress, in which it becomes intelligible to every one.
I know very well that the ministry of France have now very different notions concerning paper credit; but these notions have not as yet reached the press, except in some of the King’s answers to the remonstrances of the parliament of Paris in 1760. These answers were dictated upon sound principles, and do great honour to the ministry.
The old notions still prevailed in the remonstrances of the parliament. This plainly appears from the proposal they made to the King, at that time, to issue paper to the amount of 200 millions, which the parliament was to make good. An expedient to avoid doing that which right reason demanded of them, viz. first to secure a fund for the paper, and then to borrow upon that fund. This proposal from the parliament, and the King’s rejecting it, proves that credit was then better understood in the cabinet than in the palais.
And on the other hand, let the bank paper exceed the quantity of coin in the proportion of a thousand to one, yet still it is perfectly good and sufficient, providing the bank be possessed of an equivalent value in any species of good property. This I throw in here to point out how far the French were, at least at that time, and many years after, when Dutot and Melon wrote, from forming any just notion of the principles of banking. And, I believe, I may venture to say, that the only reason why banks have never been established in France, is, because the whole operation is still a mystery to them. I ground this conjecture upon an opinion of M. de Montesquieu, who thinks that banks are incompatible with pure monarchy; a proposition he would never have advanced had he understood the principles upon which they are established.
The next remarkable and interesting revolution made upon this famous bank, was by the arret of February 22, 1720; which constituted the union of the royal bank with the company of the Indies.
By this arret, the King delivered to that company the whole management of the bank with all the profits made by him since the first of January 1719, and in time coming. Notwithstanding this cession, the King remained guarantee for all the notes, which were not to be coined without an order of council: the company was to be responsible to the King at all times for their administration; and, as a security for their good management, they engaged to lend the King no less than sixteen hundred millions of livres.
Here is the æra and beginning of all the confusion. From this loan proceeded the downfal of the whole system.
But before I proceed to explain the scheme of the Regent in these operations upon credit, I think it will contribute to the clearing up of the subject in general, to premise some short account of the rise and progress of this great company of the Indies: and to give a short abstract of some of the most memorable transactions during the Missisippi scheme, in the order of time in which they followed one another.
Cardinal de Richlieu, that great minister to Louis XIII. was the first who established trading companies in France, anno 1628, about the time of the siege of Rochelle.
He then set on foot the companies of the West and East Indies.
Several others, viz. one for Canada, one for the Leeward Islands, and another for Cayenne, were successively established in the beginning of the reign of Louis XIV.
These companies, before 1664, had frequently changed their forms, and had succeeded very ill.
At that time the great Colbert was in the administration of the King’s affairs. He engaged his master to think seriously of establishing the trade of his kingdom upon solid principles; for which reason all the undertakers of the former projects of commerce to the new world were reimbursed; and a new establishment was made, called the Compagnie des Indes Occidentales.
This exclusive trade comprehended that of Canada, the Caribbee Islands, Acady, Newfoundland, Cayenne, the French continent of America, from the river of the Amazons to that of Oronoko, the coasts of Senegal, Goree, and other places in Africa; the whole for 40 years.
The same year, 1664, there was another company formed for the East Indies, of which we shall speak afterwards.
The greatest encouragement was given to these new establishments. Large sums were advanced by the King for several years, without interest, and upon condition, that if, at the end of that term, any loss was found on the trade, it should fall upon the money due to the King.
On examining into the West India company’s affairs, after ten years administration, that is to say, in the year 1674, it was found, that instead of profiting of their extensive privilege, by carrying on a regular trade themselves, they had sold permissions to private people to trade with them.
This abuse in the company had, however, inspired a taste for trade among the French; which the King wishing to improve, he reimbursed to the company all their expences, added their possessions to his domain, and threw the trade open to his subjects.
Thus ended the first company of the West Indies, called by the French, the Compagnie d’Occident.
After the suppression of this company, the French trade to America was carried on and improved by private adventurers, some of which obtained particular grants, to enable them to form colonies. Of this number was Robert Chevalier de la Sale, a native of Rouen. It was he who first discovered the river Missisippi, and who proposed to the King, in 1683, to establish a colony there. He lost his life in the attempt.
