Part 2 — PART II. OF BANKS. (continued 3)

So dreadful a calamity brought upon that nation, by the abuse of paper credit, may be a warning to all states to beware of the like. The best way to guard against it, is to be apprised of the delusion of it, and to see through the springs and motives by which the Missisippi bank was conducted.

After the death of the late King of France, Louis XIV. the debts contracted by that Monarch were found to extend to 2000 millions of livres, that is, to upwards of 140 millions sterling.

It was proposed to the Duke of Orleans, regent of the kingdom, to expunge the debts by a total bankruptcy. This proposal he rejected nobly; and instead of it, established a commission (called the Visa) to inquire into the claims of such of the nation’s creditors as were not then properly liquidated, nor secured by the appropriation of any fund for the payment of the interest.

In the course of this commission, many exorbitant frauds were discovered; by which it appeared, that vast sums of debt had been contracted, for no adequate value paid to the King.

236After many arbitrary proceedings, this commission threw the King’s debts, at last, into a kind of order.

Those formerly provided for were all put at 4 per cent. The creditors to the amount of six hundred millions, which had not been liquidated, nor provided for, had their claims reduced, by the commission, to two hundred and fifty millions; for which they obtained notes of state, (Billets d’etat, as they were called) bearing an interest of 4 per cent. also.

These operations performed, the total debts of the late King were reduced to the sum above mentioned; to wit, two thousand millions; bearing an interest of 4 per cent. or eighty millions per annum.

From the necessities of government, and the distressed situation of the kingdom, this interest was ill paid: and there hardly remained, out of an ill paid revenue, wherewith to defray the expence of the civil government.

About this time Mr. Law presented to the Regent the plan of a bank of circulation.

For the better understanding this affair of Mr. Law’s bank, and the views he had in establishing it at that time, I must give a short account of the most material variations of the French coin, before and after the King’s death, 1st September 1715; which I shall make as short as possible, consistently with perspicuity.

CHAP. XXIV. Account of the variations of the French coin, some time before and after the death of Louis XIV.

In 1709, there was a new general coinage in France; by which operation the King gained 23¹⁄₁₃ per cent. upon all the specie coined. (Dutot, vol. i. p. 104.)

237Out of the marc of standard gold were coined 30 louis d’ors, of 20 livres denomination each. Out of the marc of standard silver, 8 crowns, of 5 livres denomination each: so that the silver was put at 40 livres the marc.—But,

By edict of the month of September 1713, the old King appointed a diminution of the denomination of silver and gold coins; by which, after eleven successive changes, the coin of France was ordered to be brought down, from 40 livres the marc, to 28: so that the 8 crowns, which were called 40 livres in the month of September 1713, by the 2d day of September 1715, (the day after the King’s death) were to be called only 28 livres. I say called, because certainly the crowns had suffered no variation but in their name.

On the 13th of August 1715, (a few days before the King’s death) he issued a declaration; ordering that for the future the coin should remain at 28 livres per marc.

From this I conclude, that his intention was to leave, at his death, the coin of his kingdom of the same standard he had found it to be at the beginning of his reign, and at which he had preserved it invariably, during the flourishing state of his kingdom, for the space of 46 years; that is, until the year 1689.

He could not fail to be sensible of the infinite prejudice occasioned to debtors and creditors by the variations he had practised upon the coin from 1689.

To this standard, then, it was brought the very day after his death, and no sooner: therefore his debt of two thousand millions of livres should regularly be estimated according to that rate; or at about 40 shillings sterling for every 28 livres: 40 shillings being, within a trifle, the value of 8 ounces or one marc of standard silver, Paris weight.

At this rate of conversion, the two thousand millions were equal to 142,857,140l. sterling.

Soon after the King’s death, on the 2d of January 1716, the new ministry issued an edict, which totally destroyed all. This was the 238most extraordinary operation, I believe, ever invented; and to it was owing the establishment of Mr. Law’s bank: I must therefore explain it.

There had been no general coinage since 1709; the louis d’or had then been coined at 20 livres, and the crowns at 5, as has been said. The edict of 2d January 1716, ordered a new general coinage, on the same footing, both as to weight, fineness, and denomination, as that of 1709: the only difference was, that the first had an old man’s head upon it; the other had that of a child of six years old.

By this first operation, there was an end put to the former diminutions on the denomination of the coin; which was now raised again to 40 livres the marc, as in 1709^[14]. This is nothing:

There being no difference between the old coin and the new, except the stamp, the old coin was called in, and a new face was stamped on the very same pieces. But when the louis d’ors were called in, they were received at the mint at no more than 16 livres; and by a stroke of the wheel, they were, in an instant, converted into 20 livres, the denomination of the new coin.

Thus a person who brought 20 old louis d’ors to the mint, received back 16 of his own 20, new stamped, and no injustice was said to be done, from this demonstration of ministerial algebra, viz. 16 × 20 = 20 × 16. Can any thing be more clear and instructive! Some of my readers may not give credit to this; but it is true nevertheless.

Under these circumstances, it was natural for the inhabitants to wish to dispose of their old coin, at any other market than at the King’s mint. They did what they could to smuggle it to Holland; where the industrious Dutchman stamped a 16 livre piece with the head of a child, as well as the King of France could do, and sent 239it back to France for a 20 livre piece. These operations were prevented as well as government could; and every method was tried to force in the old coin to the mint.

Mr. Law judged this a very proper occasion to form the plan of a bank of circulation, upon the principles we have already explained.

He gave in his scheme to the Duke of Orleans; by whom it was approved of; and the bank was established the 2d of May of the same year 1716.

The first thing Mr. Law did, was to buy up with bank notes this old coin, at a price above what the mint gave, but many per cent. below the proportion of its value: his paper (payable in the new coin at 40 livres per marc) was run upon for this, as well as other reasons; and an immense profit ensued.

This anecdote, I think, is curious, and tends to unfold Mr. Law’s combinations, in the proposal he made to the Duke of Orleans for erecting a bank at this period of time.

CHAP. XXV. Continuation of the Account of Law’s Bank.

The bank accordingly was established in favour of Law and Company, by letters patent, of the 2d of May 1716. The Company was called, the General Bank; and the note run thus:

The bank promises to pay to the bearer at sight — livres, in coin of the same weight and fineness with the coin of this day, value received at Paris.

The first fund of this bank consisted in 1200 actions (or shares) of one thousand crowns, (or 5000 livres) bank money; in all six millions; the crown being then 5 livres, 8 to the marc; silver 240coin at 40 livres per marc, as has been said; which makes this livre just worth one shilling sterling: consequently, the shares were worth 250l. sterling, and the bank stock worth 300,000l. sterling.

By the clause in the note, by which the bank was obliged to pay according to the then weight and fineness of the coin, those who received their paper were secured against the arbitrary measures common in France of raising the denomination of the coin; and the bank was secured against the lowering of it. In a short time, most people preferred the notes to the coin; and accordingly they passed for 1 per cent. more than the coin itself.

This bank subsisted, and obtained great credit, until the 1st of January 1719: at which time the King reimbursed all the proprietors of the shares, and took the bank into his own hand, under the name of the Royal Bank^[15].

Upon this revolution, the tenor of the note was changed. It ran thus: The bank promises to pay to the bearer, at sight, — livres, in silver coin, value received at Paris.

By this alteration, the money in the notes was made to keep pace with the money in the coin; and both were equally affected by every arbitrary variation upon it. This was called, rendring the paper monnoie fixe; because the denominations contained in it did not vary according to the variations of the coin: I should have called it monnoie variable; because it was exposed to changes with respect to its real value.

Mr. Law strenuously opposed this change in the bank notes. No wonder! it was diametrically opposite to all principles of credit. It took place, however; and no body seemed dissatisfied: the nation was rather pleased: so familiar were the variations of the coin in those days, that no body ever considered any thing with regard 241to coin or money, but its denomination: the consequences of the variations in the value of denominations, upon the accompts between debtors and creditors, were not then attended to; and the credit of the notes of the royal bank continued just as good as that of Mr. Law; although the livres in this contained a determinate value; and the livres in that could have been reduced at any time to the value of halfpence, by an act of the King’s authority, who was the debtor in them. Nay more, they in fact stood many variations during the course of the system, without suffering the smallest discredit. This appears wonderful; and yet it is a fact.

Political writers upon the affairs of France at this period, such as De Melon, Savarie, Dutot, and others, abundantly certify the incredible advantage produced by the operations of Mr. Law’s bank; and the chain of events which followed, in the years 1719, and 1720, when it was in the King’s hands, shew to what a prodigious height credit arose upon the firm foundation laid by Mr. Law^[16].

