Government Equity and Money: John Law's System in 1720 France

Claims Supported by This Source

1. Law's system (1716–1720) was based on two pillars: converting existing public debt into something like government stock, and replacing commodity money with fiat money (summary).
2. Law supported the stock at too high a level for strategic reasons, causing money creation to lose control. The system ended with the public debt re-established at roughly its original level (Abstract).
3. The author estimates that the stock price was overvalued by a factor of 2 to 5 at its peak, which is attributed to Law's systematic price support policy. Public debt did not increase significantly during the system, and his successors returned it to its original level (p.2).
4. At the death of Louis XIV in 1715, the debt was 2.8 billion livres (1.068 billion in perpetual annuities, 830 million in venal offices, 920 million in floating debt). Interest payments, 45 million for annuities and 41.5 million for offices, exceeded the primary balance of 48 million (revenue 166 million, expenditure 71 million) (p. 7, Table 2).
5. The General Bank of May 1716 was capitalized with 1,200 shares at 5,000 livres each. Most were paid for with billets d'État trading at a 60% discount, so the initial cash requirement was only 690 livres per share. The notes were denominated in a specific silver coin (écu). By a decree of October 7, 1716, tax collectors exchanged the notes for cash; on April 10, 1717, they became legal tender for tax payments; and by a decree of June 1, 1718, notes denominated in old écus were accepted at a rate of 1 écu to 6 livres (pp. 10–12).
6. By a declaration of December 4, 1718, the King bought out the shareholders at the par value of 5,000 and established the Royal Bank. The amount of notes outstanding at the time was 39.5 million. Branches were in Paris, Lyon, La Rochelle, Tours, Orléans, and Amiens (pp. 12–13, 23 n. 26).
7. In August 1717, the Company of the West received Louisiana as a perpetual fief, along with a 25-year commercial monopoly and the Canadian beaver trade. The IPO was for 200,000 shares at 500 livres each, payable at par with billets d'État. Subscriptions closed on December 31, 1718, at 100 million, with 40% held by the King. By December 1718, it had 12 ships (pp. 13–15, 17).
8. Mergers: 1718-08-01 Tobacco monopoly (4.02 million/year); 1718-12-04 Company of Senegal; 1719-05 Company of the East Indies and China; 1719-07 Company of Africa; 1719-07-25 The Mint (50 million over 9 years); 1719-08-27 General Tax Farm (52 million/year, 50-year privilege); end of August 1719 Collection of direct taxes; 1720-02 Absorption of the Royal Bank (pp. 15–16).
9. Share issues: 1717–18 IPO 200,000 shares × 500; 1719-06 50,000 shares × 550; 1719-07 50,000 shares × 1,000; 1719-09–10 300,000 shares × 5,000 (in installments). Subscription receipts were effectively options due to a forfeiture clause. Share price was 180–290 in 1718, 500 on 1719-05-10, 650 on 06-17, 1,000 in mid-July, 3,600 on 08-26, 5,350 on 09-09, peaking at 10,000 in January 1720 (pp. 17–18, 20, 44; Fig. 4).
10. By a decree of 1719-08-27, the Company lent 1.2 billion (raised to 1.6 billion on 09-17 and 10-10) to the King at 3%, and the King forcibly redeemed annuities, venal offices, caisse commune notes, and billets d'État (1.49984 billion ordered on 08-31, totaling 1.97712 billion by July 1720). The Company ultimately raised the funds with shares, not 3% bonds (pp. 19–21, Table 3, n. 23: Faure and Murphy differ on whether the August plan was for bonds or shares; the author sides with Faure).
11. Restrictions on specie: 1719-12-21 Prohibition of payments over 10 livres in silver and 300 in gold; 1720-01-28 Notes become legal tender nationwide; 02-27 Prohibition of holding over 500 livres in specie; 03-11 Demonetization of gold and silver announced; 04-01 Invalidation of gold and silver clauses. Contemporary estimates of specie were about 1.2 billion (pp. 23–24, n. 28).
12. Table 4: Outstanding balance of notes (excluding amounts burned, in millions of livres) 1719-04-30 38.0・05-31 109.9・07-31 159.9・08-31 380.6・09-30 500.6・11-30 620.6・12-31 769.0・1720-01-30 810.1・02-29 1,069.7・03-05 1,089.9・03-31 1,261.5・04-30 2,054.0・05-22 2,116.5・05-31 2,235.1・06-30 2,359.0・07-31 2,081.7・08-31 2,006.8・09-30 2,001.7・10-10 2,038.4・10-31 2,069.0・11-27 2,069.1・1721-01-08 2,069.1 (p. 25)
13. From 1719-10, the Company bought its own shares at 5,000. At the end of December, it opened a window posting daily prices and bought 800 million (16% of capital). When the Bank was merged into the Company on 1720-02-22 and support ceased, the price fell from 9,925 to 8,500 on 03-01. On 03-05, it reopened a window with a fixed price of 9,000 and, between March and May, bought back 27% of its own shares for 1.2135 billion (pp. 29–30).
14. The decision of 1720-05-21: Law himself wrote the preamble, establishing a schedule to devalue shares monthly from 9,000 to 5,000 and notes to half their face value. Revoked on 05-27; Law dismissed and placed under house arrest on 05-28, reinstated a few days later (p.30).
15. June–November: Notes collected through payments for annuities (1 billion at 2.5%), bank accounts (July 13, finally 239 million), and shares. The bank's conversion resumed on July 9 for small amounts and was suspended indefinitely amid the turmoil of July 17. On August 15, the demonetization schedule was set; on October 10, it was moved forward to November 1 (remaining balance: 1.169 billion). Law left the country in early December (pp. 31–35).
16. The Visa (1721–22): Submitted 2.2112 billion → principal 1.7 billion, annuities 47 million (until 1724-01). Claims of 500 livres or less were not reduced (half the number of people, 40% of the amount); the rest were reduced by an average of 39%. The market price of the certificates was about 25% of face value in 1722. Taxation of 200 people for 190 million. Shares 125,000 → 55,735 (pp. 35–38, Table 7).
17. The debt in 1724 was 2.5414 billion in principal and 86.7 million in interest payments, not significantly different from 1717 (2.3217 billion and 93.7 million). The increase during the System is estimated at about 150 million; if this were called a default, it would be 5–10% (Table 2, p. 50).
18. Hamilton's price index rose 25% in the single month of January 1720, and another 19% from January to the peak in August. In the same period, the quantity of notes increased 2.6-fold. The exchange rate fell below par at the end of January 1720, and the specie devaluations in March (25%), April (11%), and July (44%) followed the fall of the paper livre (pp. 26–27).
19. The legal price of silver (mint equivalent) changed 64 times between 1689 and 1726, including 8 times in 1720 alone, and then remained unchanged from 1726 to 1795 (p. 7, Table 5). The Company was put into receivership in April 1721, resumed operations in April 1723, traded until 1769, and was liquidated in 1770 (pp. 35, 41).
20. Valuation: Earnings of 75.5 million × a multiple of 15 gives 1,875 livres per share, one-fifth of the peak of 9,000. Even assuming Dutch-level interest rates, this was an overvaluation by a factor of two. From November–December 1719, the market price was a direct result of Law's policy. Law was not a fraudster (the Company conducted real business and invested over 9.5 million livres of its assets in French real estate). The replacement of specie with paper money "was long held in ill repute thereafter," and its reputation was not restored until the 1930s (pp. 47–51).

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