France 1789: A Bankrupt Regime

By Peter Burley | Published in History Today Volume: 34 Issue: 1 In the world today, a nation's financial collapse can threaten its political and social stability. It was the same in France in 1789, explains Peter Burley. The threat by countries as far apart as Poland or Brazil to default on the repayment of their loans is a commonplace newspaper headline today. The first recognisably modern crisis of state bankruptcy where a nation's financial collapse led directly to political and social upheaval was experienced by France as the prelude to the French Revolution. There were some important differences to be noted between France's situation in the late 1780s and that of modern debtor regimes. Commodities did not dominate national economies in the way oil or cocoa, for example, may today. France was generally reckoned to be the world's most developed nation, and not beholden to any one creditor or organised consortium, thus foreign intervention was not a factor to be taken into account. As well as the more obvious rules of modern public finance above all keeping capital and revenue accounts strictly separate France still suffered from a. legacy of medieval accounting practice including the division of taxes into 'ordinary' and 'extraordinary' categories, with important constitutional implications, and a fiscal administration which had become progressively compartmentalised, duplicated, and partly privatised, making it uncontrollable, unaccountable, and impossible to reform coherently. Today's financial crises involve an international community of bankers, world markets, and doom laden talk of 'domino effects'. While there was an international banking community in the eighteenth century, it lacked the scope and cohesion of today's. Most economic activity was still at a very local level, and France could hardly even be said to have a national economy at this date. Each nation if not each province stood or fell economically in isolation. This was also the period at the close of mercantilism, and governments still believed that there was a fixed sum of wealth in the world economy and that if one competitor for that wealth collapsed then the others would be able to share out the spoils particularly in terms of colonial trade. This noted, the ancien regime did still depend on credit from domestic and foreign institutions, especially to raise the cash to mobilise for war, Thus, France's predicament enables us to see a financial crisis of a modern nature isolated within a single country and allowed to run its full course. The collapse of France's national finances lasted half a century, but its most important single moment was in the summer of 1788, captured in Thomas Jefferson's illuminating eye-witness account when he was United States' Ambassador. On August 20th he wrote: the want of money...has in fact overborne all their resources, and the day before yesterday they published an [order] suspending all reimbursements of capital, and reducing all the payments of the principal mass of demands for interest... The consternation is as yet too great to let us judge the issue. It will probably ripen the public mind to the necessity of a change in their constitution... It is a remarkable proof of the total incompetency of a single head (i.e. Louis XVI) to govern a nation well, when with a revenue of six hundred millions they are

led... to stop the wheels of government, even in its most essential movements, for lack of money. And on September 3rd he reported: [Lomnie de Brienne] was hereupon removed... and Mr Necker was called in as Director General of the finance... The public joy on this change of administration was very great indeed. The people of Paris were amusing themselves with trying and burning [Lomnie de Brienne] in effigy. Jefferson was describing not a full bankruptcy but an indefinite postponement of the repayment of the capital debt, together with an arbitrary reduction in the payment of interest on that capital. This was a more drastic version of today's expedient of re-scheduling a capital debt, whereby countries in difficulty are given an extended but still defined period in which to repay. The even more common term of 'defaulting' covers the failure to repay either capital or interest without declaring a bankruptcy or arranging a rescheduling. The most drastic option of all is a repudiation whereby a regime simply announces that it will repay neither capital nor interest on loans. France's action in 1788 came dangerously close to a repudiation and in practice it probably did amount to a repudiation in all but name, but the regime shied away from the opprobrium this open admission would have brought. The fear of the consequences of a repudiation was one of the factors behind the need to summon the States General as an immediate political necessity rather than a long-term option. The start of France's financial embarrassment is generally dated from the first colonial war of Louis XV's reign, the War of Austrian Succession. Up to then the stable administration of Cardinal Fleury (1726-43) had kept the war debt inherited from Louis XIV under control while external commitments were consciously limited. Fleury did not, however, leave any surplus, and increases in public expenditure would have to be financed by loans. After 1740 public expenditure did rise most importantly because of the three costly colonial wars financed by steadily more expensive loans but there was no concomitant increase in public revenue. It is, therefore, necessary to examine how and why this came about. The Controllers General after around 1740 did realise that the need to service the war debt would create a growing annual deficit which in turn would demand measures to change internal policies whether better house-keeping, austerity measures, or long-term reform to secure increased government