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CHAPTER II.: THE BANK AND “SYSTEM” OF LAW. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 3 (France, Italy, Spain, Portugal, Canada).
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THE BANK AND “SYSTEM” OF LAW.
France at the Close of the Reign of Louis XIV.
BY his continual wars and the building of fortifications, Louis XIV. at his death left the finances of France in wretched disorder. “The manner in which fiscal affairs had been administered since the death of Colbert, in 1683.” writes Dutot, cashier of Law’s bank, “had perhaps wrought as much damage to the State as was caused by the enormous expenses of the last two wars. The sole object of the Administration, apparently, was to extort money from the people by any means; and no thought was taken of the harm that might result to real estate, to commerce, or to industry. This procedure produced results which had certainly not been foreseen. It gave an exaggerated value to the very money so sadly needed, and thus made it more difficult to procure; it deprived realty, commerce, and industry of those facilities by the aid of which they would always have been in position to furnish money to the State. In its paper issues, the State would have had a valuable resource and a salutary instrument of credit if it had not, soon after their emission, offered to pay interest upon them, thus depriving them of public confidence. The only use the Treasury had for these notes was to make payments with them; so far from being willing to accept them himself, the King expressly forbade their acceptance in payment of public dues. At the same time, he commanded that they be received as a legal tender between individuals, even in payment of letters of credit. But, in spite of these facts, the people had such confidence in the bills at first that the King was enabled to pay off part of the war debt with them, even while their interest-bearing quality and the fact that they were refused in public payments showed that it would be impossible to maintain their credit permanently. In the end, this credit disappeared entirely. Finally the bills were converted into rentes in this manner: on the occasion of the general recoinage of 1709, by virtue of which it was hoped to remedy the evils caused by the bills, rentes were issued and exchanged for the bills and gold and silver of the old coinage, the proportion being one-sixth bills and five-sixths specie.
“To complete the operation, the coinage was debased by a fictitious increase of twenty-three per cent. in its value. That difference at once aroused the enlightened cupidity of our neighbors, impelling them to gather up the old coins and carry them away in order to adjust their value to that of the debased new coins, and then return them to us. Thus France was placed at a great disadvantage relatively to the neighboring States, independently of the large sums the latter were enabled to gain at the expense of the King and the State. The Treasury was replenished by means of loans at a rate of interest beyond the means of the Government to pay. The greater the depreciation of the paper so issued, the more it was necessary to issue it in order to raise the amounts needed by the State; the Treasury continued in this way, ignoring the fact that every increase in the number of bills added to the distrust with which they were regarded and so decreased the demand for them; in this manner all the advantage was thrown away that might have been secured by a careful management of the nation’s credit. Among the bills so issued were bills from the tax departments and the Navy, supply bills, trust fund bills, and an enormous quantity of various other descriptions.”
By 1715, the arrears aggregated 711,000,000 livres, and the deficit for that year was 78,000,000, so that the debt due upon demand was 789,000,000 livres, equivalent to 1,420,000,000 francs of these times. Not only were the resources of the Treasury exhausted, but the citizens were reduced to such a state of poverty that they were no longer able to pay their taxes. It was this unskillful management of the finances that suggested to Vauban the composition of his famous “Dime Royale,” which brought him into disgrace with Louis XIV. In one of the first councils following the death of the Great Monarch the wretched state of the finances was revealed without reserve. Some of the councilors proposed that the State be simply declared bankrupt. The Regent strenuously dissented from that proposal, but only to advocate measures that were no better, if, indeed, they were not much worse. With a view to the reduction of the outstanding debt, it was determined that, inasmuch as the State bills had greatly depreciated, their nominal value should be reduced to their actual market price. An ordinance of December 7, 1715, directed all holders of State obligations to present them for “official inspection.” The debts thus inspected were scaled down and replaced by State bills bearing four per cent. interest, and payable at various intervals. By this process, the debt of 652,000,000 livres was exchanged for 250,000,000 livres in State bills.
DOINGS OF THE CHAMBER OF JUSTICE.
But the needs of the State were too great to be fully met by such an act of bankruptcy; for while this procedure lessened the demand liabilities, it brought nothing into the Treasury. As a further step in this direction, recourse was had to a form of proceeding which was none the less odious because it happened to have numerous precedents in its favor. Financiers, and especially revenue farmers, having become extremely obnoxious to the people, who imputed to them misfortunes for which the rapacity of the Treasury should have been held accountable, the Regency determined upon an indiscriminate spoliation of this class, or, as the saying was, upon making them “disgorge.” To this end, they were forbidden to quit the country, under pain of death, and a Chamber of Justice was erected to take cognizance of their official extortions. The mode of procedure was most simple. All the accused were required to produce their books and accounts. for the past twenty-seven years, to prove affirmatively what they were worth at the beginning of that period, and to draw up a minute and detailed account of their possessions at the time of the investigation. Every false declaration was punishable by sentence to the galleys for life; a reward was offered to informers, and all persons were forbidden, under pain of death, to reproach those spies for their treachery. Whenever, by the use of these means, the Chamber of Justice was unable to prove any offence against the accused, it simply confiscated four-fifths of his earnings for the twenty-seven years, compelling him to acknowledge, at the same time, that he retained the remaining fifth at the bounty of the King. These intolerable measures, comparable only to the proscriptions of Marius and Sulla, brought in less than had been expected. About 6000 persons were brought to judgment, whose possessions, by their own showing, aggregated some 1,200,000,000 livres; 4410 of these were condemned to pay a total of 219,000,000 livres; but many of them were able to find powerful protectors, and by 1717 the Treasury had recovered only 70,000,000 livres, and barely half of the fines imposed were ever collected at all.
