While the regent and Law were closeted together, it was left to Noailles to initiate more painful methods of improving the country’s finances. A year earlier, he had instigated the Visa, a drastic form of financial surgery, by which large swaths of royal debt were amputated. Long-term debt, which had largely financed Louis’s wars, mostly took the form of annuity bonds sold by Paris’s city government, the Hôtel de Ville, to financiers and other private investors. The bonds paid a set interest rate that was covered traditionally by an agreed source of government revenue. One of Noailles’s money-saving measures was to reduce the interest on bonds from 7 percent to 4 percent. He also converted the various forms of short-term debt into billets d’états, state notes worth only two-thirds of their former value. He cut salaries and pensions, and revalued the coinage at 50 percent of its previous worth.
In systems of currency based on the value of gold and silver, especially in France, adjusting the value of the coinage was a frequent royal scam. The French monetary system was based on the livre tournois, a unit of account (like the pound sterling in England) used to express prices, contracts, and wages, for which there was no single coin, and against which the value of gold and silver coins could be adjusted. French coins included the gold louis d’or and the silver écu, equivalent in England to the gold guinea and the silver shilling. In this case, Noailles raised the value of the louis d’or, stating that its value would increase from fourteen to twenty livres (and the écu from three livres ten sous to five livres), thus effectively devaluing the livre. This was an inflationary measure that would cause prices to rise, even though it reduced the value of the state’s debt by diminishing the amount of coins needed to repay it. Revaluations worked by demanding that the public bring all their coins to the mint either for endorsement with a new stamp, representing the increased value, or by reminting lighter coins with a higher valuation against the livre. In both cases the state appropriated part of the bullion in the process of stamping or reminting it, but concealed it against the adjustments in value. The public, well aware that the Crown was profiting from such transactions, was understandably reluctant to hand over coins and see them altered in this manner, hence the tendency to hoard them, adulterate them, or smuggle them abroad and sell them as bullion.
Noailles’s measures made the balance sheet look better but plunged the nation into further financial distress. By encouraging people to send coins abroad, they worsened the shortage; by reducing interest payments and the value of government securities, they forced people to sell to maintain a level of income and the market price plummeted 80 percent. Businesses already foundering from a shortage of money fell deeper into debt and shopkeepers closed their doors—how could they agree to buy or sell something when they were unsure from one day to the next what the livre would be worth? Hundreds were bankrupted, which led in turn to mass unemployment. Many had no option but to turn to crime. The Gazette de la Régence recorded the climate of wretchedness: “It is not possible to express the misery of the provinces. The countryside is full of robbers; we dare not go out of the towns for fear of robberies which happen every night . . . nowhere else is there a country like it, and if the King does not pay we run the risk of a revolt. There are several officers who went charitably to dinner with some capuchins and even the capuchins made a collection for them. It is utter desolation.” Not only was the entire country foundering in an economic abyss, the very fabric of society was threatened.
Then Noailles instigated his most drastic remedy yet. In March 1716, a so-called Chamber of Justice was charged to investigate and call to account the financiers, tax collectors, and other officials who, it was felt, had profited unlawfully and on a vast scale from France’s economic distress. To assist the courts in their quest, people were tempted to inform with the bait of a fifth of any recovered money or property. Treachery ensued on an unparalleled scale. Disgruntled servants betrayed their employers, wives and mistresses whispered of their lovers’ financial misdemeanors, children cited their parents’ transgressions, and fearful of being reported, anyone who had coins hoarded them, unwittingly worsening the monetary shortage. People who panicked and tried to flee the country found that innkeepers and postmasters had been ordered to refuse horses to anyone they suspected of evading justice. Some turned back, admitted their crime, and relinquished properties or large sums of money to avoid the rack or the pillory. Others committed suicide rather than subject themselves to the horrors of investigation.
The Chamber of Justice was installed, somewhat inappropriately, in the convent of the Grands Augustins, and a sinister torture chamber was set up next door. Many successfully bribed their way out of trouble, some courtiers and the regent’s mistress, La Parabère, profiting vastly as a consequence. One tax collector, fined 12 million livres, was approached by a courtier and offered a reduction if he was paid a douceur of 100,000 livres. “You are too late, my friend,” the financier is said to have responded. “I have already made a deal with your wife for fifty thousand.”
For the unfortunates who could not escape, the procedure often appeared to have been as terrifying as feared. The financier Samuel Bernard, one of Law’s most vociferous opponents, offered some 6 million livres but was still sentenced to death. The profiteers La Normande and Monsieur Gruet were heavily fined, and sentenced to “make amends” by parading in front of Notre Dame and Les Halles, La Normande wearing a shirt and a placard reading “voleur du peuple” (fraudster of the public), before being condemned to spend the rest of their lives on the galleys. La Normande was eventually spared the final punishment, and most reports were merely propaganda exercises to pin the blame on the unpopular financiers, many of whom acted only as middlemen for the court elite. Nevertheless, fear of the Chamber of Justice was all too real.
