Banque Royale
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John Law's Bank () was a short-lived but highly consequential financial institution in the
Kingdom of France The Kingdom of France is the historiographical name or umbrella term given to various political entities of France in the Middle Ages, medieval and Early modern France, early modern period. It was one of the most powerful states in Europe from th ...
, started by
John Law John Law may refer to: Arts and entertainment * John Law (artist) (born 1958), American artist * John Law (comics), comic-book character created by Will Eisner * John Law (film director), Hong Kong film director * John Law (musician) (born 1961) ...
in May 1716 as a private-sector
joint-stock company A joint-stock company (JSC) is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership). Shareho ...
,
nationalized Nationalization (nationalisation in British English) is the process of transforming privately owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization contrasts with priv ...
in December 1718, and acquired by his Company of the Indies in February 1720. It was France's first
bank of issue A bank of issue, also referred to as a note-issuing bank or issuing authority, is a financial institution that issues banknotes. The short-lived Stockholms Banco (1657-1667) printed notes from 1661 onwards and is generally viewed as the first-ev ...
, and has also been referred to as the country's first
central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
.


Name

The bank was formally known as the Banque générale () upon establishment in 1716, and renamed to Banque royale () upon nationalization in late 1718. It was commonly associated with its founder and thus widely referred to as John Law's Bank.


Background

Various projects of institutions that could be viewed as central banks were conceived in early modern France, but none came to fruition before Law's venture. The oldest documented endeavors failed in 1548 and 1566 despite tentative royal support. A third documented project, under Henry IV, adopted the name "Banque de France" and was approved by the ''Conseil Royal'' on , but was not implemented. A state bank inspired by the Venetian Banco del Giro was proposed in 1644. The sequence accelerated after the successful start of the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
in 1694 and given the sorry state of French finances in the late years of
Louis XIV LouisXIV (Louis-Dieudonné; 5 September 16381 September 1715), also known as Louis the Great () or the Sun King (), was King of France from 1643 until his death in 1715. His verified reign of 72 years and 110 days is the List of longest-reign ...
's reign, with several projects promoted from 1701 onwards. John Law had worked for years on various concepts of national banks, in part inspired by the Bank of England, and had come close to persuading the French kingdom to endorse his proposals when
Louis XIV LouisXIV (Louis-Dieudonné; 5 September 16381 September 1715), also known as Louis the Great () or the Sun King (), was King of France from 1643 until his death in 1715. His verified reign of 72 years and 110 days is the List of longest-reign ...
died on . Louis XIV's long reign and wars had bankrupted the French monarchy. The regent
Philippe II, Duke of Orléans Philippe II, Duke of Orléans (Philippe Charles; 2 August 1674 – 2 December 1723), who was known as the Regent, was a French prince, soldier, and statesman who served as Regent of the Kingdom of France from 1715 to 1723. He is referred to i ...
first declined to embrace Law's ideas, which had no support from France's established financiers. Instead, the Regent appointed Adrien Maurice de Noailles, 3rd Duke of Noailles to address the kingdom's financial emergency, which Noailles did through a combination of forced debt restructuring, fiscal
austerity In economic policy, austerity is a set of Political economy, political-economic policies that aim to reduce government budget deficits through Government spending, spending cuts, tax increases, or a combination of both. There are three prim ...
, and shake-downs of the financiers. Noailles's policies did not succeed at restoring confidence and credit, however, and the Regent eventually turned back to Law and his bank project.


Banque Générale

On , the Regency Council approved a motion presented by Noailles to "give Mr Law the power to establish a bank", albeit on a less ambitious scheme than that suggested by Law to comptroller-general Nicolas Desmarets in Louis XIV's dying days. That same day,
letters patent Letters patent (plurale tantum, plural form for singular and plural) are a type of legal instrument in the form of a published written order issued by a monarch, President (government title), president or other head of state, generally granti ...
were issued giving Law's General Bank an
issuance privilege A bank of issue, also referred to as a note-issuing bank or issuing authority, is a financial institution that issues banknotes. The short-lived Stockholms Banco (1657-1667) printed notes from 1661 onwards and is generally viewed as the first-ev ...
for 20 years, with the right to issue
banknote A banknote or bank notealso called a bill (North American English) or simply a noteis a type of paper money that is made and distributed ("issued") by a bank of issue, payable to the bearer on demand. Banknotes were originally issued by commerc ...
s denominated in ''
écu The term ''écu'' () may refer to one of several France, French coins. The first ''écu'' was a gold coin (the ''écu d'or'') minted during the reign of Louis IX of France, in 1266. The value of the ''écu'' varied considerably over time, and si ...
s de banque'' set at 5
French livre The livre (abbreviation: Pound sign, £ or Livre tournois, ₶., French language, French for (pound)) was the currency of Kingdom of France and its predecessor states of Francia and West Francia from 781 to 1794. Several different livres exist ...
s per écu. On , a further set of letters patent allowed Law to capitalize his bank by issuing 1,200 shares at 5,000 livres face value. The Banque Générale was thus a private bank, with capacity to finance France's debt but no role in its fiscal revenue collection, whereas Law's proposal to Desmarets had envisioned a public bank endowed with tax-collecting authority. The conditions for share subscription made it possible to pay mostly in government bills accepted at face value, which was highly advantageous to subscribers since these forms of state debt traded at a 60 percent market discount at the time. Law bought 25 percent of the shares, while by some accounts the king owned 380 shares. The bank was initially established at Law's home on Place Louis-le-Grand (now 15 place Vendôme, part of the Hôtel Ritz) In the summer of 1716, it moved to the ''Hôtel de Mesmes'' on rue Sainte-Avoye, closer to what was then the commercial and financial hub of Paris around
Les Halles Les Halles (; 'The Halls') was Paris' central fresh food market. It last operated on 12 January 1973 and was replaced by an underground shopping centre and a park. The unpopular modernist development was demolished yet again in 2010, and replac ...
. In April 1717, Law purchased the nearby Hôtel de Soissons from its then owner the Prince of Carignan with the intent to relocate the bank there, but that transaction was stalled by Carignan's creditors.


