The French Revolution has always been seen, quite rightly, as a period of insurrection in the face of the inequalities that remained. But these insurrections and social movements have often been analysed more than the inequalities themselves. One major phenomenon is often forgotten: the role of debt in the birth of the Revolution of 1789 and the bloody decade that followed. This period marked the end of a long economic cycle.
In the 18th century, France was one of the world’s major military, economic, cultural and demographic powers. This position led to a number of conflicts, including the War of the Austrian Succession in 1740, the Seven Years’ War in 1756 and the American War of Independence in 1775. Although different, they all led to political and sometimes financial crises, but above all to fiscal reforms (tax increases, creation of new taxes, etc.) and an increase in public debt. As is the case today, Louis XV (1715-1774) and then Louis XVI (1774-1792) used debt to absolve themselves of their actions and avoid suffering the consequences.
These debts, which took the form of metallic currency (gold and silver), were contracted with foreign creditors at high rates. It was not until the creation of the Caisse d’escompte (the forerunner of the Banque de France) in 1767 that interest rates were reduced by buying back public loans. But this new institution was not a success, as the State continued to run up debts and these loans were expensive. It was dissolved two years after its creation, then liquidated a few years later.
At the same time, prices continued to rise throughout the second half of the 18th century. As gold and silver coins became scarce, the French, most of whom had no bank accounts, borrowed and saved on a massive scale to meet their expenses and ensure their future. This led to latent inflation over several decades.
Faced with this situation, intellectuals sought to increase the circulation of money and limit inflation, but no solution was found. New schools of economic thought were born and a division, which we still see today, emerged between the liberal and interventionist movements. The former, represented by Turgot, supported reducing the debt and deficit by cutting public spending, while the latter wanted more state support. From 1776 onwards, interventionism dominated under the policies of Necker, a fervent supporter of this model and successively Director of the Treasury and then Minister of Finance.
Over the years, the French economy gradually began to resemble a ‘war economy’, even in times of peace. At the dawn of the French Revolution, almost 30% of the State budget was devoted to the army, 20% to public spending and the remaining 50% to interest on the debt alone. The deficit is growing, and the public debt continues to rise, representing 80% of the wealth produced (the equivalent of GDP). The wealth of the nation is held almost exclusively by the richest 10%.
Instead of thinking about reforming the monetary system, and while inequalities remained very high, new tax increases were introduced. The majority of French people found themselves even more crushed by the tax burden, while the aristocratic minority benefited from exemptions. Inequalities widened even further, especially as prices continued to rise and poor harvests due to drought led to a violent increase in the price of bread. With their stomachs empty, the people took to the streets to demand a fair tax system, and in particular that the wealthiest should contribute to the tax effort. In 1788, riots and insurrections broke out. These were the beginnings of the French Revolution.
During this period, a man of letters named Linguet, aware of the close link between the financial system and the emerging social conflicts, proposed cancelling part of the debt. But his solution was violently contested and he was guillotined during the Terror. Without realising it, he was advocating a solution that was adopted a few years later, after a bloody decade.
The year 1789 began. In January, the enraged French demanded a tax cut as the first measure in the cahiers de doléances. But the ministers were powerless in the face of these events, which were beyond their control. Debt servicing continued to increase and the State found itself in the throes of bankruptcy. The Estates General were convened to settle the matter. The situation worsened. On 14 July, 900 people attack the Bastille prison to seize new weapons.
Against this backdrop, Finance Minister Necker called for the creation of an exceptional tax. Mirabeau, considered to be ‘close’ to the French, supported this proposal and declared in September 1789 in a speech that became famous: ‘Two centuries of depredations and brigandage have dug the abyss into which the kingdom is about to sink. This appalling abyss must be filled! Here is a list of French property owners. Choose from among the richest, so as to sacrifice fewer citizens. Come on, these two thousand notables have enough to make up the deficit. But today the bankruptcy, the hideous bankruptcy is here; it threatens to consume you, your property, your honour.’
He was heavily in debt, and a month later the king secretly gave him 200,000 francs, then several thousand every month, to vote in favour of the interests of the nobility…
In the autumn of 1789, a climate of terror reigned in France. The financial crisis continued to worsen and new riots broke out. Necker thought that galloping inflation would solve the public debt and calm the situation. Faced with a shortage of gold and silver, however, he launched a loan of 30 million pounds at very high interest rates, which were now set by the market following a reform.
A year later, the Constituent Assembly decided to introduce what had been abandoned since the failure of the Law system in 1720: paper money known as assignats. This currency was created in large quantities from property confiscated from the nobility and the clergy. In 1790, over a billion pounds of interest-bearing assignats were printed. The State then issued more in an attempt to pay off its debt and to finance the war against Austria in 1792, instigated by the Girondins.
