Grand Super Cycle National Bankruptcies

Part VI

Fall of the French Monarchy

 

By

 

Joseph M. Miller

jmiller585@mchsi.com

 

Daan Joubert

daanj@kingsley.co.za

 

Marion Butler

juneb01@msn.com

 

“When all resources were exhausted, the Assembly created its paper money, which became famous under the title of assignats, and which, by further extending the facility for spending without receiving, made the running of the finances so easy and convenient.  The government was then still less disposed to put pressure on the tax-payers and to demand sacrifices of them; it was then that the executive’s consideration and strength were no longer put to any difficult test; and so it was that the establishment of a fictitious currency, through its freeing of the administration from the imperious yoke of reality, enabled the legislators to abandon themselves with more confidence to their abstractions; and the need for money, so crude an embarrassment, never again served to distract them from their lofty thoughts.” – Jacques Necker

 

URLs for previous articles in this series are provided at the end.

 

After the ruinous 14^th century, Europe enjoyed another three centuries of economic growth that we label the Renaissance Grand Super Cycle.  This was followed by a decline in the West that continued for much of the 18^th century.  This article will focus on the French collapse.  For readers interested in the decline elsewhere, some sources are listed at the end of this article, along with brief commentary on Holland, England, and America. 

 

French Monetary System in the 18^th Century

 

Coinage of the Ancien Regime after 1726

1 Ecu (30 grams silver) = 6 livres

1 Louis d’Or (7.64grams gold) = 24 livres

1 livre was therefore equivalent to 1/100 ounce gold or 5 grams silver.  There was no 1-livre coin.

 

Coinage of the Republic after 1795

1 Franc = 5 grams silver (90% pure)

Note: In the revised monetary system, 80 francs equaled 81 livres of the Ancien Regime.

 

The Ancien Regime

 

France was the most powerful and populous nation of Europe in the 18^th century, with 19 million people in 1700 and 26 million in 1789 (2: Doyle, p.158).  Absolute monarchy was at its height during the reign of Louis XIV (1642-1715), which was the longest reign of any European monarch.  Louis’ passion for glory, which earned him the nickname the Sun King, was expressed primarily through his military and the splendor of his court.

 

Louis’ residence and court at Versailles was the most magnificent palace in Europe, built by 36,000 workmen from 1660 to 1685.  Louis relished magnificence and grandeur, and he encouraged extravagant living among his court.  He surrounded himself with the great nobles of the realm, and developed an elaborate system of etiquette to govern their lives, which was filled with festivity.  Thousands of servants were required to maintain this glorious court. 

 

While France had less than a third of the population of the Roman Empire, Louis XIV’s military establishment at the end of his reign was larger than Rome’s.  The following table shows total manpower employed by Louis XIV’s military, including army, navy, police and coast guard.  The table comes from www.louis-xiv.de/, which contains additional information on Louis XIV for readers interested in the Sun King.

 

Table 1: Louis XIV’s Military 

 

This high level of military expenditure left France deeply in debt when Louis XIV died on September 1, 1715.  Increasing debt, in turn, created a growing class of rentiers who were dependent on interest income (called rentes or annuities) from the national debt. 

 

Louis XIV was succeeded to the throne by his 5-year-old great grandson, Louis XV, who reigned from 1715 to 1774.  Philippe II, Duke of Orleans and nephew of Louis XIV, ruled France as Regent for Louis XV until his death in 1723.  Louis XVI reigned from 1774 to his beheading in 1793 during the French Revolution.  For more information on Louis XIV, Louis XV, Louis XVI, and the French Revolution, see www.angelfire.com/va/frenchrev/index.html.

 

The Mississippi Scheme

 

When Philippe took over as Regent of France he was faced with a national debt of some 1.5 billion livres, and an annual interest expense of 80 millions (6: Thiers, p. 83, and 3: Garber, p.96.  Other sources provide higher debt figures).  State revenues were 145 million livres, while state expenditures were 142 millions, not counting interest on the debt (4: Mackay, p.5), so there was an annual deficit of about 77 millions or half the revenue.  Philippe convened a council to deal with the problem, and some members proposed national bankruptcy as the only method of avoiding a revolution.  This remedy was rejected as being unacceptable to Philippe, and the currency was debased by 20% instead.  “By this contrivance the treasury gained seventy-two millions of livres.” (4: Mackay, p.5)    The government also instituted a chamber of justice to investigate past actions by loan contractors and tax collectors, and many of them were imprisoned and fined.  “About a hundred and eighty millions of livres were levied in this manner, of which eighty were applied in payment of the debts contracted by the government.  The remainder found its way into the pockets of courtiers.” (4: Mackay, p.7)

 

In this atmosphere of financial chaos, John Law appeared in Paris with proposals to solve France’s ills.  “He asserted that a metallic currency, unaided by a paper money, was wholly inadequate to the wants of a commercial country, and particularly cited the examples of Great Britain and Holland to show the advantages of paper.  He used many sound arguments on the subject of credit, and proposed, as a means of restoring that of France, then at so low an ebb among the nations, that he should be allowed to set up a bank, which should have the management of the royal revenues, and issue notes, both on that and on landed security.” (4: Mackay, p.7)

