III. BOOM AND CRASH: 1716–20

His first task was to restore financial order and stability to the state. He inherited a bankrupt government, with a debt of 2,400,000,000 livres; to which was added a floating debt of 590 million livres in the form of billets d’état—royal promissory notes circulating in the nation, and now worth hardly a third of their face value. The net receipts of the government for 1715 were 69 million livres; its expenses, 147 million. Most of the revenue expected in 1716 had been spent in advance.17

Saint-Simon advised a flat declaration of bankruptcy. Duc Adrien Maurice de Noailles protested. The Regent compromised with some intermediate measures of economy and reform. The army was reduced to 25,000 men; discharged soldiers were exempted from taxes for six years; those with eight children were permanently exempt. The taille, the gabelle, the capitation, and other taxes were reduced; abuses in their collection were denounced, and some were remedied. Hundreds of dispensable governmental officeholders were dismissed—2,400 in Paris alone. A Chambre de Justice was established (March, 1716) before which all those financiers, merchants, munitions manufacturers, and others were summoned on suspicion of having defrauded the government. Here Noailles, accustomed to military measures, instituted a veritable terror; those who would reveal their fellow defaulters were promised lenience; informers were promised a fifth of all funds recovered by their help; the penalty of death was decreed against interference with informers; confiscation of property and condemnation to the galleys for life were prescribed for those who gave false testimony about their finances. Some convicted persons were hanged; some were put into pillories before a rejoicing populace; a few financiers, hopeless of clearing themselves, committed suicide. The results were not commensurate with the methods. Most of the guilty bought exemption from examination or conviction by bribing the officials of the Chamber, or the friends of the Regent, or his mistresses. Corruption ran to the point where, instead of the guilty offering bribes, the courtiers solicited them. A financier having been fined 1,200,000 livres, a courtier promised to have the fine forgiven for a fee of 300,000 livres. “My dear Count,” said the financier, “you come too late; I have just concluded a similar arrangement with your wife for half that sum.”18 The edict that dissolved the Chambre de Justice (March, 1717) declared, with a candor rare in governments, that “corruption was so widely spread that almost all classes were infected with it, so that just punishments could not be laid upon so great a number of guilty persons without dangerously disturbing commerce, public order, and the state.” The net profit to the government, when the inquisition was ended, was some seventy million francs.19

Disappointed with these results, the Regent gave ear to a remarkable Scot who offered him a new system of finance. John Law, born to an Edinburgh banker in 1671, studied banking in London, saw the opening of the Bank of England in 1694, fought a duel over a love affair, killed his rival, and fled to the Continent with a death sentence on his head. He was handsome, affable, mathematical; he speculated successfully in foreign exchange, and his capacity for calculating and remembering the combinations of cards helped him to butter his bread in divers lands. He watched the working of the banks at Amsterdam, Hamburg, Venice, and Genoa. In Amsterdam especially he felt the magic of the credit system, by which a bank issued paper money to many times the gold value of its reserves, putting ten gulden to work on the security of one, and so stimulating, facilitating, and multiplying industrial and commerical activities; and there he saw how, with a bank that businessmen could trust, transactions might be effected by a mere shifting of bank balances, without the nuisance of carrying or exchanging silver or gold. He wondered why such a national bank and credit system could not be established in France. He conceived what was later called his Système.

His central conception was to increase the employment of men and materials by issuing paper money, on the credit of the state, to twice the value of the national reserves in silver, gold, and land; and by lowering the rate of interest, so encouraging businessmen to borrow money for new enterprises and methods in industry and commerce. In this way money would create business, business would increase employment and production, the national revenues and reserves would rise, more money could be issued, and the beneficent spiral would expand. If the public, instead of hoarding the precious metals, could be induced, by interest payments, to deposit its savings in a national bank, these savings could be added to the reserves, and additional currency could be issued; idle money would be put to work, and the prosperity of the country would be advanced.

