Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance (10 page)

The Chamber of Justice was installed, somewhat inappropriately, in the convent of the Grands Augustins, and a sinister torture chamber was set up next door. Many successfully bribed their way out of trouble, some courtiers and the regent’s mistress, La Parabère, profiting vastly as a consequence. One tax collector, fined 12 million livres, was approached by a courtier and offered a reduction if he was paid a
douceur
of 100,000 livres. “You are too late, my friend,” the financier is said to have responded. “I have already made a deal with your wife for fifty thousand.”

For the unfortunates who could not escape, the procedure often appeared to have been as terrifying as feared. The financier Samuel Bernard, one of Law’s most vociferous opponents, offered some 6 million livres but was still sentenced to death. The profiteers La Normande and Monsieur Gruet were heavily fined, and sentenced to “make amends” by parading in front of Notre Dame and Les Halles, La Normande wearing a shirt and a placard reading
“voleur du peuple”
(fraudster of the public), before being condemned to spend the rest of their lives on the galleys. La Normande was eventually spared the final punishment, and most reports were merely propaganda exercises to pin the blame on the unpopular financiers, many of whom acted only as middlemen for the court elite. Nevertheless, fear of the Chamber of Justice was all too real.

Among the frightening panoply of French punishments—being broken on the wheel, hanged, racked, whipped, and pilloried—life on the galleys was among the most horrific. The condemned were chained, naked to the waist, in rows of half a dozen at each oar, while their supervisors strode on platforms above and whipped them to make them row harder for ten or twelve hours at a stretch. Hundreds died in excruciating agony at the oar, to be flung overboard like so much rotten meat. Like many forms of punishment, the galleys were regarded as an entertaining tourist attraction: the slaves were made to dance, sing, and row for the delectation of the crowd. The diarist John Evelyn was among the travelers who saw them in the seventeenth century. He recorded, “Their rising forwards and falling back at their oars, is a miserable spectacle, and the noise of their chains with the roaring of the beaten waters has something strange and fearful in it, to one unaccustomed. They are ruled and chastised with a bull’s pizzle dried upon their backs and soles of their feet upon the least disorder, and without the least humanity.”

Against such a backdrop of horror Law’s scheme seemed suddenly to offer painless salvation. By spring the stage was set: his new proposal laid out plans for a private bank, funded by himself and other willing investors, which would issue notes backed by deposits of gold and silver coins and redeemable at all times in coins equivalent to the value of the coin at the time of the notes’ issue, “which could not be subject to any variation.” Thus, Law pledged, his notes would be more secure than metal money, a hedge against currency vacillations, and therefore a help to commerce. Moreover, paper notes would increase the amount of circulating money and trade would be boosted. In short, he vowed, his bank would offer hope and the promise of a better future.

The regent listened avidly. Harried with other concerns of state, exhausted by all-night excess, exasperated with interminable financial dilemmas and Noailles’s ineffectual, unpopular remedies, he wanted a speedy, effective answer. Law now had his unstinting support. Before the meeting at which the new proposal was due to be presented to the council, the regent spoke to each member individually to make his wishes clear. Conscious of the menacing Chamber of Justice, almost all fell into line. A solitary exception was the Duc de Saint-Simon, who dared to speak out against Law’s scheme. He knew little of finance but was sharp and honest enough to point out two main pitfalls: “First to govern the bank with enough foresight and wisdom not to make more bills than they ought ...; second, that what was excellent in a republic . . . became dangerous in an absolute monarchy like that of France, where the necessities of war ill-undertaken and ill-sustained, the rapacity of ministers, favourites, mistresses, the luxury, extravagant expenditure, and prodigality of a king might soon exhaust a bank, ruin the holders of bills, and overthrow the kingdom.” The objection, in other words, was the same as that voiced by Bernard in Louis XIV’s day: since the king was above the law, in difficult times there was no guarantee that the bank would not be abused.

Orléans fobbed him off with woolly reassurances, although neither he nor Law had any real answers to this flaw. The bank was to be unregulated and answerable only to Law and his shareholders. Anything could happen.

In May 1716, Law, having adopted French nationality as required, was finally granted a charter for his Banque Générale for a term of twenty years. But even with its seal of official approval it failed to generate much interest. Its stock consisted of 1,200 shares each valued at 5,000 livres ($400). Its capital should have been 6 million livres (or $480,000) sterling, but it was far less: only a quarter of the shares were taken up, and these transactions were not straightforward. Investors could pay three-quarters of the cost of shares in
billets d’états,
the unpopular government securities that were currently worth 60 percent less than their face value. In real terms the bank’s working capital was thus little more than 800,000 livres.

Public suspicion shone through the lackluster response. Law was still branded a dubious foreigner, a gambler, and, some said, a charlatan. Few trusted him, let alone his paper money. The establishment, who had been the chief investors in the painful disaster of the annuity bonds and
billets,
remembered the experience ruefully. To the wider French populace banks of issue were mysterious institutions, and the press compounded their entrenched misgivings, deriding the Banque Générale as “a vision . . . one can only laugh at it, no one believes it will last.” Undercapitalized, ridiculed, and distrusted, Law’s bank battled for its existence.

To save it Law resorted to both subtle and headline-grabbing tactics. His goal was first to ensure that the regent’s trust in him was unwavering, second to make his notes and his bank so attractive and powerful that only the foolish or destitute would ignore them. He began by allying himself to the regent’s most trusted friend, Saint-Simon. Once a week Law visited Saint-Simon to let him know how business was progressing. This, he hoped, would gain him credibility, as well as useful snippets of inside information. But Saint-Simon was no fool: “I soon knew that if Law desired these regular interviews it was not that he expected to make me an able financier; but as a man of intelligence, and he had plenty of it, he wanted access to a servitor of the Regent who was more than all others truly in his confidence.” But exposed to Law’s mesmeric charm even Saint-Simon capitulated: “We soon began to talk with a confidence which I never had reason to regret.”

At the bank’s offices Law adopted a more straightforward approach to boost business. Rather like the incentives dangled before students today by Wall Street banks, he offered a tempting range of free or inexpensive banking services. At the Banque Générale, he proclaimed, you could transfer money from Paris to the provinces, discount bills, and exchange foreign currency for little or no charge. Even the hostile
Gazette de la Régence
was beguiled when one of the author’s friends with 1,800 livres to transfer from Marseille to Paris paid a visit to Monsieur Law’s office. Here, according to the report in the
Gazette,
a Swiss footman, magnificently uniformed in green, introduced him to the bank’s officials. They told him that if someone in Marseille handed his coins to the local director of the mint he would be given the 1,800 livres at the bank in Paris. There would be no charge for a transaction of this small size.

The regent helped by making his well-publicized deposits and ensured that everyone knew he was using the bank for foreign transactions. Foreigners followed his lead, and at last found somewhere in Paris to discount their bills of exchange with ease and at reasonable prices. The influx of foreign currency alleviated the shortage of coins, and, with the slow trickle of banknotes Law printed and issued to depositors, boosted the money supply sufficiently for commerce to begin to pick up. Traders liked the banknotes because the guarantee of being paid in coin of fixed value meant that they knew exactly what something would cost or what price they would receive. The notes began to command a premium, like those issued by the Bank of Amsterdam.

The small shoots of recovery were nurtured by the regent’s continuing sponsorship of the bank. In October 1716 he ordered tax collectors to remit payments to the Treasury in Law’s banknotes. A few months later another edict declared that the public could pay their taxes in notes. Eighteen months after opening there were profits enough to pay shareholders a six-monthly dividend of 7 percent, and Law’s inconspicuous white notes, engraved with the legend “The bank promises to pay the bearer at sight, the sum of—livres, in coin of the weight and standard of this day, value received,” were circulating throughout France and had begun to effect the revival he had promised.

But profit brought obstacles as well as dividends. Law was damaging the business of the private bankers of Paris: his offer of cut-rate services to the public encroached on business they regarded as their domain. According to some accounts, mounting resentment inspired a group of anonymous opponents to combine their resources with the express intention of bringing him down. When their hoard reached 5 million livres in notes, they presented them at the bank for immediate payment. Law knew that his promise to “pay on demand” underpinned the public’s confidence, on which every bank depends. Without it the dream would crumble. He also knew that the bank reserves did not contain 5 million livres’ worth of coins.