 

In 1716 Law was permitted to establish a bank, Law and Company, whose notes would be accepted by the state in payment of taxes.  Based on the initial success of the bank, Law was granted trading rights in Louisiana, and a company for this purpose was incorporated in August 1717, the Compagnie d’Occident.  The public invested enthusiastically in the enterprise, and France was gripped by the early stages of speculative fever.  The government granted Law a monopoly on the sale of tobacco in September 1718, and the Compagnie d’Occident acquired the Sengalese Company, engaged in the African slave trade, in November 1718.  In January 1719, Law’s bank became the Royal Bank of France, with all of its shares purchased by the government; and Phillipe appointed Law to remain as director of its operations.  In May 1719, the Compagnie d’Occident acquired the East India Company and China Company, thus controlling all French trade beyond the borders of Europe; and the consolidated organization was renamed the Compagnie des Indes.  In July 1719 the Company purchased, for 50 million livres, the right to mint all gold and silver coins (3: Garber, p.95).   In August 1719 Law purchased, for 52 millions, the right to collect all indirect taxes, and in October his company took over the collection of direct taxes as well (3: Garber, p.96).  At this point Law conceived the grand scheme of having the Compagnie des Indes acquire the entire national debt.

 

The Company had been established August 1717 with the issue of 200,000 shares at 500 livres each.  Additional shares had been issued in May and July 1719 to fund the acquisition of the Far East trading companies and minting rights; and subsequent to these share issues the price of company stock exploded to 5,000 livres per share by September.  This allowed Law to acquire the national debt of 1.5 billions with the issue of an additional 300,000 shares, sold in three installments from September 12 through October 2.  Table 2 below shows the shares issued by the company, and amounts realized.  

 

Table 2: Shares Issued by the Compagnie des Indes (6: Thiers, p.108)

 

In acquiring the national debt, the Company agreed to a diminished interest rate of 3%, thereby reducing the annual cost to the government from 80 millions to 48 millions.  With this new source of revenue, the Company’s total net profit increased from 32.5 millions to 80.5 millions (see table 3 below).  

 

Table 3: Profits of the Compagnie des Indes (6: Thiers, p.113)

 

With 600,000 shares outstanding, net profits of 80.5 millions equated to134 livres net income per share.  For investors who had purchased shares for 500 livres back in 1717 and 1718 this represented an extraordinary 27% return on investment, but for new investors who paid 5,000 livres per share, the return was only 2.7%.  Yet this fact did not stop the parabolic rise in share prices, which reached a peak of 18-20,000 livres in December (6: Thiers, p.111).  This final orgy of speculation concluded the Mississippi Bubble.  Assuming a peak price of 18,000 livres per share, the total market capitalization of the Compagnie des Indes reached a zenith of 10.8 billion livres.  “For perspective, Law estimated the national wealth of France at 30 billion livres.” (3: Garber, p.97)   At 18,000 livres per share, the net income of 134 livres per share represented a return on investment of only 0.74%.

 

 By the end of 1719 share prices fell back to 15,000 livres, and this filled people with a sense of doubt and unease.  “However, the bank notes were not yet distrusted.  The bank was, in fact, entirely distinct from the company, and their fate, up to this time, appeared in no way dependent the one on the other.  The notes had not undergone any fictitious and extraordinary advance.  Large amounts had been issued, certainly; but for gold and silver, and upon the deposit of shares.” (6: Thiers, p.128)  Meanwhile, a number of people, sensing the coming storm, were selling their shares, and by the end of January 1720, share prices fell below 10,000 livres (3: Garber, p.99).  

 

“On February 22, 1720, the Compagnie took over direct control of the management of the Banque Royale; and the Banque Royale’s notes were made legal tender for payments above 100 livres.” (3: Garber, p.100)   The Royal Bank then supported share prices of the Company by issuing bank notes and exchanging them for stock, with the share price pegged at 9,000 livres.  “Until its termination on May 21, 1720, the pegging scheme generated legal tender note expansions of 300 million, 390 million, 438 million, and 362 million livres on March 25, April 5, April 19, and May 1, respectively, to absorb sales by shareholders.  The Banque’s legal tender note circulation doubled in about one month…. As a result of this dramatic monetary expansion, the average monthly inflation rate from August 1719 through September 1720 was 4 percent, with a peak of 23 percent in January 1720.” (3: Garber, p.101)  By May 1720 France had issued a total of about 2.7 billion livres in paper money versus a money supply of 1.2 billion in gold and silver coin  (3: Garber, pp.99 & 102). 