revenue. Nonetheless, the deficit did grow and as early as 1768 Controller General Laverdy warned that the total debt had reached 259,000,000 livres , with the implication that the regime could not cope with this level of debt. In 1776 Necker warned that the annual deficit (prior to his appointment, of course) had reached 24,000,000 l. (perhaps 4 per cent of the Control General's turn-over). These figures were strictly private to the inner circles of government, and were only obtained by the British embassy through political espionage; it was not until 1786 that any official recognition of the debt and deficit was made. The long period of secrecy was aimed unsuccessfully at preventing a loss of financial confidence in the regime with the threat of credit drying up or higher interest being charged against a bad risk. As part of this strategy the various Controllers General adopted measures which might be termed 'creative accounting' culminating in Necker's Compte Rendu (or published budget) of 1781 which purported to show that no real deficit existed. It can be seen that the government's more serious response to the gradually worsening financial crisis was to attempt structural reform, which was via devolution of fiscal

responsibility to the provinces or by the relaxation of government controls on the food industry in the hope that growth in this sector would stimulate the economy more generally. Unfortunately this latter policy showed unacceptable teething problems, as people rioted or starved in response to uncontrolled bouts of inflation of bread prices (one such was taking place in the summer of 1789). Structural reform might seem the bold approach but, except for Turgot's attacks on vested interest, it was in reality the softer option and the less effective. Two contemporary judgements on structural reform illustrate this. The Duc de Chatelet condemned the extensive debates of the Assembly of Notables in 1787. 'We have discussed everything and accomplished nothing', and the British Ambassador's analysis of Turgot's wide-ranging policies was, 'Turgot's measures have hitherto rather lessened than increased [France's] revenue'. Although there was a steady process of delaying payments and repudiating small scale debts owed to politically compliant creditors, only Terray of the more important Controllers General addressed himself directly to the deficit itself. As a result of his austerity measures he became the most reviled Controller General of the century and his name became a byword for ruthlessness, rapacity, and extortion. France's financial embarrassment grew more serious after the American War of Independence when the government realised that bankruptcy would be inevitable if no radical steps were taken, but still refused to admit the situation openly (1781-6). War debts dominated the nation's finances, and their repayment was the single largest item of expenditure. This is a dangerous position for any regime because its taxpayers may react badly to the discovery that their contributions are not helping the country directly, but flowing into the hands of 'money lenders' often foreign. Two reasons for no action being taken between 1781 and 1786 were that the Compte Rendu did paint such a rosy picture and that it proved almost impossible to unravel how Necker had been running the Control General. It was all too easy to treat the times as special circumstances where temporary expedients could safely be used. The threshold of confusing capital and revenue accounts was crossed in this period with new loans raised to cover shortterm commitments, including the interest on war debts. France slipped into the final phase of insolvency with the actual cash running out. Controller General Calonne admitted that this was a possibility in 1786, and this revelation set in train the events known as the 'pre-revolution', starting with the convoking of the Assembly of Notables. Calonne revealed a deficit of 100,000,000 l. , a figure which was successively revised upwards over the next three years. The hard decisions which should have been taken earlier had now become unpalatable choices as the regime found it could not cover all its commitments. The harsh reality was first felt in foreign affairs when France had to forego intervening in three international crises where her interests were directly affected. Jefferson called this France's 'temporary annihilation in the political scales of Europe'. At this stage modern regimes fear the two evils of hyper-inflation and mass unemployment leading to social disorder as is happening in Brazil today. The ancien rgime did manage to preserve a stable bullion currency although. the price of basic foodstuffs was subject to violent fluctuations, but the Revolutionary government was later to suffer from inflation when it experimented with paper currency. Mass unemployment of a recognisably modern kind affected only a very few areas of France because large-scale industrialisation was still in the future. The few areas of industrial production, though, were in severe recession in part

