What became known as ‘Law’s System’, or just ‘the System’ – the far-reaching attempt to establish public credit through a state bank which would receive tax revenue, keep interest rates low, boost the economy and liquidate the royal debt – would be indissolubly associated with the Regency in social memory. Contemporaries were aware they were living through an extraordinary collective experience under the financial stewardship of a man generally regarded, as one individual put it, as ‘a kind of wizard [enchanteur] whom one day we will perhaps believe as imaginary as Merlin’.30 The son of an Edinburgh goldsmith, who had evaded imprisonment while young for killing a man in a duel, Law travelled widely throughout Europe, gaining a reputation as a lucky gambler and as a formulator of financial schemes. His intimate knowledge of banking experiments being successfully brought to fruition in London (where the Bank of England had been established in 1694), in Amsterdam, Genoa, Turin and elsewhere gave him an air of plausibility. Affable and polite, he mixed easily in aristocratic circles and had got to know Orléans in the late 1690s. He remained in touch and was to be at hand when the duke came to power and found himself facing the financial ruin of a mighty state.
Law’s diagnosis of the ailing French economy highlighted the conjunction of a monetary crisis, that is, a shortage of currency, which was causing the economy to stagnate, and a fiscal crisis, that is, enormous state debts and high interest rates caused by the state’s inability to pay those debts. Releasing the state from its fiscal burden thus seemed inextricably linked to the reanimation of the economy through more credit. Law’s initial proposal in 1715 was consequently simple enough: a state bankruptcy. Orléans could doubtless see the attractions of Law’s arguments, but the political and financial risks they entailed made him resist falling under the wizard’s spell. In May 1716, however, the Regent authorized the Scot to establish a private bank, which received deposits, discounted bills, converted foreign currency and issued notes. It was initially approved by Noailles and waved through by the Paris Parlement, but the latter was less enchanted by the pressure Orléans began to place on state officials to accept Law’s banknotes in their transactions; and even less by subsequent decisions to allow tax payments in banknotes. The magistrates’ quibbles failed to inhibit the success of Law’s schemes, however, and the bank prospered, with its shares changing hands at well above the quoted price.
In the autumn of 1717, Law opened a second front, establishing the Mississippi Company, subsequently renamed the Occident Company, to exploit the wealth of ‘Louisiana’, the name for French holdings in North America from the Mississippi delta in the south to the Great Lakes in the north. The Company’s propaganda machine issued flagrant appeals to investor greed: the mountains of Louisiana, it seemed, were chockful with gold, silver, copper, lead and quicksilver; fine wool almost leapt off the backs of the native sheep; the climate allowed not one but two annual harvests of rice and tobacco; and the natives were allegedly friendly (more than friendly in the case of the women, who were said to volunteer their sexual services joyfully to all comers).