242But alas! the superstructure, then, became so far beyond the proportion of the foundation, that the whole fabric fell to ruin, and involved a nation, just emerging from bankruptcy and inanition, into new calamities, almost equal to the former.

As long as the credit of this bank subsisted, it appeared to the French to be perfectly solid. The bubble no sooner burst, than the whole nation was thrown into astonishment and consternation. No body could conceive from whence the credit had sprung; what had created such mountains of wealth in so short a time; and by what witchcraft and fascination it had been made to disappear in an instant, in the short period of one day.

Volumes have been since writ in France, by men of speculation, in order to prove, that it was a want of confidence in the public, and not the want of a proper security for the paper, which occasioned this downfal.

This, if we judge by what has been writ, has been the general opinion of that nation to this day: and since it was found impossible, in France, to create confidence in circulating paper, which had no security for its value, many people there, and some even 243among ourselves, conclude, that a great part of the wealth of Great Britain, which consists in paper, well secured, is false and fictitious.

I shall now proceed to set before my reader the great lines of the royal Mississippi bank of France, from the 1st of January 1719, to the total overthrow of all credit, upon the fatal 21st day of May 1720. This was a golden dream, in which the French nation, and a great part of Europe was plunged, for the short space of 506 days.

CHAP. XXVI. Account of the Royal Mississippi Bank of France, established on Public Credit.

In order to unravel the chaos of this affair in a proper manner, it will not be amiss to begin by giving the reader an idea of the plan which naturally might suggest itself to the Regent of France, from the hint of Mr. Law’s bank. By the help of this clue, he will be the better able to conduct himself through the operations of this system, as the French call it.

The Regent perceived, that in consequence of the credit of Law’s bank, people grew fond of paper-money. The consequence of this, he saw, was, to bring a great quantity of coin into the bank. The debts of France were very great, being, as has been said, above 2000 millions. The coin, at that time, in France, was reckoned at about 1200 millions, at 60 livres the marc, or 40 millions sterling. The Regent thought, that if he could draw either the whole, or even the greatest part of this 1200 millions of coin into his bank, and replace the use of it to the kingdom, by as much paper, secured upon his word, that he should then be able 244to pay off, with it, near one half of all the debts of France: and by thus throwing back the coin into circulation, in paying off the debts, that it would return of itself into the bank, in the course of payments made to the state; that credit would be thereby supported, as the bank would be enabled to pay in coin the notes as they happened to return, in the course of domestic circulation.

This was both a plausible and an honest scheme, relatively to a Duke of Orleans, whom we cannot suppose to have been master of the principles of credit; and very practicable in a country where there was so great a quantity of coin as 40 millions sterling, and a well established credit in the bank, which prevented all runs upon it from diffidence. Nothing but a wrong balance of trade could have occasioned any run for coin; because, for the reason already given, the paper bore for the most part a premium of 1 per cent. above it.

Accordingly, during the whole year 1719, the credit of the royal bank was without suspicion, although the Regent had, by the last day of December of that year, coined of bank paper, for no less a sum than 769 millions, reckoning in 59 millions of paper, which had been formerly issued by the general bank of Law and company; for which he had given value to the proprietors, when he took the bank into his own hands, as we have said above.

I must here observe, that by this plan of the Regent, there was, in one sense, a kind of security for the notes issued. So far as they were issued for coin brought in from the advanced value of the paper, this coin was the security: in the second place, when the coin was paid away to the creditors of the state, the Regent withdrew the obligations which had been granted to them; and although I allow that the King’s own obligation withdrawn, was no security to the public, who had received bank notes for the payment; yet still the interest formerly paid to the creditors, was a fund out of which, upon the principles of public credit, the annual interest for the notes was secured. Had, indeed, the French nation perceived upon what bottom the security for the paper stood, during 245the year 1719, perhaps the credit of the bank might have been rendred precarious; but they neither saw it or sought after it: and the men of speculation were all of opinion, that as long as there was no more paper issued by the bank than there was coin in the kingdom, there could be no harm done. Of this any person who has read Dutot, de Melon, Savarie, and others, will be perfectly satisfied^[17]. And I desire no farther proof of the total ignorance of the French in matters of this kind, than to find them agreeing, that bank paper is always good, providing there be coin in the nation 246to realize it, although that coin be not the property of the bank. [Dutot, p. 132, 133.] On the contrary, it is very evident from what has been said, that although there should be a thousand times more coin in a country than the bank paper, still that bank paper must be a mere delusion, and, in fact, of no value whatsoever, except so far as the bank is possessed of the value of it in one species of property or another.

And on the other hand, let the bank paper exceed the quantity of coin in the proportion of a thousand to one, yet still it is perfectly good and sufficient, providing the bank be possessed of an equivalent value in any species of good property. This I throw in here to point out how far the French were, at least at that time, and many years after, when Dutot and Melon wrote, from forming any just notion of the principles of banking. And, I believe, I may venture to say, that the only reason why banks have never been established in France, is, because the whole operation is still a mystery to them. I ground this conjecture upon an opinion of M. de Montesquieu, who thinks that banks are incompatible with pure monarchy; a proposition he would never have advanced had he understood the principles upon which they are established.

The next remarkable and interesting revolution made upon this famous bank, was by the arret of February 22, 1720; which constituted the union of the royal bank with the company of the Indies.

By this arret, the King delivered to that company the whole management of the bank with all the profits made by him since the first of January 1719, and in time coming. Notwithstanding this cession, the King remained guarantee for all the notes, which were not to be coined without an order of council: the company was to be responsible to the King at all times for their administration; and, as a security for their good management, they engaged to lend the King no less than sixteen hundred millions of livres.

Here is the æra and beginning of all the confusion. From this loan proceeded the downfal of the whole system.

247But before I proceed to explain the scheme of the Regent in these operations upon credit, I think it will contribute to the clearing up of the subject in general, to premise some short account of the rise and progress of this great company of the Indies: and to give a short abstract of some of the most memorable transactions during the Missisippi scheme, in the order of time in which they followed one another.

CHAP. XXVII. A short Account of the French Company of the Indies.

Cardinal de Richlieu, that great minister to Louis XIII. was the first who established trading companies in France, anno 1628, about the time of the siege of Rochelle.

He then set on foot the companies of the West and East Indies.

Several others, viz. one for Canada, one for the Leeward Islands, and another for Cayenne, were successively established in the beginning of the reign of Louis XIV.

These companies, before 1664, had frequently changed their forms, and had succeeded very ill.

At that time the great Colbert was in the administration of the King’s affairs. He engaged his master to think seriously of establishing the trade of his kingdom upon solid principles; for which reason all the undertakers of the former projects of commerce to the new world were reimbursed; and a new establishment was made, called the Compagnie des Indes Occidentales.

This exclusive trade comprehended that of Canada, the Caribbee Islands, Acady, Newfoundland, Cayenne, the French continent of America, from the river of the Amazons to that of Oronoko, the 248coasts of Senegal, Goree, and other places in Africa; the whole for 40 years.

The same year, 1664, there was another company formed for the East Indies, of which we shall speak afterwards.

The greatest encouragement was given to these new establishments. Large sums were advanced by the King for several years, without interest, and upon condition, that if, at the end of that term, any loss was found on the trade, it should fall upon the money due to the King.

On examining into the West India company’s affairs, after ten years administration, that is to say, in the year 1674, it was found, that instead of profiting of their extensive privilege, by carrying on a regular trade themselves, they had sold permissions to private people to trade with them.

This abuse in the company had, however, inspired a taste for trade among the French; which the King wishing to improve, he reimbursed to the company all their expences, added their possessions to his domain, and threw the trade open to his subjects.

Thus ended the first company of the West Indies, called by the French, the Compagnie d’Occident.

After the suppression of this company, the French trade to America was carried on and improved by private adventurers, some of which obtained particular grants, to enable them to form colonies. Of this number was Robert Chevalier de la Sale, a native of Rouen. It was he who first discovered the river Missisippi, and who proposed to the King, in 1683, to establish a colony there. He lost his life in the attempt.

Hiberville, a Canadian, took up the project; but soon died. He was succeeded by Antony Crozat, in 1712, who had better success; but the death of the King in 1715, and the rising genius of Mr. Law, engaged the Regent of France to make Crozat renounce his exclusive privilege of trading. Upon which, by edict of the 6th of September 1717, was formed the second Compagnie d’Occident, in favour of Mr. Law: to which was added the fur trade of Canada, then in 249the hands of private adventurers, and the farm of the tobacco, for which he paid 1,500,000 livres a year.

I now come to the EastEast India company.

I have already mentioned the establishment of it by the great Colbert in 1664.