In 1708 Law expounded his ideas to the French government; Louis XIV rejected them. When Philippe d’Orléans became regent, Law proposed to redeem with his System the bankrupt finances of France. He inquired why it was that only France, Spain, and Portugal, among the leading states of Europe, were still without national banks, and why it was that France, with a soil so fruitful and men so clever, was nevertheless lying prostrate in economic stagnation. Philippe agreed to let him establish, as a private venture, a Banque Générale (1716). It accepted deposits, paid interest, made loans, and issued bank notes—for ten, a hundred, and a thousand francs—whose steady value, tied to a fixed weight of silver, soon made them a preferred medium of exchange. These notes constituted the first regular paper money, and Law’s bank, with its provincial branches, set up the first organized credit system in France. In April, 1717, the notes of the bank were made receivable for taxes.

In September Law advanced to a more adventurous stage of his ideas. He secured from the Regent a concession to a new Compagnie d’Occident for the exploitation of the whole Mississippi basin, then under French control. He sold to the public 200,000 shares in this Company of the West at 500 livres per share; it was a high price, but three quarters of the payment could be made in billets d’état—government notes—at their face value, which was thrice their actual worth. Glad of this opportunity to exchange depreciated paper for shares in a profit-promising enterprise, the public soon took up all the shares. With swelling optimism Law instructed his bank to buy the royal tobacco monopoly, and all French companies handling foreign trade; these he combined with the Compagnie d’Occident in a Compagnie des Indes, which was to monopolize all foreign commerce. A socialism of external trade seemed to some businessmen to presage a socialism of internal production and distribution; opposition to Law began to form.

On December 4, 1718, Law’s bank was reconstituted as the Banque Royale; its notes were declared legal tender, and it was given almost full control of the nation’s finances. He issued new stock in the Compagnie des Indes at 550 livres the share; it was soon subscribed. Expectation of high returns raised the public estimate of the shares’ worth; they were exchanged at an ever-increasing price in a wave of speculation, until they were quoted at 5,000 livres, nine or ten times their face value. Lady Mary Wortley Montagu, passing through Paris in 1718, smiled at the sight of France submitting its economic life to a Briton. Law himself allowed his imagination to distance his judgment. The new Banque Royale not only took charge of the Mint and all tax collections; it took over the national debt by giving a share in the Compagnie des Indes in exchange for 5,000 livres’ face value in government obligations; in this way, he thought, passive capital would become active in his varied enterprises. He further endangered the solvency of the Banque by making a gift of 24,00 shares to the Regent.

Despite these rash ventures, public confidence in him was unimpaired, public enthusiasm for the Compagnie rose, buyers bid higher and higher for its shares. Counterfeiters added to the furor by throwing false share certificates upon the market. The narrow, dirty Rue Quincampoix, where the System had its offices, was for two years the Wall Street of Paris. Buyers and sellers of all classes, duchesses and prostitutes, Parisians, provincials, foreigners, gathered there in numbers and excitement mounted day by day. Some were trampled to death in the crush, or were run down by the carriages of the aristocracy. Old Maréchal de Villars, riding by, stopped to lecture the crowd for its fanatic greed. Tiny stalls in the little street fetched higher rentals per month than houses had brought in twenty years. Residents complained that the noise was unbearable. Still the buyers shouted their competing offers; the price of a share rose almost daily, sometimes hourly; at the end of 1719 some were sold for 12,000 livres each; by that time the market value of all outstanding shares was eighty times greater than the worth of all the known gold and silver in France.20 Since only ten per cent of its face value had to be paid for a share, turnovers were rapid, and fortunes were made in a day. A banker made 100 million livres, a hotel waiter thirty million.21 Now for the first time men heard the word millionaire.22

Law was the man of the hour. In 1720 he was made comptroller general of finances. Highflown lords and ladies fluttered in his anteroom, seeking his advice in money matters or his support in court intrigues. “I myself,” Voltaire would recall, “saw him pass through the galleries of the Palais-Royal followed by dukes and peers, marshals of France, bishops of the Church.”23 A duchess humbly kissed his hand.

