bank of England, an operation it has in common with all the private
bankers in the capital, I must answer a question I have frequently heard
proposed.
How it happens, that in a city of so great trade as London, it is
possible that people should be found even among merchants, who allow
their money to remain in the hands of bankers without interest; when in
Scotland, a place of so little trade, interest may always be got for
money for the shortest time?
The answer to this question is to be derived from the very principles of
trade itself.
The money which merchants have either in the hands of the bank, or of
bankers, though very considerable at all times, is in perpetual
fluctuation: it cannot then be lent to any but a banker, who would
consent to pay interest for the sums in hand. But no such banker can be
found, nor ever will be found, until all the bankers in London consent
to such a regulation. The reason is plain. One principal use the bankers
make of the average-money in their hands, is the discounting of bills.
Who then could pay interest for money, and discount, in competition with
others of the same trade, who have it for nothing?
But suppose the bank, and all the bankers in town, should come to the
resolution of giving interest for the money in their hands, what would
be the consequence?
I answer, that upon such an alteration, discount would rise above the
present rates, to the great prejudice of the trade of the nation; and
bankers would lend the money in their hands upon a more precarious
security for the sake of a higher interest.
All the landed men who reside in London, and many other wealthy people,
not concerned in trade, constantly keep their money either in the bank,
or in some banker’s hand, without interest: this enables bankers in
general to discount foreign bills at 4 _per cent._ as has been said,
even when the rate of interest is rather above that standard. This is,
as it were, a contribution from the rich and idle, in favour of the
trade of the nation.
Let, therefore, gentlemen who have much idle money, think of any other
expedient than that of obtaining interest for it, from those who
discount bills in London. Not one of them can afford to do it, and
thrive by his business; and the hurt which would result to trade in
general, will constantly be a sufficient bar against a general
resolution for that purpose.
What has been said, will, I hope, prove satisfactory as to the
resolution of the question above proposed, so far as regards London. It
remains to be answered, how those who supply the place of bankers in
Scotland, and even the banks themselves, can afford to pay interest for
any sum put into their hands for a short time.
I answer, that as to the Scotch exchangers, as we have called them, the
profits on their trade admit of borrowing money at interest, which that
of the bank of England and private bankers cannot do. If these last can
gain 4 or 5 _per cent._ by discounting of bills, it is all they can
honestly expect: every other employment of the money in their hands is
precarious, either as to the security or promptitude of calling it in,
to answer the demands which are made upon them.
As to the Scotch banks, we have seen how directly contrary to all
principles it is, to borrow money in Scotland. How it diminishes the
profits upon their own trade, and hurts the circulation of the country;
but although it diminishes their profit, it carries along with it no
positive loss to them, as would be the case with a London banker, who
would pay interest for all the money in his hands, when he never can
draw any back, except for that part which we have called the average.
Every London banker is obliged to have a certain sum of cash constantly
in his chest, the interest of which would be all lost, did he pay for
it: whereas the exchangers in Scotland never have a shilling by them;
and when any demand is made upon them, they draw the money from the
banks, in consequence of their credit by cash accompts.
Besides foreign bills, which the bank of England discounts at 4 _per
cent._ they also discount inland bills, and notes of hand between
merchants in London, at 5 _per cent._
The inland bills to be discounted at the bank must all be payable in
London. The bank calls in no money from any distant quarter of the
kingdom.
As the discounting of notes of hand between London merchants might
operate the same effect, as if the bank should advance them money upon
personal security, in case the notes were drawn for obtaining credit, in
place of paying money really due between the merchants, in the course of
business, the clerks of the bank keep a watchful eye over this branch of
management, and, by examining the reciprocal draughts of merchants
between themselves, they easily acquire a knowledge of the state of
their affairs, and are thereby enabled to judge how far it is expedient
to launch out in discounting either the notes or bills wherein they are
concerned.
I shall not pretend to assign a reason why, in the price of discount,
the bank makes a difference of 1 _per cent._ between foreign and inland
bills of exchange. It may either be an indulgence and encouragement to
foreign trade; or it may be upon the consideration of the better
security of foreign bills, which commonly pass through several
indorsations before they are offered to be discounted at the bank.
I come next to the circulation between the bank and the exchequer.
The bank of England is to the exchequer, what a private person’s banker
is to him. It receives the cash of the exchequer, and answers its
demands.
Cash comes to the exchequer from the amount of taxes. The two great
branches of which are the excise and customs. To explain this operation
with the more distinctness, I shall take the example of the excise.