Among the frightening panoply of French punishments—being broken on the wheel, hanged, racked, whipped, and pilloried—life on the galleys was among the most horrific. The condemned were chained, naked to the waist, in rows of half a dozen at each oar, while their supervisors strode on platforms above and whipped them to make them row harder for ten or twelve hours at a stretch. Hundreds died in excruciating agony at the oar, to be flung overboard like so much rotten meat. Like many forms of punishment, the galleys were regarded as an entertaining tourist attraction: the slaves were made to dance, sing, and row for the delectation of the crowd. The diarist John Evelyn was among the travelers who saw them in the seventeenth century. He recorded, “Their rising forwards and falling back at their oars, is a miserable spectacle, and the noise of their chains with the roaring of the beaten waters has something strange and fearful in it, to one unaccustomed. They are ruled and chastised with a bull’s pizzle dried upon their backs and soles of their feet upon the least disorder, and without the least humanity.”
Against such a backdrop of horror Law’s scheme seemed suddenly to offer painless salvation. By spring the stage was set: his new proposal laid out plans for a private bank, funded by himself and other willing investors, which would issue notes backed by deposits of gold and silver coins and redeemable at all times in coins equivalent to the value of the coin at the time of the notes’ issue, “which could not be subject to any variation.” Thus, Law pledged, his notes would be more secure than metal money, a hedge against currency vacillations, and therefore a help to commerce. Moreover, paper notes would increase the amount of circulating money and trade would be boosted. In short, he vowed, his bank would offer hope and the promise of a better future.
The regent listened avidly. Harried with other concerns of state, exhausted by all-night excess, exasperated with interminable financial dilemmas and Noailles’s ineffectual, unpopular remedies, he wanted a speedy, effective answer. Law now had his unstinting support. Before the meeting at which the new proposal was due to be presented to the council, the regent spoke to each member individually to make his wishes clear. Conscious of the menacing Chamber of Justice, almost all fell into line. A solitary exception was the Duc de Saint-Simon, who
dared to speak out against Law’s scheme. He knew little of finance but was sharp and honest enough to point out two main pitfalls: “First to govern the bank with enough foresight and wisdom not to make more bills than they ought ...; second, that what was excellent in a republic . . . became dangerous in an absolute monarchy like that of France, where the necessities of war ill-undertaken and ill-sustained, the rapacity of ministers, favourites, mistresses, the luxury, extravagant expenditure, and prodigality of a king might soon exhaust a bank, ruin the holders of bills, and overthrow the kingdom.” The objection, in other words, was the same as that voiced by Bernard in Louis XIV’s day: since the king was above the law, in difficult times there was no guarantee that the bank would not be abused.
Orléans fobbed him off with woolly reassurances, although neither he nor Law had any real answers to this flaw. The bank was to be unregulated and answerable only to Law and his shareholders. Anything could happen.
In May 1716, Law, having adopted French nationality as required, was finally granted a charter for his Banque Générale for a term of twenty years. But even with its seal of official approval it failed to generate much interest. Its stock consisted of 1,200 shares each valued at 5,000 livres ($400). Its capital should have been 6 million livres (or $480,000) sterling, but it was far less: only a quarter of the shares were taken up, and these transactions were not straightforward. Investors could pay three-quarters of the cost of shares in billets d’états, the unpopular government securities that were currently worth 60 percent less than their face value. In real terms the bank’s working capital was thus little more than 800,000 livres.
Public suspicion shone through the lackluster response. Law was still branded a dubious foreigner, a gambler, and, some said, a charlatan. Few trusted him, let alone his paper money. The establishment, who had been the chief investors in the painful disaster of the annuity bonds and billets, remembered the experience ruefully. To the wider French populace banks of issue were mysterious institutions, and the press compounded their entrenched misgivings, deriding the Banque Générale as “a vision . . . one can only laugh at it, no one believes it will last.” Undercapitalized, ridiculed, and distrusted, Law’s bank battled for its existence.
To save it Law resorted to both subtle and headline-grabbing tactics. His goal was first to ensure that the regent’s trust in him was unwavering, second to make his notes and his bank so attractive and powerful that only the foolish or destitute would ignore them. He began by allying himself to the regent’s most trusted friend, Saint-Simon. Once a week Law visited Saint-Simon to let him know how business was progressing. This, he hoped, would gain him credibility, as well as useful snippets of inside information. But Saint-Simon was no fool: “I soon knew that if Law desired these regular interviews it was not that he expected to make me an able financier; but as a man of intelligence, and he had plenty of it, he wanted access to a servitor of the Regent who was more than all others truly in his confidence.” But exposed to Law’s mesmeric charm even Saint-Simon capitulated: “We soon began to talk with a confidence which I never had reason to regret.”
At the bank’s offices Law adopted a more straightforward approach to boost business. Rather like the incentives dangled before students today by Wall Street banks, he offered a tempting range of free or inexpensive banking services. At the Banque Générale, he proclaimed, you could transfer money from Paris to the provinces, discount bills, and exchange foreign currency for little or no charge. Even the hostile Gazette de la Régence was beguiled when one of the author’s friends with 1,800 livres to transfer from Marseille to Paris paid a visit to Monsieur Law’s office. Here, according to the report in the Gazette, a Swiss footman, magnificently uniformed in green, introduced him to the bank’s officials. They told him that if someone in Marseille handed his coins to the local director of the mint he would be given the 1,800 livres at the bank in Paris. There would be no charge for a transaction of this small size.