He was not visibly spoiled by the apparent triumph of his ideas, or by the exaltation of his personal power; indeed, he was alarmed by the exaggerated value that public avidity had placed upon the shares of the company.24 He took no advantage of his position to swell his own wealth. Saint-Simon, who opposed the System, declared:

There was neither avarice nor roguery in his composition. He was a gentle, good, respectable man, whom excess of credit and fortune had not spoiled, and whose deportment, equipage, table, and furniture could not scandalize anyone. He suffered with singular patience and constancy all vexations excited by his operations, until toward the last … he became quick and bad-tempered.

Some of the nobility frowned upon him as an alien and a Protestant, and noted that he and his English wife, though they seemed devoted to each other, were not legally married. To reduce this hostility Law accepted French citizenship and the Roman Catholic faith.

He used his power to spur the prosperity of his adopted country. He reduced taxes and put an end to their clumsy and corrupt collection by private agencies. He showed for the masses a sympathy unusual in financiers. He broke up, for cultivation by the peasantry, large estates held by the Church or by corporations; he went so far as to propose, soon after being made comptroller general, that the Church be compelled to sell all the property it had acquired since 1600—that is, half of all its French possessions.25He anticipated Turgot by abolishing duties on the movement of food and goods within France. He organized the building or repair of roads, bridges, and canals. He brought in skilled artisans from abroad to establish new industries; he encouraged industrial expansion by lowering the rate of interest on loans; French enterprises increased sixty per cent in the two years (1719–20) of his ascendancy. He revived and multiplied the merchant marine by expanding trade with Asia, Africa, and America; French ships engaged in foreign trade numbered sixteen in March, 1719, three hundred in June, 1720; French foreign commerce, under Law, reached again the zenith it had touched under Colbert. He persuaded French nobles to finance the production of coffee and tobacco in Louisiana, and himself financed the development of the Arkansas River area. In 1718 New Orleans was founded, and took the Regent’s family name.

Despite the many-sided efforts of Law and Philippe, the American enterprise did not prosper. Much of the Mississippi Valley was still unconquered wilderness. Every effort was made to settle the region with French colonists. Law offered dowries and 450 acres to emigrating families. When emigration proved less attractive than speculation, prisoners, vagabonds, and prostitutes were deported to Louisiana, and young men and women (like the Manon Lescaut of Prévost’s novel) were pressed into the venture by stratagem or force. Such victims were so badly fed that many of them died on the way. Edicts of May, 1720, stopped this barbarous impressment. In the colony itself poor equipment, bad management, and rebellion hampered economic improvement, and made the earnings of the “Mississippi Company” (as the people called it) far less than speculation had presumed. Hopes of gold or precious stones to be mined from the colonial soil proved illusory, though Law himself had entertained that dream.

News of these difficulties must have reached France. The cleverest of the speculators judged that the shares of the company had touched their peak, and that it was now time to sell. They made great profits by selling promptly; thousands of others, equally greedy but poorer in information or judgment, were ruined by selling too late. In December, 1719, the selling became more eager and competitive than the buying. Within a month the Duc de Bourbon disposed of his shares for twenty million livres; the Prince de Conti sold his for fourteen million; three wagons were needed to cart away the gold that Law did not dare refuse the Prince for his bank notes and company shares.26 A Prussian speculator unloaded his holdings and departed with thirty million livres in gold. Others cashed their shares to buy land, houses, jewelry, and other articles whose worth rested on the solid base of human need or vanity. The financiers who had been punished by the Chamber of Justice revenged themselves by cashing their notes and sending the gold out of France. Law tried to stop the drain of gold from the treasury by securing from the Regent edicts forbidding the public to hold, trade, or export the precious metals, and requiring the surrender of all gold and silver above the value of five hundred francs to the Banque Royale. Agents of the bank were empowered to enter homes and search for hidden precious metal; even Louis XIV had never ventured upon such an invasion of privacy. “Many people,” according to Saint-Simon, “hid their money with so much secrecy that, dying without being able to say where they had put it, their little treasures remained buried and lost to their heirs.”27