The excise is computed to bring in annually from London, and the fifty
two collections over all England, nett into the exchequer, above four
and a half millions sterling.
The fifty two collectors send the amount of their collections to London
eight times a year, _almost entirely in bills_. As the same may be said
of the remittances of all the other taxes, we may from this circumstance
observe by the way, that London alone must constantly owe to the country
of England a sum equal to all the bills drawn upon it; that is to say,
to all the taxes which the country pays: a circumstance not to be
overlooked, from which many things may be learned, as will be taken
notice of in the proper place.
The bills sent by the fifty two collectors, are drawn payable to the
commissioners of excise; they indorse them to the receiver general; he
carries them to the bank as they fall due, and gets a receipt for the
amount; this receipt he carries to the exchequer, who charge it in their
account with the bank, and deliver tallies to the receiver general for
the amount of his payments; these tallies he delivers to the
commissioners of excise, who enter them in their book of tallies. This
operation is performed once every week, and serves as a discharge from
the commissioners to the receiver general.
The bank, again, keeps an account with the exchequer, which is settled
once every day, by two clerks, who go from the bank to the exchequer for
that purpose. When coin is wanted by the exchequer, for payments where
bank notes will not answer, the coin is furnished by the bank; when
paper will serve the purpose, paper is issued.
Besides this operation in the receipt of taxes, the bank advances to
government, that is to the exchequer, the amount of the land or other
taxes imposed, which are to be levied within the year. This we see is a
loan upon _government security for a short term_, quite consistent with
the principles upon which the bank is established. The large sums the
bank is constantly receiving of public money, and the great assistance
it obtains from thence in carrying on the other branches of their trade,
enable it at present to make advances of money to government at 3 _per
cent._ It observes the same rule with respect to the great companies of
the East Indies, and South Sea, for the same reason: but no advances are
made to private people; and in discounting of bills and notes of hand,
the regulations above mentioned are adhered to.
Thus the whole amount of taxes is poured into the bank, in the manner we
have been describing.
The bank also keeps the transfer books of all the funds negotiated at
the bank; and out of the public money in its hand, it pays the interest
of those debts, for which government allows to the bank a sum
proportionate to the expence of that branch of management.
When the bank, as a company, lends to government upon a permanent fund,
the capital whereof is not demandable, this operation is foreign to
their business as a bank, and is conducted by the company, as an article
of management of their private property.
Let us now examine by what channels their notes enter into circulation,
and the security upon which they stand.
When issued in the discount of bills, they stand upon the principles of
mercantile credit, and depend upon the goodness of the bills discounted.
When issued upon the faith of taxes to be paid within the year, they
stand upon the security of that payment, which is of a very complex
nature, as any one may perceive. As long as the inhabitants of England
consume exciseable goods, the excise will be paid: as long as trade goes
on, customs will be paid: and as long as government subsists, the
collateral security of the state will serve to make up all deficiencies
in the amount of taxes. No security, therefore, can be better than the
notes of the bank of England, while government subsists. The losses that
great company meet with from bad debts, I am informed, are very
inconsiderable.
The greatest risk the bank runs, is in discounting bad bills; but by the
extent of their business in this branch, and by circulating the cash of
all the merchants who keep accounts with them, they acquire so perfect a
knowledge of the state of their affairs, that it rarely happens that any
one can fail for very considerable sums, without the bank’s having a
previous notice of it. A sudden loss may no doubt happen, without a
possibility of being foreseen; but the matter of fact proving that their
losses upon bad bills are inconsiderable, we may thence infer, that
there is but little mystery to the bank, with regard to the credit of
London merchants.
I come now to the last branch of their management, to wit, their trade
in gold and silver.
For the circulation of bank notes, coin is necessary. We have seen, in
treating of the Scotch banks, how coin is brought in: to wit, in
consequence of all the payments made to the bank, in which there must be
a proportion of coin equal to what is found in common circulation. What
is not paid in coin, comes in, in their own notes, which are thereby
taken out of the circle; and consequently make place for a subsequent
supply, which issues in the manner we have described.
In times of peace, and a favourable balance of trade, the bank suffers
little by the obligation it is under to pay in coin, except so far as
the great confusion of the present currency affords an occasion to
money-jobbers to melt down the new guineas. The extent of this traffic I
am no judge of, and the bank no doubt has an interest in preventing it
as far as the laws have provided a remedy against it.
But when large payments are to be made abroad, the distress of the bank
is no doubt very great.
