FROM DEFICIT TO DELUGE
The Origins of the French Revolution
STANFORD UNIVERSITY PRESS
Copyright © 2011 the Board of Trustees of the Leland Stanford Junior University
All right reserved.
Financial Origins of the French Revolution Gail Bossenga
Few would dispute that the immediate cause of the French Revolution was the impending financial bankruptcy of the royal government. In 1786 the controller-general, Charles-Alexandre de Calonne, announced that although the government's total revenue was only approximately 474 million livres
, expenditures were running around 575 million, leaving a deficit of 101 million. Nearly half of the crown's expenses, furthermore, stemmed simply from the cost of servicing its enormous debt. Two years of feverish attempts by the king's finance ministers, first Calonne and then Etienne-Charles de Loménie de Brienne, archbishop of Toulouse, to solve the pressing financial problem came to naught. On August 16, 1788, Brienne was forced to suspend payments on short-term loans falling due at the royal treasury and gave creditors interest-bearing notes instead, a measure commonly perceived as a partial bankruptcy. He also moved up the convocation of the Estates-General to the following May in order to put France's financial house back in order. Absolute monarchy was to be no more.
In attempting to explain the financial origins of the Revolution, the question of why the monarchy went bankrupt has not posed a great mystery to historians. The French monarchy had suffered for centuries from structural problems that left it unable to overcome its financial difficulties. The basic issues were threefold: French kings constantly engaged in expensive wars; the unwieldy French system of taxation was unable to generate sufficient revenues to pay for those wars; and finally, to make ends meet, the French monarchy borrowed large sums of money at relatively high interest rates, which eventually left it unable to meet its financial commitments. Given this unhappy situation, it had become a long-standing tradition for French monarchs to use default to solve, so to speak, their financial woes. Bankruptcies of some sort during or after wars were common. In France they can be found in the years 1559, 1598, 1634, 1648, 1661, 1716, 1722, 1759, 1770–71, and 1788.
The government's descent toward bankruptcy in 1788, therefore, is hardly cause for surprise. France had, after all, fought two extremely expensive wars in the two decades before the Revolution: the Seven Years' War (1756–63) and the American War of Independence (1776–83), the first costing around 1.325 billion livres, and the second almost as much, between 1 and 1.3 billion livres. Meanwhile, the royal government had not been able to overhaul the French tax structure and therefore had to borrow large sums at high interest rates. The financial problems of the French monarchy on the eve of the Revolution might be seen, therefore, as a predictable consequence of long-standing institutional difficulties. What was not predictable was the path that the monarchy took. In 1788, instead of defaulting on part of its obligations, the monarchy convoked the Estates-General, the kingdom's representative body, which had not met in 175 years. It was this act, the calling of the Estates-General to solve a financial crisis, and not impending bankruptcy per se, that was novel in French history. This fateful decision opened the way to a whole new era in politics, in fact, to revolution.
The convocation of the Estates-General in response to royal financial distress thus poses a problem for historians looking at long-term patterns. It does not really fit. Economic historians have argued recently that the institutional structure of France was more modern than is usually assumed. The implication is that the financial situation of France in 1788 did not require such drastic measures as calling the Estates-General. The French system, contended one economic historian, could have survived the crisis of 1788 with a package of defaults "only slightly worse than that of 1770." "Only gradual administrative tax reforms were necessary to save the monarchy, not the politically difficult, perhaps impossible, radical fiscal changes proposed by some reformers," stated another. Could the French monarchy have survived with some "gradual" tax reforms, or with yet another round of defaults? The ministers in charge of the royal treasury obviously did not think so, or they would not have called the Estates-General. Bankruptcy had never been a simple financial option for the monarchy, and its effects cannot be evaluated in financial terms alone. Traditionally, bankruptcy occurred during highly unstable political situations, such as the seventeenth-century revolt of the Fronde, or in times of monarchical weakness, such as the minority of a king. Bankruptcy always presented the possibility, as Philip Hoffman observed, of political consequences that "were considerable and not always predictable." Until the end of the Old Regime, those outcomes had always ended ultimately with the survival, and even seemingly increased authority, of absolute monarchy. In 1788 that pattern changed.
