Macroeconomic Features of the French Revolution

The paper reads the French Revolution’s monetary history as a “procession of regimes in which the ‘if’ parts of the three types of monetary models are approximately fulfilled,” using unpleasant-arithmetic and sustainable-plans reasoning to organize the fiscal narrative and three distinct money-demand theories – tax-backed/asset-backed, legal-restrictions, and classical (Cagan) hyperinflation – as lenses for three successive phases of the assignat (pp. 474, 477). The authors state they use these theories “first to shape our descriptions and second to interpret how the revolutionaries explained their actions,” reflecting “the rational expectations hypothesis that parts of a time-series model are used by the people within the model to guide their forecasts and decisions” (p. 477) – that is, the deputies of the National Assembly and Convention explicitly debated backing, forced currency, and deficit monetization in terms recognizable from these same theories.

Between 1688 and 1789 the ratio of debt service to fiscal revenues rose from very low levels to about 60 percent in both Britain and France, but Britain achieved this while raising taxes enough after each war to fund the resulting debt, whereas France instead “acted on the numerator (debt service)” through repeated default (pp. 477-78, fig. 1). Britain’s Bank of England (chartered 1694) and its parliamentary system of tying each loan to a dedicated tax gave British public creditors a credible commitment mechanism, so Britain “did not default on its debt during the 100 years following the Glorious Revolution of 1688” (pp. 478-79). France, by contrast, suffered three sharp episodes of default/reimbursement suspension – 1713-15 (following the Spanish Succession War and John Law’s System), 1759-63 (Seven Years’ War), and 1770-73 (the Terray ministry) – each restoring the debt-service ratio to a lower level only temporarily (p. 480). By 1788, France’s debt-service-to-revenue ratio again approached the levels that had historically preceded default, constituting the immediate “unpleasant arithmetic” that produced the fiscal crisis of 1788 (pp. 480-82, 490-91).

The authors argue that theories of dynamic Ramsey (state-contingent) taxation counsel “caution about condemning France’s recurrent defaults or praising Britain’s abstinence,” since optimal tax-smoothing arrangements can call for state-contingent debt repudiation in bad states, and it is not obvious the timing of French defaults matches “wars’” onsets as those theories would predict (p. 482). They also invoke Chari and Kehoe’s (1990) concept of a “sustainable” government plan – one that “enlists the self-interest of each group to implement its part when the time or contingency comes for it to act” – to argue that French Old Regime fiscal institutions, including the venal-office system and the Parlements’ power to resist new taxes, were not simply inefficient relics but self-enforcing arrangements that made reform difficult precisely because they worked as designed (p. 476, 491). The paper’s own gloss is that French ministers “understood arithmetic and compound interest” but “faced different constraints on their actions,” reflecting “a deficient ‘commitment technology’” rather than incompetence (p. 490).

More than 50,000 venal officers owned judicial, police, administrative, and fiscal offices whose implicit “wages represented the interest” on the price paid to acquire them, making the finances of all offices “a component of the public debt that could not be altered or diminished without major institutional changes” (pp. 483-84). Indirect taxes were farmed to syndicates (the Fermes Générales, managing 35 percent of revenues by 1789) or collected through salaried régies (25 percent), while direct taxes such as the taille were collected unevenly across provinces, with recently annexed territories negotiating tax dues through provincial Estates (pp. 484-85). The Parlements, courts that registered royal edicts and could issue “remonstrances” against them, gave France “the appearance of an absolute monarchy” overlaid with institutions that “effectively constrained centralized authority” (pp. 482-83); the regent’s 1715 decision not to make the Estates General permanent, for fear of unleashing “uncontrollable forces,” left this constrained-monarchy structure in place until 1789 (pp. 489-90).

