Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance (11 page)

The turning point came when the Parlement audaciously demanded that the regent revoke the devaluation. When he refused, the judges retaliated by publishing an edict that outlawed the link between the bank and the government. No longer would taxes be payable in banknotes, it said, and, moreover, it was “forbidden to all foreigners, even naturalized, to meddle directly or indirectly, or to participate under assumed names, in the handling or the administration of the royal funds.” The reference to Law could not have been clearer.

The crisis deepened. Word reached Saint-Simon that the Parlement intended to send bailiffs “some morning with a warrant to arrest Law and hang him within three hours in the prison-yard.” At this, according to the Jacobite exile General Dillon, the regent “sent immediate orders to the foot and horse guards to be ready at a call and had powder and ball distributed to them. There are actually footguards at Law’s house to secure his person from insult.” It must all have been a frightening reminder to Law of his trial and imprisonment. During an emergency meeting hastily convened by Saint-Simon, the strain of the past days took their toll and Law’s self-possession crumbled: he broke down, according to Saint-Simon, “more dead than alive, [he] knew not what to say, still less what to do.” Saint-Simon calmed him, and suggested that Law and Katherine take refuge in vacant apartments at the Palais Royal. Here, said Saint-Simon, he would be able to “make more noise and bind the Regent more and . . . talk with him at all hours and urge him up to the mark.” In fact the regent was too preoccupied to keep Law briefed with the unfolding events, and Law, already unsettled, became increasingly isolated and insecure.

Orléans had decided to surprise the Parlement with a meeting known as a
lit de justice,
in which the young king would assert his regent’s authority and override the Parlement’s remonstrance. Saint-Simon helped lay plans to crush the Parlement and only perceived Law’s anxiety when he was accosted by one of Law’s servants, who begged him to visit his master. He found Law in distress with Katherine. It may have been the first time she had seen Law’s vulnerability, and to judge from Saint-Simon’s account of this meeting, she had failed to allay his fears. Law was taut with the fear that the regent was abandoning him to his enemies, and it was only when Saint-Simon reassured him that there was nothing sinister in the regent’s behavior that he seemed “to breathe again.”

On August 26, the day of the
lit de justice,
Paris awoke to find Swiss guards, musketeers, cavalry, and household troops posted around the Palais Royal, the Tuileries, Law’s bank, and other strategic landmarks. The meeting began at ten in the Palais de Justice. Before the regency council, the Parlement, officers of the bodyguard, and a contingent of spectators “of consideration and mark,” the eight-year-old king mounted the small staircase to his throne beneath a tapestry baldachin. D’Argenson, as Keeper of the Seals, made the announcement on the boy’s behalf: “The King chooses to be obeyed, and obeyed on the spot.” Thus, with more than a dash of melodrama, the royal authority of the regent was upheld, and the sixty-nine rebellious magistrates of the Parlement quashed. Three refused to fall into line and were arrested. The rest sweated profusely into their powdered wigs and robes of ceremonial velvet and conceded, reluctantly, that their moment had passed. The challenge had failed: once again Law, the outsider, had eluded them.

F
INDING THE
P
HILOSOPHER’S
S
TONE

There appears nothing but new clothes, new figures and an infinite number of families raised to new fortunes. They see 800 new coaches set up in Paris, and the families enriched purchase new plate, new furniture, new clothes and new equipage, so that there is a most prodigious trade there.