The enthusiastic public response to Law’s two-track scheme helped persuade the Regent that it was worth the risks involved to give the Scot the opportunity to transform France from a land of troubles into one of milk and honey. Law was well aware that the recent record of governments arbitrarily declaring devaluations, recoinages, and financial manipulations had been more than sufficient ‘to destroy trust and confidence in a state’. Constraint, he argued, ‘is contrary to the principles on which credit must be built’.31A new blast of freedom was necessary in the state’s affairs – a freedom which was an implicit renunciation of many of the axioms of economic policy in place since Colbert. The upgrading of credit should go hand in hand with a downgrading of the importance of bullion reserves, the sine qua non of mercantilist lore. ‘Money is not the value FOR WHICH goods are exchanged’, Law asserted, ‘but the value BY WHICH they are exchanged’. Money should be the lubricant which helped to turn the wealth-producing wheels within society, and it should not, in the shape of bullion, be regarded as the simple embodiment of wealth. Indeed, currency would be more effective for not being gold and silver but fiduciary paper money. A state bank issuing the latter would stimulate foreign trade and domestic manufacture, but also centralize government income, stabilize the currency, and bring down interest rates. A prosperous, demonetized economy would also encourage population growth, and ensure that additional hands found employment: ‘Let no one be idle,’ Law proclaimed.32 Furthermore, within the context of general economic growth and new-found internal confidence, the state banking scheme would allow government to tackle the repayment of the royal debt and to begin to get rid of its dependency on venality of office (officials would have their capital sums reimbursed). The mutual strengthening of state and society would ultimately help France win back European hegemony without the need for costly military ventures: France could become ‘the arbiter of Europe without the use of force’.33
There was a strong Fénelonian undertone to the idea of being ‘arbiter of Europe without the use of force’: building up wealth and prosperity at home without the need for international military involvement which was hugely expensive and socially divisive was a siren’s song which Orléans, whose room for financial manoeuvre was dangerously thin, found increasingly seductive. Retributive justice against financiers was reducing the government’s ability to borrow, while thoughts of a bankruptcy were ruled out of court by the deteriorating international situation vis-à-vis Spain, a situation, moreover, which was worsened by the covert activities of the Maines and the Breton nobility, as well as by a resurgent Paris Parlement. Following the winding-up of the Polysynody, Orléans gave himself a breathing space by the coup de main of 26 August 1718. The Parlement, which had been expanding its ambitions as regards state finance, had its goose well and truly cooked, and the Maine faction was delivered a heavy blow. In the ensuing moment of calm, Orléans took Law more formally under his wing, and also gave his aide, the abbé Dubois, a freer hand in foreign affairs. The Scot’s private dealings and the operations of state now became increasingly intertwined. In December 1718, his bank was made the state bank, its issues regulated by government decree. The establishment of four daughter branches in the provinces (at Amiens, Orléans, La Rochelle and Tours) highlighted the System’s claims to be vivifying the economy of the country as a whole. In July 1719, Law’s company was awarded the monopoly of coining and issuing money. From that autumn, his bank took on full responsibility for reimbursing the royal debt, assumed prelude to the ending of venal office. The aim seemed to be, with a wave of the wand, to switch the state’s creditors into investors in the economy by encouraging them to transfer their holdings of government paper (rentes and such like) into shares in his Company.
The scope of Law’s System was widened still further by its extension into tax-collection. From late 1718, it undertook the farming of tobacco taxes, and in August 1719 it beat off strong competition from a cartel headed by the Paris brothers to take over control of the General Farm, which was responsible for the collection of other indirect taxes. In October, Law was entrusted with collection of direct taxes too. The commercial dimensions of Law’s activities also expanded: a veritable empire was placed in his hands by integration into his Occident Company of the East Indies and China trading companies, followed soon by the Africa and Saint-Domingue companies. The new company was floated as the Indies Company (Compagnie des Indes) and its shares were eagerly purchased, with values rocketing upwards.
By late 1719, the zenith of Law’s fortunes had been reached. All of France’s maritime and colonial trade was effectively in the hands of his Indies Company. He ran the state’s bank, holding the monopoly of issue, coinage and the printing of money; and tax-collection was under his sole control. In January 1720 (after agreeing to convert to Catholicism), Law would be made Controller-General of the Finances, the first such since the death of Louis XIV, and in the following month his bank and company were merged into a single organism. Nor had Law’s ambitions and schemings reached an end. He was still hatching further plans for a unitary and universal direct tax and for a fresh burst of economic freedom.
But was the picture a little suspiciously sunny? The increased amount of paper money in circulation had produced a boom, but one that was producing its own problems: over-liquidity in the economy, fuelling runaway inflation. The whole operation could, moreover, only be sustained so long as all players retained a faith in the economic performance of the System. Here Law was longer on promises than performance. In particular, he was utterly disingenuous in everything to do with profits deriving from colonial exploitation. In 1719–20, in the midst of France’s Law-led boom, Louisiana was experiencing a famine, and new recruits to the colony were dying like flies from epidemic disease. A dangerous gap was thus opening up between rhetoric and reality. Symptomatically, an ex-governor of Louisiana who on his return to Paris queried the Mississippi pipe-dream found in the Company’s literature was thrown into the Bastille for his pains, while Paris police spies were primed to keep a close watch for individuals diffusing rumours and gossip which risked destabilizing Company – and government – credit.