Financial systems both respond to and produce interest groups. This essay argues that although bankruptcies were a continual problem for the French monarchy, the pattern of borrowing shifted over the period of Louis XIV to the Revolution and gradually gave rise to different interest groups. A well-known feature of the Old Regime was that new practices and institutions were placed on top of existing ones, thereby allowing institutions with potentially contradictory principles to develop simultaneously. This process occurred in the realm of credit. The French monarchy was originally built on an institutional network that could be described as absolute, patrimonial, and corporate. Its financial arrangements were similarly derived from these conditions. Increasingly, however, largely in response to the Anglo-Dutch "financial revolution," France had to compete against a rival state that mobilized resources with great success through politically transparent, legally secure, and market-oriented mechanisms. Initially the French monarchy met this threat by retreating even more resolutely into financial arrangements that drew on patrimonial and corporate organization, in effect, by systematizing that kind of organization. When this proved insufficient, French ministers began to supplement older arrangements with new ones that relied much more directly on voluntary public lending on the market. Hence the perception that France was more modern than is often assumed.
The combination of new wine and old wineskins proved to be successful in the short term, but very costly in the longer term, and ultimately unsustainable. Old institutions continued to be crucial for mobilizing credit, especially short-term credit, but they created tenacious interest groups, including a host of financiers, who made their profits off inefficiencies in the system. Over time, the sustainability of borrowing on the market demanded that these inefficiencies be eradicated, or at least dramatically curtailed. In the mid-eighteenth century, the early philosophe Charles-Louis de Secondat, baron de Montesquieu, had observed that once credit had emerged and merchants could withdraw their money from a country easily through mechanisms like the letter of exchange, violence and arbitrary acts of sovereign authority were counterproductive to governmental strength: "Since that time, ... the great arbitrary actions of authority (les grands coups d'autorité) have been proven to be ineffective and ... only good government brings prosperity [to the prince]." A fascinating feature of the French story is how credit and absolute monarchy's grands coups d'autorité were able to coexist, albeit in tension, for such a long time. Ultimately, however, a financial system rooted in patrimonial and privileged institutions could be reconciled neither with the French monarchy's growing reliance on a large, international pool of lenders, nor with the competitive advantages accruing to states that were able to mobilize credit efficiently in wartime. Pressures such as these led reforming ministers to begin to attack the traditional institutional base by which the monarchy had mobilized credit, and finally, in a time of crisis, to cast their lot with the Estates-General in an attempt to make public credit truly public, rather than personal and royal.
The structure of credit under the French monarchy was the product of a variety of factors, political and cultural, as well as financial. The overarching political feature shaping credit was the monarchy's "absolute" character. Because the monarchy did not answer to other human institutions—it was supposedly bound only by God's law, natural law, and fundamental law—there was no way to call it to account if it declared bankruptcy. Owing to this lack of trust in the monarchy's ability to pay, lending to the king became ensconced in privileged corporate institutions and various forms of court-protected posts that could buffer, offset, or protect lenders from the adverse effects of royal arbitrariness. Privilege, it might be said, was an early-modern institutional substitute for default or risk premium.
Royal bankruptcy profoundly shaped the most important institutions by which credit was mobilized in France down to the Revolution. The first turning point was in 1559, when the king defaulted on debts owed to a syndicate of Italian bankers located in Lyon. After foreign bankers withdrew, the monarchy increasingly turned to borrowing from its own subjects, who were responsive to royal political pressure in a way that foreigners were not. The monarchy came to rely on two types of long-term loans: rentes and venal offices. A rente was an annuity that an individual purchased from a provider (such as a government) in return for an assured annual revenue (actually interest on the loan) for the period specified in the contract. Because lenders were afraid that the royal government would not honor its commitments, the city of Paris took on the role of actually issuing and servicing the rentes, known as the rentes sur l'hôtel de ville de Paris. Later the government also used other intermediate governing bodies—the church, provincial estates, and large commercial cities—to borrow in various forms on its behalf, although on a smaller scale. Owing to their corporate status, these institutions had legal standing and privileges that gave them a degree of collective self-government, access to financial resources including taxes, and a permanent structure. This combination of resources provided a buffer against royal arbitrariness, but it was by no means failsafe. Interest on the early Parisian rentes was often paid irregularly, at least to individuals without connections to the royal court, and some issues of rentes were essentially loans that royal office holders and tax farmers were constrained to buy. Far from forming a voluntary lending public, these early lenders in Paris might be considered captive lenders of the royal government.