After his death, want of experience in those who succeeded him, abuse of administration, carelesness in those who carried on the company’s business, competition between different companies, and, in short, every obstacle to new establishments, concurred with the consequences of the long and expensive wars of Louis XIV. to render all commercial projects ineffectual; and all the expence bestowed in establishing those companies was in a manner lost.

In 1710, the merchants of St. Malo undertook the East India company. It languished in their hands until 1719, and their importations were not sufficient to supply the demand of France for India goods: for this reason it was taken from them, and incorporated with Mr. Law’s company of the West Indies, in May 1719.

By this incorporation was established the great Company of the Indies, which still subsists in France: the only monument extant of the famous and unfortunate Law.

For the better understanding, therefore, what is to follow, let us attend to some historical and chronological anecdotes, relative to the wonderful operations of this Missisippi bank, and company of the Indies. These I shall set down according to the order of time in which they happened, that my reader may have recourse to them as he goes along.

Without the help of this table, I should be involved in a history of those events, which however amusing it might be to some readers, would be quite inconsistent with the nature of this inquiry.

250

CHAP. XXVIII. Chronological Anecdotes.

1709.

A general coinage in France: the marc of standard silver, worth two pounds sterling, put at 40 livres denomination.

September 1713. The late King reduces the denomination of the silver coin to 28 livres the marc, and the gold in proportion.

These reductions were made gradual and progressive, and were finally to take place no sooner than the 2d of September 1715.

August 1715. The King declares, that in time coming, the coin was to remain stable at 28 livres the marc of fine silver.

September 1715. The King dies.

January 2, 1716. The Regent of France orders a new general coinage: raises the silver coin to 40 livres the marc, and calls down the old King’s coin (though of the same weight, fineness, and denomination) 20 per cent.

May 1716. Mr. Law’s bank established: bank notes coined; and the old coin bought up at great discount.

September 6, 1717. Mr. Law’s company of the West established.

September 4, 1718. He undertakes the farm of tobacco.

September 22, 1718. The first creation of actions of the company of the West to the number of 200,000, subscribed for in state billets, at the rate of 500 livres per action.

January 1, 1719. The bank taken from Law, and vested in the King. At this time the number of bank notes coined amounted to 59 millions of livres.

April 22, 1719. A new coinage of 51 millions of notes; in which the tenure of the note was changed, and the paper declared monnoie fixe.

May 1719. Mr. Law’s company of the West incorporated with the company of the East Indies; after which it was called the Company of the Indies.

251June 1719. Created 50,000 new actions of the incorporated company; sold for coin at 550 livres per action.

June 10, 1719. Coined of bank notes for 50 millions of livres.

June 1719. The mint made over to the company for 50 millions.

July 1719. Created 50,000 actions as above, sold, for notes, at 1000 livres per action.

July 25, 1719. Coined of bank notes for 240 millions.

August 1719. The company obtains the general farms: promises a dividend upon every action of 200 livres: agree to lend the King sixteen hundred millions at 3 per cent. and have transferred to them 48 millions per annum for the interest of that sum.

September 12, 1719. Coined of bank notes for 120 millions.

September 13, 1719. Created no less than 100,000 actions; price fixed at 5000 livres per action.

September 28, 1719. Created 100,000 more actions, price as the former, fixed at 5000 livres each.

October 2, 1719. Created 100,000 more actions, price as the former, at 5000 livres each.

October 4, 1719. Coined by the Regent’s private order, not delivered to the company, 24,000 more actions, which compleated the number of 624,000 actions; beyond which they never extended.

October 24, 1719. Coined of bank notes for 120 millions.

December 29, 1719. Coined of bank notes for 129 millions.

January 1720. Coined of bank notes for 21 millions.

February 1720. Coined of bank notes for 279 millions.

February 22, 1720. Incorporation of the bank with the company of the Indies.

February 27, 1720. A prohibition by which no one was to have in his custody more than 500 livres of coin.

March 5, 1720. The coin raised to 80 livres per marc.

March 11, 1720. The coin brought down to 65 livres per marc; and gold forbid to be coined at the mint, or used in commerce.

livres.

March 1720. Coined of bank notes for 191 803 060

April 1720. Coined of bank notes for 792 474 720

May 1, 1720. Coined of bank notes for 642 395 130

252May 21, 1720. The denomination of the paper diminished by arret of council, which, in an instant, put an end to all credit, and made the bubble burst.

At this period had been coined of bank notes to the immense

livres

sum of 2 696 400 000

Of which had been issued 2 235 083 590

Remained in the bank 461 316 410

Dutot, Vol. I. p. 144. Vol. II. p. 207.

May 27, 1720. The arret of the 21st of this month recalled, and the paper restored to its full denomination.

May 29, 1720. The coin raised to 82 livres 10 sols per marc.

June 3, 1720. 400,000 actions belonging to the Regent are burnt; and the 24,000 more, which were created October 4, 1719, suppressed; also 25 millions of the interest formerly granted to the company for their loan of 1600 millions, retroceded by the company, and constituted again upon the town-house of Paris.

October 10, 1720. All bank notes are ordered, by arret of this day, to be suppressed, if not brought to the bank before the 1st of December following, in order to be paid in manner therein specified.

CHAP. XXIX. Continuation of the Account of the Royal Bank of France, until the time that the Company of the Indies promised a Dividend of 200 Livres per Action.

These things premised, what follows will, I hope, be easily understood.

So soon as the Regent of France perceived the wonderful effects produced by Mr. Law’s bank, he immediately resolved to make use 253of that engine, for clearing the King’s revenue of a part of the unsupportable load of 80 millions of yearly interest, due, though indeed very irregularly paid, to the creditors.

It was to compass this end, that he bestowed on Mr. Law the company of the West Indies, and the farm of the tobacco.

To absorb 100 millions of the most discredited articles of the King’s debts, 200,000 actions or shares of this company were created. These were rated at 500 livres each, and the subscription for the actions was ordered to be paid in billets d’etat, so much discredited by reason of the bad payment of the interest, that 500 livres, nominal value in these billets, would not have sold upon change for above 160 or 170 livres. In the subscription they were taken for the full value. As these actions became part of the company’s stock, and as the interest of the billets was to be paid to them by the King, this was effectually a loan from the company to the King of 100 millions at 4 per cent.

The next step was to pay the interest regularly to the company. Upon this the actions which had been bought for 170 livres, real value, mounted to par, that is, to 500 livres.

This was ascribed to the wonderful operations of the bank; whereas it was wholly owing to the regular payment of the interest.

In May following 1719, the East India company was incorporated with the West India company: and the 200,000 actions formerly created, were to be entitled to a common share of the profits of the joint trade.

But as the sale of the first actions had produced no liquid value which could be turned into trade (having been paid for in state billets) a new creation of 50,000 new actions was made in June 1719, and the subscription opened at 550 livres payable in effective coin.

The confidence of the public in Mr. Law, was at this time so great, that they might have sold for much more: but it was judged expedient to limit the subscriptions to this sum; leaving the price 254of the actions to rise in the market, according to demand, in favour of the original subscribers.

This money amounting to 27 500 000 livres in coin, was to be employed in building of ships, and other preparations for carrying on the trade.

The hopes of the public were so much raised by the favourable appearance of a most lucrative trade, that more actions were greedily demanded.

Accordingly in a month after (July 1719) another creation was made of 50,000 actions; and the price of them fixed at 1000 livres.

It must be observed, that all actions delivered by the company of the Indies, originally contained an obligation on the company for no more than 4 per cent. upon the value of 500500 livres, with a proportion of the profits on the trade; so that the rise of the actions proceeded entirely from the hopes of those great profits, and from the sinking of the rate of interest; a consequence of the plenty of money to be lent.

But besides the trade, what raised their value at this time, was, that just before the last creation of actions, the King had made over the mint to the company for a consideration of 50 millions of livres; and this opened a new branch of profit to every one interested.

The sale of the last coined actions taking place at 1000 livres each, so great a rise seems to have engaged the Regent to extend his views much farther than ever. To say that he foresaw what was to happen, would be doing him the greatest injustice. He foresaw it not, most certainly; for no man could foresee such complicated events. But had he conducted himself upon solid principles; or by the rules which, we now say, common honesty required, he certainly never would have countenanced the subsequent operation.

The fourth creation of actions was in the beginning of September 1719.

In the interval between the third and the fourth creation, the Regent made over the general farms to the company, who paid three millions and a half advanced rent for them. And the company 255obliged themselves to lend the King (including the 100 millions already lent upon the first creation of actions) the immense sum of 1600 millions at 3 per cent. that is, for 48 millions interest. Now it is very plain, that before the month of September 1719, it was impossible they could lend the King so great a sum.