The Regency then resorted once more to a debasement of the coinage, and the piece of 3 livres 10 sous, which weighed an ounce at the death of Louis XIV., was reduced to less than half an ounce. The people of France had reached the lowest depths of wretchedness; the conspiracy of Cellamare had just obscured the political sky and threatened to bring back the evil days of the Fronde, when a stranger appeared upon the scene and promised to make all bright again.
JOHN LAW APPEARS.
“A Scotchman, I know not of what family,” writes the Duke of Saint-Simon in his memoirs, “a great gambler and schemer, who had gained much in the various countries he had visited, had come to Paris during the last days of the deceased King. His name was Law, but when he became better known, people grew so accustomed to call him Lass that his name of Law disappeared.* He was mentioned to M. le Duc d’Orleans as a man familiar with banking and commercial matters, with the movements of the precious metals, and with moneys and finance. From this description the Regent was desirous of seeing him.” John Law’s manner of life had been a most erratic one. Son of an Edinburgh goldsmith, of the upper middle or lower titled class, he had received a very thorough education. He traveled extensively over Europe, where his constant success and large gains at gambling caused him to be regarded with suspicion, though no case of cheating was ever proved against him. Having fought a duel in London and killed his antagonist, he was condemned to death, but succeeded in escaping. He fled to Paris, but being driven out of that city, he retired first to Italy, but finally took up his abode in Amsterdam, where he applied himself seriously to a study of credit. About 1700, he returned to Scotland and published, under the title “Money and Trade Considered,” a scheme of finance, which he summarizes thus: “It is proposed that Parliament shall appoint forty commissioners, who shall be accountable for their management of affairs; and that these commissioners shall be empowered to issue notes to be a legal tender for all purposes. The Parliament shall choose one of these three methods of issue: The first method is to authorize the Commission to loan its bills, at ordinary interest, on mortgage security, the loan in no case to exceed half the value of the realty mortgaged; the second mode is to give out in notes the full value of the land, estimated upon the basis of twenty years’ revenue, or more or less according to the valuation that may be placed upon it; the Commission, or its authorized agents, being empowered to enter into possession of the land by wadsett redeemable within a certain period; the third plan is to issue notes to the full value of the land upon sale of it irredeemably to the Commission or its representatives. These notes will always be as valuable as specie, because they will represent a mortgage value exactly equivalent to the coin it could be exchanged for. If there should be any losses, a fourth of the Commission’s income would suffice, in all probability, to cover them. This paper money will not depreciate as coin has depreciated in the past, and may again in the future, and we shall always have as much specie as we can use, but never any more.”
The theories of Law which we have here set forth are extremely dangerous, for he does not point out any method by which the paper is to be redeemed; there could, in fact, be but one method, a sale of the lands, and we may instance the assignats issued during the French Revolution as proof of the fact that real estate cannot be made to serve as the basis of paper money. For this purpose there is no reliable security but coin. The Scottish Parliament very wisely repudiated Law’s project, whereupon he set out once more upon his travels and was in France at the time of the unfortunate measures we have described.
LAW’S BANK SCHEME.
Law disapproved of these measures, saying that they would produce none of the expected results; that they would make the evil worse instead of curing it, and that he would guarantee to ameliorate the commerce and finances of the country without injuring anyone. It was at this time that he was presented to the Regent, whom he won over completely. His plan consisted in the establishment of a bank of issue, to be managed by the State, for its own profit, and at its own risk. The Council of Finance opposed the plan. Law, not in the least discouraged, next worked out a new scheme looking to the establishment of an independent bank, its capital to be furnished by shareholders and its affairs to be managed by them under the supervision of a committee composed of some of the principal officers of the State. In spite of vigorous opposition, letters patent were issued on May 2, 1716, and registered by the Parliament on the 23d of the same month, authorizing a general bank, in the following terms.
“The benefits that public banks have conferred upon various European States, sustaining their credit, building up their commerce, and supporting their manufactures, have made it clear to us that our people might secure the like advantages from similar institutions. Sieur Law having proposed to us, some months since, the establishment of a bank with our money, to be administered in our name and under our authority, the project was examined in our Council of Finance, where several bankers, merchants, and deputies from our trading cities being convened and required to give their advice, they were unanimous in the opinion that nothing could be more advantageous to our kingdom, which, through its situation and fertility, and the industry of its inhabitants, stood in need of nothing more than a solid credit for acquiring the most extensive and flourishing commerce. They thought, however, that the present time was not favorable for the undertaking, and that it would be better that such an institution should be founded and managed by a corporation. These reasons, added to some special clauses of the project, determined us to refuse it. But the said Sieur Law has prayed us to accord him the privilege of erecting another kind of bank, to be established and supported by his own money and that of his associates; and through its means he proposes to increase the circulation of money; to put an end to usury; to supply to travelers a simple means of remittance between Paris and the provinces; to furnish to foreigners a safe method of preserving and handling such capital as they have among us, and to facilitate for our own people the sale of their products and the payment of their taxes. * * * And, inasmuch as it seems to us that this institution, conducted according to his plans, can result in no harm, but is likely, on the other hand, so far as we can judge from the experience of neighboring States, to prove a successful enterprise and to produce very beneficial effects, we have been pleased to grant to the said Sieur Law, whose experience, knowledge, and ability are well known to us, the privilege he asks.”