 

Meanwhile, during the early months of 1720, holders of this ever-growing pile of paper money began converting their notes into gold and silver, and sending it abroad for safety.  The Royal Bank responded by limiting its payments in specie to 20 livres in silver or 100 livres in gold.  “The little coin that was left in the country was carefully treasured, or hidden until the scarcity became so great, that the operations of trade could no longer be carried on.  In this emergency, Law hazarded the bold experiment of forbidding the use of specie altogether.  In February 1720 an edict was published, which, instead of restoring the credit of the paper, as was intended, destroyed it irrecoverably, and drove the country to the very brink of revolution.  By this famous edict it was forbidden to any person whatever have more than five hundred livres (20 pounds sterling) of coin in his possession, under pain of heavy fine, and confiscation of the sums found.” (4: Mackay, p.22)   From this edict, a great public hatred was born for John Law and the Regent. 

 

In May 1720 John Law finally realized that both the bank notes and shares were overvalued.  To save his system from destruction he proposed reducing the value of banknotes to 50% of their face value, and reducing the pegged price of Company shares from 9,000 to 5,000 livres, which would be accomplished over seven stages, to be completed December 1.  (3: Garber, p.101)  This solution failed, and the entire system collapsed before the end of the year.   Fearing for his life, John Law fled the country.  His properties in France were confiscated and he died in exile, virtually destitute. 

 

By October 1720, Company shares sold for 2,000 livres in depreciated bank notes, which in turn were worth only 10% of their face value in gold or silver, making the true share price only 200 livres (6: Thiers, p.185).  The government set about the sad task of liquidating John Law’s system, converting existing bank notes into government annuities or preferred shares of the company earning a 2% dividend (6: Thiers, pp. 185-6).  The government withheld interest payments to the Company, allowing this money to be used in payment of the new annuities created in the liquidation of the system.  “The public debt was thus changed – partly into annuities and partly into shares. The capital was nearly the same as before the system, but the interest was very much diminished.  There was but little more than thirty-seven millions to pay, instead of eighty millions; but a very large number of creditors had been completely ruined and the public credit was as low as in 1716.  The bank was abolished – the Company, deprived of all its privileges except that of foreign commerce, continued to exist under the name of the Indian Company, and was all that remained of the vast machine which Law had contrived.” (6: Thiers, pp.188-9)

 

The Final Decades of the Ancien Regime

 

In subsequent years a succession of Controller-Generals struggled to restore the royal finances by introducing new taxes, increasing rates on existing taxes, reducing annuities, and debasing the coinage.  (The final debasement of the Ancien Regime in 1726 defined the ecu (6 livres) as 30 grams silver.)  These efforts, combined with a long period of peace, resulted in budget that was more or less balanced by 1726, and government finances remained sound throughout the 1730’s, in spite of French involvement in the War of the Polish Succession (1733-38).  

 

In mid-century, however, French finances again became critical due to two expensive wars.  Expenditures in the War of Austrian Succession (1740-48) and the Seven Years War (1756-63), 1 billion and 1.8 billion livres respectively, raised the national debt to 2.3 billions by 1764, with debt service consuming about 60% of the budget (11: Schama, p.65).  At the beginning of 1770, the revenues of that year and the next were already spent.  “Since the state had exhausted its credit, bankruptcy appeared imminent, and was only evaded by the rough and ready methods of the new Controller-General, the abbe Terray.”  (1: Aftalion, p.20)  In Terray’s partial bankruptcy of 1770, the incomes of thousands of state creditors were cut dramatically.  “It was the first time the government had defaulted on its obligations for two generations.” (2: Doyle, p.89)  While Terray was allowed to increase tax rates and deal ruthlessly with the creditors, Louis XV did not permit him to seriously reduce government expenditure, as Terray desired.  Nevertheless, the Treasury was in a fairly healthy condition when Louis XV died in 1774.

 

When Louis XVI ascended the throne, he dismissed the hated Terray and replaced him with A.R.J. Turgot, who “came into the Council of the King with a whole peaceful revolution in his head.“ (11: Schama, p.83).  Turgot proposed a program of sweeping reform designed to establish civil equality and representative government, promote free trade, revive the French economy, balance the budget, and restore government finances; but he only managed some of these changes before he was dismissed.  Among his accomplishments, he reduced government expenditure by 60 millions; he abolished the hated corvee, the unpaid roadwork done by impressed peasants; he abolished monopolies, and eliminated special privileges held by corporations, guilds, and trading companies.  “Had Turgot been allowed to pursue his policies of free trade and less government intervention, France may very well have become Europe’s first ‘common market’ and avoided violent revolution.  A rising tide would have lifted all ships.  Unfortunately for France and the cause of freedom, resistance at the Court and special interests proved too powerful, and Turgot was removed from office in 1776.” (8: Peterson, p.2)  Voltaire wrote, “The dismissal of this great man crushes me…. Since that fatal day, I have not followed anything … and am now waiting patiently for someone to cut our throats.”

 

Clugny, Turgot’s successor, was only in office for a few months, but in this brief time he managed to overturn all of Turgot’s reforms.  Clugny was succeeded, in turn, by Jacques Necker who served from 1776 to 1781. 

