After being defeated at Waterloo, Napoleon Bonaparte was forced to give up control of France. The treaty that finally ended the long Napoleonic Wars nonetheless imposed on the defeated country responsibility for paying a large indemnity, the first of two in 19th century France. The public finances were in shambles; so, meeting such payments would be difficult in any era, let alone in one when sovereign bond markets were largely undeveloped. France would finally succeed in raising a loan, partly thanks to the involvement of one of the most well-respected banks at the time. This allowed the country to restore its place in Europe and was a landmark moment for the continent’s bond market.
Waterloo
When Napoleon Bonaparte abdicated and the old monarchy was restored in April 1814, the victorious coalition that defeated the emperor withdrew from France quickly and reached a lenient peace with the country. However, this restoration was quickly interrupted. Napoleon escaped from his exile on the island of Elba in March 1815 and returned to France, gathering enough support to take control of the country and prompt the restored King Louis XVIII to flee abroad. The emperor’s final defeat at Waterloo ended French remobilization and saw Louis XVIII returned to the throne.
The ‘Second Restoration’ meant that France was once again invaded and occupied. The country had already been greatly indebted and depleted by the requisitions demanded by its own army and now the armies of the coalition were in search of provisions and spoils. The British had subsidized the armies of its coalition partners but it was decided that France would pick up that burden from here. After all, France had imposed its own payment requirements on countries it had defeated and on its client states under Napoleon’s rule.
The Treaty
Though the Allied countries had differing views, it was quickly apparent that the second peace would not be so easy on France as the first. During the negotiations, the Prussians were more demanding while Britain and Austria were less antagonistic. Both Britain’s Viscount Castlereagh and Austria’s Prince Metternich believed France useful to maintaining a balance of power in Europe but they were not in favor of letting them off easy either. So, Napoleon’s second attempt at power led to a less generous treaty. Nonetheless, the Allies still promised to restore France to a respectable position and protect its restored monarchy from domestic revolutions should it pay certain reparations, creating an incentive for good behavior.
The Second Treaty of Paris was signed in November 1815. Reparation payments under the treaty were set at 700 million francs after an initial Allied position of 800 million francs, already far lower than a 1.2-billion-franc sum proposed by the Prussians. The indemnity would be paid in fifteen installments over five years. The 700 million francs would not bear interest unless unpaid, in which case any arrears would accrue interest at 5% per year.
The indemnity was in addition to a requirement that the French state pay the Allied army occupying its country, also for five years. Add to this the responsibility for wartime damages inflicted on Allied nationals in the form of requisitions and, thanks to the lobbying of creditors, defaults on debt. These were ultimately settled at 320 million francs. To guarantee part of these obligations, the French state gave the recipients of the reparations an annuity of 7 million francs a year, an annuity which the Allies could then sell for perhaps 140 million francs in the event of nonpayment on the indemnity.
The responsibilities under the treaty did not end there. The French were even required to establish a fund to finance the construction or reconstruction of military fortifications in its neighboring countries. Domestically, the French government also sought to compensate the domestic victims of its earlier revolutions and the plantation owners in its former colony of Haiti, which had since become independent.
Rentes
Louis XVIII, his Prime Minister the Duke of Richelieu, and the finance minister Baron Joseph-Dominique Louis were each determined to meet the indemnity payments as well as honor other indebtedness incurred by France and due to citizens and foreigners alike. However, the treasury was empty. Further, there was the risk that the increase in taxes and cuts in expenditures this would mean would increase popular support for Napoleon, as it had prior to his 1815 return. But now it was Louis XVIII who was returned and his government was nevertheless decided on its course after the Second Restoration.
Sovereign bonds, called rentes, had already been issued to cover some of the costs imposed on France with the end of the Napoleonic Wars, specifically the settlement of previously defaulted debts. Yields on rentes were high amidst the political and economic instability, above 8%. For example, an issue of 5% rentes in 1815 were sold at 51.23% of face value, for an actual yield closer to 9.8%. French short-term borrowings yielded 12%. The country was not deemed as creditworthy as a country like Britain, making financing indemnity payments a very expensive proposition.
Bankers
France would obviously benefit from a loan but when they are needed most, loans are difficult to be had. The government worked with bankers in London and Hamburg to obtain a small loan of 70 million francs in 1816 but at this point the French parliament did not seem committed to honoring its obligations, making borrowing expense and large loans unattractive. The government even missed an indemnity payment in November 1816. Work would need to be done before making new overtures to the financiers of Europe.