Banque Royale

The decision to nationalize the bank, long advocated by Law, was made in a context of unveiling of the
Cellamare conspiracy The Cellamare conspiracy of 1718 ( French: ''Conspiration de Cellamare'') was a conspiracy against the Regent of France, Philippe d'Orléans (1674–1723) that aimed to depose him of his position and place Philip V of Spain as the new regent of Fr ...
and diplomatic escalation in the
War of the Quadruple Alliance The War of the Quadruple Alliance, 1718 to 1720, was a conflict between Spain and a coalition of Austria, Great Britain, France, and Savoy, joined in 1719 by the Dutch Republic. Most of the fighting took place in Sicily and Spain, with minor engag ...
, as it appeared that France may need to increase its military expenditure. An edict of announced the conversion of the Banque Générale into the Banque Royale, by which all private shareholders were reimbursed at face value, namely 5,000 livres per share. Given the discount at the time of subscription, this represented a typical annualized return of 64 percent. A separate decree on specified that all large transactions should be paid in banknotes in the bank's branches in
Amiens Amiens (English: or ; ; , or ) is a city and Communes of France, commune in northern France, located north of Paris and south-west of Lille. It is the capital of the Somme (department), Somme Departments of France, department in the region ...
,
La Rochelle La Rochelle (, , ; Poitevin-Saintongeais: ''La Rochéle'') is a city on the west coast of France and a seaport on the Bay of Biscay, a part of the Atlantic Ocean. It is the capital of the Charente-Maritime Departments of France, department. Wi ...
,
Lyon Lyon (Franco-Provençal: ''Liyon'') is a city in France. It is located at the confluence of the rivers Rhône and Saône, to the northwest of the French Alps, southeast of Paris, north of Marseille, southwest of Geneva, Switzerland, north ...
,
Orléans Orléans (,"Orleans"
(US) and
Tours Tours ( ; ) is the largest city in the region of Centre-Val de Loire, France. It is the Prefectures in France, prefecture of the Departments of France, department of Indre-et-Loire. The Communes of France, commune of Tours had 136,463 inhabita ...
. By the time of its nationalization, the bank had banknotes in circulation for a total 39.5 million livres, which were trusted and circulated at par. That circulation was comparable in volume to that of the Bank of England at the same time. From then the bank remained managed by Law on behalf of the King, and all its profits were transferred to the Royal Treasury. From January 1719, it began issuing notes that were not backed by reserves of
specie Specie may refer to: * Coins or other metal money in mass circulation * Bullion coins * Hard money (policy) * Commodity money * Specie Circular, 1836 executive order by US President Andrew Jackson regarding hard money * Specie Payment Resumption A ...
. As such, Law's bank was one of the first European financial institutions to develop the use of
fiat money Fiat money is a type of government-issued currency that is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tende ...
. That led to a considerable expansion in the amount of banknotes in circulation, estimated to have grown tenfold in the following year. In early 1720, it moved to the ''Hôtel de Nevers'', part of the former ''Palais Mazarin'' in Paris.


Merger with Law's Company and aftermath

In February 1720, the bank was subsumed into
John Law's Company John Law's Company, founded in 1717 by Scottish economist and financier John Law, was a joint-stock company that occupies a unique place in French and European monetary history, as it was for a brief moment granted the entire revenue-raising ca ...
, after which the company owned it and managed its operations. Later on, a
bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...
ensued when the value of the new paper currency was halved.Sheeran, Paul and Spain, Amber. ''The international political economy of investment bubbles'', Ashgate Publishing, Ltd., 2004, , p. 95Davies, Roy and Davies, Glyn
"A Comparative Chronology of Money: Monetary History from Ancient Times to the Present Day: 1700–1749"
(1996 and 1999)
During the subsequent restructuring, the French authorities decided to assume the liabilities of the bankrupt bank while leaving the (parent) company in the ownership of its existing shareholders. The bank was eventually liquidated in November 1723.


See also

*
Money creation Money creation, or money issuance, is the process by which the money supply of a country, or an economic or monetary region,Such as the Eurozone or ECCAS is increased. In most modern economies, money is created by both central banks and comm ...


References

Banks established in 1716 Defunct banks of France
France France, officially the French Republic, is a country located primarily in Western Europe. Overseas France, Its overseas regions and territories include French Guiana in South America, Saint Pierre and Miquelon in the Atlantic Ocean#North Atlan ...
French banks of issue {{finance-stub