French Experiments with Paper Money – Part 2

French Experiments with Paper Money – Part 2

By: Pierre Driessen

Following the collapse of John Law’s “System”, the French government’s finances became desperate. Royal debt had tripled between 1715 and 1722, credit was drying up, interest rates were soaring and the crown’s credibility had been severely tarnished. Over time however, through governmental and administrative reforms and a program of careful diplomatic, economic and tax policies, the finances of the Bourbon monarchy were placed on a more sound footing.

The corner stone of this program was the use of diplomacy to advance French ambitions, in Europe and across the globe, while avoiding the expense and uncertain outcome of war. Coupled with domestic economic, fiscal and tax reforms the French economy began to boom. From 1715 to 1789, its population grew by 1/3, from 21.6 to 28.6 million; trade with Europe increased fourfold and with its colonies tenfold. This economic performance was unrivalled by any other European state, it was even better than that of its arch-rival Britain.

Industrial and mercantile reforms, begun under Louis XIV’s minister Colbert, appeared to have taken root in the provinces and only been temporarily halted. Regions of concentration of specific manufacturing and industrial production began to appear, not just in urban but also in rural areas. One particular characteristic of French manufacturing, still dominant today, was its focus on fashionableness. This made French goods the ‘must have’, allowing French industry to set trends, charge higher prices and stay ahead of competitors. This was particularly true of the luxury trade. The innovative system of factory inspection by state officials ensured that the quality of goods produced stayed high.

Agriculture however, remained France’s dominant industry, the volume and value of the grain trade dwarfed that of colonial trade for instance. Unlike previous governments, those of post 1722 pursued agricultural reforms, helping to increase yields and crop varieties, which began to break the subsistence and famine cycle. This raised the income of even the poorest laborer family. Infrastructure spending, especially on roads, canals and ports provided further economic stimulus. As a result, the French economy continued its general and broad based expansion until the mid 1750’s. This helped state finances. Credit steadily improved and the population’s tax burden as a percentage decreased. It is estimated that the per capita French tax burden was about half of that borne by the English.

Despite French diplomatic successes, notably the expansion of France’s borders through the peaceful acquisition of the duchy of Lorraine (1766), war could not be avoided altogether. Especially with England, ‘cold war’ existed, which flared-up where commercial and colonial interests clashed. Most of these flare-ups occurred as a result of colonial ambitions: in India, North America and the Caribbean.

This state of affairs exploded into the first truly global war. The Seven Years War (1755-1763), proved disastrous for France. Government finances were thrown into chaos, trade was disrupted and tax burdens began to rise. The military disasters and resultant loss of territory, such as Quebec in 1759, damaged the crown’s prestige, domestically and internationally. Internal divisions within the French ruling class began to surface again and as a result many of the carefully nurtured reforms and policies of the previous decades came undone.

At the conclusion of this war, the government had to start the rebuilding of state finances. The French were bend on revenge for the humiliations they had suffered at British hands. A ruinously expensive naval rebuilding and expansion program was begun. Upon the death of Louis XV (b.1710, 1715-1774), his politically uncertain, clumsy and inexperienced grandson, Louis XVI (b.1754, 1774- 1792), assumed the throne. Lacking the desire to govern, Louis XVI proved hopelessly inadequate to the task of running Europe’s largest state.

Medal showing the busts of Louis XVI and Marie-Antoinette,
King and Queen of France (1774-1791)

His reign was marked by indecision, vacillation and the infighting of court factions, which prevented any consistency in government policy or thorough reforms. The one firm decision, namely to aid Britain’s thirteen rebellious colonies in North America, would prove disastrous for France and the Bourbon dynasty. At the time however, it seemed the perfect opportunity for France to avenge itself for the humiliations suffered during the Seven Years War at British hands. Following the British humiliating defeat in the American War, Louis XVI’s domestic popularity and France’s international standing soared. It proved to be a Pyrrhic victory; it’s spoils short lived, expensive and illusory.

The bulk of the costs of the war had been financed by heavy state borrowing under the direction of Jacques Necker, Directeur-General de Finance, effectively minister of finance. Financial calculations were based upon the assumption and hope that it was to be a short war, without new taxes – sounds familiar? The actual cost had not been felt by Louis XVI’s subjects, as taxes had not been increased significantly. This was about to change.

In an effort to win public confidence in the crown’s finances and keep interest rates on state debt from rising ever higher, in February 1781 Necker took the unheard of step to publish the Compte Rendu au Roi (‘Account for the King’). State finances hitherto had been a closely guarded state secret. Despite its name, it was not a confidential report of the state’s finances prepared for the king; rather it was an ‘open and transparent public disclosure’ of the state’s financial position. The Compte Rendu purported to show an average yearly expenditure of 400 million livres with a surplus of 10 million. However, it crucially omitted the full extend of the state’s indebtedness as a result of the American War. Necker’s accounting methods are still the subject of heated scholarly debate and can be interpreted in a variety of ways. The fact remains that they did not provide a true accounting of crown finances and indebtedness.