K
ING OF
H
ALF
A
MERICA

But the bank is not the only nor the greatest of my ideas. I will produce a work that will surprise Europe by the changes it will bring in France’s favour, greater changes than those brought by the discovery of the Indies or by the introduction of credit. By this work Your Royal Highness will be in a position to relieve the kingdom of the sad condition into which it has fallen, and to make it more powerful than it has ever been, to establish order in finances, to replace, support and increase agriculture, manufacturing and commerce, to increase the population and the revenues of the kingdom, to reimburse useless and onerous charges, to increase the revenues of the King while helping the people, and to reduce the state debt without doing wrong to the creditors.

Letter from John Law to the regent,

December 1715

L
AW SAVED HIMSELF BY STALLING.
H
E TOLD THE MEN HE
would need twenty-four hours to raise such an unusually large sum and appealed to the finance ministry for support. Law’s influence with the regent still irked Noailles, the finance minister, but the bank’s success had relieved the pressure on his ministry, and, although he must have hated to admit it, he knew it was in his interest as much as Law’s that the bank should be sustained. Thus, when Law outlined his predicament, Noailles ordered the mint to provide Law with the coins he required. One can scarcely imagine the incredulity of the men returning the next day, expecting to find the bank in disarray; instead piles of coins were counted out before them. When they departed, along with their swollen bags of silver and gold, they took with them the unwelcome news that John Law had unequivocally trounced them.

While the bank inched precariously toward success, however, Law was looking over his shoulder for more daring ventures. Two years after the bank had opened, an opportunity to reveal his wider talents arose, unexpectedly, in the form of a diamond. The jewel came from India, where, according to Saint-Simon, an employee at the Great Mogul’s diamond mines smuggled out a 140-carat stone in his rectum. It was usual at the time for anyone dealing with precious stones to be closely searched and given a purgative before they were allowed to leave their place of employment, but somehow the man evaded the usual checks and escaped with his jewel. Eventually, after changing hands several times, it was sold for the substantial sum of £20,000 (US$32,000) to Thomas Pitt, governor of the English East India Company’s Fort Madras settlement, immortalized ever after as Diamond Pitt. A stone of such prodigious size had never before been seen, and Pitt, in high hopes that his purchase would prove a canny investment, sent it back to London for cutting. The jewel that emerged was “the size of a Reine Claude plum, almost round in shape, of a thickness equal to its width, perfectly white, free from all blemish, cloud, or speck,” enthused Saint-Simon. Naturally Pitt was anxious to recoup his considerable outlay as quickly as possible, but he found that in times of war and climates of financial uncertainty, diamonds on such a scale are no one’s friend. Even the quintessentially self-indulgent Louis XIV, when offered the stone the year before he died, refused it. In 1717, as Law was casting about for ways to impress the regent, Pitt came back to Paris with his diamond, which was still for sale. He called on Law and showed him a crystal replica of the jewel that “eclipsed all others in Europe.” At this pivotal moment in his career, the gem encapsulated Law’s personal and patriotic aspirations. If he could bring about its royal acquisition, he would endorse his own influence at court as well as highlighting the regent’s preeminence in Europe. He encouraged Orléans to buy.

Orléans saw it differently; though tempted, he was terrified. To make such an acquisition while widespread hardship continued would court controversy and criticism. But to Law, as to most men of his age, scruples were a selective luxury. Idealism could be put on hold when necessary, and ambition now demanded a different rationale. With the help of Saint-Simon, he argued persuasively that the “greatest king in Europe” should not apply the same rules as everyone else and that, in any case, the amount in question would have little real effect on the populace. The jewel’s splendor would reinforce France’s status in the world, and thus the greatness of the regency.

Orléans capitulated and authorized Law to make the final negotiations. A price of 2 million livres was agreed, but since there was no money to buy the diamond outright, a loan was secured against other jewels. Ever since, the Regent Diamond has adorned the regalia of France. Stolen during the revolution, it was recovered in time to sparkle on the ceremonial sword of the first consul in 1801, and it remains in the Galerie d’Apollon in the Louvre, a gleaming testimony to Law’s determination to make his mark and the regent’s irresolution in the face of temptation.