Daniel Defoe,

September 12, 1719

T
HE
P
ARLEMENT
’
S THREAT TO HANG HIM SHOOK
L
AW
profoundly but did not alter his resolve to put his master plan, the so-called system, into action. He was still fired by the gambler’s will to win, a philanthropic desire to improve, and the urge to experiment. Also, he was still obsessed with the rejection of his appeal for a pardon for the death of Wilson, and craved redemption. But Law’s sense of isolation at the Palais Royal seems also to have awakened a more profound, barely acknowledged need for social acceptance and belonging. Law the opportunist, once happy to live outside the conventions of society and to make use of his
haut monde
connections for his own ends, now longed to be properly part of them. As with many successful businessmen today, he was consumed by political ambition. Perhaps Katherine had something to do with this shift in his thinking: the death threat and the rapid turns in political events must have disturbed her and underlined the vulnerability of their position. Perhaps behind Law’s increasing desire for public office lay not only his ambition but concern that the family’s future should be made more secure. It is possible, too, that Katherine felt she had an important role to play: as a doyenne of society, she could forge alliances that would help to stabilize Law’s political career. One fundamental belief, however, she could not change: in money, he was convinced, lay the key to salvation and the answer to his aims.

As France’s premier banker, he was ideally poised to become a man of repute. The following autumn, when Lady Mary Wortley Montagu was passing through Paris, she noted the change in his fortunes: “I must say I saw nothing in France that delighted me so much as to see an Englishman (at least a Briton) absolute at Paris. I mean Mr. Law, who treats their Dukes and Peers extremely
de haut en bas
and is treated by them with the utmost submission and respect.” Always an enthusiastic patron of the arts, Law sat for his portrait, probably with artist Alexis Simon Belle, at around this time. The painting shows a man in his mid-forties, of refinement, charm, and still youthful appearance, wearing a full-length brown periwig, embroidered velvet robe, and lace cravat—grand clothes befitting his already elevated status. His face is thin and rather angular, his mouth, though half-smiling, has an air of determination, and the expression is distant—the piercing gray-eyed gaze avoids the viewer, as if his mind is elsewhere, perhaps with his system’s next phase: his bank’s takeover by the state. The bank’s assets now included over 9 million livres in coins and 1.6 million in bills of exchange. Against these were fewer than 40 million livres in outstanding notes. Law had remembered the warnings of Saint-Simon and the lessons of the Bank of Amsterdam and had restricted the issue of notes.

In December 1718, the Banque Générale became the Banque Royale, the equivalent of a nationalized industry today. Law continued to direct it, and under his leadership over the next months, the finances of France leaned more heavily on it. New branches opened in Lyon, La Rochelle, Tours, Orléans, and Amiens. To ensure that everyone made use of paper money, any transactions of more than 600 livres were ordered to be made in paper notes or gold. Since gold was in short supply, this obliged nearly everyone to use paper for all major transactions. Meanwhile, for the leap of confidence they had shown in purchasing shares in the bank in its early uncertain days, and perhaps to buy his way into their world, Law rewarded investors lavishly. Shares that they had partly bought with devalued government bonds were paid out in coin. Both he and the regent had been major shareholders and were among those who profited greatly from the bank’s takeover.

Few recognized the dangers signaled by the bank’s new royal status. Hitherto Law had kept careful control of the numbers of notes issued. There had always been coin reserves of around 25 percent against circulating paper notes. Now, with royal ownership and no shareholders to ask awkward questions, the bank became less controllable. The issuing and quantity of printed notes and the size of reserves would be decided by the regent and his advisers. The temptation to print too much paper money too quickly would thus be virtually unchecked.

Within five months of its royal takeover, the writer Buvat had noted in his journal, with more than a touch of irony, that eight printers, each of whom earned only 500 livres a year, were employed around the clock printing 100-, 50- and 10- livre notes. A further ominous change followed: notes were no longer redeemable by value at date of issue but according to the face value, which would change along with coins if the currency was devalued: the principle that underpinned public confidence in paper had been discarded and one of Law’s most basic tenets breached. But as the eminent eighteenth-century economist Sir James Steuart later incredulously remarked, “no-body seemed dissatisfied: the nation was rather pleased; so familiar were the variations of the coin in those days, that nobody ever considered anything with regard to coin or money, but its denomination . . . this appears wonderful; and yet it is a fact.”