In Scotland, the banks, upon such occasions, are totally drained of
coin. They have no market for the metals; because they have no mint to
manufacture them into coin. It is different with respect to the bank of
England; their distress proceeds from another cause.
The exportation of the heavy guineas in time of war, and of a wrong
balance upon the trade of England, leaves circulation provided with a
light currency, in which the bank is obliged to pay their notes; and the
intrinsic value of the gold in which they pay, regulates the price of
the metals they are obliged to buy at market. If they provide them
themselves from abroad, they must pay the price of them in bills of
exchange. But then the lightness of the currency at home, sinks the
value of the pound sterling, as it raises the value of the ounce of gold
and silver. So the only considerable loss they incur, is in providing
the metals, which must ever be considerable, so long as the old guineas
remain in circulation.
The loss upon coining silver is still greater than upon gold; because,
besides the loss incurred by reason of the lightness of the gold, the
metals in the silver and gold coin of Great Britain, are not
proportional to the value they bear in the London market, where they
have been bought, as has been sufficiently explained already in another
place[13].
Footnote 13:
See Book III. Chap. 21. Quest. 7.
It is with great diffidence that I propose an expedient to a company so
knowing in the arts and science of trade, for preventing, in a great
measure, this loss in providing the metals for the use of circulation.
The bank is directed by long experience, and by a knowledge of many
facts and circumstances hid from me; and which, therefore, I cannot
combine into a theory founded chiefly upon reason.
The expedient I propose has been pointed out in the preceeding parts of
this inquiry, and I only recapitulate it briefly in this place, to recal
it to mind while we are on the subject of the bank of England.
First, then, while the coin is of unequal weight, the value of the
currency never can be permanently the same. Did the bank seriously set
about forming a plan for the reformation of the coin, I have no doubt
but government, as well as the voice of the nation, would go along with
it in forwarding the execution of so noble a design.
The second step I would recommend, is that government should enable the
bank to establish a fund in Holland, Antwerp, Hamburg, and perhaps at
Cadiz and Lisbon, for borrowing (though at a high interest) sums of
money equal to what may be due by England to the continent upon certain
emergencies.
I cannot pretend to lay down any plan for this operation; but I proceed
upon this principle: that if on like occasions the British government
can find credit to borrow so large sums for the uses of war, at a very
moderate interest, surely the bank of England may imitate her example
for the uses of trade; and had she a credit abroad, upon which she could
draw, I think it must follow, that the coin of the nation might be kept
at home.
I have been an eye witness to large sums in new English guineas thrown
into the melting pots of the Dutch mints, for the small profit of less
than 1 _per cent._ gained by coining them into ducats. A small duty
imposed upon coinage in the English mint, would prevent this practice
abroad; and then British coin would come safe back again, upon every
return of a favourable balance on their trade. At present it comes home
in bullion, which the bank must buy dear; the state must coin at a
considerable expence; and the bank after all must give it to circulation
at the mint price, which is many _per cent._ below prime cost, as
matters have stood for several years.
From this review of the constitution of the bank of England, and of the
principles upon which it is founded, we may discover how impossible it
is, that banks upon mortgage and private credit, can ever receive any
considerable assistance from it; and how groundless all insinuations
concerning its jealousy of such companies must be.
A more natural object of its jealousy is that of the London bankers, who
carry on a trade similar to its own, in many respects, and who, in the
course of their business, draw from it very large quantities of coin.
This, however, occasions no ill will on the part of the bank. The trade
of London requires the assistance of all the bankers there, as well as
of the bank. Were it otherwise, the bank, by discounting bills at a less
profit, might soon oblige them to shut up shop. In this view of the
matter, the drawing coin from the bank cannot be prevented.
The bankers call for no more than their business requires. Could the
bank, therefore, circulate the whole trade of London, the consequence
would be, to issue as much coin as at present: and the coin which issues
from bankers, like to that which issues from the bank, if it be for the
uses of domestic circulation, returns to the bank in proportion as it
issues: and if it be for payment of a foreign balance, the bank knows
well that the expence of providing for _that_, must land upon it, in
spite of every method to prevent it.
I must now explain the difference between the effects produced upon the
circulation of coin, by the operations of banks established upon
mortgage and private credit, and by those of the bank of England, which
we have said to be established upon mercantile security.