 

France allied herself with America in 1778 and spent 1,066 million livres on the American Revolution (5: Doyle, p.68).  In spite of this extraordinary expenditure, Necker managed to restore the nation’s credit and borrow on a scale larger than before, without raising taxes.  He accomplished this by the force of his personality and by disguising the true state of the nation’s finances to its creditors.  In 1781 he published the Compte rendu au roi par M. Necker, which revealed the national budget to the public for the first time.  “Unfortunately, the figures presented in the Compte rendu were false.  They elicited a wholly fictitious surplus of income (264 millions) over expenditure (254 millions), which was done by overestimating the former and underestimating the latter, by confusing actual with theoretical movement of funds, by omitting considerable sums outstanding on current expenses, by forgetting extraordinary expenses and by a number of equally crude devices.” (1: Aftalion, p.24)  The actual deficit was later calculated at 70 millions, not counting extraordinary expenditures for the American Revolution.  The total deficit, including wartime expenditure, was close to 200 millions in 1781 and 295 millions in 1782 (1: Aftalion, p.25).

 

Ironically, Necker was undone, not by his deceptions, but by his honest efforts to reduce government expenditure.  Necker’s economies annoyed a good many courtiers, and earned him powerful enemies at Court (particularly the Ministers of the Army and of the Navy), just as Turgot had done before him.  Using his increased popularity gained from publishing the Compte rendu, Necker tried to force the King to admit him to the council that made the critical policy and spending decisions of the state.  The King refused, based on the advice of Necker’s enemies, and Necker resigned.

 

Necker was succeeded by Joly de Fleury who resigned after a short time, finding himself unequal to the task before him.  De Fleury was succeeded by d’Ormesson, who was honest but inexperienced.  D’Ormesson’s assault on the tax-farmers, who were vitally needed as lenders, caused his dismissal at the end of 1783.

 

The next Controller-General, Calonne, believed that unrestrained government expenditure would convince people that the government’s finances were sound, thereby restoring creditworthiness of the state.  He also argued that high government expenditure would improve the French economy.  He spent heavily on public works and gave money generously to the Court.  Calonne expressed delight at the lavish lifestyle of Versailles (the King’s brother alone received about 1 million livres annually) (7: Castelot, p.220) and encouraged the Court to spend more.

 

Queen Marie Antoinette, whose annual dress budget was 122,000 livres, spent 272,000 for that purpose in 1786 (7: Castelot, p.220).  In a nation where unskilled labor earned 1 to 1.5 livres daily, and skilled labor earned 2 to 3 livres daily (1: Aftalion, pp.39-40) this figure represented the wages of several lifetimes.  Later, when Marie Antoinette’s extravagance became known to the public, it created intense hatred for the Austrian-born Queen.  “Henceforth she was always known as ‘Madame Deficit.’  In her own person she was held to be the incarnation of the bankruptcy of the monarchy.” (7: Castelot, p.221)  In her defense she said, “How could I have suspected that the finances were in such a bad state?  When I asked for 50,000 livres I was brought 100,000.”  

 

Calonne’s policy of extravagant expenditure kept him in favor at Versailles (where he was known as “The Wizard”) and may have fooled the state’s creditors for a time, but it only made the day of reckoning worse.  On August 20, 1786 Calonne informed the King that the state was on the verge of financial collapse, having borrowed 1,250 millions over the past ten years alone.  “According to Calonne, total revenue for 1786 would amount to 475 million livres, but expenditure would probably total 587 millions – a deficit of 112 millions, or almost a quarter of the annual revenue.” (2: Doyle, p.43)   State credit was exhausted, and raising taxes was not practical, since the French believed they were already the most highly taxed people of Europe.  Calonne’s solution, presented to the King in The Precis d’un plan d’amelioration des finances, was essentially a watered down version of Turgot’s attempted reforms.   An Assembly of Notables, called in February 1787 to ratify Calonne’s reforms, proved extremely hostile.  Its members reasoned that a finance minister who recently claimed all was well, and now claimed the situation was extremely dire, was lying either then or now.    

 

Calonne was dismissed and replaced by Lomenie de Brienne, who had opposed Calonne’s measures but now discovered the financial condition to be just as catastrophic as Calonne had declared.   “The plans he advanced therefore could not help but resemble those of Calonne.  As his popularity faded, the Assembly of Notables declared that any new reform would have to be ratified by the Parlements.  The convocation of this assembly had therefore been of no avail, for it was effectively declaring itself incompetent; it was disbanded at the end of May.  However, the debates had been sufficiently public for the whole of the country to be aware of the gravity of the financial situation.  It had now become clear that radical steps would have to be taken.  Voices, including that of Lafayette, were now raised in favor of calling the Estates-General.” (1: Aftalion, p.29)

 

Brienne attempted to get two new taxes passed by the Parlements, a stamp duty and a universal tax on land, but the Parlements insisted that only the Estates-General could approve the new taxes.  The French budget for 1788 (the last budget of the Ancien Regime) was published in March 1788, and it destroyed what little confidence remained in the government’s finances.   (The 1788 budget is presented in tables 4 and 5 below, with 629 million total and percentages from Florin Aftalion (1: p.196).  Other figures are estimates calculated by us.)   Unable to borrow or tax more, the government was bankrupt and suspended Treasury payments on August 16.  The King dismissed Brienne on August 25, recalled Necker to control of the finances, and arranged for the Estates-General to meet on May 1, 1789.  These measures restored the state’s creditworthiness sufficiently for Necker to obtain loans to carry the government until the meeting of the Estates-General.