As the price of shares continued to decline, Law tried to bolster it by offering 9,000 livres (in paper money) per share; but the consequent increase in bank notes lowered their value and raised the price of goods. By May, 1720, prices had risen one hundred per cent, wages seventy-five per cent, as compared with 1716; by July a pair of silk stockings brought forty livres. A panic of inflation set in; men rushed to exchange paper currency and stock certificates for goods; so the Duc de La Force amassed candles, and the Maréchal d’Estrées piled up stores of coffee and chocolate. To check this flight from money to goods, Law announced (May 21) a fifty per cent reduction in the official value of bank notes and company shares. It was a serious error—perhaps due to pressure from the frightened Regent, who himself felt the pressure of Law’s noble and clerical foes.28 Philippe tried to ease the crisis by restoring all his company shares to the bank.29

Nevertheless, the wave of selling continued. In July the bank was compelled to suspend payment on any of its notes above ten francs. Holders of the notes besieged the bank, clamoring for the redemption of their paper in silver or gold. In Paris the crowd was so great that ten women were trampled to death in the confusion; later three of the corpses were carried in an angry procession beneath the windows of the Regent. The people, whose mad speculation had caused the collapse of the System, held Law responsible for all difficulties. Attempts were made to seize and kill him; these failing, his coach was smashed to pieces in the courtyard of the Palais-Royal. Repeated riots expressed the feeling of the public that it had been deceived by financial tricks, and that the upper classes had profited at the expense of the community. Parlement joined in the attacks upon Law; Philippe banished it to Pontoise (July 20); the people defended the Parlement.

In August the shares of the Mississippi Company, which at their peak had reached 12,000 livres, fell to 2,000, and the bank notes dropped to ten per cent of their original worth. In October the news leaked out—and spread from mouth to mouth—that the Regent, during the prosperity of the Banque Royale, had drawn from it notes to the total face value of three billion francs, of which a large part had been consumed in lavish gifts to friends and mistresses. About the same time a cashier of the bank absconded to Prussia with an enormous quantity of its gold. The shares of the Mississippi Company fell to 200 livres. In December the Regent abolished the bank, dismissed Law, and recalled the Parlement. On the fourteenth, Law left France with his son. He had sunk his own fortune into the Compagnie des Indes, and shared the fate of most shareholders; he had deposited no funds abroad; now he took with him only two thousand livres and a few mediocre gems. At Brussels he received from Peter the Great an invitation to come and take charge of Russia’s finances; he refused. He retired to Venice, was joined by his wife and daughter, lived in obscurity and poverty, and died there in 1729.

The principles upon which he had established his bank were theoretically sound; they would have made France solvent and prosperous had it not been for the incredible avidity of speculators and the extravagance of the Regent. Law’s own accounts, on examination, were found to be without fault. Temporarily the French economy was left apparently in ruins: shareholders and noteholders were demanding impossible payment, the circulation of money was almost paralyzed, industry was hesitating, foreigncommerce was becalmed, prices were beyond the capacity of the people to pay. The Regent summoned the brothers Paris to make some order out of the chaos. They called in all bank notes and redeemed their diverse categories with liens on the national revenue, at a loss of sixteen to ninety-five per cent to the holders. The public, its fury exhausted, submitted patiently to this practical bankruptcy.

Something remained from the debacle. Agriculture benefited from the rise in the value of its products and the depreciation of the currency. Industry, stimulated by low interest and high prices, recovered rapidly; new enterprises appeared everywhere. Internal trade profited from the reduction of internal tolls; commerce, when the chaos subsided, resumed its extension overseas. The middle classes, in whom the pursuit of gain was natural and necessary, emerged unscathed and enlarged. Financiers multiplied in number and power. The nobility gained by paying its debts in cheapened currency, but lost face by having shown, in the fever of speculation, a concupiscence as blatant as in any class. The Regency remained tarnished with its faithlessness to its financial obligations and its continued luxury amid widespread disaster. An anonymous critic complained that “it will take centuries to eradicate the evil which Law is responsible for in having accustomed the people to ease and luxury, in having made them discontented with their condition, in having raised the price of food and manual labor, and in making all classes of tradespeople look for exorbitant profits.”30 But that same commercial spirit stimulated the economy and the intellect of France, while lowering the moral tone of French society. By 1722 the French economy had recovered sufficiently to let the Regent return, with the easy conscience of a government, to his wonted ways of kindly rule and generous adultery.

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