Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance Read online

  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 th
e 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.

  News of the disaster reached the rest of Europe along with reports of Law’s most daring maneuver. He had offered to take over the burden that had weighed so heavily on the nation since Louis’s final failing years, and lend the state enough to repay the national debt—1.2 billion livres at an interest rate of 3 percent. The proposal was intertwined with a highly contentious pledge to pay 52 million livres for the right to take over tax collection. At the time France leased this right to private enterprise in the shape of the General Receivers, who were responsible for direct taxation, and to the Farmers General, a syndicate of forty private financiers, who were responsible for collecting indirect taxes, such as customs duties and levies on salt and alcohol. The Farmers General were also the largest creditors of the state and profiteers from government indebtedness. The owner of a so-called tax farm lease had to estimate the sum of revenue he would raise and advance it to the state. If the revenue was below this amount, he himself was obliged to pay the state, while any revenue above it he could keep. In fact, research has recently shown that the forty financiers were not actually rich enough to advance the whole sum to be collected. They acted as “names,” or front men, for numerous anonymous investors and courtiers. It was a system that lay open to huge profits, corruption, and inefficiency, and one that was dominated by the Pâris brothers, the four most powerful financiers of France. Law’s fascination for finance had always been entwined with concern for moral economic issues. He saw injustice in the huge advantages the tax system gave to an established elite. Now he grasped the chance to eliminate them, little realizing how fiercely they would respond.

  The massive sum needed to cover the government loan would be raised by a further issue of Mississippi shares. Existing bondholders would be given a choice of converting into shares or company annuities, which offered a return of 3 percent—at least 1 percent less than they currently received. The intention was to make shares a far more attractive proposition than annuities. The scheme was by far the most grandiose yet: Law was aiming to raise seventeen times more than the sum of all the previous issues, and again he made it sound entirely plausible.

  Thus on September 13 a fourth issue of 100,000 shares, known as cinq-cents, was launched, priced at 5,000 livres with a nominal value of 500. As before, the issue was consumed hungrily by the Mississippi-mad public. Two more identical issues followed, then a final one of 24,000. Unlike earlier subscriptions, there were no restrictions on purchase—you did not need to own shares already; anyone might grow rich by buying into the Mississippi dream. The Earl of Stair noted, “The public had run upon this new subscription with that fury, that near the double of that sum is subscribed for: and there have been the greatest brigues [intrigues] and quarrels to have place in the subscription, to that degree that the new submissions are not yet delivered out, nor is the first payment received. Mr. Law’s door is shut, and all the people of quality in France are on foot, in hundreds, before his door in the Place Vendôme.” Scenes like this call to mind descriptions of the glamorous Anthony Morse—a stock dealer who in the midst of the nineteenth-century American stock boom acquired shares 5 or 10 million at a time and was frequently besieged by crowds of lesser speculators desperate for an investment tip.

  Canny and ambitious though the scheme undoubtedly was, Law seems to have naïvely ignored the effect of his plans on the tax farmers and financiers, and the court nobility who backed them. The double blow—denying their lucrative tax profits and significantly reducing their income from their government bonds—was bound to spark an angry response and make them determined to undermine his reforms. Law disregarded the danger at his peril.

  The shares were traded in the company’s new offices in Paris’s ancient commercial heartland, the rue Quincampoix, a street that today crouches under the shadow of the Centre Pompidou, in the Les Halles district. The rue Quincampoix is a long, thin thoroughfare, terminating at the rue aux Ours to the north and the rue Aubry le Boucher to the south. The road had long been a center for money changers, businessmen raising capital to start new ventures, and, during the reign of Louis XIV, traders in the unpopular billets. Its tongue-twisting name comes from one of its twelfth-century money-dealing residents, Nicolas de Kiquenpoit.

  In volatile markets news is an essential tool that helps traders anticipate where prices might move next. Today’s brokers have at their disposal data vendors such as Reuters and Bloomberg offering a mass of up-to-date analysis, research, prices, and charts. The eighteenth-century equivalent was gossip. News of the colonies, government policy, and Law’s next move was endlessly anticipated and assessed in the rue Quincampoix. So many gravitated here to talk and trade that the surrounding streets were paralyzed by horses and carriages. D’Argenson, the finance minister, whose official residence was also in the street, was infuriated when one day in November he spent more than an hour stuck in a traffic jam. Eventually carriages were banned, gates erected to control the crowds, and guards posted to prevent night dealings, which disturbed residents. In another futile attempt to restore some semblance of order, one entrance was reserved for speculators of quality, the other for everyone else.

  At the sound of a morning bell, the gates opened and convention vanished. Aristocrats jostled with their footmen and maids; bishops and priests vied with courtesans, opera singers, and actresses; magistrates did business with pickpockets; Italians, Dutch, and English mingled with the French. Daniel Defoe described the extraordinary scenes: “Nothing can be more diverting than to see the hurry and clutter of the stock-jobbers in Quincampoix street; a place so scandalously dirty, as if it had been not the sink of the city only, but of the whole kingdom. . . . The inconvenience of the darkest and nastiest street in Paris does not prevent the crowds of people of all qualities . . . coming to buy and sell their stocks in the open pl
ace; where, without distinction, they go up to the ankles in dirt, every step they take.” Even the nine-year-old King Louis XV was caught up in the frenzied mood. When a plan of Paris was laid before him, he was said to have demanded that Quincampoix be highlighted in gilding.

  The Parisian elite was startled by the extraordinary number of people from the lower orders who prospered spectacularly from Mississippi speculation. Money was easy to borrow, and since you only needed put down a 10 percent deposit to play the market, people from all walks of life rushed to sell their châteaux, their diamonds, their cows, and their crops to join in. The privileged greeted the new social mobility with diffidence, worried that the hierarchy that for centuries had underpinned their superior status had vanished along with financial gloom. Even Voltaire was bemused. Writing to the Parlement councilor Nicolas de Genonville he commented:

  It is good to come to the country when Plutus is turning all heads in the city. Have you really all gone mad in Paris? I only hear talk of millions. They say that everyone who was comfortably off is now in misery and everyone who was impoverished revels in opulence. Is this reality? Is this a chimera? Has half the nation found the philosopher’s stone in the paper mills? Is Law a god, a rogue or a charlatan who is poisoning himself with the drug he is distributing to everyone?

  Journals and memoirs of the time recount scores of tales of Mississippians propelled from poverty to wealth overnight. As with today’s lottery winners, writers of the rags-to-riches stories reveled in the difficulties of those who found the transition hard to make, often ridiculing them for daring to aspire to luxurious living. There are tales of a footman who earned so much that he was able to buy himself a fine carriage, but when it was delivered forgot his changed circumstances and found himself taking up his old position at the rear. A baker’s son from Toulouse was said to have bought an entire shop full of silver plate for 400,000 livres, and sent it home to his wife with orders to invite the local gentry for dinner and use the silver. The woman was unused to such luxurious objects but did as instructed. When her guests arrived they collapsed in mirth to see soup served in a church offertory basin, the sugar dispensed from an incense burner, and the salt from chalices.