They had already lent him, in September 1718, 100 millions, by taking the billets d’etat for the subscription of the first creation of actions; the second creation had produced coin, laid out in mercantile preparations; and the third creation of actions, at the standard value, was worth no more than 50 millions of livres: this was their whole stock. Where then could they find 1500 millions more to lend?

I therefore conclude, that at this time, the combination which I am now to unfold, must have, more or less, taken place between the Regent and this great company.

The public was abundantly imbibed with the notion of the prodigious profits of the company, before they got possession of the general farms. No sooner had they got that new source of riches into their hands, than they promised a dividend of no less than 200 livres on every action, which was ten times more than was divided on them when at first created.

The consequence of this was, that (supposing the dividend permanent and secure) an action then became as well worth 5000 livres as at first it was worth 500 livres; accordingly to 5000 did it rise, upon the promise of the new dividends.

But what could be the motive of the company to promise this dividend, only three months after their establishment? Surely, not the profits upon a trade which was not as yet opened. Surely, not the profits upon the King’s farms; for these profits it was greatly their interest to conceal.

Their views lay deeper. The Regent perceived that the spirit of the nation was too much inflamed, to suffer them to enter into an examination of the wonderful phænomena arising from the establishment of the bank, and company of the Indies. If the company 256promised 200 livres dividend, the public concluded that their profits would enable them to pay it; and really in this particular the public might be excused.

The plan, therefore, concerted between the Regent and the company seems to have been, to raise the actions to this great value, in order to suspend a greater quantity of notes in circulation.

This was to be accomplished, 1. by the Regent’s purchasing the actions himself from the company; 2. by borrowing back the notes he had paid for them, in order to fill up the loan which the company had agreed to make; 3. to pay off all the public creditors with those notes so borrowed back; and 4. when the nation was once filled with bank paper, to sell the actions he had purchased from the company, to withdraw his own paper, and then destroy it.

By this operation the whole debts of France were to be turned into actions; and the company was to become the public debtor, instead of the King, who would have no more to pay but 48 millions of interest to the company.

By this operation also, the Regent was to withdraw all the bank notes which he had issued for no other value but for the payment of debts; which notes were demandable at the bank; and for the future, he was to issue no more (I suppose) but for value preserved.

CHAP. XXX. Inquiry into the Motives of the Duke of Orleans in concerting the Plan of the Missisippi.

Now if we examine the motives of the Regent, with regard to this plan, and suppose that he foresaw all that was to happen in consequence of it; and if we also suppose that he really believed that the company never could be in a situation to make good the 257dividend of 200 livres, which they had promised upon their actions; in a word, if we put the worst interpretation upon all his actions, we must conclude that the whole was a most consummate piece of knavery.

But as this does not appear evidently, either by the succeeding operations, or ultimate consequences of this scheme, I am loth to ascribe, to that great man, a sentiment so opposite to that which animated him, on his entrance upon the regency, when he nobly rejected the plan proposed to him for expunging the debts altogether.

I may therefore suppose, that he might believe that the company to whom he had given the mint, the tobacco, the farms, and the trade of France, and to whom he soon after gave the general receipt of all the revenue, might by these means be enabled to make good their engagements to the public. I say, this may be supposed; in which case justice was to be done to every one; and the King’s debts were to be reduced to 48 millions a year, instead of 80 millions.

That this is a supposeable case, I gather from Dutot, who gives us an enumeration of the revenue of the company, Vol. I. p. 162. as follows:

Revenue of the Company of the Indies.

Interest paid to the company per annum 48 000 000

Profits upon the general farms 15 000 000

Ditto upon the general receipt of other taxes 1 500 000

Ditto upon the tobacco 2 000 000

Ditto upon the mint 4 000 000

Ditto upon their trade 10 000 000

In all of yearly income 80 500 000

Now if we suppose the interest of money at 3 per cent. this sum would answer to the capital of 2664 millions, which was more than all the debts of the kingdom, for which they were to become answerable.

258Upon this view of the matter, I say, it was possible, that the Regent might form this plan, without any intention to defraud the creditors; and more I do not pretend to affirm.

I have said that he purposely made the company raise the price of their actions, in order to draw more notes into circulation.

To this it may be objected, that he might as well have paid off the creditors with bank notes, without going this round-about way to work; and have left them to purchase the actions directly from the company.

I answer, that such an operation would have appeared too bare-faced, and might have endangered the credit of the bank. Whereas in buying the actions, which were run upon by every body, the state only appeared desirous of acquiring a share of the vast profits to be made by the company. Farther,

As the company appeared willing to accept of bank notes from the state, in payment of their actions, this manœuvre gave an additional credit, both to the actions, and to the notes; a thing very necessary to be attended to, in a scheme which was calculated to bring about a total transformation of the security for the King’s debts.

I must however observe, that at the period concerning which we are now talking, (viz. at the time the company promised the dividend of 200 livres per action) the plan we have been describing could not have been carried into execution.

There were at that time only 400,000 actions created, rated at 777 millions: of these were disposed of at least 250,000, to wit, the original 200,000; and the second creation of 50,000, sold for coin. Besides, there were then only coined in bank notes for 520 millions. So there was not a possibility of executing the plan I have mentioned, as matters then stood.

It is from the subsequent operations of the system, that it appears evident that this and this only could be the intention.

We shall see how the number of actions were multiplied, without any other view than to make the public imagine, that the funds necessary for carrying on the trade of the company were immense.

259The number of the actions sold to the public was very inconsiderable, compared with those sold to the Regent, and found in his hands at the blowing up of the system.

Besides, at the period when the number of actions was carried to the utmost, viz. to 624,000, the bank notes bore no proportion to their value; for, on the 4th of October 1719, when the last creation of actions was made, the bank notes did not exceed the sum above specified, to wit, 520 millions.

But in tracing the progress of the system upon the table, we perceive, that after the actions were once carried to their full number, (October 4th, 1719) then the coining of bank notes began at a most prodigious rate; in so much, that by the month of May 1720, they were increased from 520 millions, to above 2696 millions; and all this sum, except 461 millions, were found in circulation.

Farther: We shall see, that when the Regent and the company made out their accompts, there were found in the Regent’s hands no less than 400,000 actions, which were burnt; and 25 millions of interest upon the sum of money due by the King to the company, extinguished.

These facts prove beyond a doubt, that these 400,000 actions had been bought with the notes coined posterior to the 4th of October 1719; otherwise the actions could not have become the property of the state.

Besides, it was acknowleged publicly, that the notes were coined for that purpose. (See Dutot, Vol. I. p. 144.) In the next place, it is evident, that the notes which had been given in payment for those actions, had been borrowed back, to fill up the loan of 1600 millions of livres; which the company never could have otherwise lent to the King. And in the last place, it is certain that the public debts were paid off with these notes, so borrowed back from the company: because we shall find the notes in circulation at the blowing up of the system, in May 1720; and we shall see how they were paid and withdrawn in October following.

260This detail I own is a little long, and perhaps too minute: but I thought it necessary to prove the solidity of my conjectures concerning the Regent’s motives in concerting this plan; which no French author, that ever I saw, has pretended to unfold, except by hints too dark to be easily comprehended.

What is now to follow, will still set my conjectures in a fairer light. We have seen already from the table, with what rapidity the creation of actions went on from the 13th of September to the 4th of October 1719. No less than 324,000 were created in that interval.

Yet Dutot, vol. ii. p. 169, et seq. positively says, that on the 4th of October, the company had not sold for more than 182,500,000 livres of their actions. Now the total value, as they were rated when created, extended to 1,797,500,000; so there was little more than one tenth part of the value sold off.

Why therefore create such immense quantities of actions, and so far beyond the demand for them, but to throw dust in the eyes of the public; to keep up the spirit of infatuation; and to pave the way for the final execution of the plan?

The actions being brought, by four successive creations, of the 13th and 28th of September, the 2d and 4th of October, to their full number, the company, during that interval, obtained the general receipt of the whole revenue. Thus, says Dutot, vol. ii. p. 197. the company was intrusted with the whole revenue, debts and expences of the state, and all unnecessary charge was avoided in collecting and administring it.

In the month of November 1719, the credit of the bank, and of the company, was so great, that the actions rose to 10,000 livres. Notwithstanding, says Dutot, vol. ii. p. 198. that the company did what they could to keep down the price, by throwing into the market, in one week, for no less than 30 millions. He assigns seven different reasons for this, which, all put together, are not worth one; to wit, that the Regent was ready to buy up every one that lay upon hand, in concert with the company.

261If the company had been inclined to keep down the price of the actions, they had nothing more to do than to deliver part of the vast number they still had unsold, at the standard value of 5000 livres, at which they were rated when created; and this would have effectually prevented their rising to 10,000 livres.