But many assignats were counterfeit, some falsified, and many speculated on their value. In the political and social turmoil, confidence was lost and the new currency depreciated rapidly. In the same year, 1793, the country experienced an episode of hyperinflation and King Louis XVI was guillotined on the orders of the Montagnards (including Robespierre, Danton and Marat). New insurrections broke out under the Terror regime. They now involved all categories of French people, not just the wealthy bourgeoisie.
France was unable to emerge from the financial and monetary crisis. Some people began to refuse to accept assignats. Confidence was definitively broken, and the banknote printing press was burnt on the famous Place Vendôme in February 1796.
When the Directoire was established at the end of 1795, the country remained in crisis. But this new regime of five Directors sought to wipe the slate clean. The reforms initiated by the Thermidorians continued.
In 1797, once the insurrections were over and hundreds of thousands of people had died or disappeared, almost 70% of the public debt was cancelled. The Minister of Finance, Dominique Ramel, declared: ‘I am erasing the consequences of the mistakes of the past to give the State the means for its future.
When Napoleon Bonaparte was elected under the dictatorial power of the Consulate, the French economy was in the doldrums: production was slowing down and consumption remained extremely low. Gold and silver coins were reintroduced under a new currency, the franc. Napoleon created the Banque de France in 1800 following a proposal by the Swiss financier Perregaux, who had made his fortune speculating on assignats. At the time, the central bank was privately owned by Napoleon himself. Based on the Swedish and English models, it was designed to distribute liquidity to banks in the event of a crisis.
At the beginning of the 19th century, after a decade of revolution, confidence was more or less restored. Trade resumed, the currency stabilised and a new, long cycle began.
This return to history invites us to take a step back. There are many similarities between today and the situation in France at the end of the 18th century:
- France, like other countries around the world, has been racking up debt for several decades, particularly since the 2008 financial crisis. This means that the risk is passed on to future generations.
- Inequality is at an all-time high, as it was at the end of the 18th century. In France, the richest 10% now hold more than half the country’s wealth. (The situation is even more worrying in other countries).
- Unconventional tools are used to reduce government interest rates What we now call ‘quantitative easing’ already existed in 1767… from the Caisse d’escompte.
- Over the last two decades, prices have risen moderately (although housing prices have risen sharply). And from April 2021 onwards, inflation has continued to rise, particularly food prices, as in 1788.
- Today, as in 1789, the three main items in the French State budget include interest on the debt and the army budget. Public spending is also restricted.
- This time, the disaster of hyperinflation has been avoided thanks to the action of central banks. But the ECB is limiting its action in an attempt to reduce debt through inflation (a solution advocated during the bankruptcy of 1789).
Despite these similarities, there is one major difference between the monetary system of the 18th century and the current one: since money is no longer limited by a physical limit, the contemporary model allows people to go further into debt, thereby delaying the end of the current cycle. This has significant indirect effects (rising inequalities of wealth, social and societal tensions, etc.).
While the spectre of a new French Revolution and social unrest (such as the Yellow Vests) can never be ruled out, it remains more complicated in this age of hyper-digitalisation.
In the aftermath of the health crisis, when public debt rose sharply, several think tanks proposed cancelling part of the debt. One idea was to cancel the debt bought up by the central bank between 2020 and 2022, which the State would have to repay (which ultimately amounts to the State repaying itself, since the central bank is a public institution…
In the case of debt cancellation or relief, however, these repayments would be reinvested and not ‘eliminated’). But this proposal went unheeded after being deemed ‘unthinkable’ by central bankers. Yet it was a solution used on several occasions, both 3000 years ago in Mesopotamia and more recently by various countries (United States, Mexico, Venezuela, etc.). Germany cancelled two debts in the last century: one in 1918 and the other in 1953, when 60% of its debt was cancelled. However, these two operations, like the French cancellation in 1797, took place after a terrible war… Perhaps it will be the same this time. Karl Marx wrote: ‘History repeats itself. The first time as tragedy, the second time as farce.
As the conflict in Ukraine persists and social tensions mount in the countries concerned, the solution of cancelling part of the debt remains more topical than ever. It would prevent new social consequences being added to the current disorders (geopolitical conflicts, inequalities, etc.) and would relieve the burden on public finances. However, this solution would only have long-term effects if a new monetary system were to be introduced, one that eliminates cycles. This paradigm would first require monetary policy to be decided democratically.
Money creation will then have to be issued in limited quantities, in line with a growth target adjusted to real needs. New innovative solutions will have to be used to further reduce government debt without affecting the taxpayer. Debt-free money plays this role to the full. We then need to ensure that money circulates freely to avoid excessive savings (melting money makes this possible). Finally, politically, the long term should always be given priority over the short term. This soft landing would lay the foundations for a new era, in which the challenges of tomorrow would be met by the policies of today.