4—
THE VERY PRIVILEGED

8—
Tying the King's Hands
Credible Commitments and Royal Fiscal Policy under the Old Regime

Under the Old Regime, the French king sold offices, which in effect constituted the creation of debt shares in the state. The king sold the shares to avoid the alternative of making his subjects into equity holders by granting them representation. The sale of offices extended the fiscal capability of the French Crown by increasing the kingdom's financial liquidity while preserving the king's role as the kingdom's principal deal maker. The Crown's reputation for repudiating its debts meant that the direct sale of the kingdom's debt by the Crown was never an option.

Episodes of fiscal irresponsibility—debt repudiation, currency devaluation, and the expulsion and persecution of state creditors and financiers—are ubiquitous in both early modern French and English history.^[1] This is especially curious, since from medieval through modern times, both

[1] There were many notorious events linked to repudiations by sovereigns. The Jews were expelled from France under Philip IV and from England under Edward I in 1290. Philip IV dissolved the Knights Templar in 1307. English kings continually repudiated loans made by Italian merchant societies between 1270 and 1345. In 1661 the Chamber of Justice under Louis XIV led to a life sentence for the king's minister of finance, Nicholas Fouquet.

nations relied more heavily on credit than on taxation to support the rapidly expanding needs of armies and other state functions.^[2] An instructive example is found in the financial history of Old Regime France. There, credit operations accounted for more than half of the state's revenues by the middle of the seventeenth century, and by the eve of the French Revolution, debt service consumed the greater part of current revenues.^[3] Nevertheless, policies that were hostile to and destructive of the long-term stability of royal credit were commonplace. Such policies have routinely been condemned by historians as manifestations of the fundamentally corrupt and venal structure of traditional French society.

When describing royal finances in seventeenth-and eighteenth-century France, both contemporaries and historians invoke images of flamboyant corruption. Financiers are commonly depicted as parasites whose capital is the nation's blood, drawn from the lower levels of financial administration (like the collection of the taille , or tax on peasant incomes) and then reinvested at higher levels in the form of loans to the state. Daniel Dessert, who has provided the most extensive account that we possess of the world of high finance during the seventeenth century, has vividly described how financiers were viewed by their contemporaries:

The kingdom dreamed of radical measures against the financiers, whose ostentatious displays of wealth, worldly success, and monopolization of the most lucrative state functions all seemed scandalous. The people, exhausted by misery and war, and the state officeholders, led by the parlementaires , were the first to suffer from the increased extraordinary activity [their offices lost value by the multiplication of offices created by the king and sold by the financiers], and finally the nobility, always ready to oppose royal power, nostalgically resumed their mythic role as defenders of the oppressed; all these social groups jointly cried vengeance with wonderful unanimity.... here was a demagogic program that was sure to be popular at little cost. At the heart of the crisis, [individual financiers] were designated as scapegoats to channel the discontent. Public opinion, long conditioned by literature passionately hostile to financiers, welcomed the sight of tax collectors disgorging [their illicit gains].^[4]

[2] