The charter of the Company of the West, which succeeded to Crozat’s rights, was registered on the 6th of September, 1717. The formation of the Company was based upon an ingenious attempt to fund in the shape of rentes—practically a form of annuity bonds—that portion of the debt of the kingdom then outstanding as billets d’état. Louis XIV., at his death, had left the nation encumbered with a debt generally estimated at about 2,500,000,000, but rated above 3,000,000,000 livres[47] by some writers. His necessities had compelled him to exhaust every possible means of raising money, even to pledging specifically in advance large portions of the revenue for several years. A floating debt of about 600,000,000 livres was arbitrarily scaled down by the Regent to 250,000,000, and placed in the form known as billets d’état. Even after this reduction the new securities were at a discount of from 60 to 70 per cent. It was to provide relief from this condition of affairs that the Company of the West was inaugurated. The capital stock was divided into shares of five hundred livres each. The number of shares was not limited in the original edict. Payment for them was made exclusively in billets d’état. For these billets, when surrendered to the Government in sums of one million livres, there were issued to the Company rentes in perpetuity for forty thousand livres. The State was relieved from the pressure of so much of its debt as was thus used, by assuming the payment of 4 per cent interest upon the principal. To secure this interest money certain revenues of the Government were pledged. Thus the Company had an income of 4 per cent upon its capital guaranteed by Government. If the Louisiana grant was worth anything, all that could be made out of it was an additional temptation to the investor. That grant consisted of a monopoly of the commerce of the colony and of the absolute control of its affairs, the proprietorship of all lands that they should improve, and the ownership of mines. The privilege of granting lands free from all feudal obligation was expressly permitted. The protection of the Government was guaranteed to the servants of the Company. During the existence of the charter, which was for twenty-five years from the date of registration, property in Louisiana was to be exempt from taxation. With the exception of the condition to import six thousand white persons and three thousand negroes, this vast gift was practically unencumbered. To these privileges was also added the exclusive right to purchase beavers in Canada. The more readily to float the capital, the shares of aliens were exempt from the droit d’aubaine and from confiscation in time of war.
The name of Law, director-general of the bank, led the list of directors nominated in the royal edict. On the death of Louis XIV. this famous Scotchman had offered his services to the Regent, and by ready wit and plausible arguments had convinced him that measures could be taken which would help the State carry the heavy load of debt with which it was burdened. The foundation, on the 2d of May, 1716, of a private bank of issue with a capital of 6,000,000 livres, was an experimental step. The shares of this bank were to be paid for, 25 per cent in coin and 75 per cent in the billets d’état. The redemption of each bank-note was promised in coin of the same weight and standard as the coinage of its date. At a time when changes were frequent in the weight and alloy of coin, this feature made the notes of the bank nominally more stable than the coinage of the realm.
Law’s fundamental idea was that the prosperity of a community was proportionate to the amount of the circulating medium, and that good faith would cause paper to be preferred to coin for this purpose. In his communications to the Regent he recognized the relation of supply and demand to the subject. His proposition was to establish a government bank of issue which should act as the royal treasurer. The distrust of the Regent led him at first to decline this enterprise, but permission was given to Law to found a private bank. Under the conservative restrictions with which it was surrounded, the experimental bank was successful. The withdrawal of Crozat furnished opportunity to overcome the scruples of the Regent by substituting for the proposed royal bank a commercial company, whose stock, according to the original plan, was to be purchased exclusively with billets d’état, which, as before shown, were to be converted into 4 per cent rentes payable half-yearly. An avenue was thus opened for the use of the billets. If holders availed themselves of it, the Government would not only be relieved from their pressure, but also from the discredit of their heavy discount. It was known that Crozat had abandoned the grant because he could not make money out of it. It was evident that capital and patience were necessary to develop the commerce of Louisiana. Of money the Company received none from original subscriptions to its stock, although by the terms of the edict the interest for the year 1717 was to be reserved as a working capital. Doubts as to whether this would be sufficient to develop the colony made investors wary at first of its subscription lists. It was soon found necessary to define the amount of capital stock. This was fixed at 100,000,000 livres by an edict registered in December, 1717. The grant in August, 1718, of the right to farm the tobacco, and the extension of this right from six to nine years in September of the same year, served to quicken popular interest in the Company.
Law’s bank having proved a pronounced success, the Regent was converted to his scheme, the shareholders of the General Bank were reimbursed, and it was converted into the Royal Bank. All limit upon the power to issue bills was by this step practically removed. The character of the coin in which the bills were to be redeemed was no longer limited to the livre of the weight and standard of the date of the note, but was changed to the livre of Tours. The very restraints which had operated to give that confidence which Law had pronounced essential for a paper-money circulation were thus removed.
In quick succession the companies of Senegal, of the East Indies, of China, and of Africa were absorbed by the cormorant Company of the West. Its title was changed to “the Company of the Indies.” The profits of the mint and the general farms were purchased, and by a series of edicts the management of nearly all the financial affairs of the kingdom were lodged in the Company. Meantime France had been deluged with a flood of notes[48] from the Royal Bank. The great abundance of money had lowered interest and revived business. To meet the various payments which the Company had assumed for the privileges which it had purchased, as well as to satisfy the increasing demand for shares, the capital was increased by a series of edicts in the fall of 1719 to 600,000 shares.[49] Outstanding debts of the Government to the extent of 1,500,000,000 livres were ordered to be redeemed, and in place thereof new rentes were to be issued to the Company at 3 per cent. After the first subscription, payment for stock had been stipulated in coin or bank-notes, in place of billets d’état. The various privileges acquired by the Company had been granted one by one, and their accumulation had been slow enough to enable the public to appreciate their value and to comprehend the favor in which the Company was held by the Regent. Subscribers for new shares were therefore found with increasing ease after each new grant. The demand for the stock enabled the Company to place each new issue on the market at premiums. The later issues were at ten times the par value.
BILL OF THE BANQUE ROYALE OF LAW (1720).
Reduced from a cut in La Croix’s Dix-huitième siècle.
The price of the stock was still further inflated on the market by requiring as a condition precedent for subscriptions to the new issues, that persons desiring to subscribe should be holders of a certain number of shares of the old stock for each share of the new. Subscriptions were in turn stimulated by spreading the payments over a protracted period, on the instalment plan, thus enabling persons of small capital who wished to profit by the upward movement of the stock to operate on margins. To the competition fostered by these ingenious and at that time novel devices was now added the pressure for new shares on the part of those whose investments had been disturbed by the redemption of the rentes. Their demand that some favor be shown them in the matter of subscriptions was recognized, and edicts were issued which removed the stipulation that payments should be made in coin or bank-notes; and in their place billets d’état, notes of the common treasury, and orders on the cashier of the Company given in liquidation of Government obligations, were ordered to be received. Shares rose to ten thousand francs,[50] and even higher; and those who paid for original shares in discredited billets d’état could now realize forty times their purchase-money. The temptation to those of conservative disposition to realize their profits and convert them into coin or property now burst the bubble. For a time the Company, by purchasing its own stock, was able to check the impending disaster; but in spite of all efforts of this sort, and notwithstanding edict after edict ordaining the compulsory circulation of the notes and demonetizing gold and silver, the bank, which had in the mean time been placed under control of the Company, collapsed. The promoter of the scheme, in the same year that he was controller-general of the finances of France, was a fugitive and almost a pauper.