The tactic to publish was a very successful public relations exercise, which initially produced the desired effect. Almost overnight, it sold 100,000 copies. It increased public and creditor confidence. Long-term however, it proved to be one of the main reasons for the French Revolution of 1789. It exposed the crown and its finances to public scrutiny and criticism. This was further exacerbated by the suspicions raised when Louis XVI refused to publish any subsequent Compte Rendu after Necker’s resignation in May 1781.

His resignation was the culmination of the political infighting at the court of Versailles.

The Geneva born Necker, although viewed as a financial wizard, was regarded a parvenue by the French political and social elite. He was not of noble birth and had made his fabulous fortune thorough state lending and grain speculation. The fact that he was also a foreigner and a Protestant made him even more vulnerable to political attack. His monetary and fiscal policies, especially the austerity measures imposed on government departments and ministries, made him many enemies. The most powerful of whom was Marie-Antoinnette, Queen of France.

 

Medal showing the bust of Jacques Necker (1732 – 1804), banker and financier, born Geneva, Switzerland, director-general of finances under Louis XVI, from 1776 – 1781, dismissed. Recalled 1788, dismissed 1789, recalled same year due to popular outcry, dismissed 1790. He favored use of loans over taxation to fund state war expenditures. He opposed issuance of assignats.

Following Necker’s resignation, France’s financial pyramid began to collapse. By 1783, the American War had added 1 billion livres to the state debt, at an interest cost of between 100 – 130 million livres. His successor discovered that the ‘surplus’ was in reality a 15 million livres deficit and that the state would run deficits of 50 million livres for at least the next decade. The only solution possible was to raise new taxes and increase existing ones. This is exactly what happened. Coupled with bad harvests and a deteriorating economy, this led to widespread suffering. The situation continued to worsen and by 1787, the annual deficit had grown to 112 million livres and 40 percent of state expenditures went to debt servicing.

The government, attempting to raise more revenue and broaden the tax base by proposing to tax land owners, including the nobility and the Church, met with stiff opposition. Furthermore the bourgeoisie, represented by the assemblies and parliaments began to demand the right to vote on taxation. The absolutist political and social structure of Bourbon France, without an effective monarch at its head, began to crack. The crown was weakened by its inability to deal with its financial problems, causing these to give rise to a dangerous political crisis.

The government, increasingly desperate, began to pass laws and take action which infringed upon or offended many ancient institutions, rights, customs and privileges. When Louis XVI was questioned in public by the Duc d’Orleans (his cousin) about the legality of certain measures, the king replied in frustration: “C’est légal parce que je le veux”.

Opposition to royal authority continued to grow, led by the nobility, which while defending its own privileges, assumed the fiction of being defenders of the people against ministerial despotism. Goodwill and cooperation had vanished. The competing parties opportunistically tried to turn circumstances to their advantage, not realizing that they were setting in motion their own destruction. The ground had begun to shift, at first imperceptibly, but as events unfolded, the political storm began to gain a momentum of its own, dragging all and everything into the vortex.

The government’s decision to call the Estates- General or national parliament, in an attempt to gain broad based support for its policies, further complicated the delicate political situation and made it explosive. Unwittingly it had created a public platform for debate, criticism and airing of grievances by the newly politicized bourgeoisie against the crown and France’s social, political and economic system. Once convened, it proved impossible to control.

In late 1788, the government effectively defaulted on its obligations. State credit and credibility had vanished, people were rushing to convert crown paper into coin. Rumors of state bankruptcy were swirling everywhere. In desperation Louis XVI, with the grudging support of Marie-Antoinette, was forced to recall Necker.

On Necker shoulders were placed the hopes of many. He reassured creditors by making large loans to the state from his own vast fortune. The bourgeoisie saw him as champion of reform. His dismissal on 11 July 1789, due to court intrigue, was seen as confirmation that Louis XVI, imagined or not, was becoming a despot, intent on crushing any opposition. It caused widespread panic, politically and fiscally, and was one of the triggers for the storming of the Bastille on 14 July 1789. Across France unrest spread.

The crown lost control of events. The Constituent or National Assembly, as the Third Estate of the Estates-General had renamed itself, became the de facto government. The Assembly, having acknowledged the national debts, began the process of financial reform. Necker was recalled. The crisis of 1789 caused tax revenues to plummet and the financial reforms, which took time to implement, caused liquidity problems. To deal with this, the Assembly fiercely debated its options. The solution was the assignat. It was a compromise between those calling for the issuance of irredeemable paper and those, such as Necker, who advocated more traditional fiscal means. The assignat was an interest-bearing treasury note secured or assigned against real property. To provide this security all urban and rural Church real property was nationalized. This amounted to the seizure of between 1/4 and 1/3 of all real property in France and was valued at 1 billion livres. The initial issuance was 400 million livres of notes, bearing 5% interest, restricted to the purchase of nationalized lands only. To ensure this, the issuance was in large denominations of 1,000; 300 and 200 livres – too large for use in daily transactions.12 France’s financial difficulties appeared to be on the mend! Were they truly? Stay tuned.

 

Previously published in the ENS “The Planchet” Magazine Vol-56 Issue-05