The consequence of a bank upon mortgage, is to fill the nation with
paper money, and to reduce the quantity of coin to the lowest sum
possible. For the truth of this proposition, I appeal to the experience
of Scotland, and of Rome, where banks upon mortgage, and moveable
pledges, are found established. From these facts, and from the
principles of their constitution, which is to melt down property into
money, it follows, that when the credit of such money is well
established, the coin, which is the money of the world, will be employed
in trading with the world, and the paper, which is the money of the
society, will be employed in trading with the society.
The consequence of this, is, that when the balance of trade runs against
a country where banks upon mortgage are established, the coin first goes
out; and when, by borrowing, it can be brought back, the interest paid
for the coin borrowed, adds an additional balance against the country,
until the whole revenue of it becomes the property of other nations.
From this we may conclude, that the establishment of such banks is as
dangerous a weapon in the hands of an idle nation, as an extensive
credit is to the family of a young spendthrift.
But let us consider the consequences of such banks to an industrious
people, who preserve, upon the average of their trade, a favourable
balance with other nations.
The coin, then, goes out to return, and serves as a check upon the
course of exchange. I here suppose proper regulations in the mint, and
an entire liberty to export coin. Permitting the exportation of coin
where you have a mint, for paper to supply its place, and a favourable
balance on your trade to bring it back, is like establishing two shops
for the course of exchange. If the exchanger will not serve trade at the
price of transportation and insurance, the coin will do it for him.
In such a country, a bank, properly established, will find great profit
upon the interest of their notes, notwithstanding of the obligation to
provide, at all times, the quantity of coin necessary for circulation.
All the great objects of trade will then be fulfilled; the rest must be
left to the operation of political causes.
If the balance of the trade of such a country should have the effect of
bringing in an addition of coin, which, because of the paper, would
become unnecessary for circulation; this coin, or the value of it, will
either be added to their stock in trade, or will be lent to other
nations. This is the case of the Swiss: they are an industrious and a
frugal people; they receive annually from their trade, and from the
service of their citizens in many countries in Europe, a constant
addition to their wealth, more than their trade demands, which they lend
to their neighbours; by these means they increase the revenue of the
society; and this increase has effects almost similar to an extension of
their territory; because it is a means of increasing their population
beyond the proportion of the natural produce of their lands; and the
food they import from Germany and other countries, is paid with the
money which arises from the interest of what they have lent abroad. All
these operations are the consequences of credit and circulation.
In a country where a mercantile bank is established, the melting down of
property is greatly circumscribed; and consequently coin becomes more
necessary.
We have often said, that a circulating value (money) must constantly
bear a proportion to alienation. Circumstances will determine what
proportion of coin and what proportion of paper will be necessary for
carrying it on. These circumstances, under banks of circulation upon
mortgage, multiply paper so much that little coin is required.
Let us now examine how far the paper of a mercantile bank, like that of
England, tends to supply the demand of circulation.
Were no bank established at London, all bills would be paid, or
discounted in coin.
The bank, therefore, melts down into paper money all the bills
discounted by them, and throws it into circulation.
It also melts down into paper all the sums it advances either to
government, or to the great trading companies. In this respect it acts
upon the principle of banks upon mortgage.
It also melts down into paper all the interest upon the public funds
discounted at the bank. All this sum of paper issues from the bank into
the city of London, and proportionally supplies the circulation of that
great capital.
Let us next examine how this paper can find its way into the country of
England, there to supply the use of coin.
The whole consumption of London for meat, beer, fire, and an infinity of
articles of manufacture for domestic use and foreign exportation, comes
from the country of England.
Did the country owe nothing to London, the sums due for those
commodities would be sent into the country in the current circulation of
London, which, by what we have seen, absorbs a very large quantity of
paper.
But we have said above, that the whole amount of taxes, almost, is
remitted to London in bills: this could not be the case, were not the
capital constantly indebted to the country. This circumstance confines
the circulation of bank notes chiefly to London, and some other cities,
to which the inhabitants of London resort, and whither they carry in
their pockets the money of the capital, viz. bank notes. For these
reasons, bank notes can never be common in the country: and if, at any
time, a scarcity of currency _there_, proves hurtful to industry, the
defect cannot be remedied but by establishing banks of circulation upon
mortgage in the principal towns of England.
It may be here objected that such a regulation in England, where there
is already so great a bank settled on different principles, might draw
along with it the following hurtful consequences, viz.
1_mo_, By multiplying the circulation of paper it would send off the
coin.
2_do_, The taxes would be paid in this paper, which could not be
received at the bank of England, and that would throw the whole nation
into confusion.