because of yet another misguided attempt at structural reform when, in 1786, a free trade treaty with Britain had been signed in the hope of forcing entrepreneurial development on the French economy, which was in no state to cope with the resulting flood of cheap imports. Urban unemployment contributed to the Reveillion riots in April 1787 in Paris when a wallpaper factory was burnt down in protest against the government's failure to control bread prices. The ancien rgime's real crisis of unemployment was experienced in the countryside, where an official estimate in 1791 put the number of people destitute (because of poor harvests, high taxes, the collapse of demand for the products of cottage industry, and more aggressive practices of management by landlords) at 10 per cent of the population. By 1789 hundreds of thousands of people had abandoned their homes and roamed the countryside in itinerant hoards; they contributed much to the 'great fear' and the burning of the chteaux in that year. It is fair to ask if any of the various options which can be described to resolved France's financial problems were prejudiced by technical factors beyond the regime's control as in the collapse of the market for a commodity in today's situations. There was one such factor, and it very particularly did not affect France's greatest rival Britain which was that France's fiscal mismanagement had already caused her to be regarded as a potentially bad risk and she was charged differentially higher interest rates on her loans after the mid-century. On average this surcharge was an extra half per cent, and it helped tip the balance against France achieving a financial recovery. This factor was, however, well-known to all the Controllers General, thus begging the question of why no allowance was made for it. Aside from generally improved housekeeping, there were three broad options for tackling the financial shortfall: reduction of government commitments, above all military; repudiation of the debt or the seizure of assets to cover it; and reform of the tax structure to raise more income. Why did none of these prove realistic for the ancien rgime ? The financial problems of the ancien rgime had originated with its war debt and were compounded by retaining a relatively large military establishment. France had military commitments on a global scale, and was also the only great power to attempt to defend a colonial empire while seeking military pre-eminence on the continent of Europe. Despite painful decisions not to intervene in the first Partition of Poland in 1772, the dispute over Bavarian succession 1777-9; the Orangistcoup d'tat and Prussian intervention in Holland in 1787; the revolt and civil war in the Austrian Netherlands starting in 1787; and the RussoTurkish war starting in 1788; over the last half century of its existence the regime did undertake numerous small-scale commitments, two large-scale continental wars, and three colonial wars which together left her short of empire and depleted in resources. Britain very consciously restricted her military commitments to match her resources, and when France finally followed the same policy in her support for the American rebels, she gained the success which had previously eluded her overseas. By that time, however, the accumulated war debt was overtaking her. France maintained a large military establishment even in peace time, and in particular retained costly elite regiments around Versailles. The army and navy, like the Court as we will see below, served a vital social and political role as an outlet for a nobility denied access to politics. The regime also prized its image as the pre-eminent world power, and had no desire to be seen having to cut its coat to match its cloth. It was in the nature of the regime to overextend itself in matters where international and domestic prestige were at stake. The second type of option to balance the books was the most drastic, and would involve either

seizing sufficient domestic or foreign assets to cover the debt once and for all, or repudiating the debt and all government commitments and starting afresh. Leaving aside the outright sale of French possessions which only Napoleon could contemplate when he sold Louisiana to the USA in 1803, there was only one (domestic) asset on a scale large enough to be useful, and on which radicals had long cast an eye. This was the Church's lands and assets, which the Revolutionary government subsequently did appropriate and use as the basis for a new currency (the assignats). The arguments against such a seizure were the same as against a repudiation of debts. Repudiation of the debt was the simplest solution, and one which medieval and Renaissance monarchs had often employed. Some small-scale repudiations were undertaken as a regular part of the management of the Control General, and there were constant negotiations over rescheduling. When Terray began a more serious programme of retrenchment, the government's leading minister (Duc de Choiseul, Secretary of State for both Foreign Affairs and War) complained in a remarkable interview with the British Ambassador, 'The Controller General may, by such methods, raise the revenues to be equal to the King's expenses; but... if the King should hereafter happen to stand in need of a loan, nobody would ever advance a livre upon the public faith', and went on to complain about the differentially high interest rates mentioned earlier. What Choiseul was saying was that any repudiation large enough to be useful would destroy financial confidence in the regime and make it impossible to raise credit in the future. While the government might be able to run its normal services from tax revenue alone, it could never hope to raise the sums of liquid cash needed for an emergency such as a war without access to the international money markets. This related back to the earlier point about prestige a full-scale repudiation of the debt would cause an unacceptable loss of influence in the international scene. Choiseul was also pointing out that under the ancien rgime system of public accounting pensions were counted as a known commitment and part of the national debt. Pensions were akin to a social security system stood on its head: they were bribes to the great noble landowners to stay at Court and not involve themselves in politics of a parliamentary or particularist nature and were one of the foundations of Louis XIV's structure of government. Very few of the recipients of a pension had any objective need of one, and the system reached its height of unpopularity under Marie-Antoinette when she and her close companions demanded