By 1788 the “run-up of debt and interest payments” driven by unpleasant arithmetic left the government facing a stark choice between repeating the 1770-72 pattern of abolishing the Parlements, raising taxes, and defaulting, or seeking “wide national consensus to undertake reform on a larger scale”; Louis XVI chose the latter, summoning “a dormant institution, the Estates General” (pp. 474, 491). The paper notes that market prices for government debt in 1788-89 did not reflect the sharp anticipation of default seen before Terray’s 1770 measures, suggesting emerging confidence that reform, not default, was the government’s chosen path (p. 492), a reading corroborated by Necker’s own May 5, 1789 address crediting the king’s “virtues” – rather than “overwhelming financial distress” – for the Estates General’s convocation (pp. 492-93).

Following a motion by Talleyrand placing church assets “at the Nation’s disposal,” Necker and the Constituants tried to solve the resulting “privatization problem” together with the debt problem by creating the assignat, a note issued against and redeemable at auctions of the confiscated National Estates, then burned once received in payment (pp. 495-96). Necker’s original plan also proposed a “National Bank,” modeled on the Bank of England, but the Assembly split the plan: deputies accepted the assignat while rejecting the Bank, fearing – in La Rochefoucauld’s words – that a bank’s loans to the state “would force the government to show regards it would not have to display toward a multitude of individual enterprises” (p. 496). By August 1790 the Assembly had committed to using proceeds from selling roughly 2,400 millions of Estates to retire an “exactable debt” of about 2,000 millions, eliminating the associated interest payments outright (p. 496).

The Assembly initially favored large-denomination “bonds” (200-1,000 livres) to keep the land-for-debt exchange confined to “financially sophisticated people,” over advocates of low-denomination “money” who wanted to spread the exchange widely and bind ordinary citizens to the Revolution (pp. 496-97). Per the mechanism analyzed by Bryant and Wallace (1979, 1984), the large positive nominal interest rates the government initially paid created a “riskless” arbitrage for private intermediaries to issue small-denomination notes against the government’s large-denomination debt: by July 1792, 75 percent of 500-2,000 livre notes had been redeemed or exchanged, while 98 percent of 50-livre notes remained in circulation, and hundreds of private and municipal banks sprang up issuing their own low-denomination “billets de confiance” (pp. 500-501). The Assembly repeatedly chased this competition downward – 5-livre notes in mid-1791, notes as small as 0.5 livre by December 1791 – before finally banning private note issue and coinage outright once its own small assignats appeared in August 1792 (pp. 501-2).

From January 1791 to mid-1793, real balances of assignats grew steadily while inflation remained moderate – the price level rose only “gently” through December 1792, when the assignat traded 30 percent below par against gold – consistent with the predictions of tax-backed/real-bills money theory (pp. 500, 504). Land sales, the scheme’s fiscal foundation, proceeded briskly: by November 1791 over 1,500 millions of National Estates had been auctioned, at capitalization rates of 3-3.5 percent matching prevailing rental-property yields, “limit[ing]” overbidding driven by inflation expectations (p. 503). As Smith’s (1776) analysis of currency substitution predicted, however, the low-denomination assignat increasingly displaced specie, which left the country in response to the exchange-rate premia shown in the paper’s foreign-exchange futures data (p. 502).

The declaration of war “proved to be a turning point”: debt payments were suspended indefinitely, and the assignat was “converted from its initial purpose to become the main means of financing the war,” severing note issue from the land-sale plan and turning the tax-backed scheme into a fiat-money scheme (p. 503). Real balances had already depreciated 25 percent and the currency 40 percent against gold by the war’s start; from January to summer 1793, money growth accelerated to almost 9 percent per month and prices rose accordingly, with contemporaries like Deputy Laffon-Ladebat explicitly attributing the assignat’s depreciation not to “the quantity emitted” but to “distrust” (pp. 503-4). By summer 1793, military defeat, civil war, and depleted fiscal resources produced what the paper calls “signs of an incipient hyperinflation: falling real balances and rising inflation” – the crisis that precipitated the Terror’s legal restrictions (p. 504).