The regent helped by making his well-publicized deposits and ensured that everyone knew he was using the bank for foreign transactions. Foreigners followed his lead, and at last found somewhere in Paris to discount their bills of exchange with ease and at reasonable prices. The influx of foreign currency alleviated the shortage of coins, and, with the slow trickle of banknotes Law printed and issued to depositors, boosted the money supply sufficiently for commerce to begin to pick up. Traders liked the banknotes because the guarantee of being paid in coin of fixed value meant that they knew exactly what something would cost or what price they would receive. The notes began to command a premium, like those issued by the Bank of Amsterdam.
The small shoots of recovery were nurtured by the regent’s continuing sponsorship of the bank. In October 1716 he ordered tax collectors to remit payments to the Treasury in Law’s banknotes. A few months later another edict declared that the public could pay their taxes in notes. Eighteen months after opening there were profits enough to pay shareholders a six-monthly dividend of 7 percent, and Law’s inconspicuous white notes, engraved with the legend “The bank promises to pay the bearer at sight, the sum of—livres, in coin of the weight and standard of this day, value received,” were circulating throughout France and had begun to effect the revival he had promised.
But profit brought obstacles as well as dividends. Law was damaging the business of the private bankers of Paris: his offer of cut-rate services to the public encroached on business they regarded as their domain. According to some accounts, mounting resentment inspired a group of anonymous opponents to combine their resources with the express intention of bringing him down. When their hoard reached 5 million livres in notes, they presented them at the bank for immediate payment. Law knew that his promise to “pay on demand” underpinned the public’s confidence, on which every bank depends. Without it the dream would crumble. He also knew that the bank reserves did not contain 5 million livres’ worth of coins.
9
KING OF HALF AMERICA
But the bank is not the only nor the greatest of my ideas. I will produce a work that will surprise Europe by the changes it will bring in France’s favour, greater changes than those brought by the discovery of the Indies or by the introduction of credit. By this work Your Royal Highness will be in a position to relieve the kingdom of the sad condition into which it has fallen, and to make it more powerful than it has ever been, to establish order in finances, to replace, support and increase agriculture, manufacturing and commerce, to increase the population and the revenues of the kingdom, to reimburse useless and onerous charges, to increase the revenues of the King while helping the people, and to reduce the state debt without doing wrong to the creditors.
Letter from John Law to the regent,
December 1715
LAW SAVED HIMSELF BY STALLING. HE TOLD THE MEN HE would need twenty-four hours to raise such an unusually large sum and appealed to the finance ministry for support. Law’s influence with the regent still irked Noailles, the finance minister, but the bank’s success had relieved the pressure on his ministry, and, although he must have hated to admit it, he knew it was in his interest as much as Law’s that the bank should be sustained. Thus, when Law outlined his predicament, Noailles ordered the mint to provide Law with the coins he required. One can scarcely imagine the incredulity of the men returning the next day, expecting to find the bank in disarray; instead piles of coins were counted out before them. When they departed, along with their swollen bags of silver and gold, they took with them the unwelcome news that John Law had unequivocally trounced them.
While the bank inched precariously toward success, however, Law was looking over his shoulder for more daring ventures. Two years after the bank had opened, an opportunity to reveal his wider talents arose, unexpectedly, in the form of a diamond. The jewel came from India, where, according to Saint-Simon, an employee at the Great Mogul’s diamond mines smuggled out a 140-carat stone in his rectum. It was usual at the time for anyone dealing with precious stones to be closel
y searched and given a purgative before they were allowed to leave their place of employment, but somehow the man evaded the usual checks and escaped with his jewel. Eventually, after changing hands several times, it was sold for the substantial sum of £20,000 (US$32,000) to Thomas Pitt, governor of the English East India Company’s Fort Madras settlement, immortalized ever after as Diamond Pitt. A stone of such prodigious size had never before been seen, and Pitt, in high hopes that his purchase would prove a canny investment, sent it back to London for cutting. The jewel that emerged was “the size of a Reine Claude plum, almost round in shape, of a thickness equal to its width, perfectly white, free from all blemish, cloud, or speck,” enthused Saint-Simon. Naturally Pitt was anxious to recoup his considerable outlay as quickly as possible, but he found that in times of war and climates of financial uncertainty, diamonds on such a scale are no one’s friend. Even the quintessentially self-indulgent Louis XIV, when offered the stone the year before he died, refused it. In 1717, as Law was casting about for ways to impress the regent, Pitt came back to Paris with his diamond, which was still for sale. He called on Law and showed him a crystal replica of the jewel that “eclipsed all others in Europe.” At this pivotal moment in his career, the gem encapsulated Law’s personal and patriotic aspirations. If he could bring about its royal acquisition, he would endorse his own influence at court as well as highlighting the regent’s preeminence in Europe. He encouraged Orléans to buy.
Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance Page 9