To which I answer, 1. That if the coin were sent off, it would return,
as has been said, while the trade of England flourishes: and 2. That
this new bank paper coming in place of the coin, would no more be sent
to London than coin is sent now. The debts due by the country for taxes,
would be compensated by the reciprocal debts due by London for
subsistence, &c. and the compensation would go on as at present by
bills: but were the case otherwise, and did a change of circumstances
oblige the country to make delivery in coin to London, the holders of
the country notes would constantly, as is the case in Scotland, have
recourse to the bank established in the district, for the coin wanted to
be sent to London.
When I accidentally, as at present, happen to apply a principle to a
particular case, whereby an innovation is implied, I constantly fear a
secret rebuke from many impatient readers. I therefore beg a little
indulgence upon account of my good intention, which is only to support
ideas to be approved of, or rejected by those who have the capacity to
form plans upon them, and power to put them in execution.
------------------------------------------------------------------------
CHAP. XXIII.
_Of the first Establishment of Mr. Law’s Bank in France, in the Year
1716._
In deducing the principles of credit, I have it chiefly in view, to set
in a fair light, the security upon which paper-money is established: and
as I imagine, this important branch of my subject will still be rendered
more intelligible, by an example of the abuse to which this great engine
of commerce is exposed, I now propose to give my reader a short account
of the famous bank of circulation first established in France by Mr.
Law; but afterwards prostituted (whether by design, or by fatality, I
shall not here determine) to serve the worst of purposes; the defrauding
the creditors of the state, and a multitude of private persons.
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.
After 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.)
Out 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
142,857,140_l_. 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 most
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:
Footnote 14:
Here is also an operation upon debts. The day before this edict, that
is, the 1st of January 1716, the value of the King’s debts was (as has
been said) above 142 millions sterling: but an edict comes, raising
the coin to 40 livres _per_ marc; and consequently, reducing the debts
to the value of 100 millions sterling.
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 it 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 coin at 40 livres _per_
marc, as has been said; which makes this livre just worth one shilling
sterling: consequently, the shares were worth 250_l._ sterling, and the
bank stock worth 300,000_l_. 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].
Footnote 15:
Here the bank departed from the principles of private and mercantile
credit, upon which Law had formed it, and proceeded upon those of
public credit. Public credit in France is the credit of the Sovereign;
the solidity of which depends upon the maxims which he follows in the
course of his administration.
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 to 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].
Footnote 16:
Dutot, speaking of the great value of paper in notes and actions,
throws out several reflections, in the passage I am now to transcribe
from him, which, at the same time that they prove the great advantages
resulting to France from the establishment of credit among them,
abundantly evince how lame this author’s ideas were concerning the
principles of paper credit, and of circulation. He says, (vol. ii. p.
200.) “_This paper_ was indeed just so much real value, which credit
and confidence had created, in favour of the state: and by this sum
was circulation augmented, independently of all the coin which was
then in France.”
"Upon this revolution, Plenty immediately displayed herself through
all the towns, and all the country. She there relieved our citizens
and labourers from the oppression of debts, which indigence had
obliged them to contract: she revived industry: she restored that
value to every fund, which had been suspended by those debts: she
enabled the King to liberate himself, and to make over to his
subjects, for more than fifty-two millions of taxes, which had been
imposed in the years preceeding 1719; and for more than thirty-five
millions of other duties, extinguished during the regency. This plenty
sunk the rate of interest; crushed the usurer; carried the value of
lands to eighty and a hundred years purchase; raised up stately
edifices both in town and country; repaired the old, which were
falling to ruin; improved the soil; gave a value to every fruit
produced by the earth, which before that time had none at all. Plenty
recalled those citizens, whom misery had forced to seek their
livelihood abroad. In a word, riches flowed in from every quarter.
Gold, silver, precious stones, ornaments of all kinds, which
contribute to luxury and magnificence, came to us from every country
in Europe. Whether these prodigies, or marvellous effects, were
produced by art, by confidence, by fear, or by whim if you please, one
must agree, that that art, that confidence, that fear, or that whim,
had operated all these _realities_ which the antient administration
never could have produced.
"What a difference in the situation of France at the beginning of the
regency, and the situation in which she was in November 1719!
“Thus far the system had produced nothing but good: every thing was
commendable, and worthy of admiration.” These are the sentiments of
Dutot, concerning this system of paper credit.
But 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 among 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 to 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 the 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 to 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.
Footnote 17:
It is astonishing to find how gravely Messrs. de Melon and Dutot
reasoned concerning the nature of paper money, and the effects of
changing the value of the coin. They both seemed to agree that a livre
was a livre whether it was the 28th or the 50th part of a marc of
silver, whether it was a denomination upon paper, well or ill secured,
no matter which.