To arrest the “flight from currency” threatening its inflation-tax base, the Convention imposed a “guillotine-backed currency” regime: it became illegal to hold commodities, private securities, specie, precious metals, or foreign exchange, markets in these assets were closed, and the laws on the Maximum fixed prices and wages, with violations of assignat-parity punishable by trial within 48 hours and, in a few dozen cases, death (pp. 504-6). Consistent with legal-restrictions theory’s prediction that forced currency-holding can suppress the inflation that a given quantity of new issues would otherwise generate, real balances rose and the price level fell during the Terror even as the government raised extraordinary new issues – of some 4,500 millions in real spending from April 1792 to August 1795, over 3,700 millions were financed through money creation (pp. 500, 506-7).

No – the paper stresses that the Terror combined harsh currency enforcement with unusual care for existing debt claims: outstanding bonds were converted into a single nontransferable perpetual rent in August 1793, protecting them from repayment in depreciated paper, and the May 1794 conversion of life annuities saw Cambon commission “impressive mathematical treatments” to compute fair, age-specific conversion rates rather than simply defaulting on advantageously priced Genevan-held annuities (pp. 506-7). Government bond prices, available until June 1793, “remained high, suggesting that a major default was not deemed likely, even while the political situation deteriorated” (p. 506), a pattern the authors read as evidence that Terror-era policy, however repressive toward currency holders, continued to honor the state’s debt commitments inherited from the Old Regime and the early Revolution.

With victory at Fleurus in June 1794 removing the wartime rationale for repression, the Jacobins fell in July 1794 and their legal restrictions became “unenforceable” and were formally repealed by January 1795; as restrictions collapsed, demand for the assignat – now mocked as “Parisian money” – fell sharply, and by August 1794 the inflation rate “suddenly accelerated to reach 60 percent per month” (pp. 507-9). By Cagan’s (1956) own definition – inflation exceeding 50 percent per month – the authors date the assignat’s hyperinflation to May-December 1795 (p. 500, n. 37); trade in specie and commodities, financial markets, and foreign exchange all reopened as legal restrictions lapsed, and police reports and contemporary anecdotes (a Swiss visitor buying up Parisian goods with gold) corroborate an inverse real balance-inflation relationship “familiar to us now from twentieth-century hyperinflations” that appears in none of the assignat’s earlier phases (pp. 499, 508-9).

The Directory’s rescue attempts all failed: a December 1795 “Forced Loan,” a mandatory open-market operation requiring taxpayers to surrender assignats for tax-credit coupons, aimed to collect 600 millions in real terms within ten weeks but raised only 50 millions in five months because of weak tax-collection capacity, and the assignat’s price barely moved (p. 509). The government then retired the assignat entirely in February 1796 and retried the tax-backed method with a new currency, the mandat, issued against a fresh tranche of National Estates – but the mandat fell from 35 percent of face value in March 1796 to 6 percent by summer and was demonetized, alongside the assignat, on February 4, 1797, “ending 7 years away from a metallic standard” (pp. 509-10). With paper money exhausted, the government paid debt interest in heavily discounted IOUs, and the elected government’s 1797 “two-thirds bankruptcy” (the 18 Fructidor coup) cut the public debt by two-thirds, after which France returned to a specie standard for the remainder of the Napoleonic Wars (pp. 511-12).

Citing Hawtrey (1919), the authors note that specie fleeing France in the early 1790s “fueled an expansion of credit and inflation” in England, and that the later 1795 reversal of specie flows – as the hyperinflation drew metal back into France – contributed to the drain on the Bank of England that prompted Britain’s own 1797 suspension of convertibility, just three weeks after France’s return to specie, making it “ironic that Britain should have stumbled on a temporarily inconvertible currency as a successful means of finance whereas France deliberately created a new system of currency but failed to sustain it except by the Terror” (pp. 512-13). Napoleon’s fiscal order reversed the Revolution’s ineffectual reliance on local tax administration, reasserting central control and expanding indirect taxation to finally push per capita revenues back to prerevolutionary levels; the budget was balanced in 1802, “25 years after Turgot,” and remained so “until the Russian campaign of 1812,” even as the government’s disdain for capital markets left “intact the same ‘sovereign borrowing’ problem that Necker had so sharply characterized in 1784” (pp. 513-14).