 

Table 4: Expense Budget of France in 1788

 

Table 5: Projected Revenues and Borrowing of France in 1788

 

Finances of the Revolutionary Government  

 

From the viewpoint of Necker and Louis, the mission of the Estates-General was to raise the taxes necessary to continue the government, but the Estates-General thought that reform of government was more important than the finances.  Within half a year the Assembly overthrew the administrative, social, and judicial institutions of the Ancien Regime and replaced them with a constitutional monarchy.  Meanwhile, the critical financial problems, which had brought the Assembly together in the first place, were left unsolved.  In fact, matters were worse than before, as taxes went uncollected while France waited on the Assembly to reform the tax code.  Tax revenues in 1790 averaged 15 million livres per month versus state expenditures of 55 millions (1: p.71).  Necker harped on the issue, bringing several proposals to the Assembly involving extreme cost cutting, new taxes, deferral of expenditure, and new borrowing; but the Revolutionary government did not support these ideas, which they viewed as simply the old policies of the Ancien Regime.

 

The total debt of France as of August 27, 1790 was 4,241 million livres. (1: p.76).  This was more than twice the gold and silver money supply of France, which totaled about 2 billion livres (1: p.79), and almost three times the national income of 1.5 billion livres.  The 1790 tax receipts of 15 millions per month were inadequate to pay the 257 millions in interest on this debt, even if there were no other government expenses; yet the Revolutionary government was determined not to default, as it did not want the creditors of the state to turn against the Revolution.    

 

The Assembly’s solution was to sell state property (biens nationaux) worth 400 million livres (5: Doyle, p.134), and confiscate and sell the property of the Catholic Church in France, worth approximately 2 billions  (10: White, p.5).  The nation, in future, would provide the wages of the clergy and relief of the poor, but the Assembly did not assume responsibility for the debts of the Church, abandoning Church creditors to their fate.  Some members of the Assembly argued against this proposal, and pointed out the terrible consequences that would result from a failure to respect property rights.  Such arguments did not succeed, as the Assembly could find no other solution to its financial morass. 

 

Unfortunately, the sale of all this state and church property would take time, and the government needed money immediately.  The Assembly therefore decided to issue paper money, called assignats, which were backed by the value of the land to be sold.   The idea was that assignats held by the public could be used to purchase biens nationaux, and would be destroyed upon receipt by the government after each sale.  But the issue of paper money did not occur until lengthy debate, during which opponents reminded the Assembly of the failure of John Law’s experiment.  Boislandry, a merchant from Versailles, pointed out the terrible consequences of paper money in America and elsewhere:

 

“In America, during the last war, Congress put a considerable quantity of paper money into circulation. This paper money, having fought a vain battle against public distrust, was annihilated, so to speak, by itself, in the hands of the property-owners, to the extent that 100 dollars of paper money are now barely worth 5 dollars in coin.  The Danes, the Swedes and the Russians also have paper currency.  In all these nations, it has … paralysed money; everywhere it has impeded trade and industry … Paper money in Sweden, even though it was mortgaged against royal properties, was so debased, during a certain period of time, that a ducat in coin was worth ten ducats in paper money; yet it was a paper money based on land values, similar in all respects to the one you are advocating.” 

 

By early June 1791, 1.2 billions in assignats had been issued.  Of this figure, approximately 379 millions had been used to pay down the national debt and 771 millions had been spent by the government, leaving roughly 50 millions in reserve.  Assignats totaling 200 millions had been destroyed upon sale of biens nationaux, leaving 1 billion in circulation.  At this point the Assembly voted an additional 600 millions in assignats to be printed (1: p.95).   Meanwhile, the government found it extremely difficult to collect taxes.  For example, the land tax receipts in 1791 were about 34 millions, versus a projected 300 millions (1: p.103).  Thus, to finance the government, the Assembly continued to issue assignats in ever increasing quantities.  On October 19, 1795, “the floor of the printing house where assignats were produced collapsed with the activity of the presses, which were turning out 2,000 millions worth of paper money per month.” (5: Doyle, p.322).  On February 19, 1796, the plates used to make assignats were solemnly destroyed.  At that point there were 34 billions in circulation out of a total 45 billions in assignats produced.