But it was the interest of the Regent, who was at that time well provided with actions, to stock-job, and to buy with one hand, while he was selling with the other: these operations were then as well known in the street called Quinquempoix, as now in Change-alley.

As a proof of the justness of my allegation, that the Regent was doing all he could to raise the price of the actions, Dutot informs us, in the place above cited, that the bank, at this very time, was lending money, upon the security of actions, at 2 per cent. If that was thethe case, how was it possible that an action, with 200 livres dividend, should sell for less than 10,000 livres, which is the capital corresponding to 200 livres, at 2 per cent.?

This is evident; and were it necessary, it may be proved to demonstration, that the rise of the actions was the consequence of a political combination.

But if money, at that time, came to bear no more than 2 per cent. and if the company was able to afford 200 livres upon the action; where was the inequity of raising the actions to 10,000 livres? I confess I can see none, nor do I perceive either the impossibility or improbability of the two postulata, had matters been rightly conducted.

As to money’s falling to 2 per cent. any man of 20 years old may expect to see it, without a Mississippi: and as for the payment of the dividends, there never were in the hands of the public, nor ever could be, had all the creditors of the 2000 millions of public debts invested in actions at 10,000 a-piece, one half of 624,000 actions disposed of: consequently, the 200 livres dividend would not have amounted, upon 312,000 actions, to more than 62,400,000 livres; 262and the revenue of the company, as we have seen, exceeded 80 millions a year.

This still tends to vindicate the Regent from the gross imputation of fraud, in the conduct of the Missisippi.

But what should still more exculpate that prince, in the eyes of every impartial man who examines the whole conduct of the affair, is the uniform sentiments of the most intelligent men in France concerning the doctrine of money and credit.

When we find Dutot, who wrote against the arbitrary change of the coin; and De Melon, the Regent’s man of confidence and secretary, who wrote for it, two persons considered in France as most able financiers, both agreeing, that during the operations of the system, money never was to be considered but according to denominations; that there was nothing against good policy in changing the value of these denominations; and that paper-money, whether issued for value, or for no value, or for the payment of debts, was always good, providing there was coin enough in France for the changing of it, although that coin did not belong to the debtors in the paper; when these principles, I say, were adopted by the men of penetration in France; when we find them published in their writings, many years after the Regent’s death, as maxims of what they call their credit public; I think it would be the highest injustice to load the Duke of Orleans with the gross imputation of knavery, in the Missisippi scheme.

Law no doubt saw its tendency. But Law saw also, that credit supported itself on those occasions, where it stood on the most ticklish bottom: he saw bank notes to the amount of more than two thousand millions, issued in payment of the King’s debts, without occasioning any run upon the bank, or without suggesting an idea to the public that the bank should naturally have had some fund, to make them good: he saw people, who were in possession of a value in paper exceeding 6000 millions of livres, 60 to the marc, (Dutot, vol. i. p. 144.) look calm and unconcerned, when, in one day, the coin was raised in its denomination to 80 livres in 263the marc; by which operation, the 6000 millions of the day before lost 25 per cent. of their real value. He saw that this operation did not in the least affect the credit of the bank paper; because people minded nothing but denominations.

He saw farther, that by the operation proposed, the whole debt of the King would be transferred upon the company. He saw that these debts, being turned into bank notes, would not be sufficient to buy above 200,000 actions, at the value they then sold for. He knew that the Regent, who had bought 400,000 of these actions at 5000 livres apiece, that is, at half price, would remain in possession of 200,000 actions, after selling enough to draw back the whole of the bank notes issued for the payment of the debts; and he saw that the company of the Indies had a yearly income of above 80 millions to enable them to make good their engagements: besides, he saw a power in the King to raise the denominations of the coin at will, without shocking the ideas of his people, by which means he might have paid the 2000 millions with one louis d’or. Put all these circumstances together, and I can imagine that Law’s brain was turned; that he had lost sight of all his principles; and that he might believe that his former common sense, was, at that time, become absolute nonsense in France.

That common sense may become nonsense, is a thing by no means peculiar to France, but quite peculiar to man.

I shall offer but one argument more, to prove that the Duke of Orleans, and Law, could have no premeditated design of defrauding the public, by these wonderful operations; which is, that admitting the contrary, would be allowing them an infinite superiority of understanding over all the rest of Europe.

Until the bubble burst, no body could know where it was to end: every thing appeared very extraordinary indeed; and the fatal catastrophe might have been expected from the greatness of the undertaking, merely. But if there had been any roguery in the plan itself, it must have appeared palpable long before; because 264the whole of the operations in which only it could consist, were public.

All the notes were created by public act of council; so were the actions: the loan of 1600 millions to the King, by the company, was a public deed; so was the alienation in their favour, of 48 millions for the interest of that sum. Notes were avowedly coined in order to purchase actions, (Dutot, Vol. I. p. 144.) the creditors were avowedly paid with bank notes, at a time when it was forbid to have 500 livres in coin in any person’s custody; consequently, it was also forbid to demand coin for bank notes.

Now all this was going on in the months of February, March, April, and the beginning of May 1720; and no suspicion of any failure of credit. The coin also was sometimes raised, sometimes diminished in its value, and still the fabric stood firm.

Under these circumstances, to say there was knavery, is to say that all the world were absolutely blockheads, except the Regent and John Law: and to that opinion I never can subscribe.

It may seem surprising that I should take so much pains to vindicate the two principal conductors of that scheme. My intention is not so much to do justice to their reputation, which has been grossly calumniated by many, who have written the history of those times, as to prove, that an ill concerted system of credit may bring ruin on a nation, although fraud be out of the question: and if a nation be plunged into all the calamities which a public bankruptcy can occasion, it is but a small consolation to be assured of the good intentions of those who were the cause of it.

265

CHAP. XXXI. Continuation of the Account of the royal Bank of France, until the total Bankruptcy on the 21st of May 1720.

I now resume the thread of my story. We left off at that period when the credit of the company and of the bank was in all its glory, (November 1719) the actions selling at 10,000 livres; dividend 200 livres a year per action; and the bank lending at 2 per cent.: all this was quite consistent with the then rate of money.

In this state did matters continue until the 22d of February 1720, when the bank was incorporated with the company of the Indies.

The King still continued guarantee of all the bank notes, none were to be coined but by his authority: and the controller-general for the time being, was to have, at all times, with the Prevot des marchands of Paris, ready access to inspect the books of the bank.

As the intention, at the time of the incorporation, was to coin a very great quantity of notes, in order to buy up the actions; and to borrow back the money, in order to pay off the creditors; it was proper to gather together as much coin as possible, to guard against a run upon the bank: for which purpose the famous Arret de Conseil, of the 27th of February 1720, was published, forbidding any person to keep by them more than 500 livres in coin.

This was plainly annulling the obligation in the bank paper, to pay to the bearer on demand the sum specified, in silver coin.

Was it not very natural, that such an arret should have, at once, put an end to the credit of the bank. No such thing however happened. The credit remained solid after this as before; and no body minded gold or silver any more than if the denomination in their paper had had no relation to those metals. Accordingly, many, who had coin and confidence, brought it in, and were glad to get paper for it.

266The coin being collected in about a week’s time, another Arret de Conseil, of the 5th of March, was issued, raising the denomination from 60 livres to 80 livres the marc. Thus, I suppose, the coin which the week before had been taken in at 60 livres, was paid away at 80: and the bank gained 33⅓ per cent. upon this operation. Did this hurt the credit of the bank paper? Not in the least.

So soon as the coin was paid away, which was not a long operation, for it was over in less than a week; another Arret de Conseil, of the 11th of the same month of March, came out, declaring that, by the first of April, the coin was to be again reduced to 70 livres the marc, and on the first of May to 65 livres. Upon this, the coin, which had been paid away the week before, came pouring into the bank, for fear of the diminution which was to take place the first of April. In this period of about three weeks, the bank received about 44 millions of livres; and those who brought it in thought they were well rid of it.

It was during the months of February, March, and April 1720, that the great operations of the system were carried on.

We may see by the chronological anecdotes in the 36th chapter, what prodigious sums of bank notes were coined, and issued during that time. It was during this period also, that a final conclusion was put to the reimbursing all the public creditors with bank notes: in consequence of which payment, the former securities granted to them by the King, under the authority of the parliament of Paris, were withdrawn and annulled.

Here then we have conducted this scheme to the last period.

There remained only one step to be made to conclude the operation; to wit, the sale of the actions, which the Regent had in his custody to the number of 400,000.

These were to be sold to the public, who were at this time in possession of bank notes to the value of 2 235 083 590 livres. See the foregoing table.

