System of Law

The Système of Law is an economic system developed by the Écossais John Law. It recommends the use of Paper money rather than of currency metal, the paper money having the advantage of circulating easily between the individuals and it is this circulation which creates the real richness of an economy.

This system will be tried in France, of 1716 with 1720, initially successfully, success which allows the general Banque - strictly financial organization - to grow bigger until absorbing the companies and the French colonial activity of its company sister, the perpetual company of the Indies. But the vassalage of this system at the French State, while asking him to take responsibility for its debts French finances, and the Spéculation which is exploited the actions of the company of Law finally will ruin the system of it. When the shareholders, in 1720, suddenly ask to recover to them Or, this one already disappeared to reinflate the cases of the State, and the colonial richnesses did not arrive yet: the system must admit its Banqueroute.

Birth of the system

John Law arrives to France in 1714. He is received in 1714 by the duke of Orleans, which recommends it to Desmarets, General inspector of finances. In 1715, Louis XIV dies and, Louis XV being still child, the duke of Orleans seizes regency. Finances of the kingdom are then in a disastrous state following decades of war. The debt rises then between 2 and 2,5 billion delivers S, that is to say the equivalent of ten years of receipts. The regent sees Law again and, convinced by its system, imposes it on its advisers, Noailles, Rouillé and Amelot.

The May 2nd 1716, Law is authorized by edict to create a private banking, on the model of the bank of England, which takes the name of general Bank, located street Quincampoix at Paris. Its capital rises then to 6 million books, distributed in 1.200 actions, payable for a quarter in cash and the paper remainder “of State”. The bank is an immediate success. The April 10th 1717, a new edict widens the privileges of the bank: the tickets which it issues, convertible out of gold, can be received in payment of the taxes.

Developments

The August 23rd 1717, Law obtains the retrocession of the privileges of the Company of Louisiana, yielded by the financier Antoine Crozat to discharge a debt with respect to the State. The September 6th, Law creates the Company of Occident, for the French colonies of America and of Senegal, quickly called the Company of the Mississippi. Consequently, it holds the commercial monopoly of the Louisiana for twenty-five years, with the objective to populate the colony of 6.000 White and 3.000 Blacks in ten years, to compete with the Spain and the England. Its capital rises to 100 million books, divided into 200.000 paper payable actions of State, comprising 4% of dividends. There still, it is a success: Law presents Louisiana like a land of plenty to attract the capital, but the colonists are not sufficiently numerous at the beginning and the majority make it to escape the galères. The operation makes it possible to sponge 60 million books of national debt.

But Law intends to make its two establishments of the public institutions. In its spirit, both are dependant: it is a question of attracting incur it metal circulating in the kingdom, to run out to replace the paper money, guaranteed on the economic power of France. According to Law, the latter is virtually unlimited: she sat on the exploitation of the French colonies. If the Regent is gained with these theories, they meet only little support elsewhere. Only the abbot Dubois and the duke of Saint-Simon are in favor, to tell the truth a little tepid.

The general Bank becomes royal Banque the December 4th 1718, the banknotes becoming thus guaranteed by the king. In 1719, the company absorbs the French Compagnie of the Eastern Indies, the Compagnie of China and other business firms rival. It becomes thus the perpetual Compagnie of the Indies. Law obtains the farm of the tobacco in addition and repurchases of force the farm of the indirect taxes to the Frères Paris. In July 1719, the company receives the monopoly of emission of the currency in France. In October, finally, it receives the general receipts.

The institutions of Law have from now on the seizure on the whole of the foreign trade and the tax system of France. The actions of the company make it possible to refund the national debts. Law hopes whereas a better control of the system and a better management will allow substantial profits. Moreover, the company lends 1,2 billion books to this last, at the rate of 3%. A second loan of 200 million is used for refunding of the offices known as “useless”. These loans involve successive increases in capital, leaving thus free course to the speculation: they are the famous scenes of the street Quincampoix, immortalized by Uneven the of Paul Féval and satirized by Lesage in Turcaret .

The crisis

In 1720, the bank and the company amalgamate. Law, convert with Catholicism, are named General inspector of finances the January 5th, to attract the capital. The situation packs: to break the traditional French hoarding of gold and the money, Law prohibits the possession of more than 500 pounds of noble metals per hearth, under penalty of confiscation and of fine. A reward is promised to the denouncers, and of the searchings take place, even in the ecclesiastics. The March 11th, to discourage the public of the coin, it suspends the legal tender value of gold, from on December 31st. Whereas the public opinion thunders, it makes stop the “spreaders of false rumors”, which are off-set with the colonies, which creates a scandal.

In parallel, the propaganda orchestrated by Law on Eldorado of Louisiana does not find taking any more. The large ones, like the prince de Conti or the duke of Bourbon, come in person to withdraw gold with the seat of the bank, street Quincampoix, which involves riots. The stock exchange falls, without Law managing to control it. The July 17th, 17 dead is collected following the riots street Quincampoix. The July 21st, a stop institutes a semi-bankruptcy. The Parliament, which tries to resist, is exiled with Pontoise. This precipitates the fall of the system, which is removed by stages in September and October. The October 10th, one starting from November 1st announces the suspension of banknotes.

The system of Law is not any more. Law itself, which resigned of the system check, flees of Paris the December 14th, before being exiled with Venice. It is replaced by the Furrier of Houssaye.

Liquidation

The liquidation of the system is entrusted to the Frères Paris, old munitionnaires nouveau riches during the War of succession of Spain. A stop of the October 28th obliges the shareholders to make them stamp with the seat of the company. Those judged “in good faith” receive them under about eight, the others… under three years.

The system of the “visa” is spread out January 2nd 1721 at January 1722. It relates to 2,5 billion paper books, for a total of 511.000 depositors. This recension makes it possible to consider the population concerned with the system of Law: approximately 2 million people, is 10% of the population. Among the depositors, 251.000 hold less than 500 pounds and 100.000 more than 10.000 books. At the end of the visa, the debt is brought back to 1,7 billion books. 185 speculators were struck of fine, for a total of 187 million books. The two fifths of “concerned” were completely compensated. Under 400 pounds, all were it. The least rich were thus not penalized by the fall of the system.

The assessment

The system of Law made it possible to deal with part of the national debt. This one, temporarily freer of its movements, could support the war against Spain. More discreetly, this financial puff of air enabled him to corrupt certain Austrian ministers, and undoubtedly the Irish troops sent by Spain to support the Conspiration of Pontcallec.

However, the fall of the system returns durably France being wary with regard to the paper money: it will have ruined good number of shareholders, while enriching considerably those which had known to resell in time. The system of Law thus allowed a certain social mobility, but also caused tough rancours.

In the economic domain, the best circulation of the currency instigated the foreign trade, mainly towards the colonies.

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