 

By February 1796 the paper money had depreciated to the point where 1 silver franc was worth 600 francs in assignats (10: White, p.54).  Over time, the assignats had depreciated in proportion to the monetary inflation, but there were distinct periods when the paper money was either undervalued or overvalued relative to the size of the paper money supply.  “What we actually find is that indeed, over a period of four years, the observed values and the theoretical values vary in relation to each other.  However, over shorter periods, the assignats may seem to be over- or undervalued.  Thus, the autumn of 1792 was a period of overvaluation (possibly due to military victories of the time) and, conversely, the summer of 1793 saw an abnormal fall in the value of paper money (related, no doubt, to the series of defeats suffered by France).  During the Terror, and the accompanying price controls, the assignat was once again overvalued, and this situation did not end on 9 Thermidor (ed: fall of Robespierre and the Reign of Terror) but persisted up until the end of 1794.  Finally, after the spring of 1795, the assignats definitively collapsed as a currency, very probably because, having observed the accelerating drop of value of the paper currency, the public was less and less prepared to accept it.” (1: p.183)

 

The assignats were replaced with a new paper currency, mandats territoriaux (land notes), of which 2.4 billion francs were issued.  (One franc, under the monetary system of the Republic, was essentially equal to the old livre – 1/100 ounce gold or 5 grams silver.)  Holders of assignats could convert them into mandats at the rate of 30 livres in assignats for 1 franc in mandats.  The mandats never held the confidence of the public, and they lost 90% of their value by the end of April 1796.  “The mandat, which had lost virtually all its value after less than a year in existence, was officially withdrawn from circulation on 4 February 1797.  It could be used for one month more, at the rate of 1% of its face value, for the payment of tax arrears.” (1: p.176)   Therefore, had a person held 3,000 livres in assignats (theoretically worth 15,000 grams silver or 30 ounces gold) from the early 1790’s, they would have been converted into 100 francs in mandats in early 1796.  These mandats would then have been converted into a single franc in coin (5 grams silver, equivalent to 1/100 ounce gold) in early 1797.  Thus ended the paper money experiment of the French Revolution.

 

When we published Part I: Introduction to this series, we expected this to be the end of the story, and labeled the declining wave in France as ending in 1796, with the collapse of the mandats.  We must now amend that date to 1797, since we learn of one last financial outrage by the French government that year.  “On 30 September 1797, the Minister of Finance, Ramel, cut the public debt at a stroke from 250 millions to eighty millions.  A third of the debt was maintained (‘consolidated’), the bills which represented it being acceptable in payment for taxes or for biens nationaux.  The other two-thirds, which were described as ‘repaid’, were in fact exchanged against bearer bonds valid for the settlement of that portion of the biens nationaux that was payable in paper money (assignats) and rapidly lost almost all of their value.” (1: p.178)   Thus ended the long and vain attempt to avoid national default by the successive governments of France.

 

One reason that the Assembly had been compelled to print so much paper money was the high level of expenditure in the War of the First Coalition.  Alarmed by the growing violence of the Revolution, Prussia and Austria invaded France in August 1792, and by August 1793 France was near collapse.  The government responded with the levee en masse on August 23, conscripting the entire male population of France, and hastily assembled 14 armies in a few short weeks.  By September 1794 French armies totaled 1,169,000 men (5: Doyle, p.205).  France was saved from defeat, but the tide of war shifted back and forth until Napoleon took command of the Army of Italy on March 27, 1796.  After a string of victories in northern Italy, Napoleon invaded Austria on March 10, 1797, and reached Leoben, 95 miles from Vienna, on April 6.  The Austrian Emperor sued for peace, and signed the Peace of Leoben on April 18, 1797.  With France now opposed only by England, French armies were reduced to 270,000 men by yearend (5: Doyle, p.340).

 

Napoleon had reported on March 28, 1796, the day after taking command in Italy, that, “one battalion has mutinied on the ground that it had neither boots nor pay.” (9: Markham, p.40)  But French armies, which previously had been destitute, ragged, and unpaid, became self-funding after Napoleon’s victories of 1796, and were able to send substantial surpluses to the government in Paris.  By March 26, 1797, the Army of Italy sent the government the equivalent of 51 million francs in gold and silver, while the Army of Sambre-et-Meuse sent 10 millions, and the Army of the Rhine sent over 2 million francs.  These sums were but a small fraction of the 240 millions in francs taken by these armies in their final conquests, and used mostly to support themselves.  During this period the French government also received 100 million florins from Holland and began to sell the biens nationaux of Belgium (1: p.177).

 

The French Economy

 

Elliott Waves are measured by stock market indices, although Elliott himself said that waves still exist even in the absence of such an index.   Stock market indexes are unavailable for most historical periods, and we must therefore choose proxies as measuring devices.  This inevitably leaves wave counts open to much more debate than exists when simply examining a stock index, and none of our wave counts measured by such proxies can be considered absolute. 

 

If one were to label the French declining wave GSC4 (the 18^th century decline) based on economic output, for example, rather than based on the financial condition of the state and its creditors as we have done, then the ending date would be 1795.  This bottom for the economy corresponds with the terrible economic dislocations caused by the levee en masse in late 1793, combined with the economic chaos caused by the rapid collapse of the assignats, and bad weather in 1794 and 1795. 

