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In 1803, the United States of America purchased 828,000 square miles of adjoining territory for 3 cents per acre; France received US$11,250,000; and both parties were delighted.

This is an analysis of the Louisiana Purchase from a real estate lawyer’s perspective.

How did France acquire Louisiana?

The Americas were the New World, ripe for colonisation by the Old World (European Countries) after they were discovered by Christopher Columbus in 1492.

So it was that in 1682, that France claimed the Louisiana Territory. It was named after King Louis XIV of France (the “Sun King”).

Louisiana began to be settled by the French and in 1718 New Orleans was founded as a trading port. By virtue of its strategic location at the mouth of the Mississippi River, New Orleans controlled navigation rights on the Mississippi River. It was the key to control of the Louisiana Territory, which extended up the Mississippi River Basin to its headwaters near the current Canadian border. It is the Mid-West of the United States.

In 1762, France ceded the Louisiana Territory to Spain after France lost the Seven Years War, as part of its war reparations. But for Spain, Louisiana was a disappointment because it had none of the gold and silver of Central and South America.

 

Napoleon regains Louisiana for France

 

In one his first military expeditions, Napoleon crossed the Alps in 1796 and conquered Northern Italy. The territory included the Kingdom of Etruria, which makes up a large part of modern Tuscany. He left behind a commander in control.

In 1800, Napoleon had designs on the Louisiana Territory to become a Western Colonial Empire of France. He needed to come up with an attractive proposal to put to King Carlos IV of Spain, to persuade the King to retrocede Spain’s sovereignty over the Louisiana Territory to France. He knew that the King Carlos IV of Spain had a daughter, Maria Luisa, who had married. He guessed that an estate and a title for her would prove attractive to the King.

Napoleon offered the Kingdom of Etruria to King Carlos IV in exchange for the Louisiana Territory. In the Treaty of San Ildefonso signed on October 1, 1800, which was confirmed as the Treaty of Aranjuez on March 21, 1801, Spain agreed to retrocede the Louisiana Territory to France. Maria Luisa became the Queen of Etruria, and Napoleon had his Western Empire.

It was not until October 1802 that sovereignty to the Territory was formally transferred to France.

In the meantime, Napoleon had gone cold on Louisiana. It was clear to him that it not going to enrich France with its revenues or produce. He decided to sell it, but he had a problem - the only buyer was its neighbour, the United States of America.

He had to play the waiting game, for the United States to approach France to have bargaining power on the price. He was in luck. He did not have to wait long for the United States to come calling.

The United States of America purchases the Louisiana Territory

Thomas Jefferson, the third President of the United States of America took office on March 4, 1801. He wanted to annex The Louisiana Territory for the United States to fulfill his dream of western expansion, and by doing so, to double the size of the United States.

Under International Law, he had three options to annex the Louisiana Territory. He could annex it by conquest, as Napoleon had done in Northern Italy. Or he could annex it by settlement, as France had done by having its nationals settle in the Louisiana Territory. Or he could annex it by treaty, as Spain had done when the Louisiana Territory was ceded to it by France.

President Jefferson decided to annex the Louisiana Territory by treaty. He rejected conquest because France had been the most important ally of the United States in the War of Independence and he did not wish to antagonise France while facing a hostile Britain. He rejected settlement because even though settlers from the United States had settled in the Mississippi River Basin, it would not deliver control of the strategic city of New Orleans.

He was jolted into action when the port of New Orleans was suddenly closed to American Commerce in mid-1802.

In January 1803, President Jefferson appointed James Monroe his special envoy to France to negotiate the purchase of New Orleans. He set a price limit of US$9,375,000.

On April 12, 1803, James Monroe arrived in Paris, and together with Robert R. Livingstone, the United States Minister to France, negotiated the Louisiana Purchase.

France made the opening offer of US$22,500,000 to sell the whole of the Louisiana Territory.

The United States countered with their opening offer of US$8,000,000 to purchase New Orleans.

Both France and the United Stated were keen to conclude a deal.

After just four days, the parties met halfway –a price of US $15,000,000 was agreed for the sale and purchase of the whole of the Louisiana Territory.

The terms took another two weeks to agree. The Treaty and Conventions were signed on May 2, and were antedated to April 30, 1803

They provided that the United States was to pay France US$11,250,000 outright and assume claims of its citizens against France in the agreed amount of US$3,750,000.

The sum of US$3,000,000 was payable on ratification of the Treaty. The remainder, US$8,250,000, was payable on seller financing terms: the sum of US$8,250,000 was payable after 15 years, with interest at the rate of 6% per annum payable by instalments (of US$337,500 each) half yearly.

The downpayment of US$3,000,000 was made in gold. The remainder and the interest were paid by the issue of United States Treasury Bonds.

Comparing the gold price of US$19.39 per ounce in 1803 with a gold price of US$2,000 per ounce today, the amount of US$10,218,750 that France received would be worth more than one billion dollars (US$1,054,023,000) today.

Interest-bearing United States Treasury Bonds are suitable for an investor, but not for someone like Napoleon who needed funds for a military campaign against Britain and to fill the coffers of the depleted French Treasury.

It here that Napoleon demonstrated his financial genius.

Napoleon knew that he could negotiate an increase in the initial offer by United States of $8,000,000 by giving delayed payment terms and sell the whole of Louisiana). He succeeded in negotiating a price increase from US$8,000,000 to US$15,000,000, an increase of 87.5% increase.

Napoleon knew that he could convert the US Treasury Bonds he would receive into cash by giving a discount to face value. If the discount was less than 87.5%, he would profit from giving payment terms and the whole of Louisiana. He needed to find a Banker.

Napoleon knew that Barings Bank (Francis Baring and Co.) in London was the U.S. Government's official banking agent and excelled at raising funds from investors. So, soon after the Treaty and Conventions were signed, he sent an envoy to Barings Bank offering the US Treasury Bonds in exchange for a lump sum. France had the authority to trade the US Treasury Bonds under the Convention.

Napoleon negotiated a small discount: of 12.5 cents in the dollar on the US Treasury Bond for US$8,250,000. The Bonds for the interest payments were transferred for no extra payment. In summary, Napoleon had received a premium of 87.5% in return for a discount of 12.5%, and made a profit of 75%.

In due course France received US$7,218,750 in gold through Hope & Co. of Amsterdam (the payment agent of Barings Bank). The Barings Bank investors received a return of 6% per annum until the US Treasury Bonds were repaid (the repayment date was deferred until 1823).

The Louisiana Territory was handed over by Spain to France on November 30, 1803, and by France to the United States on December 20, 1803.

President Jefferson had the final word on the benefits: “The fertility of the country, its climate and extent, promise in due season important aids to our treasury, an ample provision for our posterity, and a wide-spread field for the blessings of freedom.”

In a fascinating and entertaining video, Anthony Cordato, a real estate lawyer, recounts the chain of events from Napoleon’s conquest of the Kingdom of Etruria in 1796 until the Louisiana Territory was handed over to the United States on December 20, 1803. These events make up the back-story of the Louisiana Purchase, arguably the greatest real estate deal of all time.

Click on this link: The financial genius of Napoleon – The Louisiana Purchase