This preamble was followed by the organic laws of the bank, in ten articles, which may be thus summarized: Exclusive authority is given to Law and his associates to maintain a general bank in the kingdom for a period of twenty years, beginning with the registry of his letters patent. The bank is authorized to keep its books and issue its bills upon a specie basis, in terms of “ecus de banque”; that is to say, coins of the weight and fineness constituting the standard on the day the bills are issued. Citizens of France and foreigners alike are privileged to contract in terms of “ecus de banque,” in order to avoid all difficulties arising from changes in the standard of weight and fineness between the date of the contract and the day of payment. The bank is exempt from all taxes and assessments. Shares belonging to aliens are not liable to droits d’aubaine, nor to confiscation even in time of war. The bank is compelled to give its notes in exchange for specie to all who demand them. Counterfeiting the bills of the bank is punishable by death. The last article provided that the privileges conferred upon Law should not be construed to the prejudice of the other bankers of the kingdom, who should be allowed to continue their business as usual.
The regulations of the bank, approved by letters patent of May 20, 1716, fixed the capital at 1,200,000 “ecus de banque” (equivalent to 6,000,000 livres in current money), divided into 1200 registered shares of 1000 “ecus” each. It was to begin business as soon as the 1200 shares were taken and a stockholders’ meeting had been held for choosing officers. The stated meetings of stockholders were to be on June 20th and December 20th. Stockholders were entitled to one vote for every five shares in their possession, and a balance-sheet was to be published every six months. The bills of the bank were to be signed by the manager and one stockholder chosen at a stockholders’ meeting, and were to be registered by number, date, and amount in a book kept for the purpose. The bank opened accounts current and made payments by transfers upon its books for a commission of 5 sous upon the 1000 livres; it discounted commercial paper and bills of exchange. It was forbidden to engage in any commercial transaction on its own account, or as agent, or to issue any bills not due on demand. These rules were all very reasonable, and if stock-jobbing and the needs of the Government had not impelled Law to misuse the instrument he had created, France would have anticipated by eighty-four years the possession of an establishment that would have shielded her from many misfortunes. The capital was payable in four installments, one-fourth in specie and three-fourths in State bills; the fact that these bills were worth at the most not over one-third of their face value, together with a general desire to stand well with the Regent, caused the shares to be rapidly subscribed. The bank began business toward the end of May, 1716. Its capital was so small that no jealousy was excited in any quarter, while the fact that its bills were payable in coins of a determinate weight and fineness, and the convenience of making payments through the bank—a method not common at that time in France—soon brought it a clientage. Every business man had his account at the bank, and the demand for its bills in exchange for coin was so great that the bank was soon in a position to exact a premium for its paper. It was of great value to the community from the day of its inception. The heavy losses sustained by all men of means had left the field free to usurers, and the best commercial paper could not be placed at less than thirty per cent. per annum. The bank announced its readiness to discount paper at six per cent., and in this way found an outlet for the deposits, which soon began to assume respectable proportions; it was not long before the rate of discount was reduced to four per cent. But Law was not long content with the modest rôle of a discounter; he anticipated the needs of commerce, offered his assistance to various manufacturing enterprises, advocated the undertaking of needful public works, and exerted himself so actively in all directions that commerce, which had appeared to be on the verge of extinction, took on new life.
LAW’S SUCCESS AROUSES COMPETITION.
Law was accomplishing even more than he had promised, and his success, while it confirmed his standing before the Regent, aroused the envy of certain other persons, the most powerful of whom was d’Argenson, head of the Council of Finance. He incited the brothers Paris to enter into competition with the famous Scotchman. The brothers Paris conceived the establishment of a company with a capital of 100,000,000 livres, divided into 100,000 shares of 1000 livres each, payable in State bills; it was to take over the lease of all the general taxes, its main object being, like that of Law’s company, to increase the value of State paper. They agreed to pay annually to the State 48,000,000 livres, and hoped to realize 100,000,000 from the revenue collections. Their security to the State was to consist of the 100,000,000 livres of paper making up their capital stock. A six years’ lease of the taxes was made to the company in the name of Aymard Lambert, valet of one of the brothers Paris. This scheme was known as the “Anti-System.”
THE ROYAL BANK SUPERSEDES THE GENERAL BANK.
Law had at this time a large number of projects on foot. He had won a signal victory over Parliament, which had strenuously opposed his proposition that the bills of his bank be received as money at all public treasuries. He next set to work to clear the field of the “Anti-System.” On December 4, 1718, a proclamation of the King converted the General Bank into the Royal Bank. This proclamation declares that the services rendered by the General Bank in quickening the circulation of money and reducing interest rates had led the King to make a re-examination of Law’s original proposition, which was (as we have noted above) the establishment of a bank to be conducted in the name and by the authority of the King; that in order to effect the change, all the shares of the General Bank had been bought up and the King had thus become sole proprietor of the institution, which had just become the Royal Bank. The bank retained its 6,000,000 livres of original capital, but it was no longer proposed to redeem its bills in coins of the weight and fineness prevailing on the day of their issue; holders of the bills could at their option demand payment in “ecus de banque” or in livres tournois. This arrangement was not altogether clear and it raised a question as to the future success of the bank. One privilege which was granted to the Royal Bank and which, unfortunately, is now secured to the Bank of France, proved to be an injury rather than a benefit—the complete exemption from garnishment of all funds held by it in accounts current, except when the depositor became a bankrupt. The transformation of the General Bank into the Royal Bank was an unfortunate change, because the former had a real capital, while the latter furnished no guaranty to those dealing with it except the responsibility of a government not over-scrupulous. Besides, the new institution was to be governed upon the principle of a State bank, and such establishments, with few exceptions, have always been a failure.
LAW’S COMPAGNIE D’OCCIDENT.
