Chap. XXXI: Continuation of the Account of the Royal Bank of France, until the total Bankruptcy on the 21st of May 1720

I now resume the thread of my story. We left off at that period when the credit of the company and of the bank was in all its glory (November 1719); the actions selling at 10,000 livres, dividend 200 livres a year per action, and the bank lending at 2 per cent: all this was quite consistent with the then rate of money.

In this state did matters continue until the 22nd of February 1720, when the bank was incorporated with the company of the Indies.

The King still continued guarantee of all the bank notes; none were to be coined but by his authority: and the comptroller-general for the time being, was to have, at all times, together with the Prevot des marchands of Paris, ready access to inspect the books of the bank.

As the intention, at the time of the incorporation, was to coin a very great quantity of notes, in order to buy up the actions, and to borrow back the money, in order to pay off the creditors, it was proper to gather together as much coin as possible, to guard against a run upon the bank: for which purpose, the famous Arret de Conseil, of the 27th of February 1720, was published, forbidding any person to keep by them more than 500 livres in coin.

This was plainly annulling the obligation in the bank paper, to pay to the bearer on demand the sum specified, in silver coin.

Was it not very natural, that such an arret should have, at once, put an end to the credit of the bank? No such thing however happened. The credit remained solid after this as before; and nobody minded gold or silver any more than if the denomination in their paper had had no relation to these metals. Accordingly, many, who had coin and confidence, brought it in, and were glad to get paper for it.

The coin being collected in about a week's time, another Arret de Conseil, of the 5th of March, was issued, rising the denomination from 60 livres to 80 livres the marc. Thus, I suppose, the coin which the week before had been taken in at 60 livres, was paid away at 80: and the bank gained 33 1/3 per Cent. upon this operation. Did this hurt the credit of the bank paper? Not in the least.

As soon as the coin was paid away, which was not a long operation, for it was over in less than a week; another Arret de Conseil, of the 11th of the same month of March, came out, declaring that, by the first of April, the coin was to be again reduced to 70 livres the marc, and on the first of May to 65 livres. Upon this, the coin, which had been paid away the week before, came pouring into the bank, for fear of the diminution which was to take place the first of April. In this period of about three weeks, the bank received in coin about 44 millions of livres; and those who brought it in thought they were well rid of it.

It was during the months of February, March, and April 1720, that the great operations of the system were carried on.

We may see by the chronological anecdotes in the 28th chapter, what prodigious sums of bank notes were coined, and issued during that time. It was during this period also, that a final conclusion was put to the reimbursing all the public creditors with bank notes: in consequence of which payment, the former securities granted to them by the King, under the authority of the parliament of Paris, were withdrawn and annulled.

Here then we have conducted this scheme to the last period.

There remained only one step to be made to conclude the operation; to wit, the sale of the actions, which the Regent had in his custody to the number of 400,000.

These were to be sold to the public, who were at this time in possession of bank notes to the value of 2,235,083,590 livres. See the foregoing table.

Had the sale of the actions taken place, the notes would all have returned to the bank, and there have been destroyed: by which operation, the company would have become debtor to the public for the dividends of all the actions in their hands, and to the King for all those which might have remained in the hands of the Regent. These proportions we cannot bring to any calculation, as it would have depended entirely on the price of the actions during so great an operation; and on the private conventions between the parties, the Regent and the company.

But alas! all this is a vain speculation. The system, which hitherto had stood its ground in spite of the most violent shocks, was now to tumble into ruin from a childish whim.

In order to set this stroke of political arithmetic in the most ludicrous light possible, I must do it in Dutot's own words, uttered with a sore heart and in sober sadness.

He had said before, that the coin of France was equal to 1200 millions of livres at 60 livres the marc. This marc was now at 65 livres (in May 1720, as above) so the numerary value, as he calls it, (that is the denomination,) of the coin was now risen to 1,300,000,000; but the bank notes circulating in the month of May were carried to 2,696,400,000; then he adds,

'The 1300 millions of coin which were in France, were very far from 2696 millions of notes. In that case the sum of notes was to the sum of coin, nearly as 2 2/27 are to 1; that is to say, that 207 livres 8 sols 1 7/8 denier in notes, was only worth 100 livres in coin; or otherwise, that a bank note of 100 livres was only worth 48 livres 4 sols 5 deniers in coin, or thereabouts.' Would not any mortal conclude from this calculation of Dutot's, that the whole sum of 1300 millions had been in the bank, as the only fund for the payment of the paper?

