Revolution Rentes

Throughout the 18th century, French public finances teetered on the brink. The state then found itself in deep financial ruin within a few years of the beginning of the French Revolution, culminating in a default on the debt in 1796-97. With this, the outlook for the next century would hardly seem promising. The 19th century would witness French defeat in two major wars (in 1815 and 1870) and three large revolutions (in 1830, 1848, and 1871). Yet, the public finances were now on much more stable footing and there was no state bankruptcy as there was in the 1790s. The market prices of France’s publicly traded 5% rentes do much of the heavy lifting in telling this story.

Grand-Livre de la Dette Publique

In 1793, the Grand-Livre de la Dette Publique (or Great Book of the Public Debt) was created. The record listed all the loans that comprised the public debt of France under their various names. Amidst the turmoil of the French Revolution, this was a bit of progress. The Grand-Livre de la Dette Publique acknowledged the legality of a creditor’s claim and allowed for an easier tracking of the state’s total indebtedness. It brought a transparency to French public finances which had been missing for most of the 18th century. This may have encouraged the consolidation of the state debt, a project which was also a product of the revolution.

5% Rentes

The French debt would be consolidated into the 5% rentes. These ‘rentes’ were annuities that paid interest of 5% of face value every year in perpetuity. The government could redeem them at any point but had no obligation to do so. The value of 5% rentes was destroyed by the instability of the French Revolution. The government was already in financial ruin and the revolution only further narrowed the tax base and made new borrowing more difficult. Add to this the cost of war and the inflation caused by over-issuance of a paper money, called the assignats. Inflation reduced the value of interest payments as one hundred francs in these assignat notes in 1789 would be worth less than five centimes by 1796.

Further, France’s government defaulted on its debts in 1796. There had already been two earlier French defaults in the 18th century, in 1721 and 1770. Then, in September 1797, with the Banqueroute des Deux Tiers, investors’ bonds were written down by two-thirds and debts to émigrés and convicts were cancelled altogether. The balance was consolidated into new 5% rentes. This maneuver reduced interest costs but the government still failed to make full payments in precious metal coin or bullion.

So, in 1797, the market value of 5% rentes reached a low of 6.125% of their face value. This was equivalent to an annual yield of 82% on one’s investment, simply the ratio of the 5% interest to the 6.125% market price. Simply put, so little was the confidence that payments would be made that someone could have purchased an annuity supposed to pay five francs a year for just six and one-eighth francs. However, there was good reason for the pessimism. Even after the debt restructuring, the government was still in dire straits. In 1799, the French state even resorted to a forced loan to cover its expenses.

Napoleonic Reforms and Recovery

The end of the French Revolution, and the beginning of France’s financial recovery, arguably began with Napoleon’s coup d’état of the 18th Brumaire in 1799. Napoleon, observing how debts had ruined the old monarchical regime and the earlier revolutionary governments, championed fiscal restraint. Even at its peak, borrowing covered just 10% of France’s costs in fighting the Napoleonic Wars.

Even before Napoleon’s coup, the price of rentes had recovered a little from the lows of 1797. By 1799, the average price of 5% rentes was 14.75 per 100 francs of face value. That year, a fund was established to gradually repay the debt, the Caisse d’Amortissement. Through the caisse, future tax collections would go towards redeeming the bonds or repurchasing them, supporting market prices.

Napoleon introduced many reforms. In 1800, taxation was reorganized and increased. The Banque de France was created in 1800 and the worthless paper notes, the assignats, were withdrawn from circulation, replaced with metal coins. Payments on the debt in precious metal specie resumed that same year. So, in 1800, prices for rentes reached a new high of 44% of face value, for a yield of 11.36%. By 1801, the market value of the 5% rentes had recovered all the way to 68% of face value, meaning they effectively yielded ‘only’ 7.35%.

This was a strong recovery considering the dire state of affairs just three or four years earlier. Yet, there was still room for improvement and the recovery continued. Prices reached another high of 90 in 1807. All this occurred during a period of muted debt growth. The public debt of France increased from forty million francs in 1799 to only sixty-three million francs in 1814, remarkable considering these were years of large-scale war.