Meanwhile, Law had determined to establish under the title of the “Compagnie d’Occident” a vast enterprise having in view the colonization of Louisiana—not merely the State which now bears that name, but the whole immense valley of the Mississippi. Colonization, however, was a mere pretext, the real object being a transmutation of the State debt. To the Compagnie d’Occident was granted, for a period of twenty-five years, beginning with January 1, 1718, the right to manage for its own profit all the French colonies in North America, together with a monopoly of all their commerce, and sovereign power over them, the sole condition being that the company should render faith and homage to the King of France. The capital was fixed at 100,000,000 livres, divided into shares of 500 livres each, payable in State bills, then at a discount of seventy per cent. Law, therefore, had no effective capital for his Compagnie d’Occident; but he was little disturbed by this fact, claiming that he would have ample funds if the State paid regularly its four per cent. interest as it had agreed.
The capital, however, was readily subscribed, because it was payable in depreciated paper, but the “Anti-System” did its utmost to injure the shares of the Compagnie d’Occident, and forced them down fifty per cent. Law determined to support them by buying at par all the shares on the market, paying thirty or forty livres on account, and stipulating for delivery of the shares in six months. This bold device was successful, and the stock was soon selling at par.
LAW’S COMPAGNIE DES INDES.
This was a mere prelude to vaster schemes. There was in existence, at the time, a Guinea company controlling the trade of the eastern coast of Africa (the remnants of an India company established by Colbert), and the rudiments of a company having a monopoly of the Chinese trade. Law combined all these to form his famous “Compagnie des Indes,” deriving his authority from a Royal edict registered on June 17, 1719, of which the following are the most important provisions:
“Since our accession to the throne, we have been sedulous to devise some means of repairing the damage which long wars had brought upon the State, and to procure for our subjects the prosperity and happiness they deserve. It gives us pleasure to see that the circulation of money has become very active and that commerce is reviving, but the end we have in view includes far greater gains. The Compagnie d’Occident, though but recently organized, has already established so high a credit that we have been led to examine the standing of the older companies, and we have been pained to discover that, in spite of the assistance they have received from the liberality of the late King, our honored sovereign and great-grandfather, they have never become self-sustaining. The Compagnie des Indes Orientales, established by virtue of the edict of August, 1664, instead of devoting to the extension of commerce the fifty years’ exclusive privilege conferred upon it, and the frequent donations of money and vessels received from the late King, has contracted large debts at home and in India, has totally abandoned its shipping business, and has determined to transfer its monopoly to individuals, the consideration being ten per cent. of the proceeds of sales in France, five per cent. of all seizures, and the retention by the company of the fifty livres per ton on exports and seventy-five livres per ton on imports which had been granted to it as a gratuity. We are convinced that this failure has been due rather to mismanagement than to the unremunerative nature of the business, and that the company might have made its commerce highly remunerative, both to its shareholders and to the kingdom. The enterprise was established in the first place upon insufficient capital, and a portion even of this the directors paid out in unearned dividends and bonuses.
“The company borrowed money at excessive rates of interest, even as high as ten per cent., and that, too, when there was no profit in it, but simply to replenish its original capital; at other times it borrowed on bottomry bonds at five per cent. per month, so that all the profits of its commerce, and more, were swallowed up in the burdens thus placed upon it. Yet, notwithstanding this unskillful management, the late King, in furtherance of the protection he had already granted to the company, and in the hope that it would at least be able to pay its debts, by his proclamation of September 29, 1714, continued its privileges for a period of ten years, dating from April 1, 1715. But the company has fallen so far short of meeting his reasonable expectations that the inhabitants of India have frequently complained to us of its failure to pay them either interest or principal, and of the fact that during the last sixteen years it has not sent a single vessel to Surat. This branch of our commerce, then, which has been moribund for a number of years, must perish altogether if some adequate provision be not made for it. The individuals who have bought the company’s rights cannot pay it the ten per cent. agreed upon and still compete with foreigners engaged in that branch of commerce; besides, a fear of being held for the company’s debts restrains them from sending their vessels to Surat, the principal city of Mongolia, and the port from which are shipped raw cotton and cotton thread, and the drugs and spices of India and Arabia. The result is that our subjects are compelled to purchase abroad practically all of the Indian products they need, either for their own consumption or for carrying on their commerce with the Guinea coasts and Senegal; that these products cost at least three times as much as they ought, and that we are in all ways deprived of the advantages which would result from a domestic trade in them.
“With regard to the China company, a close corporation which was established by decree of our Council of November 28, 1712, and by letters patent issued in consequence on February 19, 1713, and which has hitherto held part of the concession originally granted the Compagnie des Indes, we are informed that it has made no use of the exclusive privilege conferred upon it, and that its special branch of commerce is in a worse state of confusion and neglect, if possible, than that of the Compagnie des Indes. We should be wanting alike in our duty to ourselves and to our subjects if we were to allow such a state of disorder longer to continue in one of the most important branches of the national commerce; and we hold it due to the well-being of our State that we re-establish and expand the French-India trade and preserve the good name of the State by paying to those peoples the debts contracted by the company. Toward this end, we have decided to annul the privileges conferred upon the India and China companies and to transfer them to the Compagnie d’Occident. The fact that this company has been in existence for some time and is already under our protection, the excellence of its management, the high credit it has established, the fact that the consolidation of these various companies will put it in possession of ample means, all of these considerations lead us to believe that we could not place the commerce of India and China in better hands. Moreover, as the Western and Senegal companies have already been combined, this consolidation will bring under a single company a commerce extending to the four quarters of the globe. The company will have under its control all the instruments necessary for the various branches of this commerce. It will bring into the kingdom an abundance of necessary, useful, and convenient articles, the surplus it will export to foreign countries; it will foster our shipping interests and will develop a body of seamen, pilots, and officers. The whole management being moved by the same spirit, there will result that union of force and economy of outlay on which success in any commercial undertaking depends.”