The more the gap yawned open between Law’s rhetoric and normal social expectations, the more contemporaries found the whole financial boom ridiculous, immoral, even pathological. The old world of the moral economy seemed under siege by the social forces unleashed by the System. Traditionally, an economy of a ‘fair price’ had tended to prevail in business operations, with profits set by custom. Corporatism frowned on social mobility, and social esteem was usually measured in property ownership rather than moveable wealth. Now, however, prices and wages were rising vertiginously fast, changing customary economic certitudes. Twelve printing presses had to run day and night to keep up with the massive demand for banknotes. The credit market was topsy-turvy, yet Company shares soared, changing hands at up to forty times their face value, allowing mega-fortunes to be made and lost on the Rue Quincampoix in Paris (between the Rue Saint-Denis and the Rue Saint-Martin), which became an impromptu stock exchange for the System’s operations. The street had to be provided with gates at each end to keep trading within daylight hours, and special police patrols were organized to instil a semblance of order. The street was endlessly thronging with crowds seeking a speedy fortune – Paris was said to have swelled by some extra 200 to 350,000 individuals from all over France and Europe attracted by the hopes of windfalls. The old rigidities of rank crumbled under the pressure of new-found wealth: ‘everyone’, noted the Regent’s mother, ‘wants to surpass his neighbour in terms of carriage, table and appearances’. The Bordeaux magistrate and philosopher Montesquieu, whose Lettres persanes (1721) lightly clothed a critique of Louis XIV and the Regency in the form of a fictional correspondence involving Persian visitors to Paris, satirized Law’s System, bemoaning a situation where ‘servants are waited on today by their comrades and tomorrow by their masters’.34 The reimposition of archaic sumptuary legislation – individuals were forbidden from wearing diamonds and pearls save with the written permission of the king – was quite unable to check a novel fluidity in fortunes and some outrageous personal destinies. A beggar was said to have made 70 million livres from his trading on the Rue Quincampoix, a lackey 50 million, a barman a cool 40 million …
By early 1720, with the Mississippi bubble seeming fit to burst, these anxieties and apprehensions began to crystallize into political opposition. Any wealthy private individual who had benefited from the pre-Law financial system could only resent what the Scottish wizard was trying to do. The System was, opined Pâris-Duverney, one of the props of the old financial establishment, ‘preparing the ruin of the state’s old creditors’.35 Financial figures such as he – excluded from many areas of their former involvement including tax-collection – had had their heads temporarily below the parapet, but were on the qui-vive for chinks in the Scot’s armour. Law’s schemes also set alarm bells ringing in the Parlement. After its drubbing at the Regent’s hands in 1718, the latter had consigned itself (as it put it) to ‘a respectful silence [which had] exposed us to the reproaches of our fellow citizens’.36 By 1720 it was seeing it as its duty to re-enter the fray. Law’s plans for debt management and in particular his aim to end venal office discountenanced the magistrates, who had purchased their posts and regarded themselves as an important restraining influence on the crown’s right to tax. The social and economic freedoms of the System seemed to be threatening the corporatist shell of the polity in ways which the Parlement felt were profoundly unconstitutional.
These critics of the System had worked ferociously to subvert one of Law’s most intractable assumptions, namely, that paper money could make individuals’ attachments to more tangible forms of wealth such as land, gold, silver and jewellery outmoded and unfashionable. The attempt to demonetize the economy was pursued in a bewildering variety of ways. A decree of April 1719, for example, stating that Law’s banknotes were not subject to devaluation, made them more valuable than coinage. Thereafter he endlessly devalued gold and silver against banknotes in official transactions. There were twenty-eight changes in the value of gold, thirty-five in the value of silver between September 1719 and December 1720. Yet changing a traditional economic mentalité was an uphill task and, significantly, Law never fully disenchanted even his most intimate supporters (and maybe even himself) with customary forms of wealth: throughout the boom, he and his son bought up property as though it was going out of style, and those investing with him, including the aristocrats on whom he and the Regent showered sweeteners like confetti, did much the same.