Restoration and Further Reforms

Over twenty years of war came to an end when Napoleon was definitively defeated at Waterloo in 1815. After that, the monarchy was restored. Further, the terms of the peace deal required France to pay 700 million francs in war reparations. Together with other payments demanded from France, such as covering the costs of the army occupying parts of the country, France paid 1,863.5 million francs as a result of its defeat. Still, the price of 5% rentes reached 100% of their face value by the mid-1820s. By this point, France’s government borrowing cost was just 1% higher than that of Britain.

‘La place Louis XVI (place de la Concorde) en 1829’, Giuseppe Canella (1829)

While some 19th century French economists advised that all public borrowing was bad, as Napoleon believed, the French state continued to borrow but did so at lower and lower rates. Even those who had less phobia for borrowing, believing public credit could augment the power of the nation, still held that the public debt was sacred and had to be handled responsibly and professionally. They identified Britain’s ability to borrow large sums of money cheaply as an advantage and not a weakness.

Napoleon’s defeat and a new constitution brought other improvements, such as the end of the war and parliamentary scrutiny of the public finances. Ministers now had to report expenses incurred to parliament each fiscal year and budgets were subject to votes. The new government left in place Napoleon’s progressive reforms but tax collections improved still further. The state also continued repurchases of rentes by the Caisse d’Amortissement, supporting prices and giving investors confidence that the state was serious about repaying its debts.

Falling Rates

The 5% rentes were now trading above their face value; this meant that investors were accepting an actual return below 5% per year. As such, conditions were ripe for the French state to test the market and issue bonds yielding less than 5%. To this end, 3% and 4% rentes were introduced in 1824. The yield on each of these was effectively 4% since the 3% rentes were issued at 75% of face value. As people came to expect the 5% rentes would soon be redeemed, they transitioned to buying these lower rate rentes. Sensibly, people had reason to believe that the government would not continue paying 5% on its old rentes when it could raise money at 3% or 4% in the market, money it could use to redeem the 5% rentes. A redemption would be bad news for investors buying 5% rents at a premium to their face value.

In any case, interest rates had normalized meaningfully in the early 19th century so room for improvement was not the same as the middle of the century approached. The 3% rentes maintained their valuation of around 75% of face value for decades but began to rise meaningfully towards the end of the century. They were worth over 80% of face value for much of the 1880s and reached 100% of face value by the late 1890s as the government’s cost of borrowing fell just below 3.0%. Such a low cost of borrowing was stunning considering where it began the century, a century which saw revolutions in 1830, 1848, and 1871.

However, payment on the public debt survived these revolutions. Indeed, it was more difficult to envision a default than ever before. For one, a default would be very politically costly since the rentes were widely held by the public. The French state sold bonds directly to the public starting in 1854. Thus, whereas there were only 200,000 holders of British state bonds throughout the 19th century, the holders of French rentes grew from 125,000 in 1830 to more than three million by 1914.

The public debt may have helped thwart revolutionary inclinations. The ability to place bonds with the broader public at low rates of interest enhanced the state’s legitimacy and bound the fortunes of the public with that of the state. In this way, the public debt protected the state just as the state respected the sanctity of its obligations.

At the end of the 19th century, Paris was the center of finance in continental Europe. Its finances had an aura of stability, something almost unimaginable at the start of the century, in the dying days of the French Revolution. The stability would benefit not only France as, with the exception of London, foreign governments would turn most often to the Paris market to place their own bonds.

Lesson

It is often said that it takes a long time to heal a broken reputation. This is certainly true when the root problems for the disrepute go unresolved as it had in 18th century France when the public finances were shrouded in mystery. Mystery is the enemy of trust.

At the start of the 19th century though, the French state was tackling the causes of its poor reputation as a borrower and was pulling the public finances into the public light. The Grand-Livre de la Dette Publique and parliamentary control over state budgets accomplished this. While the resumption of payments on the debt no doubt drove a temporary recovery, resilience in the public finances could not have survived a century of revolution without these institutional reforms.

More from the Tontine Coffee-House

Read how France financed war reparations levied on it after military defeat in 1815 and 1871. Also, learn about the early history of the Banque de France and the financial repercussions of the 1848 revolution. Consider subscribing to this blog’s newsletter here.