The king dissolved the conservative ultra-monarchist Parliament and the electorate sent a more liberal one in return, one that was actually more supportive of the king’s aims with respect to the indemnity. Despite the strain involved, honoring the treaty and its required payments was still regarded as crucial to restoring France’s position in Europe. Obviously, honoring such a burden was easier said than done in a country that had defaulted five times in the 18th century.
Conditions seemed to improve from here though. The British bank Barings and their Dutch associates, Hope & Company, became more interested in underwriting a large French loan, a prospect that Barings and others had previously dismissed as impossible. The Duke of Wellington, the victor at Waterloo, brokered the loan. Alexander Baring went to France in January 1817 to observe conditions there for himself; by February, he secured the opportunity to raise a loan for France to the relief of its government. That a major British bank would underwrite a large French loan was impressive and received considerable attention from Allied governments and the informed public.
The first 100-million-franc tranche of this 315-million-franc loan was sold at 57.75% of face value for a yield of just over 8.6%. Barings bought the issue at 55.0%, keeping the difference for itself. The bankers Baguenault, Delessert, Greffulhe, Hottinguer and Lafitte were hired to form part of the bond-selling syndicate but Barings continued to bear the risk should the rentes go unsold. In the end, French investors bought nearly 58% of the issue, despite observers regarding the country too impoverished by its dismal recent history to supply such capital. Much of the rest went to investors in Britain and the Netherlands, which possessed the most developed capital markets of the era.
By July 1817, the rente had appreciated to 68% of face value. The environment was favorable to new loans, which were placed in 1817 and 1818. By now, the confidence the political changes and the participation of Barings and Hope had provided meant borrowing costs could be lower and the interest of banks higher. By 1818 though, the government was placing its own loans into the market without the banks and a massive 292-million-franc issue in May 1818 was oversubscribed.
Debts
In the end, the French did reasonably well, and better than many expected, in meeting the indemnity payments. This was not preordained. The total cost of the 700-million-franc indemnity and other reparations came to comprise roughly 20% of French GDP at the time or more or less two years of tax revenues. Budget surpluses provided only a minority part of the required funds. Rather, borrowing secured the amounts needed to meet the final indemnity payments.
By 1821, the French government was indebted to the tune of 4.17 billion francs, as compared to ‘only’ 1.27 billion in 1814. Even that year, it was also still making payments in compensation for goods requisitioned during the wars and this consumed 13% of the state budget in 1821. Unlike in the case of German reparations a century later, France was quite accepting of its financial burden. Consequently, trust in its government hadn’t been stronger in a generation or more and over time, France came to be seen as one of the most creditworthy countries in the world, rather than among the least.
Lesson
Bankers, especially Barings and Hope, shaped the course of history. The loans they underwrote smoothed over reparations payments and essentially allowed them to be paid over a longer period of time, avoiding a diplomatic crisis, not to mention an economic and financial crisis, triggered by a French default. However, the Barings and Hope loan did more than give the French a chance to restore their public credit. The loan was among the first of its kind and globalized the financial markets. Massive loans syndicated in more than one country were rare in 18th century Europe but they would become much more common going forward.
More from the Tontine Coffee-House
Read about the monetary effects of Germany’s post-war malaise. Also, learn about Barings’ part in financing America’s purchase of Louisiana from Napoleon’s France and the bank’s role in the Panic of 1890. Lastly, consider subscribing to this blog’s newsletter here.
Further Reading
1. De Graaf, Beatrice. “Chapter 7 – The Price of Security.” Fighting Terror after Napoleon: How Europe Became Secure after 1815, Cambridge University Press, Cambridge, United Kingdom, 2020, pp. 302–356.
2. Gauchet, Thomas, and Christine Haynes. “Restoring Credit in Post-Napoleonic France: Settling French War Claims.” War in History, vol. 27, no. 3, Feb. 2019, pp. 433–455.
3. Kindleberger, Charles P. “The Baring Indemnity Loans.” A Financial History of Western Europe, George Allen & Unwin, London, 1984, pp. 219–220.
4. White, Eugene N. “Making the French Pay: The Costs and Consequences of the Napoleonic Reparations.” European Review of Economic History, vol. 5, no. 3, Dec. 2001, pp. 337–365.
