John Law of Lauriston / Financier and Statesman, Founder of the Bank of France, Originator of the Mississippi Scheme, Etc.

by A. W. Wiston-Glynn

“Mississippi begins to stagger; the actions fall and there are no more buyers; which has happened by Law’s imprudence, and boundless desire for gain. He had raised the actions to such a price that it required above forty millions to pay the interest at four per cent. When the French, by degrees, began to make this calculation, and found that it was impossible that even the King could find his account to furnish such a sum annually to support Mississippi, they found themselves cheated; and they are now crowding to sell out. Law will do what he can to support the actions, but the thing is impossible. The mystery of the matter is this: in the original fund of one hundred millions, the King and the Regent had about forty millions; and the same proportion of additional subscription of fifty millions. The company bought the coinage of the King at fifty millions, to be paid in fifteen months. Besides these fifty millions, the King or the Regent, by selling out when the actions were at four hundred, might have got two hundred millions; at which rate they might have been supported. But by buoying them up to six hundred, to make the Regent win three hundred millions, Law risks to have the whole fabric tumble to the ground. For the French, who run on boldly and impetuously in the beginning of all enterprises, run back with the same impetuosity when once they are rebuffed. I do not know if I have explained this matter to you, so as that you will be able to understand. It is, certainly, something more extravagant and more ridiculous than anything that ever happened in any other country. I wish for your diversion I could but talk one hour to you upon that subject.”

Law, however, was equal to the opposition of his enemies, and treated their efforts to undermine his position with the utmost indifference and contempt. He proceeded apace with the completion of his schemes, and was now approaching the zenith of his power. All that now remained for him to accomplish of his original plans was the purchase of the great farms and several other smaller sources of the national revenues.

The anti-scheme attempted by the brothers Paris, under the auspices of D’Argenson, had been carried out to the extent of a lease of the great revenue farms having been granted to Aymard Lambert, D’Argenson’s valet-de-chambre, but had not been put into operation. Law now came forward and secured the lease on behalf of the Western Company, accomplishing the three-fold object of acquiring a valuable asset for the company, relieving the taxpayers from the intolerable exactions of the farmers, and, lastly, humiliating D’Argenson for the part he took in the anti-scheme. The grant of the great farms was formally made on 27th, and of the other departments of taxation on 31st August. The treasury had derived from these sources the annual revenue of 48,000,000 livres, but Law offered a further sum of 3,500,000 livres for the privilege which was to extend over a period of nine years. The Company now declared its ability to pay a dividend of 200 livres upon its shares, or 40 per cent. upon its capital. Such a declaration at once counteracted the devices of Law’s opponents to lower the price of the shares, and within a few days they rose to a premium of 1000 per cent., at which extravagant price it was even extremely difficult to make substantial purchases. The demand was also created by the condition that allotment of the recently issued shares would only be in favour of those already possessed of stock. “The public,” says Lord Stair, “has run upon this new subscription with that fury that near the double of that sum is subscribed for; and there have been the greatest brigues and quarrels to have place in the subscription, to that degree, that the new submissions are not yet delivered out, nor is the first payment received. Mr. Law’s door is shut, and all the people of quality in France are on foot, in hundreds, before his door in the Place Vendôme.”

Law now made the concluding proposal of his schemes. The absorption of billets d’état by the Company, although extensive, had not yet exhausted them. There still remained almost 1500 million livres in circulation, and Law was anxious to have them liquidated. He accordingly proposed to lend the King a sum of money sufficient for the purpose at 3 per cent. per annum, and at the same time to reduce the interest upon the 100 millions previously advanced at 4 per cent. to a similar rate; and in return for an offer so advantageous, he secured an extension of the various grants to the Company for the uniform period of fifty years. To carry through this, the largest and most important transaction upon which the Company had entered as yet, an issue of 300,000 new shares was made at a price of 5000 livres, thus yielding a premium of 4500 livres. These shares, however, were not to be allotted to the public. The Regent was fully alive to the possibility of enriching himself by securing the whole of the issue and profiting by the rise which would certainly take place in their value. He already was holder of 100,000 of previously issued shares, and of the whole capital of the company only 200,000 were in the hands of the public. The supply was accordingly unequal to the demand, and in the course of two months the shares reached the incredible price of 10,000 livres. A kind of madness had seized the nation. A royal road to fortune had been opened up by the ingenious foreigner; and had lured along its easy path an excited throng of princes and people, peers and commoners, clergy and laity, rich and poor—in short all who by any means could hope to secure the coveted scrip. The memoirs of the period teem with instances of the excessive folly and rashness which characterised these halcyon days of the scheme, and display a want of balance on the part of the French nation entirely beyond belief.

That the public should thus have allowed their excitement of feelings to destroy their judgment so far as to ignore the primary elements of caution and of foresight can hardly be attributed to Law. No evidence can be brought of any intention on his part to utilize his financial genius for the purpose of blinding the nation to its own interests, and turning it merely to his own exclusive advantage. The effect of his schemes was entirely beyond his control. So far as the reception they would receive from the French nation was concerned, his own anticipations were only too clearly exceeded. He undoubtedly perceived the dangerous courses upon which the public had entered, but it would have been imprudent on his part to have endeavoured by any arbitrary act to check it. He firmly believed in the adequacy of his system to accomplish the objects which he stated he had in view. He may have been, and was, somewhat over-sanguine, but that was merely a fault of temperament, not a consequence of sinister motive. He may have been extravagant in praise of the possibilities of his schemes, but that was due to intensity of confidence in their efficacy, not to any deliberate intention to deceive.

The total capital of the company was now 300,000,000 livres, and to pay the promised dividend of 200 livres per share would require profits of at least 120,000,000 livres. Those profits were drawn principally from the interest payable by the State upon the advances made by the Company for the purposes of liquidating the national debt, from the coinage, from the tobacco monopoly, from the great farms, from the collection of general taxes, and from their general commerce. Amongst these the only leakage which could occur would be in the latter, and Law’s estimate of the profits derivable from it were placed at one-third of the whole. Such an estimate, however, may have been so wide of the mark that the expenditure incurred in the administration of the Company’s commercial transactions might possibly have been so great as to absorb the whole of the surpluses accruing from the other departments. Time, however, could alone supply the test of this, but the downfall of the system anticipated the opportunity. Other contingencies arose, foreign to the business of the Company, which struck at its stability and brought its career to an unexpected end.

The closing months of 1719, and the opening months of 1720, saw the system at the height of its prosperity. Everything proceeded smoothly. Nothing ruffled the high hopes entertained by all as to its future. At the General Assembly of the proprietors of the Company held, on 30th December, 1719, for the purpose of communicating its position since the previous assembly, and of submitting the accounts for this year, it was reported that, although an accurate balance could not be struck owing to the overwhelming duties of the directors in carrying through the extensive negotiations of the previous months, “the proprietors may be assured that everything passes for the good and advantage of the Company; that the colonies of Louisiana are going on prosperously; that the trade to India, and that to Africa, and to the north, are assuming new vigour; that the produce of the Farms General is visible increasing; that there will be very considerable profits arising from the administration and striking of the coin and from the refining of the materials; that the Company wish to economize the expenses of taxations, and of the emoluments given to the Receivers General of Finance, so that the dividend of the old shares of the Western Company might be fixed at present at the proportion of 40 per cent. and a like dividend for the hundred and fifty millions of the new shares in the India Company.”

The board of directors consisted of thirty members, each of whom was obliged to deposit 200 shares as security for his good administration. Their salaries were originally fixed at 6000 livres, but at the same meeting were increased to 30,000 livres, by no means an exorbitant sum in view of the magnitude of their labours and the greatness of their responsibility.

Interesting as had been the progress of the Company during the past year, the Bank which Law had founded had also undergone a great and momentous change. Since its institution in May, 1716, its operations had met with great success, and had secured the utmost confidence of the public, not only because of the soundness of the principles which dominated its administration, but also because of its careful and cautious management. The currency became more stable than it hitherto had been, and foreign trade developed where before it had been impossible by reason of the great uncertainty of the rates of exchange. The Regent, influenced by its success and labouring under the idea that this success could be permanently maintained even though its principal features were radically changed, determined to take control of Law’s bank, and convert it from a private into a royal institution. Accordingly, on 4th December, 1718, the General Bank of Law and Company was proclaimed a Royal Bank, to be administered in future by the King and his advisers. This change was opposed by Law, who, knowing the character of the Regent, foresaw the possibility of disastrous results, but the Duc d’Orleans had decided upon the step, and opposition was of no avail. The new ordinance was to come into force on 1st January, 1719. The King reimbursed in specie the holders of the shares, and guaranteed the due payment of the notes in circulation which at that date amounted to 59,000,000 livres. The proprietors, who had, as already seen, only paid one fourth of their holding in specie and the remaining three fourths in depreciated billets d’état, thus realised their investment in cash to the face value of their securities. Law was appointed Director-General of the Bank, acting under the instructions of the King through the Regent. Thus the King by this change became the sole proprietor of the Bank, and the dignity he conferred upon it secured it even more, if that were possible, in the good favour of his people.

It has already been stated that the notes of the General Bank were always convertible at sight into coin of the weight and standard of the day of issue, and that here lay its strength and security. The Regent, however, in all probability unwilling to restrict himself from taking advantage of depreciating the coinage at any time a favourable opportunity should present itself, divested the notes of the Bank of this excellent feature, and in the future they bore that. “The Bank promises to pay the bearer, at sight, —— livres in silver coin, value received.” This change, also opposed by Law, struck at the very root principle of good credit. It endeavoured to make paper the standard of currency, while no guarantee was given that the coinage would remain of a fixed and unvarying value. No legislative decree, no royal proclamation, can place an artificial value upon the medium of currency, unless there is also present the indispensable element of public confidence. A paper currency can only circulate at its nominal value if there is behind it the security of a fixed coinage and a fund of specie in reserve for conversion. The Regent in issuing his new notes offered neither of these, but on account of the favour into which the Bank had been brought by Law, the confidence of the public remained as yet at least unshaken. We will see, however, at a later stage the consequences which this disastrous change involved.