Financial History 134 (Summer 2020) | Page 35

The Historic New Orleans Collection, The L. Kemper and Leila Moore Williams Founders Collection, 60-63 Rue Quincampoix, the “Exchange Alley” of Paris, from The Great Mirror of Folly, 1720. the country’s debt into actionable shares and c) eliminate the tax-farms and their capital-immobilizing annuities. This plan was in fact favored by Louis XIV in 1715, but on September 1 that year, the monarch died. His nephew Philippe II, duc d’Orléans, not the unanimous choice as regent for five-year-old Louis XV, took several months to secure power. Once he did, he made some initially welcomed efforts at reform and encouraged fresh ideas to solve the debt problem. Seizing the opportunity Law, with his charm and his impressive command of facts and figures, worked his way fully into Philippe’s confidence, and the Regency Council finally accepted his proposal for a bank— just not the one he wanted. The tax-farming nobility and traditional financiers who profited from France’s dysfunctional revenue structure were a force in Parlement, and naturally opposed a system promising to eliminate their livelihood. So on May 2, 1716, Law was granted letters patent for a private, note-issuing bank, the Banque Générale of Paris. Its start-up capital of six million was not enough to tackle the national debt, which stood at over two billion , but it gave Law the chance to put theory into practice. The bank sold 1,200 shares at 5,000 . Three-fourths of payment had to be made in billets d’état, treasury notes into which France’s various instruments of floating debt, some 600 million worth, had been devalued (to a third that sum) and consolidated in 1715. If successful, the bank could at least retire 4.5 million of state debt. However, it was initially derided for its size and inscrutable business model: no fees for exchanging foreign currency? But this and other perks attracted wealthy depositors, as did especially its guaranteed one-toone exchange rate, in specie for its bank notes, protecting them from the state’s unpredictable currency devaluations. Law proved an able banker; by October 1716, the Treasury would only accept his bank’s notes for tax payments, making them, in effect, legal currency. As the Regent funneled his own money and the state’s business through the bank, he not only ensured its success, but paved the way for the central bank required by Law’s System. In January 1717, Crozat, unable to make a profit on Louisiana, renounced his monopoly in return for the Treasury’s forgiving a large portion of his 6.6 million tax bill. But in March he proposed a new trading company. Whether inspired by the Bank of England, by Law’s Banque Générale, or both, Crozat’s company would issue 500 shares worth 1.5 million , payable in billets d’état: a bit of France’s floating debt could be exchanged for shares in its threadbare colony. The Regency Council embraced the concept, but lacked financing and expertise. As 1717 dragged on the Council tinkered with Crozat’s plan, finally asking Law—now respected for his bank’s help with state finances—to buy a large number of shares. Needing the company for the next phase of his System, Law countered with his own proposal, differing from Crozat’s in one essential feature: his company would raise 100 million in capital. In August, letters patent were issued for the “Company of the West,” with Law, and Crozat in name only, as financial directors; from September 14–24, more than 28 million in mères (“mother” shares) were sold. www.MoAF.org | Summer 2020 | FINANCIAL HISTORY 33