Hiberville, a Canadian, took up the project; but soon died. He was succeeded by Antony Crozat, in 1712, who had better success; but the death of the King in 1715, and the rising genius of Mr. Law, engaged the Regent of France to make Crozat renounce his exclusive privilege of trading. Upon which, by edict of the 6th of September 1717, was formed the second Compagnie d’Occident, in favour of Mr. Law: to which was added the fur trade of Canada, then in the hands of private adventurers, and the farm of the tobacco, for which he paid 1,500,000 livres a year.
I now come to the EastEast India company.
I have already mentioned the establishment of it by the great Colbert in 1664.
After his death, want of experience in those who succeeded him, abuse of administration, carelesness in those who carried on the company’s business, competition between different companies, and, in short, every obstacle to new establishments, concurred with the consequences of the long and expensive wars of Louis XIV. to render all commercial projects ineffectual; and all the expence bestowed in establishing those companies was in a manner lost.
In 1710, the merchants of St. Malo undertook the East India company. It languished in their hands until 1719, and their importations were not sufficient to supply the demand of France for India goods: for this reason it was taken from them, and incorporated with Mr. Law’s company of the West Indies, in May 1719.
By this incorporation was established the great Company of the Indies, which still subsists in France: the only monument extant of the famous and unfortunate Law.
For the better understanding, therefore, what is to follow, let us attend to some historical and chronological anecdotes, relative to the wonderful operations of this Missisippi bank, and company of the Indies. These I shall set down according to the order of time in which they happened, that my reader may have recourse to them as he goes along.
Without the help of this table, I should be involved in a history of those events, which however amusing it might be to some readers, would be quite inconsistent with the nature of this inquiry.
A general coinage in France: the marc of standard silver, worth two pounds sterling, put at 40 livres denomination.
September 1713. The late King reduces the denomination of the silver coin to 28 livres the marc, and the gold in proportion.
These reductions were made gradual and progressive, and were finally to take place no sooner than the 2d of September 1715.
August 1715. The King declares, that in time coming, the coin was to remain stable at 28 livres the marc of fine silver.
September 1715. The King dies.
January 2, 1716. The Regent of France orders a new general coinage: raises the silver coin to 40 livres the marc, and calls down the old King’s coin (though of the same weight, fineness, and denomination) 20 per cent.
May 1716. Mr. Law’s bank established: bank notes coined; and the old coin bought up at great discount.
September 6, 1717. Mr. Law’s company of the West established.
September 4, 1718. He undertakes the farm of tobacco.
September 22, 1718. The first creation of actions of the company of the West to the number of 200,000, subscribed for in state billets, at the rate of 500 livres per action.
January 1, 1719. The bank taken from Law, and vested in the King. At this time the number of bank notes coined amounted to 59 millions of livres.
April 22, 1719. A new coinage of 51 millions of notes; in which the tenure of the note was changed, and the paper declared monnoie fixe.
May 1719. Mr. Law’s company of the West incorporated with the company of the East Indies; after which it was called the Company of the Indies.
June 1719. Created 50,000 new actions of the incorporated company; sold for coin at 550 livres per action.
June 10, 1719. Coined of bank notes for 50 millions of livres.
June 1719. The mint made over to the company for 50 millions.
July 1719. Created 50,000 actions as above, sold, for notes, at 1000 livres per action.
July 25, 1719. Coined of bank notes for 240 millions.
August 1719. The company obtains the general farms: promises a dividend upon every action of 200 livres: agree to lend the King sixteen hundred millions at 3 per cent. and have transferred to them 48 millions per annum for the interest of that sum.
September 12, 1719. Coined of bank notes for 120 millions.
September 13, 1719. Created no less than 100,000 actions; price fixed at 5000 livres per action.
September 28, 1719. Created 100,000 more actions, price as the former, fixed at 5000 livres each.
October 2, 1719. Created 100,000 more actions, price as the former, at 5000 livres each.
October 4, 1719. Coined by the Regent’s private order, not delivered to the company, 24,000 more actions, which compleated the number of 624,000 actions; beyond which they never extended.
| October 24, 1719. Coined of bank notes for | 120 millions. | |
| December 29, 1719. Coined of bank notes for | 129 millions. | |
| January 1720. Coined of bank notes for | 21 millions. | |
| February 1720. Coined of bank notes for | 279 millions. |
February 22, 1720. Incorporation of the bank with the company of the Indies.
