Devaluations and the French ‘Mint Bills’

France was the setting of one of the largest early experiments with paper money in Europe. This experiment usually refers to the paper money introduced in France by the Scottish economist and banker John Law in the mid-to-late 1710s. This was not the true introduction of paper money in France though. The country used paper money just before John Law, when France was engaged in the War of the Spanish Succession from 1701-1714. These were the billets de monnaie, or ‘mint bills’.

Michel Chamillart

French public finances resorted to greater improvisation under the management of Michel Chamillart, who was finance minister starting from 1699. His tenure overlapped substantially with the War of the Spanish Succession, which started in 1701 by which point Chamillart had already also been made minister for war. Wars always tested the limits of governments and this one cost the French state about 100 million livres annually. A fiscal deficit of up to 80 million livres appeared, and this before considering debt service costs that were mounting as well.

Starting from 1702, Chamillart made greater use of the caisse des emprunts, a semi-public body that received control over certain tax revenues and used that money to make payments on short-term bonds it issued on behalf of the state. However, the issuance of bonds by the caisse des emprunts did not cover the full cost of the war. Other avenues for raising money were resorted to; for instance, the government created new offices by the thousands which they sold to officeholders to raise new money. More interestingly though, Michel Chamillart would introduce a paper money to France. He would also make use of currency devaluations to secure more seigniorage revenues for the state.

Precedent for Devaluations

France had utilized devaluation as a mean of raising money before the introduction of paper money by Chamillart. The value of the livre tournois was reduced in 1689 in response to capital flight from France by emigrating Huguenot bankers. In this devaluation, old coins were demonetized and stamped with a new value.

Even in the absence of paper money, devaluations were a source of revenue for the state. Upon a revaluation, people turned in coins of a certain value; they would in turn receive back from the mint the same nominal value in newly-stamped coins, each of a greater denomination, which meant they received back a smaller number of coins than they gave up, delivering the state a profit. Another devaluation along these lines took place in 1693.

Gold Louis d’Or of 1701, Stamp/Overstrike on Both Sides

Paper Money Introduced in 1701

After Chamillart took over French finances, there was yet another devaluation by restamping in 1701. During the old devaluations, people delivering their demonetized coins to the mint were given a receipt representing their right to new coins once they were stamped. This time, in advance of the stamping process, which took time, the state introduced billets de monnaie (mint bills). The bills were essentially an ‘advance’ received by the state on the expected profit from devaluation, a form of credit for the government. In theory, billets de monnaie should each be outstanding for a few days since re-stamping does not take long but, in practice, they remained outstanding for longer.

The redemption of mint bills was increasingly delayed, so they clearly were no longer mere receipts of the old sort anymore. Mint bills were also issued in larger nominal values than the value of coins received by the mint for re-stamping. They began being used as a means of payment by the government too. So, they came to resemble a form of paper money in many respects. However, as interest bearing notes, the mint bills were not very money like in that respect.

In any case, the fiscal situation deteriorated as the war went on. There were difficulties raising new credit through the caisse des emprunts in late 1703. During this period, the excess of mint bills issued beyond the value of coins delivered to the mint picked up. The excess value of mint bills outstanding rose from 1 million livres in May 1702 to 2.3 million livres in July 1703 and 6.7 million in December 1703. That said, the mint bills were eventually redeemed or converted into other obligations so they did not come to feature as permanent components of the country’s money supply.

Another Devaluation in 1704

Yet, the state would return to the expediency of mint bills and devaluation again. Funds were in short supply once more in 1704 and payments to the state’s creditors had to be delayed. Unsurprisingly, a fourth devaluation was announced in May 1704. In a shock to the government, little money turned up at the mints, just about 175 million livres. This suggests the French money supply had contracted since 1701 when 321.5 million livres of gold and silver coins were delivered to be stamped.

A myriad of factors explain this. Some coins were hoarded by the public rather than be re-stamped and thus were being withheld from circulation. The war had also sent much of France’s money abroad. Outflows to maintain armies abroad cost perhaps around 70 million livres annually; another estimate by French Huguenot banker Henry Huguetan suggested that between one-quarter and one-third of the specie of France left the country each year. The flow of precious metal, often from Spain, was cut off as was much other trade. That said, some people sent their coins abroad to be restamped by counterfeiters so they could keep the profit from seigniorage themselves. This may have contributed to the shortfall in coins handed over to the mint without representing an actual drop in the money supply even if these coins were illicit.

Devaluations had negative effects on the foreign exchange value of the livre. This was an obvious outcome but others were less so. For one, devaluations did not seem to increase the circulating money supply. It did not offset the outflows of precious metal and perhaps even encouraged it. Thus, the devaluations were not associated with a runaway money supply at all. In fact, money was scarce as evidenced by interest rates that stayed high; according to Huguetan, prevailing interest rates reached 25% in July 1704.

Mint Bills Reintroduced

The devaluation of 1704 failed to provide sufficient resources for the French state. Thus, payments on debts issued by the caisse des emprunts were suspended by September. Holders of these bonds had to be paid partially in new issuances of mint bills. These mint bills became legal tender, except that they could not be used to pay taxes. Rather curiously, the paper money had to be accepted for payment of debts except for amounts due to the state itself.

The mint bills were not regarded as perfect substitutes for metal coins; they traded at an 8% discount to specie in July 1705. By year-end 1705, there were 83.6 million livres of mint bills outstanding and this total grew still more, but the numbers were not disclosed publicly. In 1706, the mint bills were no longer redeemable for coins and no longer earned their holder any interest. Mint bills were also being distributed in smaller denominations; minimum denominations fell first from 500 livres to 400 livres in May 1706 and then 200 livres by July and then just 50 livres. Thus, they were more money-like than the first issuances in 1701.

That said, after military shortcomings in 1706, this discount to specie value grew and became volatile. The discount on paper money reached as high as 37.5% in November 1706; in other words, one livre in coined money was worth 1.6 livres in paper money. That year, the volume of mint bills outstanding grew from perhaps around 100 million livres in January to somewhere around 173-180 million by October.

Reversal in Policy After 1708

Brokers trading in mint bills at discounts were threatened by the state but this did not stop the depreciation. The government engaged in more constructive projects to restore their value though. The option to convert mint bills into other securities was introduced in September 1706 and, perhaps to encourage conversion and thus the reduction in the balance of bills outstanding, their status as legal tender was briefly suspended in 1707 before being restored. In one of the most significant developments of this era, Nicolas Desmaretz succeeded Michel Chamillart as finance minister in February 1708.

That said, a fifth devaluation took place in 1709. Yet, this one was different from the others. Firstly, this one was achieved by a reminting of the coinage rather than just a restamping; as such, coins were actually melted down and replaced with new ones. More significantly, mint bills were also withdrawn during this recoinage. People were required to provide to the mint an amount of mint bills equal to one-sixth of their coins being re-coined into the new money. Thus, this recoinage was a means of removing mint bills from circulation at no cost to the state. It worked insofar as this led to the return of 37 million livres in mint bills, out of 72 million circulating before the recoinage; this after conversions to other securities had already reduced the balance to start with.

Nevertheless, this was not a fortuitous time to try to right France’s fiscal and monetary situation. There was a famine in 1709 that affected nearly the entire country and the war had not been a success for France even after eight years. The credit of the caisse des emprunts and France itself were both poor and the state was having to postpone payments. Mint bills were being sold by those skeptical of the state’s financial health; in Lyon, they had fallen to just half of their face value.

That said, there were positive developments as well. Large deliveries of goods and precious metals from Spanish America in 1709 rescued both the Spanish and French states. These increased the supply of precious metal specie and revenues from import duties. Further supporting the public finances, a new income tax, called the dixième, was introduced in 1710. This helped bring about the resumption of interest on the bonds of the caisse des emprunts, though it was resumed at a 5% rate as comparted to the 8-10% rates before.

Desmaretz continued removing mint bills from circulation, including through new conversion options. By October 1711, they were largely withdrawn. So, depreciated money left circulation. This was done at a cost though. For example, the indebtedness of the caisse des emprunts expanded from 44 million to 140 million livres between 1707 and 1714. Interest payments on these securities had to be suspended in 1710 and repayment upon redemption by investors could only be met by issuing new debts at a discount to face value, increasing the debt of France.

Lesson

France engaged in several devaluations from 1689 to 1709 and introduced a form of paper money that came to comprise a substantial share of the country’s money supply. Such a policy might be expected to cause money supply to increase and interest rates to fall. There would be some stimulative effect even if the policy is not without its costs. However, if the total stock of currency depreciates by more than the increasing face value of paper notes, whether by means of ‘bad money’ chasing out good money, capital flight, or a lack of confidence in public finances, the total value of the money supply may actually be falling despite new notes being issued. In circumstances like this, which characterized France in the first decade of the 18th century, even the benefits of paper money fail to be realized.

More from the Tontine Coffee-House

Read about the exodus of French Huguenots towards Switzerland around the same time and about John Law’s experiments with paper money in France. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.