This is a laboured equation, and from it we have a specimen of this gentleman's method of calculating the value of bank paper: but let us hear him out.

'This prodigious quantity of money in circulation', says he, 'had raised the price of every thing excessively: so in order to bring down prices, it was judged more expedient to diminish the denomination of the bank notes, than to raise the denomination of the coin; because that diminished the quantity of money, this augmented it.'

This was the grand point under deliberation, before the famous arret of the 21st of May was given, viz. whether it were better to raise the value of the coin, which did not belong to the bank, but to the French nation, to double the denomination it bore at this time, that is, to 130 livres the marc, by which means the 1300 millions would have made 2600 millions, or to reduce the 2600 millions of bank notes to one half, that is, to 1300 millions, the total denomination of the coin.

To some people it would have appeared more rational to reject both the alternatives, and to allow matters to stand as they were, as long as they would stand, at least until the actions had been all sold off; but this was not thought proper. After a most learned deliberation, it was resolved to reduce to one half, the denomination of all the paper of France, bank notes as well as actions, instead of raising the denomination of the coin; and this because the prices of commodities were supposed to be in proportion to the quantity of the denominations of money.

The arret was no sooner published than the whole paper fabric fell to nothing. The day following, the 22nd of May, a man might have starved with a hundred millions of paper in his pocket.

This was a catastrophe the like of which, I believe, never happened: it is so ridiculous that it is a subject fit only for a farce.

Here Dutot's lamentations and regrets are inimitable.

In one place he says, 'Credit was too far fetched to be solid. It was therefore proper to sacrifice one part, to give a soliditY to the other. Even this was done; but the consequences did not correspond to the intention. Confidence, which is the soul of credit, eclipsed itself, and the loss of the bank note, drew on the loss of the action.'

In another place he says, 'This arret of the 21st of May, which according to some blessoit l'équité,' (a very mild expression!) 'destroyed all confidence in the public; because the King had diminished one half of that paper money (the bank notes) which had been declared fixed.'

Is it not a thousand pities that confidence should have disappeared upon so slight a wound given to equity, only in the opinion of some? For Dutot thought the operation perfectly consistent with the principles of public credit.

He tells us, that a letter was written to calm the minds of the people, and to shew them how absurd it was, to allow the paper to be fixed, while the coin varied; but, says he, 'as there was a revenue attached to the action, the value of that paper did not depend so much upon the capital, as on the sum of the interest.' Very just. But were the dividends to stand at 200 livres, without suffering the same diminution as the action? And how was confidence to subsist in a county, where the denominations of both the paper and the coin were at the disposal of a minister?

The diminution upon the paper, by the arret of the 21st of May, raised a most terrible clamour; and Law became the execration of France, instead of being considered as its saviour. He was banished, and reduced to beggary the same day.

What profit could either the Regent, or Law, have reaped from the success of such an operation? Had the coin been raised to 130 livres the marc, no hurt would probably have ensued, and the same effect would have been produced.

Had matters been left without any change at all, no bad consequences would have followed: these existed only in the heads of the French theorists. There was, indeed, twice as much money in bank notes as in coin, in the whole kingdom of France: and what then?

When the Regent saw the fatal effects of his arret of the 21st of May, he revoked it on the 27th of the same month. On the 29th, he raised the coin to 82 livres 10 sols in the marc, and re-established all the paper at its former denomination: but, as Dutot has said, confidence was gone, and was no more to be recalled. Nothing surprises me, but that she lived so long under such rough management.

Dutot, in talking of this augmentation of the coin, on the 29th of May, to 82 livres 10 sols, says, 'This operation was consistent with the principles of public credit, and advantageous. They would have done better had they pushed the augmentation to 135 livres the marc; which would have made the specie of France equal to the sum of bank notes.' These are his words, p. 165.

Are not these very sensible principles, coming from a man who has written a book, which indeed few people can understand, in order to prove the great hurt of tampering with the coin of France?