Had the sale of the actions taken place, the notes would all have returned to the bank, and there have been destroyed: by which 267operation, the company would have become debtor to the public for the dividends of all the actions in their hands, and to the King for all those which might have remained in the hands of the Regent. These proportions we cannot bring to any calculation, as it would have depended entirely on the price of the actions during so great an operation; and on the private conventions between the parties, the Regent and the company.

But alas! all this is a vain speculation. The system which hitherto had stood its ground in spite of the most violent shocks, was now to tumble into ruin from a childish whim.

In order to set this stroke of political arithmetic in the most ludicrous light possible, I must do it in Dutot’s own words, uttered with a sore heart and in sober sadness.

He had said before, that the coin of France was equal to 1200 millions of livres at 60 livres the marc. This marc was now at 65 livres (in May 1720, as above) so the numerary value, as he calls it, (that is the denomination) of the coin was now risen to 1 300 000 000; but the bank notes circulating in the month of May were carried to 2 696 400 000; then he adds,

"The 1300 millions of coin which were in France, were very far from 2696 millions of notes. In that case, the sum of notes was to the sum of coin, nearly as 2²⁄₂₇ are to 1; that is to say, that 207 livres 8 sols 1⅞ denier in notes, was only worth 100 livres in coin; or otherwise, that a bank note of 100 livres, was only worth 48 livres 4 sols 5 deniers in coin, or thereabouts." Would not any mortal conclude from this, that the whole sum of 1300 millions had been in the bank, as the only fund for the payment of the paper?

This is a laboured equation, and from it we have a specimen of this gentleman’s method of calculating the value of bank paper: but let us hear him out.

“This prodigious quantity of money in circulation, says he, had raised the price of every thing excessively: so in order to bring down prices, it was judged more expedient to diminish the denomination of the bank notes, than to raise the denomination of 268the coin; because that diminished the quantity of money, this augmented it.”

This was the grand point put under deliberation, before the famous arret of the 21st of May was given, viz. whether to raise the value of the coin, which did not belong to the bank, but to the French nation, to double the denomination it bore at that time, that is, to 130 livres the marc, by which means the 1300 millions would have made 2600 millions, or to reduce the 2600 millions of bank notes to one half, that is, to 1300 millions, the total denomination of the coin.

To some people it would have appeared more proper, to allow matters to stand as they were, as long as they would stand, at least until the actions had been all sold off; but this was not thought proper. After a most learned deliberation, it was concluded to reduce the denomination of all the paper of France, bank notes as well as actions, instead of raising the denomination of the coin; and this because prices were in proportion to the quantity of the denominations of money.

The arret was no sooner published than the whole paper fabric fell to nothing. The day following, the 22d of May, a man might have starved with a hundred millions of paper in his pocket.

This was a catastrophe the like of which, I believe, never happened: it is so ridiculous that it is a subject fit only for a farce.

Here Dutot’s lamentations and regrets are inimitable.

In one place he says, “Credit was too far stretched to be solid. It was therefore proper to sacrifice one part, to give a solidity to the other. Even this was done; but the consequences did not correspond to the intention. Confidence, which is the soul of credit, eclipsed itself, and the loss of the bank note, drew on the loss of the action.”

In another place he says, “This arret of the 21st of May, which according to some blessoit l’equité” (a very mild expression!) “destroyed all confidence in the public; because the King had diminished 269one half of that paper money (the bank notes) which had been declared fixed.”

Is it not a thousand pities that confidence should have disappeared upon so slight a wound given to equity, only in the opinion of some? For Dutot thought the operation perfectly consistent with the principles of public credit.

He tells us, that a letter was writ to calm the minds of the people, and to shew them how absurd it was, to allow the paper to be fixed, while the coin varied: but, says he, “as there was a revenue attached to the action, the value of that paper did not depend so much upon the capital, as on the sum of the interest.” Very just. But were the dividends to stand at 200 livres, without suffering the same diminution as the action? And how was confidence to subsist in a country, where the denominations of both the paper and the coin were at the disposal of a minister?

The diminution upon the paper, by the arret of the 21st of May, raised a most terrible clamour; and Law became the execration of France, instead of being considered as its saviour. He was banished, and reduced to beggary the same day.

What profit could either the Regent, or Law, have reaped from the success of such an operation? Had the coin been raised to 130 livres the marc, no hurt would probably have ensued, and the same effect would have been produced.

Had matters been left without any change at all, no bad consequences would have followed: these existed only in the heads of the French theorists. There was, indeed, twice as much money in bank notes as in coin, in the whole kingdom of France: and what then?

When the Regent saw the fatal effects of his arret of the 21st of May, he revoked it on the 27th of the same month. On the 29th, he raised the coin to 82 livres 10 sols in the marc, and re-established all the paper at its former denomination: but, as Dutot has said, confidence was gone, and was no more to be recalled. 270Nothing surprises me, but that she lived so long under such rough management.

Dutot, in talking of this augmentation of the coin, on the 29th of May, to 82 livres 10 sols, says, “This operation was consistent with the principles of public credit, and advantageous. They would have done better had they pushed the augmentation to 135 livres the marc; which would have made the specie of France equal to the sum of bank notes.” These are his words, p. 165.

Are not these very sensible principles, coming from a man who has writ a book, which indeed few people can understand, in order to prove the great hurt of tampering with the coin of France?

CHAP. XXXII. Conclusion of the Missisippi Scheme.

The Regent, persuaded that the blunder of the 21st of May was absolutely irreparable, fell to work next to clear accompts with the company.

He owed them 1600 millions capital, and 48 millions a year of interest upon it.

On the other hand, he had in his possession no less than 400,000 actions, which at 200 livres dividend, which the company was obliged to pay, amounted to 80 millions a year.

How the Regent and the company settled matters, I do not know precisely. This, however, is certain, that by the arret of the 3d of June 1720, the number of 400 000 actions, belonging to the Regent, were burnt; and 24 000 more which had been created by his particular order, the 4th of October 1719, and never delivered to the company, were suppressed.

271On the other hand, the company ceded 25 millions a year, of the 48 millions which had been transferred to them.

That sum was constituted anew upon the town-house of Paris, as a fund to be subscribed for by the proprietors of bank notes, at the rate of 2½ per cent. or as the French call it at the 40th penny. (Dutot, p. 168.) In consequence of this, 530 millions of bank notes were subscribed for, and paid in, in the month of June 1720.

After the destruction of the 400,000 actions, the credit of the bank notes languished until the 10th of October 1720.

The object for which they were created was now gone. The whole scheme of transferring the King’s debts upon the company vanished in the conflagration of the actions. What was then to be done?

The bank was at an end: 2235 millions of discredited bank notes in circulation, and a small sum of coin to make them good, was a situation which no authority could long support.

The resolution then was taken to put a final conclusion to this great affair; to bid a long farewel to credit and confidence; and to return upon the old system of rents upon the town-house of Paris; and of coming at money in the best way they could.

We shall now see how this was accomplished; and from that form a pretty good guess at the extent of the fraud committed, with respect to the creditors of France; not so much, I think, from any intrinsic defect in the Missisippi scheme, as from the distress the nation was thrown into, by the ignorance of those who over-ruled John Law in conducting it.

We have seen how the actions were reduced to the number of 200,000; we must now give an account of the deplorable fate of the bank notes.

By the arret of 10th of October 1720, all bank notes were entirely suppressed; and it was declared, that after the 1st of December following, they were to have no course whatsoever.

Here follows the arrangement of this great affair, viz. the liquidation of 2 696 400 000 livres of bank notes as regulated by this arret.

272

1mo, Of the above total of notes coined, there remained in the bank at that time, for 707 327 460 livres.

2do, Subscribed for at 2½ per cent. in June 1720 530 000 000

3tio, Carried to the bank by private people as a fund of credit there 200 000 000

4to, Paid in coin by the bank 90 000 000

1 527 327 460

This sum of notes was ordered to be burnt by the arret of the 10th of October.

The remainder still in the hands of the public, says the arret, was to the amount of 1 169 720 540 livres, and the King declares, that the holders of them might employ them as follows:

1mo, In purchasing the remainder of the subscription of 25 millions of rents on the town-house of Paris, at 2½ per cent. inde 470 000 000 livres.

2do, In purchasing a farther sum constituted on the town-house of Paris, of 8 millions of perpetual annuities, at the rate of 2 per cent. or at the 50th penny 00 000 000

3tio, In purchasing a farther sum constituted on the town-house of Paris, of 8 millions of life-rent annuities, at 4 per cent. or at the 25th penny 100 000 000

These sums amounted to 970 000 000

Sum above 1 527 327 460

Together 2 497 327 460

There still remained outstanding about 200 millions of bank notes.

These were ordered to be disposed of in several different ways, mentioned in the arret of the 10th of October; which it would be needless to mention, as it would require a long explanation to make the thing understood: let it suffice that there was an outlet provided for them, which brought in between 2 and 3 per cent.

273Thus we see the conclusion of the whole affair.

At the beginning, the King’s debts stood at 2000 millions capital, and 80 millions interest very ill paid.

At the end of the scheme there had been coined of notes about 2696 millions.

Of which in the bank, October 10, 1720 707 mil.

And paid in coin 90

This substracted 797 millions.

There remained outstanding in bank notes^[18] 1899 millions.

Add to this 100 millions still due by the King to the company for the billets d’etat withdrawn in constituting the first 200,000 actions which still subsisted, and for which the company was to receive 5 per cent. 100 millions.

So the capital of the King’s debts remained at 1999 millions.

Balance gained by the whole operation 1 million.

Consequently there was little or no fraud as to the capital 2000 millions.

Let us next examine the state of interest.

The interest at the last was,

1mo, Of rents constituted in June 1720, on the town-house, at 2½ per cent. or at the 40th penny 25 millions.

2do, Ditto of the 10th of October 1720, at 2 per cent. or at the 50th penny 8 millions.

274 3tio, Ditto at ditto upon lives at 4 per cent. or at the 25th penny 4 millions.

4to, Due to the company upon the original stock of 100 millions still paid them at this day at 5 per cent. 5 millions.

5to, For the 200 millions of credit at the bank, suppose at the rate of 3 per cent. 6 millions.

6to, For the last 200 millions provided for in different ways, suppose at 2½ per cent. 5 millions.

7to, Allowed to the company to indemnify them for the loss they sustained by these arbitrary ways of reckoning with them, 80 millions at 5 per cent. still paid them 4 millions.

57 millions.

The interest at first was 80 millions

The interest at last was 57 millions

Defrauded by the scheme 23 millions a year.

This is (as near as I can guess at it) the state of the French bankruptcy in 1720.

The creditors were robbed of 23 millions a year. I call it robbed, because the interest due to them was diminished by that sum, without their consent, and in consequence of the most arbitrary proceedings; whereas, had the system been conducted with ability, the whole of the debts would have been brought to an interest of 48 millions, instead of 57, and no body would have complained of injustice.

Money likewise might have been brought to 2 per cent. The 1600 millions borrowed of the company at 3 per cent. would then have been reduced to two; which would have brought the 48 millions of interest, upon the whole, to 32 millions: and France, from being reduced to beggary by the King’s wars, would have become the most flourishing state in Europe.

275Let us next guess at what may reasonably be supposed to have been the largest sum of coin ever collected in this bank.

I imagine that the far greater part of all the coin supposed to be in France during the Missisippi scheme, remained in private hands, without ever coming into the bank. My reason for being of this opinion is,

Law never could have had more than the value of his original stock, and all the value of notes he had in circulation.

It is absurd to imagine he ever should have had the half, or near it; but let me suppose it,

The bank stock was 6 millions.

The notes he issued were 59 millions.

In all 65 millions.

This is a trifle compared with 1200 millions.

Next for the united bank. The time at which the greatest quantity of coin was collected, must have been when all credit failed, that is, on the 21st of May 1720.

At that time coin was taken out of commerce: every one was forbid to have above 500 livres in possession; and every operation had been used to call it in.

At this time, we know that all the notes coined were issued, except to the value of 461 316 410 livres.

Now we have seen that on the 10th of October following, there were in the bank to the value of 707 327 460 livres.

Let me, therefore, suppose, that from the 21st of May to the 10th of October, the bank paid away in coin, the difference between these

two sums; to wit, 246 011 050 livres.

Add to that sum what was then in the bank, viz. 90 000 000

Sum 336 011 050

This sum is all we possibly can suppose to have been in the bank on the 21st of May, when credit failed.

We must reckon this sum of coin at 82 livres 10 sols per marc, the then value; which makes about 8 146 600l. sterling. A large 276sum, no doubt; but little more than ⅕ of 40 millions sterling, the value of 1200 millions of livres, at 60 to the marc, as has been said. Consequently, either those 40 millions sterling were not then in France, or the greatest part of the sum had remained in private hands during this whole operation.

In this light I see the Missisippi scheme. I may, no doubt, be mistaken in many things: the lights, or rather the glimmerings, by which I have been conducted through this inquiry, must plead my excuse.

But it is not so much facts as principles, I have been investigating through this whole disquisition; and the imperfect account I have been able to give of the former, will at least point out, I hope, the notions which the French nation, at that time, had of the latter. If the contrast between French principles, and those I have laid down, tend to cast any light upon the subject of paper credit in general, my end is accomplished: if they ever prove of use to mankind, I shall not think my labour lost.

CHAP. XXXIII. Why Credit fell, and how it might have been supported.

I shall now make a few general observations upon the total and sudden fall of credit in France in May 1720: and I shall suggest the means by which, I think, it might have been sustained, even after all the preceeding mismanagement.

Was it any wonder that the French should be astonished at this prodigious revolution, at this immense value of paper on the 21st of May, and at the total discredit of every bit of it the day following?

277If there was a value, said they, what is become of it? If there never was any value, how could a nation be so deceived? This phænomenon has puzzled many a head; but the nature and principles of credit furnish an easy solution of it.

In deducing the principles of credit, we have shewn that a permanent and well secured fund of interest is always equal in value to a corresponding capital.

The difference between a permanent and well secured fund, and a precarious and ill secured fund, consists in this, that the first never can disappear, and the other may.

Now the fund, in this case, was at first real and did exist; but it was rendred precarious, by a blundering administration: then credit failed, and in that convulsion, the fund of interest was fraudulently diminished by an act of power.

Had the true principles of credit been understood in France, the bank notes and actions might have been supported, even after the arret of the 21st of May: and all the monstrous value of paper, raised so high by the low rate of interest, might have been preserved: consequently that value, in capital, really existed relatively to the rate of interest.

As the object of the present disquisition into the principles upon which the Missisippi scheme was conducted, is only intended as an illustration of the principles of credit in general; I shall first account for the wonderful phænomenon above mentioned, and then shew how, in the greatest of all the French distress, their credit might have been re-established in a more solid manner than ever.

As to the wonderful phænomenon of the prodigious wealth created by the system, and annihilated in one day, I answer, that there had been no creation of wealth at all, except in consequence of the fall of interest.

1mo, We have seen that at the death of the late King of France, the interest of his debts amounted to 80 millions. Was not this a fund which ought to have been made solid and permanent? Will 278any man say, that a regular plan of paying this interest was a means of creating new wealth? Certainly not.

2do, These debts were secured by contracts of constitution of annual rents upon the town-house of Paris: a security taken in the name of a particular creditor, which requires a form of law to transfer.

By the scheme we have been explaining, all these securities were changed: and instead of constitutions of rent, bank notes, in which the King was equally debtor, were given.

Will any man say, that this was the means of either increasing or diminishing the wealth of France? Certainly not. A man who has a good bond in his pocket is as rich before it is paid with bank notes as after: but he has not so much money in his hands; because the bond is not money, and the notes are.

3tio, We have said that the interest of the King’s debts amounted to 80 millions a year, at 4 per cent.

We have seen how the company of the Indies were provided with a fund equal to this sum, arising from the 48 millions which the King paid for the loan of the paper with which the debts were to be paid, and from many other lucrative branches of revenue; which instead of being burthensome to the King, were, on the contrary, a means of augmenting his income, by the advanced rent the company gave for the different farms which produced them.

Had the public creditors, therefore, vested their claims in actions, they would, in consequence of that operation, have become sharers in the fund of 80 millions a year, administred by themselves, (and they would then have been the company) open to be improved by trade abroad, and by a good administration at home.

Had this system been carried on in a plain easy way, consistently with common sense, the public creditors would have been paid; the King’s revenue augmented; and it would have been put under a good and a cheap administration.

279But when, by the absurd operations of changing the denominations of coin and paper, and wantonly playing with every man’s property, the creditors saw themselves standing on the brink of a precipice; and finding, instead of a good contract on the town-house of Paris, a bank note put into their hands, which might be diminished in its value by one half every month, while at the same time the coin might be raised to double, it was very natural to suppose, that the intention of the King’s ministers was to withdraw from them totally these 80 millions, less or more, to which they were entitled: in which case, there was an annihilation indeed of all the notes; but there was no annihilation of wealth: for in that case, the wealth was still the same, only it was transferred from the creditors to the King the debtor: that is, the creditors were defrauded.

