money , bank money that would be backed by the public debt of the colonies . Grand ’ s memos to Franklin setting out his ideas are a pleasure to read : short , clear and entirely to the point . And Franklin was a fast learner . Together , the two friends hatched a plan to create bank money for use by the Continental Congress — yet another version of the old story of states and banks exchanging debts and promises .
So , by 1778 , things were looking pretty positive for Franklin and the American representatives to France . The king of France , Louis XVI , and his foreign minister had agreed to support the United States ; the finance minister , Necker , was already on board . But getting cash from a sovereign state is always a struggle : persuading donors takes time , prying cash out of bureaucracies is far from easy , quibbling makes the outcome uncertain and gifts suddenly become loans . The cash that finally reaches the recipient is often late and insufficient . French aid to the colonies was no exception . France ’ s public debt was huge and the French treasury was short of coins .
Also , Grand was cautious as well as ambitious . He had dealt with sovereign nations , those that were more established than the fledgling United States , plenty of times . He knew the perils of relying on the promises of sovereigns and he was not going to “ bet the bank ” on the promises of either France or the North American colonies fighting for independence . The colonies weren ’ t even a nation yet , despite the Continental Congress declaring it the United States of America in September 1776 , and with all the bills of credit in circulation , it was already awash with debts .
Grand ’ s considered proposal was therefore to issue bank debt to the Continental Congress on the requirement that both America and France promised to pay his bank first . But Necker was reluctant to give explicit royal guarantees , so the negotiations stalled . At which point , Grand and Franklin came up ith a new proposal : special promissory notes , written promises to pay .
These were a success . Between 1779 and 1782 Benjamin Franklin signed promissory notes , each one for an amount ranging from 250,000 to 800,000 livres . In this way , over the course of just a few years , Franklin was able to secure no less than 18 million livres in funds for the Continental Congress . And Franklin , being Franklin , designed and printed the notes himself at his printing press in Passy , putting his characteristic flair and care into their design and reproduction .
The wording on these radical promissory notes indicates precisely the nature of the scheme that he and Grand had concocted to get the colonies the purchasing power they so desperately needed . Each note was signed by Franklin on behalf of the Continental Congress and each of the 13 colonies , jointly and severally ; they were therefore the obligations of each and every American sovereign entity . Also , on the notes , Franklin promised to pay Grand & Cie , on January 1 , 1785 , for the benefit of the French Royal Treasury , which meant that Necker thus felt safe and secure to promise to also pay the bank for the benefit of the United States .
It was the linking of sovereign promises that did the trick : France was now indebted to the bank for the benefit of the United States , and the United States was indebted to the bank for the benefit of France . With the two sovereign promises in his pocket , Grand happily issued debts to the United States , bank money that the Continental Congress could spend right away . He had successfully gained a new client without endangering the future of Grand & Cie .
In this process , Grand , Necker and Franklin had basically come up with the sovereign version of an “ accommodation bill ,” through which two parties guarantee each other promises to pay one bank . That bank then feels safe to issue debts for the benefit of one party . Historically , accommodation bills have been used by aggressive financers to get banks to issue debt to them and such schemes have often been criticized as one of the main reasons why banks fail and why bank money is unsafe . Adam Smith , for example , the great Scottish economist , advised banks not to accept accommodation bills . They were way too risky . Nonetheless , that ’ s exactly what Grand , Necker and Franklin did in 1785 : two sovereign nations using aggressive financial engineering to support a fight for independence — a fine example of truly daring financial dealing between states and banks .
Not surprisingly , several other banks in Europe had got word of the Continental Congress ’ s needs and were also busy going after their business . But they approached the process in a different way than Grand , trying to make a quick buck . Luckily for the future United States , both Franklin and Grand were able to take the long view , with Grand , in particular , knowing that his bank would profit more for a longer period of time if the colonies succeeded , becoming a truly sovereign nation with debt , the perfect client .
Paolo Zannoni is the executive deputy chairman of the Board of Prada , president of Prada Holding and international advisor to the executive office of Goldman Sachs International . He is also a member of the advisory board of the Jackson Institute and the Center for International Finance at Yale University . He is the author of Money and Promises : Seven Deals that Changed the World ( Columbia Business School Publishing , June 2024 ), from which this article has been adapted .
16 FINANCIAL HISTORY | Summer 2024 | www . MoAF . org