Venality, or sale, of offices, constituted a second early pillar of royal borrowing. In this case the monarchy used the lure of privilege, titles, and government functions as a way to mobilize credit. The initial sale of an office was a long-term loan to the royal government. The office holder purchased the office and received the right to exercise the functions of the office. He also obtained all the privileges, such as honorific titles or tax exemptions, attached to the office and a monetary return, gages, sometimes translated as salary, but technically interest on the capital invested in the office. Venal offices offered benefits to both king and investor. The monarchy's pocketbook benefited from the low interest rates that it paid to office holders in the form of gages. In addition, in periods of fiscal crisis, the royal government could coerce its office holders into lending additional funds by threatening to take back their offices or create duplicate offices that would compete with the current holders if they did not supply the crown with fresh loans. The office holders, in turn, put up with these conditions because they sought the authority and other perquisites attached to the offices. All offices conferred some degree of social standing on their recipients, as well as reductions in various taxes. The costly offices known as the secretaries of the king were particularly famous, or infamous, because they did not require the holders to perform any discernible judicial duties, but ennobled the owners and their posterity after twenty years of so-called service or death in office.
It is difficult to say who gained—or lost—the most from venality of offices. The practice allowed the crown to borrow substantial sums from wealthy individuals at relatively low interest rates. But if interest rates themselves were not high, the monarchy found itself obliged to pay in other ways. The creation of thousands of offices led to a bloated and inefficient administrative sector. New office holders were taken at least partly off the tax rolls. Patrimonial tendencies in society were enhanced. The famous paulette, a fee paid to the royal government that gave office holders the right to sell or bequeath their offices as property, was itself a product of bankruptcy, created in 1604 as a way to compensate office holders for a royal default on interest payments on rentes. Venality thus ended up tying the king's hands on administrative reform, because he could not suppress offices without reimbursing the owners for them. Nonetheless, this method of mobilizing loans also turned lenders into state servants and thereby created a political bond between them and the crown that would not have existed in other forms of lending.
The practice of short-term lending, by which lenders expected repayment within a year or so, also became enmeshed in privileged institutions. Central to short-term credit was the ability to anticipate tax revenues—that is, to spend the crown's revenues before they were deposited with a tax collector. Two institutions—tax farming and advances from tax receivers and accountants owning venal offices—became central to this practice. Like the use of rentes and venal offices, a heightened reliance on tax farming was a response to royal bankruptcy in 1559. After the king defaulted, bankers were still willing to advance the crown money for its immediate needs, but they insisted on collecting the revenues that would service their loans directly through tax farms under their control. By the terms of tax farming, a consortium of financiers leased the right to collect specified indirect taxes from the government. They retained any profits that they made over the price of the lease. The practice made it easy for the tax farmers to deduct the interest owed to them on loans to the government from the price of their lease. Rather than forming syndicates like the tax farmers, the receivers and receivers general who oversaw collection of direct taxes owned venal offices. They too allowed the government to borrow tax revenues before they had been collected and charged the government interest and fees for supplying this form of credit.
Short-term loans were far more expensive than long-term loans like rentes; Louis XIV's finance minister Jean-Baptiste Colbert reckoned their interest rate at about 15 percent annually, and rates had been even higher during the upheaval of the Fronde. One sign of a "financial revolution" is that governments move away from a substantial use of expensive short-term credit toward reliance on less-expensive long-term credit. France was never able to make this transition fully and on the eve of the Revolution was still highly dependent on advances from tax farmers and receivers to keep it afloat from day to day. In fact, it was a crisis in short-term credit that forced Brienne to convoke the Estates-General in May 1789, several years sooner than he had planned.
In the early years of the Bourbon monarchy, social attitudes helped to make royal bankruptcy acceptable, if not desirable. Wrapping itself in the cloak of justice, the monarchy couched part of its bankruptcies as moral cleansing operations by setting up chambres de justice. These special courts investigated the ostensible corruption and profiteering by financiers and made them pay restitution or rewrite the terms of loans, thereby liberating the monarchy partially from certain debts. Such show trials reinforced the image of the monarch as a concerned ruler who wished to protect his people from rapacious financiers, rather than as a sovereign who broke his word. Unsurprisingly, the financiers best connected at court often escaped with far lighter fines than others.
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