Thirteen articles annexed to this proclamation constitute the charter of the Compagnie des Indes. It had the sole privilege of trading, to the exclusion of all other French individuals or companies, from the Cape of Good Hope throughout all the seas of Eastern India, the islands of Madagascar, Bourbon, and France, the coasts of Sofala, the Red Sea, Persia, Mongolia, Siam, China, and Japan; from the straits of Magellan and Le Maire throughout all the southern seas. At a valuation to be determined by appraisement within a week after the registering of the edict, the new company came into full proprietorship of all the lands, islands, forts, dwelling-houses, store-houses, goods and chattels, real estate, claims, sources of revenue, ships, barks, munitions of war, provisions, negroes, cattle, articles of merchandise, and all other property and rights which the Compagnie des Indes Orientales and the Compagnie de la Chine had acquired, conquered, or purchased, whether in France or in the Indies and China. The new company was to assume all the valid debts of the old companies and to pay to them such balance as should appear upon the liquidation. It succeeded to all the gratuities of the companies it replaced; it had the privilege of importing all kinds of merchandise, even including such as were otherwise prohibited, on condition that it should place them in a bonded warehouse and re-export them. The privileges granted to the Compagnie des Indes amounted, in fact, to a monopoly of the whole foreign commerce of France.
The Compagnie d’Occident had sold all of its shares for State bills, having no actual and realizable value, and the utmost that could be hoped for from them was the regular payment of the four per cent. interest they bore.
It was imperative that the Compagnie des Indes should have more valuable resources; accordingly, Article IV of the edict incorporating that company fixed its capital at 25,000,000 livres, divided into shares of 500 livres each, to be had only in exchange for actual cash, and only on payment to the cashier of the Compagnie d’Occident of 550 livres for each share. The new shares were to be numbered consecutively after those of the Compagnie d’Occident already in existence, and were to confer upon their holders the same rights and privileges. The old shareholders were given a preference in the subscription for the new shares in the proportion of one of the latter for four of the former. The new shares were to be paid for in five per cent. installments, payable monthly for twenty months. The Parliament distrusted these schemes, which it did not understand, and it refused to register the edict; but its resistance was overcome and everything was arranged as Law had conceived and planned. The preference reserved to the old shares, called by the public “Mothers,” caused them to appreciate rapidly until they had mounted to 130 per cent. The new shares, known as “Daughters,” acquired a proportional premium, and not only was the subscription fully covered, but the shares became the subjects of the wildest speculation, which forced their price ever higher and higher. The company thus formed professedly as a simple trading and carrying corporation, soon deviated widely from its avowed purposes. On July 25, 1719, it purchased for 50,000,000 livres the management of the Mint and the issue of coin for a period of nine years. By a decree of the Council of State rendered on August 27, 1719, the farm of the revenues, which had been granted to Aymard Lambert, ostensible agent of the brothers Paris, was taken from them and given to the Compagnie des Indes until the year 1770. The latter also agreed to loan to the King 1200 million livres (an amount soon afterward raised to 1500 millions) to be used in paying the State debt. It obtained a lease of the salt taxes of Alsace and Franche Comté, and the tobacco monopoly; it undertook to pay the debts of the State for a commission of three per cent. and to collect all taxes paid directly to the Treasury, recompensing the receiving officers for their loss.
The profits expected to accrue from the management of the Mint carried the shares to 1000 livres, a premium of 100 per cent. In order to pay the 50,000,000 livres due for the Mint concession, Law put out another issue of shares known upon the market as “Granddaughters.” They were issued to those who were already stockholders in the proportion of one new to five old shares; they were sold at a premium of 100 per cent.—that is to say, for 1000 livres each—payable in bills of the bank. The shares were very soon quoted at 200 per cent. above par, and the State obligations, which Law was about to meet, rose to par. To raise the 1500 million livres promised to the Government, Law made a new issue of shares at a premium of 1000 per cent., so that the 150,000,000 of nominal capital produced 1,500,000,000 of funds; a supplementary issue of 24,000 shares, of 500 livres each, made on October 4, 1719, brought in 120,000,000 livres more. Taking account of all these issues, M. André Cochut* presents the following table:
M. André Cochut thus estimates the probable profits upon this enormous capital:
This amount divided among the 624,000 shares would have given, losses aside, a dividend of 130 livres per share, or 26 per cent. on the nominal capital; but the average price of the shares had been 2720 livres, reducing the dividend rate to 4.75 per cent., and as the actual holders of the stock had taken it at a price of at least 5000 livres per share, their income upon the actual investment could not be greater than 2.6 per cent. The public appeared to regard the Scotchman as one endowed with magic power, and it did not stop to make this simple calculation. The crowd packed itself against the wickets in the rue Vivienne where the Compagnie des Indes had its offices, and fought for shares. After the stock was issued, the excitement was transferred to the rue Quincampoix, which became the scene of the most extraordinary transactions. Not only was the street crowded with Parisians, but multitudes came from the provinces as well, and finally the very stage-coach tickets became objects of speculation.