The spectacular diamond was a mere diversion compared with the mammoth drama to which Law had hinted in letters to the regent: “The bank is not the only nor the greatest of my ideas. I will produce a work that will surprise Europe by the changes which it will produce in France’s favour,” he wrote, a few months before the bank was inaugurated.

The idea that would rock the world and immortalize its inventor seemed innocuous enough. Law’s rapacious eye had focused on the wealth promised by the Indies, Africa, and the Americas, and he wanted to form an overseas trading company to exploit it. The Italians, the Spanish, the Portuguese, the Dutch, and the English had all reaped immense fortunes from their fleets laden with silk, ebony, ivory, lacquer, coffee, tea, chocolate, spices, gold, silver, porcelain, and myriad other luxurious and lucrative cargoes. Now, said Law, France should share the harvest.

So far the French had enjoyed little success overseas. Cardinal de Richelieu, Louis XIII’s great minister, had set up East and West Indian companies a little less than a century earlier. Under Colbert, in Louis XIV’s reign, further ventures had been tried in Canada, the Caribbean, Newfoundland, the French Americas, and the coast of Senegal. None had flourished, and overseas trade had been handed over to private enterprise. Among those who grasped the colonial baton was Robert Cavalier de la Salle, a native of Rouen, who in 1682 set out from Montreal, found and navigated the Mississippi, and was murdered while trying to establish a colony in Louisiana. The Canadian-born captain of a naval frigate, Pierre le Moyne d’Iberville, continued the quest, and when he died, Robert Crozat, a wealthy Parisian financier, took over. Crozat had come closer than anyone before him to succeeding, plowing 1.5 million livres into his enterprise. But when he came under the beady eye of the Chamber of Justice and found he owed taxes of 6.6 million livres, he decided, with some reluctance, to relinquish his Mississippi concession in part payment of his dues.

Here was Law’s great chance. The trading privilege that had reverted to the Crown was for the French colony of Louisiana, a territory many times larger than France, stretching from the mouth of the Mississippi for three thousand miles north, encompassing what is now Louisiana, Mississippi, Arkansas, Missouri, Illinois, Iowa, Wisconsin, Minnesota, and parts of Canada. This vast tract was uncultivated, largely unexplored, and inhabited only by tribes of Indians. No one knew what riches lay beneath its soil or within its forests, and most of France did not even know where the colony was, but it was whispered that this new El Dorado was copiously endowed with seams of gold and silver and with emerald mountains.

The ingenious scheme was baited to entice both the regent and the private investor. The reason most other overseas ventures had failed, Law said, was because they were undercapitalized and badly directed. His venture would be amply funded and inspirationally managed and would earn such huge revenues that France would again become the most powerful nation in the world. He would raise the necessary capital of 100 million livres by selling 200,000 shares, each valued at 500 livres. If he formed a stock company and sold shares to the general public, everyone who wanted to could share in his company’s success and grow rich. The draw for the Crown was that investors would partly pay for shares in Crown debt—the state bonds or
billets
that had been circulating in some form since the reign of Louis XIV. The company would charge a lower rate of interest for the
billets,
thus effectively doing the Crown a favor by saving precious money. The bargain for brave investors was that Law offered to accept the devalued
billets at face value
in return for company shares.

But when the scheme was discussed, the Parlement (the sovereign law court of Paris with some political functions including registering all laws and state loans) voiced strong resistance. Suspicions remained of Law’s motives; jealousy of his influence with the regent rankled. Law was an outsider, and no matter how successful, ingenious, and persuasive, always would be.

The regent, however, viewed things differently. His affection and admiration for Law had grown with the bank’s profits. Law tendered the promise of untold wealth, adventure, uncertainty, excitement. The Parlement represented the small-mindedness of judges. For a man who always craved the frisson of novelty, who had spent long years feeling frustrated under the reactionary Louis, there was little contest. He overruled the critics, and Law was granted his privilege. In August 1717, the Company of the West, known popularly ever since as the Mississippi Company, was founded. It was given the right to all trade between France and its Louisiana colony for twenty-five years and to maintain its own army and navy, to mine, and to farm. As managing director of the company Law held sway, ruling half of America in all but name.