If Law was unhappy he gave no sign of it. Apparently he was busy reinvesting profits from his bank shares. He began to build a vast property portfolio, buying the Duchy of Mercoeur from the Dowager Princess of Condé for the sum of 100,000 livres and the Hôtel de Soissons from the Prince of Carignan for 750,000 livres. The Hôtel became the headquarters of the Mississippi Company, but the beautiful gardens were retained by the shrewd prince, who later profited by letting them as a marketplace for share dealing.

At around this time, Law was joined in Paris by his brother William, who was four years his junior, had trained in Edinburgh as a goldsmith, and was, Law believed, one of his most trusted allies. William was a founding director of the Banque Générale and had worked for some time as Law’s agent in London. Among his friends was George Middleton, one of London’s leading bankers, whose services the Laws used to undertake their investments in diamonds, Scottish property, and South Sea and East India stock. Shortly before settling in France, William married Rebecca Dives, the strikingly beautiful daughter of a London coal merchant. In Paris the couple took up residence in a suitably imposing mansion, employed a retinue of liveried servants, acquired several carriages, and thanks to Law and Katherine’s influence, were introduced to court circles.

Meanwhile, Law was casting his net ever wider. He was anxious to encourage local industry, having always seen it as fundamental to national prosperity. An agent in England was employed under his brother’s direction to find clock- and watchmakers, weavers, metalworkers, and other specialist craftsmen and tempt them with various financial enticements to move to France. According to Buvat, around nine hundred workers settled at Versailles, where they were given lodgings in a converted stable block belonging to the Duchesse de Berry, the regent’s daughter, and in the nearby Parc aux Cerfs. Each received a salary of thirty livres per month plus thirty sous a day for food. It was a move few immigrants can have regretted: a huge demand for luxury goods was one of the immediate effects of the incredible economic boom France was about to experience.

Chiefly, though, the price of Mississippi shares, which was still struggling disappointingly below par, engrossed Law. The way to turn the ailing Mississippi Company into Europe’s most successful conglomerate and to return France to a state of prosperity, Law concluded, was to monopolize French trade and state finances. This audacious idea was, in a sense, the lesson of youth reapplied: as a young man he had learned that the way to win was to ensure that the odds of winning were always in his favor. Now the same principle was utilized in corporate enterprise. Law was dealing his company an unbeatable hand.

The first acquisitions targeted overseas trade: the right to tobacco farming in the colonies, to slaves and other lucrative products in Senegal. Tobacco smoking had yet to become entrenched in polite circles, but snuff was the height of fashion—the Princess Palatine tartly criticized ladies for “arriving here with their noses dirty as if they had rubbed them in mud,” although a year later she remarked perceptively, “They call it the magic plant, because those who begin to use it can no longer give it up.” The profits from such a monopoly, as many investors quickly realized, were therefore likely only to grow.

Then came the most crucial coup so far: the acquisition of trade to the East Indies. Law had noted that the French East India and China Company had been badly managed and was making huge losses. He contended that if it was merged with the Mississippi Company it would form an enterprise with global trading rights from which each company would benefit. The idea was grandiose, daring, risky, but he made it sound plausible. The acquisitions would be paid for by a second issue of 50,000 shares, nicknamed
filles,
daughters (the first issue was known as
mères,
mothers), priced at 500 livres each (with a nominal value of 500 livres). Unlike the
mères
issue, which investors had bought with state bonds, the
filles
would be paid for in cash. This, Law explained, was because the first move he would make to revive French overseas trade would be to invest in two dozen ships of five hundred tons each and the capital from the shares would be necessary to finance them.

The establishment sneered. As usual d’Argenson, who—according to Law—was “jealous of the credit that I had acquired with His Royal Highness and the public by the direction of the bank and the Western company,” was a vociferous opponent, claiming that the plan was doomed and casting doubt on public willingness to invest, given that the first issue of shares was still trading below par. Egged on by d’Argenson, even the regent was anxious about the scheme’s viability and stalled Law’s request for royal sanction. Realizing that the doubters would be silenced only if he demonstrated, irrefutably, that the idea was fail-safe, Law conferred with several key friends and potential investors. They agreed on easy terms of payment for the new issue of shares: ten monthly installments (later made even more tempting by being increased to twenty). Ships would be slow to prepare and fit, Law said, so the company would not need its full working capital immediately. With this incentive dangling before them, five supporters were keen enough to pledge to buy a million livres’ worth of shares each. Law’s gambling instincts now surfaced: he guaranteed to put up 2.5 million livres as a first down payment on the par price. This effectively obliged him to buy over 90 percent of the entire issue and invest a total of 25 million livres. To the regent, self-assurance on such a scale was irresistible: on Sunday, May 23, he overruled d’Argenson’s misgivings and authorized the deal. The new enterprise was named the Company of the Indies, although most still used the old sobriquet, Mississippi Company.

Beneath his surface bravado, Law fretted over the wisdom of his move: “On Monday night I did not sleep; I had gained a great confidence with the public and I feared losing it by the action that I had taken,” he later owned. In fact, his gamble paid off. In the goldfish-bowl society in which he moved, underwriting an issue on such a scale could scarcely fail to attract attention. Everyone assumed that to do so Law, with his inside knowledge, had to have been certain of success. The growing profits of his acquisitions, particularly of the tobacco monopoly and the distant Louisiana colony, seemed assured. The shrewdest began to follow suit.

Rapidly, amid a flurry of rumor, the herd instinct took hold. The price of the old shares broke through their par price and rose to 600 livres, and subscriptions for the new issue streamed in. By mid-June shares were changing hands at 650 livres, and 50 million paper notes poured off the bank’s presses to enable people to purchase the next issue of shares, which would be offered at the end of the month. Slowly, the skeptical French public, who had burned their fingers with state bonds, were learning that paper investments could rise as well as fall in value. Law was about to compound the lesson with maneuvers that laid bare his grasp of consumer psychology: the elementary concept that reducing supply increases demand.

New issue restrictions were imposed: in order to buy one new share investors had to own four old ones. Thus, those who had bought the original issue enjoyed the pleasure of watching the value of their investment rise as, over the summer of 1719, France savored her first taste of a bull market. By the time the second installment was due on the new issue, the share price had doubled to 1,000 livres. Meanwhile, Law gilded the lily still further by stating that the company would pay a generous 12 percent dividend of 60 livres in the following year. As the bank printed more notes and issued more loans to allow greater numbers of people to buy and deal in shares, prices continued to rise.

Law’s summer spending spree was still incomplete. At the end of July 1719 he bought the rights to the Royal Mint for 50 million livres. To cover the cost, a third issue of 50,000 shares was offered. These were nicknamed
petites filles,
granddaughters, and as before were linked to earlier issues. To buy one granddaughter you had to own four mothers and a daughter.

Outside the Mississippi Company office, throughout the summer of 1719, Paris was rapidly engulfed in unprecedented speculation madness. By mid-August the shares that three months earlier had languished at 490 livres were being snapped up at 3,500. A carnival atmosphere descended on the city, and on the evening before St. Louis Day, August 25, thousands gathered in the Jardin des Tuileries to enjoy a firework and musical extravaganza. At the end of the evening the fashionable crowd funneled toward an exit at one end of the gardens but found their way partially barred because a steward had forgotten to open one of the gates. Impatience became a surge of panic when word spread that pickpockets were capitalizing on the wealthy captive audience. A dozen or so thieves were later arrested, pockets crammed with gold and silver snuff boxes, watches, diamond crosses, embroidered shawls, handkerchiefs, lace headdresses, pieces of men’s waistcoats, and panels of expensive ladies’ coats that had been subtly cut from their backs. Amid the pandemonium, eleven women fell and were suffocated or trampled to death. Hundreds more suffered broken limbs, heat exhaustion, the aftereffects of crushing. Paris mourned.