In addition, the more resistance there was to his demonetization plans, the more Law resorted to measures of constraint, which sat ill alongside his earlier grave prognostications about the importance of avoiding force in establishing public confidence. His steps to bolster faltering confidence in his paper schemes led Law now to enthuse about ‘forced credit … which emanates from the sovereign [alone] and not from his subjects’.37 Absolutist regimes, he argued, even had an edge over liberal and constitutional ones when it came to schemes like his. ‘I maintain’, he wrote, ‘that an absolute prince who knows how to govern can extend his credit further and find needed funds at a lower interest rate than a prince who is limited in his authority.’38 As long as he acted in a rational manner which seemed neither factional nor arbitrary and provided that he had public opinion behind him, an absolute monarch could control secrecy and business corruption, command obedience, minimize financial dependence on private individuals, and maintain public order – all prerequisites for producing prosperity.
Yet as though, strangely, he were a latterday believer in the propaganda of the Sun King, Law massively overestimated the extent to which absolutism could deliver the required measure of obedience in this as in any sphere. He discovered that the more the ‘absolute’ monarchy had recourse to measures of constraint, the more the public doubted that the System could hold. In early 1720, Law had it formally decreed that banknotes should be exchanged at face value – even though they were generally being discounted by some 20 per cent at the time. He followed this with a state decree forbidding any individual from holding over 500 livres in specie – a chimerical wish. Worse too, the government assured its unpopularity by authorizing house searches to ensure against hoarding of gold and silver. Such attempts to use force in order to limit the option of convertibility from paper to specie provoked added pressure on paper among a nervous public unable quite to shake off attachment to more tangible forms of wealth. A gadarene rush to convert from paper to specie in early 1720, led by Law’s erstwhile cronies among the court aristocracy, underlined the point. The prince de Conti needed three carts to wheel back his converted bullion from the Rue Quincampoix. He was said to have made 5 million livres from the operation – and was not untypical: the duc de Bourbon came out of the System some 20 million livres, the duc d’Antin some 12 million, richer. The courtly rats were leaving the sinking Scottish ship.
As a downward spiral started to develop, Law’s efforts to contain speculation by pegging shares, now made available in unlimited quantities, at the level of 9,000 livres, were unable to forestall the drop in value. His decision to reduce the interest payments on state bonds from 4 to 2 per cent was similarly inopportune, for it mobilized against him the solid bourgeoisie of Paris, who had resisted the speculative blandishments of the System for the more traditional security of state bonds. Such individuals from ‘an infinite number of middling families’, were always, as the Cardinal de Retz had noted of the Fronde, ‘the most to be feared in revolutions’.39 In the face of spreading public discontent, which the Parlement now stepped in to exacerbate, and with the high nobility losing faith in the System, Orléans’s faith in his Finance Minister wobbled. When in May 1720, Law tried to brazen out the crisis by an emergency 50 per cent devaluation of share prices and banknotes, public confidence sagged disastrously. What the Regent had hoped would be a restructuring of public credit turned out to be the death rattle of the System. Public fury at the devaluation edict was so intense that Orléans reversed it a week later, and removed Law from the post of Controller-General. Though the Scot remained on the councils of state, he needed an armed guard to avoid being lynched. Anyone using the word ‘System’, expostulated Parisian barrister Marais, should be regarded as guilty of treason.40 Cartoonists vied with each other in portraying Law as a giant balloon, disastrously leaking air out of every orifice, or else as a dangerous lunatic deserving to be locked up for getting the state to subscribe to the economics of the madhouse. All efforts were now made to reduce the amount of paper money in circulation, and to reduce the number of shares. Paper money burnt fingers, as individuals desperately sought to get rid of it in return for more tangible assets. Banknotes and shares, stated the Regent’s mother with her customary forthrightness, were now so many ‘arse-wipes’ (torche-culs).41
In mid-July the bank closed its doors for lack of bullion reserves, and public disturbances outside the offices of the Company in the rue Vivienne on 16 July – in which nearly a score of individuals died – were followed by Law’s coach being destroyed and his coachman attacked. The Parlement waded in rather intemperately, calling for Law’s dismissal. Furious at the parlementaires’ self-promotion as guardians of financial probity and the bulwark of the small investor (and suspicious of their Frondeur intentions), the Regent banished them to the small town of Pontoise some 20 miles from the capital.