As the shares were sold for bills of the Royal Bank, the latter soon rose to a premium of ten per cent., and no one was any longer willing to accept gold or silver. Never before had such a wave of folly swept over France. Everybody was getting rich by speculation. Domestic servants and poor women gained enormous fortunes in a single day; and courtiers, deeply involved by the expenses of their residence at the Court of Louis XIV., won large sums and paid off their debts. Money gained by such easy means produced at least one beneficial result. Commerce and industry, and especially those industries engaged in the production of luxuries, increased with great rapidity; and, singularly enough, speculation in stocks effected a fusion among certain social classes that had previously dwelt apart; there were numerous marriages between poor girls of noble birth and low-born men suddenly enriched.
Before describing the disasters that finally overtook him, justice demands that we render homage to the generous intentions of Law. Inspired by the “Dime Royale” of Vauban, he conceived the idea of abolishing the expense and vexatiousness of the maltôte and establishing a degree of personal liberty which should encourage commerce by lightening the burdens of the people. He wished to substitute a single tax for the complicated system then in force. This was an economic fallacy, but it was one by which even a highly trained intellect might have been deceived. He caused the Compagnie des Indes to return the sums that had been paid for tax exemption. Paying an indemnity to the incumbents, he abolished a multitude of useless offices which had been created in time of need and sold for ready money, and which were a burden upon commerce. He secured a reduction of many taxes and the complete abolition of duties upon a large number of articles. We should add that he supplied necessary funds at low rates of interest to reputable manufacturers and merchants; that he obtained the release of many prisoners for debt; that he secured a reformation of many of the most crying abuses of the Chamber of Justice, and that he set aside a twenty-eighth part of the postal revenues toward the salaries of the professors at the University of Paris.
THE CULMINATION AND DECLINE OF LAW’S SCHEMES.
The enthusiasm continued from June, 1719, to February, 1720. By this latter date, the rise had carried the market value of the capital of the Compagnie des Indes to between 11,000,000,000 and 12,000,000,000 of livres. The profits of all the trade of France would hardly have sufficed to return a reasonable income on so large a capital. Cautious holders saw that it was time to realize their profits, and sales began. The Royal Bank was playing a very modest part in relation to the business of the Compagnie des Indes; its duty was simply to furnish the bills required by stock-dealers, and it had no serious guaranty back of the paper it issued. The depreciation of the shares of the company aroused the fears of bill-holders, and they demanded a redemption of their notes. Law’s economic ability being inferior to his genius as a financier, he suggested to the Regent the most unwise measures for compelling people to prefer the paper of the bank to coin. The only result of these measures was to drive specie into hiding, and the ruin of Law’s enterprises, or of the “System,” as they were collectively called, was assured. The Regent, however, upheld his protégé and made him Comptroller-General of the Finances. From that moment, Law’s whole existence was one continual battle against the depreciation of the shares in his companies. One of the objects of the Compagnie des Indes was the colonization of the Mississippi Valley. As his first colonists, Law sent out prostitutes and thieves from the Paris prisons, having first married them together. Then he seized upon the vagabonds of the kingdom and sent them to Louisiana, fondly supposing that a desirable colonial population could be made up of such elements, reinforced as they were afterward with invalids and professional beggars. Notwithstanding the friendless condition of the classes thus transported, the barbarity with which they were treated was universally condemned, and open riots followed later, when the company’s recruiters undertook to carry off artisans and even young boys and girls of the middle classes. As nearly all of the women sent out to Louisiana soon died, some of the men married native women and established families in the colony. While neither Law nor the Government ever made known the truth as to the result of the colonization scheme they had attempted to carry out in this remarkable fashion, the facts were finally exposed, and that was the end of the undertaking.
Beginning with the month of March, the bills of the Royal Bank, though they were regularly redeemed, lost thirty, forty, and fifty per cent. of their value, and in some cases were even refused altogether. Law debased the currency, forbade any individual to have in his possession more than 500 livres of gold or silver, either coin or bullion, and finally, on March 11th, an order was issued abolishing the use of coin altogether on and after May 1, 1720.
THE KING COMES TO LAW’S RESCUE.
Recourse was had once more to paid informers, to secret accusations, to domiciliary visits, in short, to all the worst practices of the so-called Chamber of Justice. The bank secured some help, but its credit was entirely gone. Dealing in stocks was held answerable for all these evils, and was forbidden; but the prohibition could not be made effective, because there was no way for preventing secret dealings. Finally, on May 21st, an edict was issued in these terms:
“The King, in his Council of State, having caused an examination to be made into the position to which his kingdom was reduced before the establishment of the bank, in order to compare it with the present situation, his Majesty has become convinced that the high rates of money have caused more damage to his realm than all the outlays the late King was compelled to make in order to carry on his various wars; avarice having impelled the lender to demand a greater interest per month than he could legally have charged for a year. This usury had impoverished the kingdom to such an extent that even his Majesty’s revenues could not be collected except by multiplying the penalties against delinquent tax-payers; prices of products barely sufficed to pay the costs of production and the taxes, leaving no surplus for the land-owner. This general state of poverty had compelled part of the nobility to sell their lands at a sacrifice, in order to maintain themselves in his Majesty’s service; and others of the nobility saw their property taken from them by force of law. The bounty of the King became their sole resource, and his Majesty was not in a position to extend such bounty, or even to pay the salaries of his officers and the pensions that had been granted as a reward for distinguished services. Manufactures, commerce, and navigation had almost perished. The merchant was reduced to bankruptcy and the laborer was compelled to abandon the land of his birth and seek service among strangers. Such was the condition to which King, nobility, merchant, and people had been reduced, while the money-lender alone was prosperous; and the whole kingdom would probably have fallen into a state of general disorder had not his Majesty applied prompt remedies to these evils.