 

French national income in the 1780s was about 1.5 billion livres (1: p.58), and 3/4 of this total came from agriculture (1: p.34).  While there are no agricultural production figures prior to the Revolution, food prices were trending generally upward from the mid-1750s through 1789, with major price spikes in 1770 and 1789 (1: p.37).  General prices rose also, increasing 62% from the 1730’s to 1789, while national wages increased only 22% over that period (2: Doyle, p.161).  Peasants suffered more than others, as their incomes were in decline after 1750 (1: p.33). This led to frequent subsistence riots, since lower paid workers were spending more than half their income on food in the late 18^th century (2: Doyle, p.161).  This violence was not limited to France, as there were also hunger riots in London, Geneva and Holland at the beginning of the 1780s (1: p.40)

 

During the French Revolution, per capita agricultural production fell in France, “with a veritable collapse occurring between 1792 and 1795, and a very slow recovery in subsequent years.” (1: p.191)   Poor harvests in 1794 were followed by the bitterest winter of the eighteenth century in 1795.  This resulted in severe famine, with death rates more than two times normal during 1795 (1: p.168).  While production did improve subsequently, it did not return to the 1789 level until 1814 (1: p.191).  

 

“The most important industry in France, accounting for half of all industrial production, was textiles.  And after food, clothing was the largest item in most people’s expenditure.” (2: Doyle, p.161).  Other significant industries were construction, metalworking, and glassmaking.  During the Revolution, French industry declined in a pattern similar to that of agriculture.  For example, the number of textile looms fell in half over the decade ending 1794 (1: p.191).  “In such textile towns as Lille, many trades went into steep decline.  For obvious reasons, all those employed in the métiers de luxe – wigmakers, tailors, dancing masters, teachers, musicians, and watchmakers – saw their clientele disappear.  But Cobb’s research showed more popular occupations, like shoemaking, suffering as badly, with the exception of the fortunate few who could land contracts to supply the Armee du Nord.” (Schama, p.853)  Industrial production improved slowly after 1794, and had not yet reached pre-Revolution levels by 1800 (1: p.191).

 

Conclusion

 

We ask ourselves: what were they thinking?  Any of them.  Why did anyone invest in Compagnie des Indes stock after the summer of 1719?  Do crowds really go mad as Mackay suggested?  And why did state creditors continue to loan the government money – after John Law’s disaster, after Terray’s default, after Turgot was dismissed, after Calonne published the budget?  We cannot find pity in our hearts for any of those investors, only awe and wonderment at the whole episode.

 

And why did the French aristocracy vehemently oppose those finance ministers who struggled to bring expenditures into line with revenues?  We don’t know what guided their thoughts.  Hubris maybe.  What is certain is that the success of Turgot’s and Necker’s enemies at Court doomed their own world to eventual destruction.  With the government unable or unwilling to either balance the budget or default, the fate of the Monarchy was sealed. 

 

And what made the Revolutionary government think their paper money would succeed when John Law’s paper money, and others, had utterly failed?  We don’t know.  And likewise, we don’t know what makes modern Keynesians think that their paper money will avoid the same fate as all its predecessors.  Hubris again?

 

One of the general risks faced by civilization, which we discussed in Rise and Fall of Civilizations Part I, is loss of freedom, which can manifest in many ways.  The slogan of the French Revolution was, “Liberty, Equality, Fraternity;” but the reality was something quite different, causing thousands to flee the country with their valuable skills and such money as they could escape with.  Many of these Frenchmen served in the invading foreign armies, while others, who remained in France, engaged in civil war and counter-revolution at home.  We will let Robert A. Peterson’s comments on the subject serve as the last word on the Revolution.  “Every citizen was required to carry an identity card issued by his local commune, called, in an Orwellian twist of language, Certificates of Good Citizenship.  Every house had to post an outside listing of its legal occupants; the Revolutionary Communes had committees that watched everyone in the neighborhood; and special passes were needed to travel from one city to another.  The jails were soon filled with more people than they had been under Louis XVI.  Eventually, there flooded forth such a torrent of laws that virtually every citizen was technically guilty of crimes against the state…. So much of modern statism – with all its horror and disregard for individualism – began with the French Revolution.  The ‘purge,’ the ‘commune,’ the color red as a symbol of statism, even the political terms, Left, Right, and Center came to us from this period.  The only thing that ended the carnage – inside France, at least – was ‘a man on horseback,’ Napoleon Bonaparte.  The French Revolution had brought forth first anarchy, then statism, and finally, dictatorship.  Had it not been for the indomitable spirit of the average Frenchman and France’s position as the largest country in Europe, France might never have recovered.“ (8: Peterson, p.4)  

 

Sources for This Article

 

1. Aftalion, Florin. The French Revolution: An Economic Interpretation. New York: Cambridge University Press, 1990.

 

2. Doyle, William. Origins of the French Revolution. New York: Oxford University Press, 1988.

 

3. Garber, Peter M. Famous First Bubbles. Cambridge: The MIT Press, 2000

 

4. Mackay, Charles.  Extraordinary Popular Delusions and the Madness of Crowds, Chapter 2: The Mississippi Scheme. www.litrix.com/madraven/madne002.htm.