On the other hand, stood the proprietors of the actions sold. These were in use to make a traffic of buying and selling the 200,000 actions which had been in their hands ever since September 1717, when they were first created. For we have shewn, that the posterior creation of actions by the united company, was a mere delusion, as they were all found in the custody of the Regent. The actions, I say, were immediately put into a state of stagnation; because of the discredit cast upon the bank notes, with which it had been usual to buy them.

4to, I must observe, that the stagnation of a paper which carries no interest, is equal to a temporary annihilation. The holder then is deprived of the use of his money; and he is not paid for the loss he sustains.

If, therefore, it had been possible to have given a new activity to this bank paper, without allowing it to die away, as it were, in this temporary fit of fainting, credit would have revived: all accompts would have been kept clear, for this is the use of paper money, and so short a shock would hardly have been felt.

But the great damage resulting to the public, upon every occasion of this kind, proceeds from the delay in applying the proper 280remedy. When any paper is discredited, it immediately falls in its value. The person then who is the original and real creditor for the whole value, and in whose hands the paper is when it suffers the discredit, sells at discount: this is an irretrievable loss to him; and when the paper recovers its credit again, either in part, or on the whole, the profit then belongs to the person who had bought it at discount, and does not go to indemnify the real sufferer.

This was the case with respect to the notes of the French bank: they were allowed to languish from the 21st of May that they were discredited, until the 10th of October, when their fate was decided, as has been said.

Farther, we have seen, that this whole movement of credit had for its basis 80 millions a year, originally paid to the creditors for their interest. This sum answered to the capital of 2000 millions; because at the old King’s death, interest was fixed at 4 per cent.

When, by the operations of the system, all this capital was turned into money, that is, bank notes, the regorging plenty of it made interest fall to 2 per cent. consequently, the capital, which constantly draws its value from the interest paid for it, rose to 4000 millions. We have said that the total value of the paper rose to 6000 millions; but we must reflect, that above 2000 millions of these 6000 millions was in bank notes, and employed in buying of actions. So that both the notes and the actions must not be reckoned as existing together.

Had the Regent sold the actions, he would have burnt 2000 millions of bank notes, and thus the value in paper would have remained at 4000 millions, so long as interest remained at 2 per cent.; and had interest fallen still lower, and dividends remained at 200 livres per action, the value of actions, and consequently of this capital of 4000 millions, would have risen in proportion, just as the value of the capital of the debts of Great Britain rises and falls according to the rate of money; although the same sum of interest be paid to the creditors at all times.

281This augmentation, therefore, upon the value of all capitals, during the Missisippi, of lands as well as actions, was in consequence of the fall of interest, and from no other artifice whatever. Lands in France, at that time, sold at 80 and 100 years purchase. [Dutot, Vol. II. p. 200.]

When credit failed, and when all the circulating paper was thrown into a state of stagnation, interest rose, in proportion to the deficiency of the supply for the demands of borrowers. The value of capitals then diminished. But this might have happened from another cause, had there been no bankruptcy, or intention to defraud the creditors: a war might have produced it; or any circumstance which might have raised the rate of interest.

The rise, therefore, upon capitals, from the fall of interest, I consider here as no acquisition of wealth: I reckon wealth to be that which is the annual produce of the capitals.

So much for the resolution of this wonderful phænomenon.

I must now shew that in the height of the distress, the confidence of the public was still to be regained, and credit recovered, even after the fatal arret of the 21st of May 1720.

I lay it down as a principle, that whoever has a sufficient fund, and pays interest regularly for the money he owes, runs no risk of losing his credit.

So soon, therefore, as the Regent found that by his arret of the 21st of May, all credit had disappeared; had he, upon the 27th of the same month, or at the time he raised the coin to 82 livres 10 sols per marc, ordered all bank notes presented to the bank, either to be paid in coin, or marked in the books of the bank as bearing interest at 2 per cent. I say, credit would not have suffered in any comparison to what it did. No body then would have sold a note at discount; and had it been necessary, he might have ordered the interest to be paid monthly.

The authority I have for this opinion is Dutot, who says, that upon opening the subscription of 25 millions in the month of June, the notes fell in their value 11½ per cent. only.

282Now the rate of this subscription was at 2½ per cent. as we have seen; consequently, if 100 livres of notes lost but 11½ per cent. they were worth 88½ livres in coin; but these 100 livres in notes were worth 2½ per cent. because the subscription was open at that rate: consequently 88½ livres in coin was also worth 2 livres 10 sols per annum: consequently interest, at that time, was at 2.825 per cent. that is, below 3 per cent. even after the bankruptcy.

Where then was the great harm? Where was the occasion to fly immediately to the destruction of actions, which were in the Regent’s own hand? A little patience, and good management, would have set all to rights.

I would, therefore, have left the notes in circulation under this regulation, viz. that such as should be presented to the bank should have had a transfer of 2 per cent. paid quarterly; or a value, in actions, at 10,000 livres per action; which is the capital answering a dividend of 200 livres at 2 per cent. at the option of the holder: and in case interest had come to fall still lower, the price of actions might have been augmented.

I would have set before the public a full and exact account of the company’s funds. I would have banished all mystery from the affairs of credit. I would have registred a declaration in parliament, setting forth,

1mo, That all future changes either upon the denominations of paper or coin, were contrary to the maxims of good government.

2do, That all stipulations between the King and his creditors were to be inviolable. And,

3tio, That the parliament of Paris should for ever remain invested with an exclusive right to watch over those regulations in time to come; and I would have bound the parliament by a special oath for that purpose. I would even have had the King to take the same oath: and he might have ratified it at his coronation in 1725.

By these steps I should have vested a new power in the Kings of France which they never had before: a power of having money from their subjects, from their allies, and from their enemies: a 283power they have not, nor ever will have, until the principles of credit be better understood among them.

Had such a plan been followed, I have not the least doubt, but that, 1. The actions would have been sold at a very great advanced value above the standard of 5000 livres, at which the Regent had bought them: 2. That money would have come back to 2 per cent. and then, 3. Had banks been established upon a proper plan, ease, with industry, would long ere now have appeared in every corner of that kingdom.

How infinitely more easy would it have been to establish such a plan in 1720 than at present? At that time the most difficult part of the whole was executed. The creditors had taken notes for their claims: the credit then was given. There was nothing to be done but to support it. The creditors were then at the mercy of the state: at present the state is at the mercy of the creditors. Were such operations on coin to take place at present, as were then familiar; were the King at present to attempt to turn the constitutions of rent, perpetual and life-annuities, into any other form than what they have, the credit of France would be undone for a long time; and who knows what views of ambition a situation so deplorable might not stir up in certain courts of Europe.

What state would pay its debts, if it durst do otherwise? And what state can diminish its debts in any other way than by lowering the interest upon them? But of this more in the proper place.

284

CHAP. XXXIV. How the diminishing the Denomination of the Paper in Circulation, by the arret of the 21st of May 1720, destroyed the Credit of France, when the same arbitrary Measures taken, with regard to the Coin, had produced no such Effect.

This question is curious, and I shall endeavour to resolve it in the best way I can, before I conclude this subject.

The first thing to be done is to point out the immediate effects which resulted upon diminishing the denomination of the paper; because the destruction of the credit of France was not the immediate consequence of this arret; but the ultimate effect of a chain of consequences which followed indeed very quick upon one another.

The paper had been declared, against the opinion of Mr. Law, by an Arret de Conseil of the 22d of April 1719, une monnoie fixe, as has been said. Consequently, any diminution of its denomination was a plain infraction of the public faith. From this declaration in the arret of the 22d of April 1719, the public reaped one notable advantage, which was, that in borrowing and lending paper, every one was sure that the obligations contracted could be dissolved by restoring the very same species of property which had been received; but by diminishing the denomination of it, by the arret of the 21st of May 1720, all such as were debtors, became obliged to discharge their debts at the expence of double the sum of paper borrowed.

The immediate consequence, therefore, of touching the denomination of the paper, was, to shew the public that their fortunes in paper were liable to the same inconveniences as fortunes in specie; that is, that they might be increased or diminished at pleasure. Upon this it was very natural for every one to endeavour to realize 285his paper, and put it into coin: since, in pari casu, it was better to have it in that which had some intrinsic value, than in that which had none at all.

Of all the French paper, the notes were the most easily realized; because there was contained in them a direct obligation upon the bank to pay them in coin. The actions again were more difficult to be converted; because in order to realize them, it was necessary to find people who were willing to give either notes or coin for them.

A run upon the bank, therefore, taking place, upon the arret of the 21st of May, it was obliged to stop payment: this occasioned a general alarm, and destroyed the confidence which the public had had in the state, which is what we mean by public credit.

This point explained, it remains to shew why the augmentations and diminutions upon the specie should not have ruined the credit of the paper.