vast sums to maintain the Court style of their choice. Dismantling the pensions was not something the regime could undertake without a fundamental re-evaluation of the relationship between the crown and the nobility. It was fashionable to speculate that this 'reevaluation', which would have included the loss of most useful privileges, would lead to armed defiance of the reforming government. Nor should the moral and practical arguments against a bankruptcy be ignored the Bourbons styled themselves 'Most Christian Majesty' and reneging on commitments honourably contracted would be 'Unchristian'. If the king did not pay his debts, how could he expect his subjects to pay theirs, and if they treated taxes in this light the whole process of administration would come to a halt, given that the kinds of detailed modern coercion available to government today were undreamt of then. If France could not realistically be expected either to reduce her commitments to match her resources or to balance the books by a coup de main , then could the regime either be run more efficiently oz more revenue raised? In very broad terms France's inability to tap the resources in the realm, which by general consensus were more than adequate for her needs,

was the root of the financial problem. It was one of the cliches of the regime that, as Necker put it, 'The resources of France are inexhaustible'. Jefferson quoted a figure of 600,000,000 l. for annual revenue: most contemporary commentators believed that 1,000,000,000l could be raised without undue strain on the social or economic fabric provided certain obvious reforms were carried out. The quest for this missing 400,000,000 l ., but without grasping the nettle of reform, was the backdrop to much of the politics of the late ancien rgime . The various attempts to raise the money without taking hard decisions all failed because of a series of disincentives and inefficiencies inherent in the regime. Commenting on this in March 1774, the British ambassador had a bleak forecast: 'The evils [of fiscal mismanagement] are so deeply rooted in this country, and depend on such a variety of causes, that one may fairly say they do not admit of a cure'. These evils can be grouped into three broad categories, and the first was the actual way in which taxes were collected. Many were farmed out to private contractors who bid for how much they would deliver to the Control General, keeping any surplus as profit. These tax farms were an oppressive means of raising taxation and guaranteed that less than the nation's full potential revenue reached the government. Once revenues were raised there were special bureaux and autonomous courts to deal with their administration, which created top heavy machinery run by vested interests immune from direct control. The second inefficiency was that taxation was levied in inverse proportion to subjects' ability to pay. The privileged orders (largely the nobility and clergy) liked to make out that they were exempt from all taxation, but in fact they paid around 10 per cent in taxes. Against this the peasantry might have to pay 50 per cent of their income often in taxes to the privileged orders. The government was conscious of the threat this posed of civil disorder if the burden of taxation grew insurmountable and made people destitute, but was unable to avoid it as witnessed by the English traveller Arthur Young, meeting people who told him that just this fate had overwhelmed them, This meant that it was not feasible to raise existing taxes beyond the point they had reached in the 1780s. This need to change the nature of taxation itself leads to the third and most fundamental disincentive to action. The traditional taxes under the heading 'ordinary' above all the basic personal tax known as the taille had been levied since time immemorial and had been ratified by the States General. So long as their form remained unchanged they could not be questioned or debated in the courts, but this then meant that the government could effectively never up-date them fox as long as it chose not to summon the States General. In the meantime the necessary extra revenue to cover commitments not taken into account in 1614, when the States General had last met, had to be raised by stop-gaps and temporary expedients which did require approval ('registration') by the law courts. This registration invited the kind of debate about the regime's financial management, and the policies being pursued by the ministry of the day, which the crown wished to avoid. Under Louis XVI the parlements took a very hard line on public expenditure and had a keen appreciation of 'Parkinson's Law' that government expenditure will rise to meet income and resolved to nip the process in the bud by never willingly agreeing to any increase in government revenue. It was easier for the government to raise a loan than to steer a new tax through the courts, and politically easier still to try to manage without the money. Why, though, did France not put her own house in order? With an absolute monarchy, a tamed nobility, and an envied reputation for stability France ought to have been able to implement any policy the king chose. In the event the king either chose not to take up