“By the establishment of the bank and the Compagnie des Indes the King restored things to their normal state; in the increased value of its lands the nobility found means of paying its debts; manufactures, commerce, and navigation took on new life; the lands are cultivated and the laborer is busy. But in spite of the very evident amelioration which these establishments have brought about, some persons have been so evil-disposed as to attempt their destruction, thus compelling his Majesty to issue his edict of March 5th last intending by a debasement of the coinage to uphold the credit of establishments so useful and so necessary. By this edict, his Majesty reduced the different classes of paper of the Compagnie des Indes to one class and ordered that the shares should be convertible into bills of the bank, and bills into shares, at the valuation which then appeared most just according to their relative value in coin. This debasement of the currency and the great favor in which the stock was held furnished debtors with ample means for the payment of their debts. It remained for his Majesty to provide for the investment of those sums which are to be repaid to minors, hospitals, commonalties, and other privileged creditors, and at the same time to re-establish the value of the currency, fixing it at such a rate as should be most conducive to foreign commerce and the sale of our products. All these objects his Majesty has provided for by vatious edicts, and especially by his proclamation of March 11th last, ordaining a reduction in the value of the coinage.
“But, inasmuch as these reductions will necessarily be followed by a decrease in the value not only of all products and personal property, but also in that of lands and all property savoring of the realty, his Majesty has believed that the widest interests of his subjects demanded a reduction also in the price or money value of the shares of the Compagnie des Indes and the bills of the bank, the objects of this reduction being that these shares and bills may stand in their proper relation to specie and other things of value in the kingdom; that the disproportionate value of specie may not become a menace to the public credit; that privileged creditors may be enabled to employ profitably the payments to be made to them, and finally, that our subjects may not be placed at a disadvantage in foreign commerce. And his Majesty has determined upon this reduction the more willingly because it will redound to the advantage even of those who hold shares of the Compagnie des Indes or bills of the bank; holders of these shares will receive dividends at a higher rate and the shares themselves will be convertible into a greater amount of money or of uncoined silver after the reduction than at present.
“Wherefore, the report of Sieur Law having been heard, his Majesty has ordained,” etc.
We have thought it well to reproduce this preamble in spite of its length, because it shows to how great an extent Law was disturbed by the depreciation of the shares of the Compagnie des Indes and the discredit into which the paper of the bank had fallen.
MEASURES TO STAY THE COLLAPSE.
The measures decreed by that edict consisted in a reduction of the value of shares of the Compagnie des Indes to 8000 livres on the day of its publication, 7500 on July 1st, and so on down to 5000 livres on December 1st, and in an adjustment of the value of the bank bills, in the same manner. The bills, however, were to be received at their face value until the end of the year in payment of taxes and in the purchase of life annuities. Bills of exchange and other commercial debts were to be paid in bank bills at their actual value on the due dates.
Immediately upon the promulgation of this unfortunate decree, prices of all commodities began to rise so rapidly as to create serious alarm. The uppermost thought in every man’s mind was to save some remnants of his fortune. Public clamor against the decree of the 21st was so great that it was revoked on the 27th, and Law was compelled to resign his office of Superintendent of Finance. Still the Regent did not desert him. He furnished a bodyguard to protect him against the rage of the populace and continued to follow his advice. Meanwhile, the people besieged the offices of the Royal Bank, demanding cash for their bills. The bank resorted to the most barefaced subterfuges to escape prompt payment. It redeemed large bills with small; and, in redeeming the small bills with specie, it counted out the money very slowly, and paid in coins of a less denomination than ten livres. The rue Vivienne was constantly filled with a struggling mass of men, and every day some were killed and others wounded. Finally, the public patience was exhausted and stones were thrown at the windows of the bank; then the soldiers fired upon the crowd and several were killed; the people placed the corpses upon litters and paraded the streets of Paris, crying aloud for vengeance. The crowd met Law in his carriage, recognized him, heaped insults upon him, and tore his carriage to pieces.
Provisions continued to grow dearer as the bills of the bank depreciated, and when the exasperation of the public had reached its height, new financial measures, such as canceling of bank bills, creation of life annuities, and the like, followed one another with great rapidity. Finally, on October 10, 1720, a decree was issued giving to holders of the yet outstanding bills an option to invest them in two per cent. perpetual rentes, in four per cent. life annuities, or in shares of a new India company. According to data furnished by this decree, the bank had issued between January 5, 1719, and May 1, 1720—
According to the same authority, the face value of the bills destroyed had aggregated 707,327,460 livres, but the itemized statement does not agree with this total; assuming, however, that the total was correct, the bills remaining in circulation amounted to 1,989,072,540 livres, to which should be added a subsequent issue of 50,000,000 livres. The Bank of France had been in existence seventy years before it had in circulation bills to this amount. When it had been decided that the bills of the Royal Bank were soon to go out of circulation, merchants refused to accept them except at a discount of seventy-five or eighty per cent.; the Government interfered and many persons were condemned as forestallers; but violent measures are no cure for public destitution.
LAW’S FLIGHT AND END.
Law, being held accountable for all these misfortunes, found his liberty, and even his life, in danger, and determined to flee the country. He took refuge in Brussels, where he was well received; thence he went into Italy, taking up his abode in Venice, and seeking his livelihood at the gaming-table. He died, poor, in 1729, leaving only a few pictures and a ring worth 10,000 crowns, which he had been in the habit of pawning whenever luck at play went against him. Looking at him from this distance of time, we can see that Law had no systematic theory of finance. He was a man fertile in expedients, who often advocated wise methods, but always spoiled them in the execution. There can be no question of his honesty and good faith; the best evidence of these is the condition of comparative poverty in which he lived and died after leaving France. But his influence was to the last degree disastrous, and was thoroughly demoralizing to all classes of society. A certain Count Hoorn, of illustrious birth, robbed and murdered an unfortunate courtier named Lacroix, and expiated his crime upon the wheel; murders became far more numerous in Paris; people had acquired a habit of winning money without work; desires born of stock-jobbing did not die with it, and many turned to theft and to murder as a source of income. The very name of bank became so unpopular that seventy-nine years later it required all the authority of General Bonaparte, then First Consul, to make the name acceptable as the title of a credit establishment.
LIQUIDATION OF THE “SYSTEM.”
The people of Paris, always inclined to raillery, had a song which sums up with reasonable accuracy the history of Law’s enterprises, and may be thus roughly rendered:
The liquidation of such a conglomeration of affairs presented considerable difficulties. The “System” was condemned in its entirety; the tax farmers resumed the collection of the revenues; the tolls and town dues which Law had abolished were reimposed, notwithstanding that these reforms, as well as his abolition of useless offices, had proved very beneficial to the commerce of the country.
THE “BROTHERS PARIS” GATHER UP THE WRECK.
The brothers Paris, though without official authority, were the prime movers in all matters connected with the settlement, and all their suggestions were made in the most malignant spirit. Though the Compagnie des Indes had simply obeyed the orders of the Government, its shareholders were made liable for all its undertakings and even for the bills it had issued. Thus the whole population of France was involved, except those who were absolutely destitute, because every family held some of the company’s shares, acquired either in the way of speculation or in exchange for the Government’s own bills. The brothers Paris superintended a general revision of the State’s obligations, and all of them except the rentes were scaled down in proportions varying between one-sixth and nineteen-twentieths of their face value. The revision was rapidly carried on and was completed in June, 1722, but the liquidation was not finished until September, 1728. The funds to which the process of revision was applied amounted to 3,122,236,436 livres, and this was reduced to about 1,700,000,000 livres. This sum, converted into perpetual two per cent. rentes and four per cent. life annuities, made an interest charge of about 31,000,000 livres on the former, and about 16,000,000 on the latter; in all, a charge of 47,000,000 livres on the revenues. Fifty-six thousand shares of the Compagnie des Indes were left intact, and by a decree of March 22, 1723, the company was reorganized as a private corporation, with a monopoly of various commercial enterprises. After undergoing several other reorganizations, in the course of the eighteenth century, it was finally abolished altogether in 1793. Before that time several of its ships, insured in English companies, had been wrecked, but the insurance, amounting to about 400,000 francs, was not paid until after the fall of Napoleon. When payment was made, the money, at the request of certain persons interested in the old Compagnie des Indes, was turned over to the Bank of France. There it remained for a number of years, together with the books and papers of the company. Finally, the Bank made an effort to get rid of the money and the archives. The Tribunal of the Seine appointed a liquidator; he succeeded in finding some families having interests in the old Compagnie des Indes, but some money yet remained, the title to which was not established, and this was turned over to the deposit and consignment office to await an owner. As to the Royal Bank, it disappeared and left no trace.
A considerable burden had already been laid upon those who were called the newly enriched. They were once more heavily assessed, the demand this time being in the form of a per capita levy; and this they avoided, as far as possible, by marrying impecunious daughters of the nobility, and securing from the King, by virtue of this alliance, entire or partial immunity from the new assessment. The general poverty was more severe at this time than it had been at the death of Louis XIV., and the period has left in the memory of the French people a lasting impression of dread.
AN IMPARTIAL ESTIMATE OF LAW.
Yet, again it may be repeated, all was not bad in the work of Law. One historian of his “System,” M. André Cochut, whom we have already had occasion to quote, sums up his estimate of the man and his schemes in these words: “Was the transit of the Scotch adventurer a benefit or an injury to France? To this question we can return no positive and unqualified answer. A movement so complex, an upheaval so thorough, and phenomena so extraordinary, produce upon us the most contradictory impressions. Our opinions vary with our point of view. If some individuals were crushed beneath the wreck, it is incontestable that the thorough agitation of productive wealth tended toward the enrichment of the people. Nearly all debtors, and especially mortgage-burdened owners of the soil, were enabled to pay off their debts. Many ancient estates were preserved from impending ruin and many new buildings were erected. Farming lands received permanent improvements; industry, unduly stimulated, built new factories; and a precedent in maritime ventures was established by the Compagnie des Indes. How is it that results so beneficial came out of such a woful calamity? The explanation is that Law’s conception, in spite of inherent faults, which rendered its success impossible, in spite of his own blind rashness and serious shortcomings, which made his fall so sudden and so violent, stamped its author, nevertheless, as a man of remarkable inventive genius, and as having a distinct perception of the three most prolific, and previously most neglected, of all the elements of national grandeur—maritime commerce, credit, and the spirit of association.”
In all candor, history must award to the men of those times their due share of blame for the calamitous failure of Law’s schemes. His main purposes, temperately pursued, would have greatly promoted the wealth and power of France. But their remarkably prompt success was responded to by a craze of speculation, in which Law seems to have taken little part, but which whelmed in ruin enterprises largely legitimate and highly profitable. For that, Law’s contemporaries, certainly as much as himself, if not more, must be held responsible. This is not the first instance in which the bold and beneficent plans of men of genius have been defeated through the excesses of speculations for which the schemes were not properly responsible.
[* ] This practice of calling him Lass arose from the fact that people in France spoke continually of Law’s System, which finally became corrupted into Lass System.
[* ] “Law, Son Système et Son Époque.”