But in these early days the company, like the bank, struggled to survive. The enticements Law had used to secure the concession had been costly and hindered progress. The fact that the shares were largely bought in devalued government bonds meant that the only capital available to build fleets and pay for crews, captains, stores, seeds, stock, tools, manual labor, and all the other needs of the settlers was the 4 percent interest payable on the bonds. If all the shares were subscribed, the most that would be raised would be 4 million livres a year ($440,000)—a modest sum, even then, on which to found a new El Dorado.

The reality was worse. While temptation to rid themselves of
billets
was great, the public, like the Parlement, were still distrustful of Law. Although joint-stock companies were familiar to English and Dutch investors, to the French they were not. The pleasures of share dealing were as yet undiscovered, the profits unimaginable, and the pitfalls worrisome. By the end of October, fewer than 30 million shares had been taken up, and many of those subscribed for had not been paid in full. Racking his brain for ways to boost sales, Law announced that investors could pay for shares in five installments, and might sell them at any point after the first installment had been made. But even with this incentive shares still floundered below par.

Meanwhile, Law’s enemies within the establishment were gathering. Noailles’s animosity had grown with the launch of the Mississippi Company, and he was “setting all the machines at work to overthrow him,” stirring up the councils and the Parlement against him. Law grumbled to Saint-Simon, knowing full well that his complaints would reach the regent and carry more weight than if he made the criticisms directly. In January 1718, the enmity between Noailles and Law had reached such a pitch that the regent was forced to act. He hosted a supper party at Noailles’s residence, La Raquette, at which he asked both men to present their ideas for the future. Noailles opted for the tried and tested tax and monetary manipulations. Law talked of nationalizing the bank, of expanding his trading company into a vast conglomerate, larger and more powerful than anything the world had ever seen, even of making the outstanding national debt disappear. Orléans’s “natural love of in-direct ways, and the attraction of those mines of gold which Law made him foresee” made Law’s innovative vision infinitely more appealing than Noailles’s irreconcilable traditional approach. The finance minister was ushered expediently to a new post in which he would have nothing to do with John Law.

His place was filled by the gimlet-eyed d’Argenson. Many questioned the appointment. Some said that d’Argenson knew little of finance, that he would take the role and its perks and let Law run things behind the scenes. Others felt that he was a hard-liner who had been brought in to keep a stronger control of the Parlement. Certainly it seemed that he was not going to let Law run his show and take all his glory. As if trying to out-maneuver him, d’Argenson swiftly proposed his own remedy for the country’s financial problems: he would slash government debt by calling in old coins and state bonds for revaluation. The livre would be devalued by a sixth, but a substantial amount of debt would be absorbed.

If Law had had anything to do with the scheme, he did not show it. His main worry was to prevent the public losing trust in his banknotes, although since they were guaranteed at value on date of issue, they would be unaffected—or, if anything, more desirable. Thus, he reasoned, he could lie low while d’Argenson played at finance. He was wrong.

In the Parlement there was outcry. Unlike in England, members of the French Parlement were nonelected and had little real influence over the absolute monarchy; their role was no more than that of a judicial high court with administrative and legal duties. To bolster his own position in the early days of his regency, Orléans, however, had restored to them the right of “remonstrance” before registration, which Louis XIV had removed in 1673. It was a decision he now regretted, since it gave them a lever—albeit a flimsy one—with which to challenge his authority. Law had not been overtly involved in the devaluation of the currency, and later said he had opposed it. But the scheme presented the Parlement with a twofold opportunity: to assert its power and to dispose of Law, against whom distrust festered. “The Parlement are still doing all they can to pick a hole in Mr. Law’s coat, striking at the Regent through his sides,” reported Fanny Oglethorpe—a Jacobite exile and friend of Law—of the mounting tensions. The English ambassador, the Earl of Stair, also marked the mood: “What makes it dangerous to employ Law is that everyone is against him, and that the Duke of Orléans, in the present situation of his affairs, would run a great risk in putting the administration of the finances into the hands of a stranger so generally hated, even if his system were good.”