(contains a biography of John Law for anyone interested)

 

5. Doyle, William. The Oxford History of the French Revolution. Oxford: Clarendon Press, 1989.

 

6. Thiers, Adolphe. The Mississippi Bubble. New York: Greenwood Press, 1859 (reprinted 1969).

 

7. Castelot, Andre. Queen of France. New York: Harper & Brothers, 1957.

 

8. Peterson, Robert A. A Tale of Two Revolutions. www.fiu.edu/~fcf/french/html

 

9. Markham, Felix. Napoleon. New York: The New American Library, 1963.

 

10. White, Andrew D. Fiat Money Inflation in France. New York: D. Appleton-Century Co. Inc., 1933.

 

11. Schama, Simon. Citizens. New York: Alfred A. Knopf, 1989.

 

We are grateful to Florin Aftalion for his thorough economic examination of the French Revolution.  In our opinion, anyone wishing to understand the French Revolution should read his book.  Since the debt problems of the 21^st century dwarf the problems of the 18^th century, it is worth understanding the career and economic theories of Turgot, who was the one man with the ability to actually fix the problem in France.  We recommend Turgot and the Ancien Regime in France by Douglas Dakin (New York: Octagon Books, Inc., 1965), and Biography of A.R.J. Turgot (1727-1781), by Murray N. Rothbard, at www.mises.org/turgot.asp.

 

Comments and Sources for Other Nations

 

Holland

 

Holland experienced an economic decline called the Periwig Period, which corresponded very closely with the period of French decline.  For readers interested in the Periwig period in Holland, see The Economic Decline of Empires edited by Carlo M. Cipolla, published in New York by Methuen & Co. Ltd., in 1970.  It contains “The Dutch Economic Decline”, an article by C.R. Boxer.  To state one example of the decline, the number of large and small ships under construction in Amsterdam shipyards tapered off after 1725, declined noticeably after 1750, and fell precipitously after 1775.  The numbers under construction were 306 in 1707, 25-30 in 1770, 5 per year average from 1790-93, and 1 after 1793 (Boxer, p.256). 

 

England

 

The South Sea Bubble in England was similar in many ways to the Mississippi Scheme in France.  The South Sea Bubble involved the acquisition of L31 million of the British national debt by the South Sea Company.  The South Sea Bubble, like the Mississippi Scheme, collapsed in 1720.  Garber (see source #3 above) wrote a chapter on the South Sea Bubble.  Charles Mackay’s chapter on the South Sea Bubble in Extraordinary Popular Delusions and the Madness of Crowds is available at www.litrix.com/madraven/madne003.htm.

 

The American Revolution was more damaging financially to England than to France, but did not bring down the English Monarchy.  “Not only do we now know that the British per capita tax burden was three times heavier than in France, but by 1782, the percentage of public revenue consumed to service Britain’s debt - on the order of 70% - was also considerably greater than the French equivalent.” (11: Schama, p.65)

 

America

 

America, like France, had two disastrous paper money experiences in the 18^th century, one in the early 1700’s, and one during the American Revolution.  For readers interested in the paper money of Colonial America, we recommend the Leslie Brock Center for the Study of Colonial Currency, at www.virginia.edu/~econ/brock.html.  (Leslie V. Brock, Professor Emeritus of History, College of Idaho, is a preeminent expert on American colonial currency.)

 

The first American paper money was issued by Massachusetts in 1690.  During Queen Anne’s War (the American version of the War of Spanish Succession) 1702-1713, other states followed suit (Connecticut and New Hampshire in 1709, Rhode Island in 1710) issuing paper money to help finance the war.  This paper money did not cause problems so long as the total quantity was small in relation to the silver money supply, but excessive increases of paper money in subsequent years caused hyperinflationary price increases.  Simultaneously, the silver money supply of New England, which had been L200,000 in 1700, vanished almost entirely sometime between 1718 and 1726 (depending on the source).  Consequently, the price of silver, which had been 7 shillings per ounce in 1700, reached 56.8 shillings per ounce in Boston in 1747 (from The Colonial Currency, Prices, and Exchange Rates, by Leslie Brock, pp.5-10, available at http://etext.lib.virginia.edu/journals/EH/EH34/brock34.htm).

 

During the American Revolution Congress issued $240 millions in paper money, which was known as Continental Currency.  This was the paper money referred to by Boislandry when arguing against the issuance of assignats.  Andrew White (see source #10 above) discussed this paper money at the end of Fiat Money Inflation in France, and provided a table of various price increases due to the inflationary printing of Continental Currency. 

 

Previous Articles in this Series

 

Part I: Introduction:

www.freebuck.com/articles/elliott/030104bankruptcies1.htm.

Part II: Fall of the Athenian Empire:

www.freebuck.com/articles/elliott/030113bankruptcies1.htm.

Part III: Fall of the Roman Republic:

www.freebuck.com/articles/elliott/030127bankruptcies1.htm

Part IV: Fall of the Roman Empire:

www.freebuck.com/articles/elliott/030209bankruptcies1.htm

Part V: The Hundred Years War and the Black Death:

www.freebuck.com/articles/elliott/030222bankruptcies1.htm

 

 

© Copyright 2003 by Joseph M. Miller, Daan Joubert, and Marion Butler, all rights reserved.