February 27, 1720. A prohibition by which no one was to have in his custody more than 500 livres of coin.
March 5, 1720. The coin raised to 80 livres per marc.
March 11, 1720. The coin brought down to 65 livres per marc; and gold forbid to be coined at the mint, or used in commerce.
| livres. | ||
| March 1720. Coined of bank notes for | 191 803 060 | |
| April 1720. Coined of bank notes for | 792 474 720 | |
| May 1, 1720. Coined of bank notes for | 642 395 130 |
May 21, 1720. The denomination of the paper diminished by arret of council, which, in an instant, put an end to all credit, and made the bubble burst.
At this period had been coined of bank notes to the immense
| livres | |
| sum of | 2 696 400 000 |
| Of which had been issued | 2 235 083 590 |
| Remained in the bank | 461 316 410 |
Dutot, Vol. I. p. 144. Vol. II. p. 207.
May 27, 1720. The arret of the 21st of this month recalled, and the paper restored to its full denomination.
May 29, 1720. The coin raised to 82 livres 10 sols per marc.
June 3, 1720. 400,000 actions belonging to the Regent are burnt; and the 24,000 more, which were created October 4, 1719, suppressed; also 25 millions of the interest formerly granted to the company for their loan of 1600 millions, retroceded by the company, and constituted again upon the town-house of Paris.
October 10, 1720. All bank notes are ordered, by arret of this day, to be suppressed, if not brought to the bank before the 1st of December following, in order to be paid in manner therein specified.
These things premised, what follows will, I hope, be easily understood.
So soon as the Regent of France perceived the wonderful effects produced by Mr. Law’s bank, he immediately resolved to make use of that engine, for clearing the King’s revenue of a part of the unsupportable load of 80 millions of yearly interest, due, though indeed very irregularly paid, to the creditors.
It was to compass this end, that he bestowed on Mr. Law the company of the West Indies, and the farm of the tobacco.
To absorb 100 millions of the most discredited articles of the King’s debts, 200,000 actions or shares of this company were created. These were rated at 500 livres each, and the subscription for the actions was ordered to be paid in billets d’etat, so much discredited by reason of the bad payment of the interest, that 500 livres, nominal value in these billets, would not have sold upon change for above 160 or 170 livres. In the subscription they were taken for the full value. As these actions became part of the company’s stock, and as the interest of the billets was to be paid to them by the King, this was effectually a loan from the company to the King of 100 millions at 4 per cent.
The next step was to pay the interest regularly to the company. Upon this the actions which had been bought for 170 livres, real value, mounted to par, that is, to 500 livres.
This was ascribed to the wonderful operations of the bank; whereas it was wholly owing to the regular payment of the interest.
In May following 1719, the East India company was incorporated with the West India company: and the 200,000 actions formerly created, were to be entitled to a common share of the profits of the joint trade.
But as the sale of the first actions had produced no liquid value which could be turned into trade (having been paid for in state billets) a new creation of 50,000 new actions was made in June 1719, and the subscription opened at 550 livres payable in effective coin.
The confidence of the public in Mr. Law, was at this time so great, that they might have sold for much more: but it was judged expedient to limit the subscriptions to this sum; leaving the price of the actions to rise in the market, according to demand, in favour of the original subscribers.
This money amounting to 27 500 000 livres in coin, was to be employed in building of ships, and other preparations for carrying on the trade.
The hopes of the public were so much raised by the favourable appearance of a most lucrative trade, that more actions were greedily demanded.
Accordingly in a month after (July 1719) another creation was made of 50,000 actions; and the price of them fixed at 1000 livres.
It must be observed, that all actions delivered by the company of the Indies, originally contained an obligation on the company for no more than 4 per cent. upon the value of 500500 livres, with a proportion of the profits on the trade; so that the rise of the actions proceeded entirely from the hopes of those great profits, and from the sinking of the rate of interest; a consequence of the plenty of money to be lent.
But besides the trade, what raised their value at this time, was, that just before the last creation of actions, the King had made over the mint to the company for a consideration of 50 millions of livres; and this opened a new branch of profit to every one interested.