apparently obvious options, or found that his chosen policies were too difficult or. too unpalatable to implement effectively, because the crown had long realised that every option for a solution to its financial troubles led to a dismantling of the type of monarchy which the House of Bourbon had worked so hard to create. The first step in acting on the problem the admission that it existed violated the Bourbon principle that all political matters were the exclusive prerogative of the crown and its ministers and that no one else need concern themselves with the detail. For this reason secrecy and complacency were public policy until 1786. The bedrock of the Bourbon monarchy was that it ruled without consulting any of the institutions which had evolved in the medieval and Renaissance periods to limit the power of the crown. Where an institution could not be ignored or allowed to lapse, a parallel and more amenable one was set up. Thus the States General were not summoned after 1614, while, to illustrate the other policy, the provincial governors were encouraged to stay at Court to be replaced as the crown's representative in the provinces by the appointed lntendants. The one exception to this general approach was the legal corporations, above all the parlements whose members owned their offices as private property. This refuge behind the protection of private property enabled the parlements to become the focus of an effective opposition to the crown. The crown, however, certainly did have the power to impose its will on the corporations, as Maupeou had shown in 1771 by suspending antigovernment magistrates and running the courts with appointees. In terms of fiscal reform, such power would have taken the form of decreeing that a new basic tax raised without exemptions and graduated. to match incomes would replace thetaille , but this would have been tantamount to declaring the States General abolished and the views of the parlements and other corporations of no account. Such action would have been seen as 'despotism', and stripped from Bourbon rule the illusion of constitutionality. Not only 'did the monarchy consciously strive to preserve the illusion that it ruled with the consent of its subjects, but there was also doubt if it could manage to rule on any other basis without becoming a military dictatorship. The monarchy ruled with moral authority backed by the Church all the obvious options for tackling the deficit would have robbed it of that authority. The alternative to 'despotism' would be to surrender prerogatives to an institution which would possess the authority to implement constitutional reform, in other words to set up a Parliamentary regime along British lines. The only institution which could have fulfilled this role was the States General, but to summon them would constitute such a loss of face for the monarchy that it was the option of last resort. Nonetheless, Calonne's public revelation of the deficit in 1786 did force the government's hand into having to seek some form of institutional authority to solve the crisis. French politics in 1786-9 were the story of the regime seeking every expedient to gain this institutional authority without having to admit that the States General had prerogatives stronger than the crown's and should run public finance as did the British Parliament. The first expedient was to summon the Assembly of Notables, a body which had last met in the period after the monarchy had dispensed with the States General in the early seventeenth century. Although the notables gave their support to many useful reforms, and sanctioned a new initiative in provincial administration, they flinched from assuming the constitutional authority of ratifying new ordinary taxation. The attempt, next, to seek a solution to the financial crisis through provincial reform had been suggested by reformers from 1750

onwards. It had been official government policy under Turgot and Necker, but had never been pursued resolutely enough to bear fruit. It had three strands. First, the administration of finances could be made more efficient and accountable if restructured to bring it closer to the point of collection. Second, there would be a bargain between tax payers and government that higher revenues could be raised if decisions on how to levy taxes and on some of the priorities for expenditure could be devolved. Third, and the point at which the government's nerve always failed, the constitutional authority of the States General could be fragmented into manageable provincial parcels so that new taxes could be ratified without the crown appearing to lose any prerogatives. The indefinite rescheduling of loans witnessed by Jefferson cut short the government's option of experimenting with a solution in the provinces, and forced on the regime the necessity of convoking the States General. Even at this eleventh hour the government sought to rescue the crown's authority and prerogatives. First it suggested an enlarged representation of the Third Estate (the commoners), who would show their gratitude by counter-balancing the power of the privileged orders, and then, second, it suggested that the States could be forced to ratify a package of reforms and austerity measures without debate. The first measure aroused the hostility of the corporations and the nobility; it served to spark off furious debate and began to engender the atmosphere of suspicion and distrust which led eventually to the Oath of the Tennis Court and the break up of the constitution of the ancien rgime . The second was unrealistic and served only to discredit the government. In the event the States General met; all the worst fears of the government were realised, and at the same time law and order broke down simultaneously in the capital and in the countryside. The Revolution followed, proving that the cure had been worse than the disease so far as the ancien rgime was concerned. France as a nation survived the financial crisis because the Revolution allowed the new government to seize vast domestic assets and restructure the whole administration. The subsequent Revolutionary wars were financed by seizing foreign assets in conquered countries including the very banks in Holland and Geneva to which much of theancien rgime 's debt had been owed. Many countries today stand where France stood in 1786, and they are having to weigh up the same problem: will the cure to insolvency so threaten or alter their regimes as to be worse than the disease?