The whole reasoning turned merely on the question, who were robbed,
and who fantastically enriched by such absurd operations upon the coin
of a country?
The jargon of such men certainly contributed a great deal to darken
the understandings of the ministry at this time; and to make them
believe that the affairs of money were infinitely more obscure and
more difficult to be understood than they really are.
There are thousands of examples where mankind, with their learning and
reasoning, have turned common sense into inextricable science; this I
think is a famous instance of it: and it is rendring no small service
to the world, to destroy, in a manner, what others have been at so
much pains to establish. This is restoring common sense to its native
dress, in which it becomes intelligible to every one.
I know very well that the ministry of France have now very different
notions concerning paper credit; but these notions have not as yet
reached the press, except in some of the King’s answers to the
remonstrances of the parliament of Paris in 1760. These answers were
dictated upon sound principles, and do great honour to the ministry.
The old notions still prevailed in the remonstrances of the
parliament. This plainly appears from the proposal they made to the
King, at that time, to issue paper to the amount of 200 millions,
which the parliament was to make good. An expedient to avoid doing
that which right reason demanded of them, viz. first to secure a fund
for the paper, and then to borrow upon that fund. This proposal from
the parliament, and the King’s rejecting it, proves that credit was
then better understood in the cabinet than in the _palais_.
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.
But 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 coasts 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 the 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 East 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.
------------------------------------------------------------------------
CHAP. XXVIII.
_Chronological Anecdotes._
[Sidenote: 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_.
June 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
May 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 of 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 of 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 500 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 obliged 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 promised 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 dividend 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.
Upon 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.
The 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.
This 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.
If 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 the 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; and 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 the 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 the 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.
------------------------------------------------------------------------
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.
The 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 operation,
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 the 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
one 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. Nothing 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.
On 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_.
1_mo_, Of the above total of notes coined, 707 327 460 livres.
there remained in the bank at that time, for
2_do_, Subscribed for at 2½ _per cent._ in 530 000 000
June 1720
3_tio_, Carried to the bank by private people 200 000 000
as a fund of credit there
4_to_, Paid in coin by the bank 90 000 000
————————
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:
1_mo_, In purchasing the remainder of the 470 000 000 livres.
subscription of 25 millions of rents on the
town-house of Paris, at 2½ _per cent. inde_
2_do_, In purchasing a farther sum constituted 00 000 000
on the town-house of Paris, of 8 millions of
perpetual annuities, at the rate of 2 _per
cent._ or at the 50th penny
3_tio_, In purchasing a farther sum constituted 100 000 000
on the town-house of Paris, of 8 millions of
life-rent annuities, at 4 _per cent._ or at the
25th penny
————————————
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._
Thus 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 2696 millions.
notes about
Of which in the bank, October 10, 1720 707 mil.
And paid in coin 90
——
This substracted 797 millions.
——
There remained outstanding in bank 1899 millions.
notes[18]
Add to this 100 millions still due by the King to 100 millions.
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._
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 2000 millions.
capital
Footnote 18:
There are, however, in France at this day, many persons who are still
in possession of large sums of those notes. This makes some people
believe, that all the paper was called down without any equivalent
given. The reason of those notes remaining, is, that either the
proprietors neglected the occasion offered by the _arret_ of the 10th
of October, or that they were in hopes that perhaps the bank might
again recover its credit. They were mistaken, and the notes are lost.
Let us next examine the state of interest.
The interest at the last was,
1_mo_, Of rents constituted in June 1720, on the
town-house, at 2½ _per cent._ or at the 40th penny 25 millions.
2_do_, Ditto of the 10th of October 1720, at 2
_per cent._ or at the 50th penny 8 millions.
3_tio_, Ditto at ditto upon lives at 4 _per
cent._ or at the 25th penny 4 millions.
4_to_, Due to the company upon the original
stock of 100 millions still paid them at this day
at 5 _per cent._ 5 millions.
5_to_, For the 200 millions of credit at the
bank, suppose at the rate of 3 _per cent._ 6 millions.
6_to_, For the last 200 millions provided for in
different ways, suppose at 2½ _per cent._ 5 millions.
7_to_, 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.
Let 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 8 146 600_l._ sterling. A large sum, 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?
If 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.
1_mo_, 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 any man say, that a
regular plan of paying this interest was a means of creating new wealth?
Certainly not.
2_do_, 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.
3_tio_, 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.