The sale of the last coined actions taking place at 1000 livres each, so great a rise seems to have engaged the Regent to extend his views much farther than ever. To say that he foresaw what was to happen, would be doing him the greatest injustice. He foresaw it not, most certainly; for no man could foresee such complicated events. But had he conducted himself upon solid principles; or by the rules which, we now say, common honesty required, he certainly never would have countenanced the subsequent operation.
The fourth creation of actions was in the beginning of September 1719.
In the interval between the third and the fourth creation, the Regent made over the general farms to the company, who paid three millions and a half advanced rent for them. And the company obliged themselves to lend the King (including the 100 millions already lent upon the first creation of actions) the immense sum of 1600 millions at 3 per cent. that is, for 48 millions interest. Now it is very plain, that before the month of September 1719, it was impossible they could lend the King so great a sum.
They had already lent him, in September 1718, 100 millions, by taking the billets d’etat for the subscription of the first creation of actions; the second creation had produced coin, laid out in mercantile preparations; and the third creation of actions, at the standard value, was worth no more than 50 millions of livres: this was their whole stock. Where then could they find 1500 millions more to lend?
I therefore conclude, that at this time, the combination which I am now to unfold, must have, more or less, taken place between the Regent and this great company.
The public was abundantly imbibed with the notion of the prodigious profits of the company, before they got possession of the general farms. No sooner had they got that new source of riches into their hands, than they promised a dividend of no less than 200 livres on every action, which was ten times more than was divided on them when at first created.
The consequence of this was, that (supposing the dividend permanent and secure) an action then became as well worth 5000 livres as at first it was worth 500 livres; accordingly to 5000 did it rise, upon the promise of the new dividends.
But what could be the motive of the company to promise this dividend, only three months after their establishment? Surely, not the profits upon a trade which was not as yet opened. Surely, not the profits upon the King’s farms; for these profits it was greatly their interest to conceal.
Their views lay deeper. The Regent perceived that the spirit of the nation was too much inflamed, to suffer them to enter into an examination of the wonderful phænomena arising from the establishment of the bank, and company of the Indies. If the company promised 200 livres dividend, the public concluded that their profits would enable them to pay it; and really in this particular the public might be excused.
The plan, therefore, concerted between the Regent and the company seems to have been, to raise the actions to this great value, in order to suspend a greater quantity of notes in circulation.
This was to be accomplished, 1. by the Regent’s purchasing the actions himself from the company; 2. by borrowing back the notes he had paid for them, in order to fill up the loan which the company had agreed to make; 3. to pay off all the public creditors with those notes so borrowed back; and 4. when the nation was once filled with bank paper, to sell the actions he had purchased from the company, to withdraw his own paper, and then destroy it.
By this operation the whole debts of France were to be turned into actions; and the company was to become the public debtor, instead of the King, who would have no more to pay but 48 millions of interest to the company.
By this operation also, the Regent was to withdraw all the bank notes which he had issued for no other value but for the payment of debts; which notes were demandable at the bank; and for the future, he was to issue no more (I suppose) but for value preserved.
Now if we examine the motives of the Regent, with regard to this plan, and suppose that he foresaw all that was to happen in consequence of it; and if we also suppose that he really believed that the company never could be in a situation to make good the dividend of 200 livres, which they had promised upon their actions; in a word, if we put the worst interpretation upon all his actions, we must conclude that the whole was a most consummate piece of knavery.
But as this does not appear evidently, either by the succeeding operations, or ultimate consequences of this scheme, I am loth to ascribe, to that great man, a sentiment so opposite to that which animated him, on his entrance upon the regency, when he nobly rejected the plan proposed to him for expunging the debts altogether.
I may therefore suppose, that he might believe that the company to whom he had given the mint, the tobacco, the farms, and the trade of France, and to whom he soon after gave the general receipt of all the revenue, might by these means be enabled to make good their engagements to the public. I say, this may be supposed; in which case justice was to be done to every one; and the King’s debts were to be reduced to 48 millions a year, instead of 80 millions.
That this is a supposeable case, I gather from Dutot, who gives us an enumeration of the revenue of the company, Vol. I. p. 162. as follows: