Your Royal Highness will have no difficulty in reaping success from what I have the honour of proposing, the best actor is not the one with the largest role, but the one who acts the best. I know my strengths and I love pleasure too much to occupy myself in affairs that I do not understand in depth. My ideas are simple, the principles on which I have worked them out are true, and the conclusions I draw from them are correct.
Letter from John Law to the Regent,
AT THE BANQUE GÉNÉRALE THE MASSIVE DOUBLE DOORS to the rue St. Avoye stood open. Inside, a handful of clients conversed idly in the vestibule before drifting toward the grande salle to conduct their business. It was late summer 1716 and, as usual, the bank was quiet.
Later that morning a carriage arrived that was far from ordinary or expected. A few customers glimpsed it slowing to turn into the narrow, arched entrance to the street. They must have recognized the livery of the coachman and the servants inside as that of the Duc d’Orléans. The servants got out carrying metal-bound coffers, which they took into the bank and placed on the counter. Then an equerry stepped forward to unlock them. Inside each chest was a mass of gold louis d’or and silver écus, which the regent wished to entrust to the bank. The total value was a million livres.
The bank’s other customers were transfixed. For the regent to invest such a sum in a bank that was at present the subject of mockery in many quarters was astonishing and significant. They did not know that the regent and the bank’s director John Law had contrived that the deposit be made as conspicuously as possible: public awe was precisely the effect for which they strove. It would boost confidence in the ailing bank and its paper banknotes.
The ploy worked. Within days the press had reported that the regent had such faith in John Law’s new bank that he had deposited a million livres in its vaults. The previously hostile Gazette de la Régence, which had predicted “[Law’s] bank will not succeed” and “no one talks of Mr. Law’s bank except to joke about it,” now remarked on “an order the other day from the mint to send a million to M. Law’s bank, that the Regent supports and is really his bank under the name of this Englishman. Everyone believes that it will hold up because royal funds are going in to it.” Royal patronage, as John Law was only too aware, was the most potent of marketing tools.
Yet after Louis XIV’s death, Law had been disappointed by the protracted process of establishing his bank. On his accession as regent, Orléans had dismissed Desmarets and, in line with his new system of government by aristocratic councils, made the Duc de Noailles head of the finance council. Noailles was energetic, shrewd, and ambitious but indecisive and innately distrustful of anyone who might threaten his position. Louis de Rouvray Saint-Simon, a French writer, courtier, member of the Regency Council, and friend of the regent, whose forty-one volumes of memoirs provide a fascinating insight into the key personalities and events of the time, observed that “in spite of his intellect, the multitude and mobility of his ideas and views, which successively chased each other off either wholly or in part, made him incapable of concluding any work of his own; neither was he ever satisfied with work done for him.” He was a hard and insidious taskmaster, and when the regent introduced Law as someone whose ideas were worth considering, Noailles was instantly suspicious. He nodded and muttered superficial encouragements but inwardly viewed Law as “an intruder put by the hand of the Regent into their administration” and hence, according to Saint-Simon, “long bandied [him] from pillar to post.”
Noailles found France’s financial crisis far worse than anyone had imagined. The country’s debts, estimated at over 2 billion livres, incurred interest repayments of 90 million; the tax system that should have covered the repayments of interest on the debt was so staggeringly inefficient and riven with corruption that the income was swallowed up three or four years in advance. Having studied the books, Noailles summed up the monetary morass: “We found the estate of our Crown given up, the revenues of the state practically annihilated by an infinity of charges and settlements, ordinary taxation eaten up in advance, arrears of all kinds accumulated through the years, a multitude of notes, ordinances, and allocations anticipated of so many different kinds which mount up to such considerable sums that one can hardly calculate them.”
Some advisers suggested that France should simply declare herself bankrupt and start again. Law convinced Orléans that to do so would pitch the country into even worse distress. He had a better way. In October, bubbling with enthusiasm, he proffered his newest proposal to the regent: a plan for a state bank administered in the king’s name that would handle all revenues and issue paper money backed by coins. “The convenience will be such that everyone will be charmed to have these bank bills rather than money, because of the facility of making payments in paper, and the certainty of receiving the value whenever they wish.”
While Orléans pondered the scheme, Law lobbied the regent’s closest advisers for support. A brave few murmured wary encouragement, among them the Duc d’Antin, who said he was “struck by his ideas, they appeared to merit a most detailed attention.” At the end of the month the scheme was formally put to the council and a panel of thirteen of Paris’s most illustrious bankers and financiers. But still Law’s star failed to rise. Members of the business community remained scornful and distrustful, their criticisms concealing their underlying concern that if a state bank was allowed to open its doors, it would be at great cost to them. Nine of the thirteen voted against it. Noailles, defensive and resentful of Law’s effortless influence with the regent, also thwarted him. As Law waited, naïvely expecting to be told to proceed, his betrayal took place behind the closed doors of the council chamber.
Confronted by the massed hostility of the business community as well as his own advisers, Orléans concluded, regretfully, that he could not afford to back such a controversial scheme and risk upsetting so many at this delicate early stage of his regency. For the time being the scheme would have to be sacrificed. He made his closing pronouncement ceremoniously. “He had come there persuaded that the bank ought to be established; but, after the opinions he had just heard, he agreed wholly with that of M. le duc de Noailles; and it would be announced to everyone that same day that the bank would not be carried out.”
Law’s prickly response to the regent’s abandonment hid profound disillusionment. Banks were by now accepted in every prosperous country. How could anyone question their usefulness? he raged. The regent, all too well aware of the truth of this, and probably lamenting his volte-face even as he made it, dreaded that Law might return to his wandering, gambling life, or worse still, take his expertise elsewhere. While Law brooded in his Paris mansion, the regent ordered Noailles to pacify him. Law said later that Noailles made a few vague promises on the regent’s behalf, and that “I could still be useful to the state, and he hoped that this rejection would not make me want to leave France, that he wished to make my stay a pleasant one in every way he could, and that it was even the opinion of the council that he should engage me to stay, being able to be useful with the knowledge that I have.” Still bristling, Law retorted, “I have need of nothing having enough to live with ease, that my intention in proposing to serve His Royal Highness was to make myself useful to the state and not augment my own good. The truth of this was obvious by the nature of my proposition.” But as the regent had hoped, Law simmered down, secretly flattered by all the attention. “I would not have even thought of making a second proposition if he had not pressed me to do so,” he later wrote, with manifest self-righteousness.
In fact, the fire burning in Law was unlikely ever to have been extinguished by the rejection of a single council: he had been dreaming for far too long to give up. Yet again, he told himself, it was merely a matter of modifying his ideas, and waiting. If the regent was uneasy with the idea of a state bank, Law reasoned now that the answer must lie in a private scheme.
The revised plan that emerged was for a privately run bank, similar to the Bank of England, issuing banknotes and financed by shareholders. Throughout a winter so cold that, according to the Princess Palatine, the regent’s mother, even the sea at Calais froze, Law briefed Orléans with renewed enthusiasm in conferences held at the Palais Royal and at Marly. In December he equated the introduction of credit with the discovery of the Indies, remarking that “if Spain had ceded the Indies [he meant the Spanish Americas] to the English, they would not have profited as much from them as they have from the use of credit . . . My banking project . . . will not bring the least prejudice to the King nor to the people; it is the quickest, safest and most harmless method of restoring the good faith and confidence of commerce; it is the true foundation of power in a state and the way by which one must begin to establish order.” When Law talked like this, money became the stuff of dreams, a magical cure-all, the embodiment of universal happiness rather than of sordid temptation. Orléans was captivated.
While the regent and Law were closeted together, it was left to Noailles to initiate more painful methods of improving the country’s finances. A year earlier, he had instigated the Visa, a drastic form of financial surgery, by which large swaths of royal debt were amputated. Long-term debt, which had largely financed Louis’s wars, mostly took the form of annuity bonds sold by Paris’s city government, the Hôtel de Ville, to financiers and other private investors. The bonds paid a set interest rate that was covered traditionally by an agreed source of government revenue. One of Noailles’s money-saving measures was to reduce the interest on bonds from 7 percent to 4 percent. He also converted the various forms of short-term debt into billets d’états, state notes worth only two-thirds of their former value. He cut salaries and pensions, and revalued the coinage at 50 percent of its previous worth.
In systems of currency based on the value of gold and silver, especially in France, adjusting the value of the coinage was a frequent royal scam. The French monetary system was based on the livre tournois, a unit of account (like the pound sterling in England) used to express prices, contracts, and wages, for which there was no single coin, and against which the value of gold and silver coins could be adjusted. French coins included the gold louis d’or and the silver écu, equivalent in England to the gold guinea and the silver shilling. In this case, Noailles raised the value of the louis d’or, stating that its value would increase from fourteen to twenty livres (and the écu from three livres ten sous to five livres), thus effectively devaluing the livre. This was an inflationary measure that would cause prices to rise, even though it reduced the value of the state’s debt by diminishing the amount of coins needed to repay it. Revaluations worked by demanding that the public bring all their coins to the mint either for endorsement with a new stamp, representing the increased value, or by reminting lighter coins with a higher valuation against the livre. In both cases the state appropriated part of the bullion in the process of stamping or reminting it, but concealed it against the adjustments in value. The public, well aware that the Crown was profiting from such transactions, was understandably reluctant to hand over coins and see them altered in this manner, hence the tendency to hoard them, adulterate them, or smuggle them abroad and sell them as bullion.
Noailles’s measures made the balance sheet look better but plunged the nation into further financial distress. By encouraging people to send coins abroad, they worsened the shortage; by reducing interest payments and the value of government securities, they forced people to sell to maintain a level of income and the market price plummeted 80 percent. Businesses already foundering from a shortage of money fell deeper into debt and shopkeepers closed their doors—how could they agree to buy or sell something when they were unsure from one day to the next what the livre would be worth? Hundreds were bankrupted, which led in turn to mass unemployment. Many had no option but to turn to crime. The Gazette de la Régence recorded the climate of wretchedness: “It is not possible to express the misery of the provinces. The countryside is full of robbers; we dare not go out of the towns for fear of robberies which happen every night . . . nowhere else is there a country like it, and if the King does not pay we run the risk of a revolt. There are several officers who went charitably to dinner with some capuchins and even the capuchins made a collection for them. It is utter desolation.” Not only was the entire country foundering in an economic abyss, the very fabric of society was threatened.
Then Noailles instigated his most drastic remedy yet. In March 1716, a so-called Chamber of Justice was charged to investigate and call to account the financiers, tax collectors, and other officials who, it was felt, had profited unlawfully and on a vast scale from France’s economic distress. To assist the courts in their quest, people were tempted to inform with the bait of a fifth of any recovered money or property. Treachery ensued on an unparalleled scale. Disgruntled servants betrayed their employers, wives and mistresses whispered of their lovers’ financial misdemeanors, children cited their parents’ transgressions, and fearful of being reported, anyone who had coins hoarded them, unwittingly worsening the monetary shortage. People who panicked and tried to flee the country found that innkeepers and postmasters had been ordered to refuse horses to anyone they suspected of evading justice. Some turned back, admitted their crime, and relinquished properties or large sums of money to avoid the rack or the pillory. Others committed suicide rather than subject themselves to the horrors of investigation.
The Chamber of Justice was installed, somewhat inappropriately, in the convent of the Grands Augustins, and a sinister torture chamber was set up next door. Many successfully bribed their way out of trouble, some courtiers and the regent’s mistress, La Parabère, profiting vastly as a consequence. One tax collector, fined 12 million livres, was approached by a courtier and offered a reduction if he was paid a douceur of 100,000 livres. “You are too late, my friend,” the financier is said to have responded. “I have already made a deal with your wife for fifty thousand.”
For the unfortunates who could not escape, the procedure often appeared to have been as terrifying as feared. The financier Samuel Bernard, one of Law’s most vociferous opponents, offered some 6 million livres but was still sentenced to death. The profiteers La Normande and Monsieur Gruet were heavily fined, and sentenced to “make amends” by parading in front of Notre Dame and Les Halles, La Normande wearing a shirt and a placard reading “voleur du peuple” (fraudster of the public), before being condemned to spend the rest of their lives on the galleys. La Normande was eventually spared the final punishment, and most reports were merely propaganda exercises to pin the blame on the unpopular financiers, many of whom acted only as middlemen for the court elite. Nevertheless, fear of the Chamber of Justice was all too real.
Among the frightening panoply of French punishments—being broken on the wheel, hanged, racked, whipped, and pilloried—life on the galleys was among the most horrific. The condemned were chained, naked to the waist, in rows of half a dozen at each oar, while their supervisors strode on platforms above and whipped them to make them row harder for ten or twelve hours at a stretch. Hundreds died in excruciating agony at the oar, to be flung overboard like so much rotten meat. Like many forms of punishment, the galleys were regarded as an entertaining tourist attraction: the slaves were made to dance, sing, and row for the delectation of the crowd. The diarist John Evelyn was among the travelers who saw them in the seventeenth century. He recorded, “Their rising forwards and falling back at their oars, is a miserable spectacle, and the noise of their chains with the roaring of the beaten waters has something strange and fearful in it, to one unaccustomed. They are ruled and chastised with a bull’s pizzle dried upon their backs and soles of their feet upon the least disorder, and without the least humanity.”
Against such a backdrop of horror Law’s scheme seemed suddenly to offer painless salvation. By spring the stage was set: his new proposal laid out plans for a private bank, funded by himself and other willing investors, which would issue notes backed by deposits of gold and silver coins and redeemable at all times in coins equivalent to the value of the coin at the time of the notes’ issue, “which could not be subject to any variation.” Thus, Law pledged, his notes would be more secure than metal money, a hedge against currency vacillations, and therefore a help to commerce. Moreover, paper notes would increase the amount of circulating money and trade would be boosted. In short, he vowed, his bank would offer hope and the promise of a better future.
The regent listened avidly. Harried with other concerns of state, exhausted by all-night excess, exasperated with interminable financial dilemmas and Noailles’s ineffectual, unpopular remedies, he wanted a speedy, effective answer. Law now had his unstinting support. Before the meeting at which the new proposal was due to be presented to the council, the regent spoke to each member individually to make his wishes clear. Conscious of the menacing Chamber of Justice, almost all fell into line. A solitary exception was the Duc de Saint-Simon, who dared to speak out against Law’s scheme. He knew little of finance but was sharp and honest enough to point out two main pitfalls: “First to govern the bank with enough foresight and wisdom not to make more bills than they ought ...; second, that what was excellent in a republic . . . became dangerous in an absolute monarchy like that of France, where the necessities of war ill-undertaken and ill-sustained, the rapacity of ministers, favourites, mistresses, the luxury, extravagant expenditure, and prodigality of a king might soon exhaust a bank, ruin the holders of bills, and overthrow the kingdom.” The objection, in other words, was the same as that voiced by Bernard in Louis XIV’s day: since the king was above the law, in difficult times there was no guarantee that the bank would not be abused.
Orléans fobbed him off with woolly reassurances, although neither he nor Law had any real answers to this flaw. The bank was to be unregulated and answerable only to Law and his shareholders. Anything could happen.
In May 1716, Law, having adopted French nationality as required, was finally granted a charter for his Banque Générale for a term of twenty years. But even with its seal of official approval it failed to generate much interest. Its stock consisted of 1,200 shares each valued at 5,000 livres ($400). Its capital should have been 6 million livres (or $480,000) sterling, but it was far less: only a quarter of the shares were taken up, and these transactions were not straightforward. Investors could pay three-quarters of the cost of shares in billets d’états, the unpopular government securities that were currently worth 60 percent less than their face value. In real terms the bank’s working capital was thus little more than 800,000 livres.
Public suspicion shone through the lackluster response. Law was still branded a dubious foreigner, a gambler, and, some said, a charlatan. Few trusted him, let alone his paper money. The establishment, who had been the chief investors in the painful disaster of the annuity bonds and billets, remembered the experience ruefully. To the wider French populace banks of issue were mysterious institutions, and the press compounded their entrenched misgivings, deriding the Banque Générale as “a vision . . . one can only laugh at it, no one believes it will last.” Undercapitalized, ridiculed, and distrusted, Law’s bank battled for its existence.
To save it Law resorted to both subtle and headline-grabbing tactics. His goal was first to ensure that the regent’s trust in him was unwavering, second to make his notes and his bank so attractive and powerful that only the foolish or destitute would ignore them. He began by allying himself to the regent’s most trusted friend, Saint-Simon. Once a week Law visited Saint-Simon to let him know how business was progressing. This, he hoped, would gain him credibility, as well as useful snippets of inside information. But Saint-Simon was no fool: “I soon knew that if Law desired these regular interviews it was not that he expected to make me an able financier; but as a man of intelligence, and he had plenty of it, he wanted access to a servitor of the Regent who was more than all others truly in his confidence.” But exposed to Law’s mesmeric charm even Saint-Simon capitulated: “We soon began to talk with a confidence which I never had reason to regret.”
At the bank’s offices Law adopted a more straightforward approach to boost business. Rather like the incentives dangled before students today by Wall Street banks, he offered a tempting range of free or inexpensive banking services. At the Banque Générale, he proclaimed, you could transfer money from Paris to the provinces, discount bills, and exchange foreign currency for little or no charge. Even the hostile Gazette de la Régence was beguiled when one of the author’s friends with 1,800 livres to transfer from Marseille to Paris paid a visit to Monsieur Law’s office. Here, according to the report in the Gazette, a Swiss footman, magnificently uniformed in green, introduced him to the bank’s officials. They told him that if someone in Marseille handed his coins to the local director of the mint he would be given the 1,800 livres at the bank in Paris. There would be no charge for a transaction of this small size.
The regent helped by making his well-publicized deposits and ensured that everyone knew he was using the bank for foreign transactions. Foreigners followed his lead, and at last found somewhere in Paris to discount their bills of exchange with ease and at reasonable prices. The influx of foreign currency alleviated the shortage of coins, and, with the slow trickle of banknotes Law printed and issued to depositors, boosted the money supply sufficiently for commerce to begin to pick up. Traders liked the banknotes because the guarantee of being paid in coin of fixed value meant that they knew exactly what something would cost or what price they would receive. The notes began to command a premium, like those issued by the Bank of Amsterdam.
The small shoots of recovery were nurtured by the regent’s continuing sponsorship of the bank. In October 1716 he ordered tax collectors to remit payments to the Treasury in Law’s banknotes. A few months later another edict declared that the public could pay their taxes in notes. Eighteen months after opening there were profits enough to pay shareholders a six-monthly dividend of 7 percent, and Law’s inconspicuous white notes, engraved with the legend “The bank promises to pay the bearer at sight, the sum of—livres, in coin of the weight and standard of this day, value received,” were circulating throughout France and had begun to effect the revival he had promised.
But profit brought obstacles as well as dividends. Law was damaging the business of the private bankers of Paris: his offer of cut-rate services to the public encroached on business they regarded as their domain. According to some accounts, mounting resentment inspired a group of anonymous opponents to combine their resources with the express intention of bringing him down. When their hoard reached 5 million livres in notes, they presented them at the bank for immediate payment. Law knew that his promise to “pay on demand” underpinned the public’s confidence, on which every bank depends. Without it the dream would crumble. He also knew that the bank reserves did not contain 5 million livres’ worth of coins.