It was symptomatic of the way things were going, however, that Law was no longer the centre around which politics revolved, but was becoming a peripheral player, whose fate was linked to settlement of more pressing disputes. The decision on 15 August that banknotes with a face value of over 10,000 livres would lose currency from October, with those valued between 10 and 100 livres doing so in May 1721, spelt the end of his System. The measure was followed in the autumn by measures reducing current accounts by three-quarters of their face value, and then ending the use of banknotes in any sort of financial transaction. Jockeying for position in the political arena was increasingly controlled by the abbé Dubois, who utilized the looming disgrace of Law to engineer his own ascendancy. The Jansenist issue was also centre-stage again, with the Regent profiting from the Parlement’s exile from Paris to pass a decree on 4 August 1720 forbidding attacks on the Unigenitus bull. The decree excited much fury from Gallicans and Jansenists, but opposition remained generally unfocused, and Orléans was able to go forward to broker a deal whereby in return for the Parlement’s formal acceptance of the 4 August decree – plus the removal of Law from the Regent’s entourage – they were allowed back to Pâris. The new Controller-General Lepelletier de la Houssaye appointed the Paris brothers to preside over the winding-up of the System, and they operated another ‘Visa’ procedure, annulling one-third of the value of rentes, and reducing the rest into state bonds at 2 per cent. The new Controller-General urged the Scot’s incarceration in the Bastille as the best way of restoring public confidence, but the ever-tolerant Orléans allowed him a furtive rush into an exile from which he never returned. He died in Venice in 1729.
Parisian barrister Barbier would not give Christmas bonuses to his servants that year: having lost 60,000 livres in the Law fiasco, he could not afford to.42 Though much contemporary comment focused on the big winners of the System, for how many respectable and middling households was Barbier’s not the more typical experience? When the Mississippi music stopped, individuals left holding paper notes could only lose. Prominent among these losers were religious communities and hospitals, which suffered massively from having their investments converted into state bonds – it seemed a fitting conclusion to the episode that while a wealthy few prospered, hospitals and poor-houses had to shut their doors to the sick and needy. The post-Law mopping-up financial operations by the Pâris brothers revealed some half a million individuals throughout France claiming losses. If we use a multiplier of 4.5 to encompass all family members, then we can estimate that more than 10 per cent of the nation’s population were affected by the fall-out from ‘Mississippi fever’. About half of these had claims of less than 500 livres, which probably denotes their middle- or lower-middle-class status. The losers from the System thus covered all social ranks and every part of the country.
The Scottish philosopher David Hume would later joke that Law had caused a sick French economy ‘to die of the doctor’.43 Yet he was wide of the mark. The frenetic boom of 1719–20 soon passed, but rentier losses and millionaire gains overlay more nuanced effects on the economy as a whole. The System not only gave a tremendous boost to the high aristocracy, who paid off many of their debts and enjoyed massive windfall gains; it also, at a more lowly level, gave respite to much of the peasantry. The latter’s release from part of its debt burden allowed some degree of agrarian recuperation after the hard times of the turn of the century. Peasant proprietors had more money to spend and to invest. The additional demand which they represented acted as a fillip to manufacturing, which had already been boosted by the cheap credit available through the System. The property market, the building trades and the market for luxury goods were all beneficiaries of this loosening up of the economy, as were those regions associated with the colonial trades and shipping. By the late 1720s, an unparallelled burst of economic activity would launch the economy to golden years: John Law could claim some posthumous part in that story.44
In many ways, the biggest loser of all in the Law System was the state. Massively in debt following the War of Spanish Succession, government had been able to pay off many of its creditors in devalued paper through what was essentially a state bankruptcy. The Scottish wizard had also provided the ever-pragmatic Regent with sufficient funds to fight the Spanish in 1719–20 and, through the massive handouts he was able to make to the aristocracy, to forestall internal princely opposition to his foreign policy. The boost to the economy – whose long-term effects Orléans would not live to see – made the population more able to pay its taxes. Yet the state had also had to borrow very extensively too, so that the royal debt in 1722 was nearly three times that in 1715. In some ways, this was worse than going back to square one. The failure of Law’s promises of debt management to materialize and the whole fiasco of the System made the conditions in which the state could cope with its debt in the future far more problematic.
The Law episode had been highly influential, first, in helping to form a public which was intimately involved in state politics. Whereas the ‘public’ interpellated in the pamphlet wars launched by the legitimized princes in 1717–19 had been tiny, the System brought state finance under the glare of a public numbering – literally, as we have suggested – millions. Though Louis XV regarded such matters as falling solely within the purview of his closest counsellors and himself, the severe impact which the System had had on private fortunes well outside narrow financial and merchant circles galvanized growing public awareness of state credit and the problem of the royal debt.
Not only did the System make a significant contribution to developing a wider public as a political force, it also, second, predisposed that public against what was now seen as an overly authoritarian strain within the state’s financial policies. Henceforth, the state’s issuing of paper money would be seen not as a debt-management manoeuvre aimed at reducing the burden of the state within the economy, but rather as a means of increasing the crown’s political and financial independence. Law’s apparent wish to do away with the corporatist carapace of the monarchy, and his moves towards constraint (conjoined with the Regent’s shift away from Polysynody to a more classically Louis-Quatorzian stance), only confirmed the feeling, enunciated by Montesquieu, that the Scottish wizard was ‘one of the greatest promoters of despotism that has ever been seen in Europe’.45 Orléans and his successors would move back to a more decentralized and diffuse system of credit: the financial and political consequences of default were less than with a single credit organ such as Law’s bank.
Third, the Law episode endorsed the growing role of the Parlement in defining the contours of the politically acceptable and it enhanced its stature as self-appointed defender of public interest in matters financial. Its view that currency values should not be fixed arbitrarily from above and that paper money was a dangerous thing won the day. Its claims that it rather than the government represented the best interests of the nation looked more substantially based after Law than before him. This meant, fourth, that the range of financial instruments henceforth available to the monarch had been reduced, for it was generally recognized that the Parlement and the nascent public opinion which it was helping to create were making currency devaluation, bankruptcy or paper money into policy options that it would be difficult to sustain politically. For the rest of the century (including well into the Revolutionary decade, in fact), John Law was a bogey-man, a ghastly spectre instantly conjured up as soon as structural reform of public credit appeared on the horizon. By closing down options in this way, the Law episode had made the task of organizing a rational, unburdensome and centralized system of public credit intensely problematic.
The state’s failure to develop banking institutions may have impacted on economic growth – though as we shall see, France’s record was not unimpressive.46 More significant, finally, was the role of the System in confirming government dependence on networks of financial clans, with their semi-covert links to the wealthy nobility. Symptomatically, once the Scottish wizard had been put out to grass, there returned to favour the same set of individuals who had dominated state finance during the War of Spanish Succession. Law’s gravediggers were Antoine Crozat, Samuel Bernard and the Pâris brothers, notably Joseph Pâris-Duverney, who retained a pivotal place at the heart of state finance down to the 1750s. The Law System had inadvertently strengthened the very forces at the heart of the polity it had been designed to do away with.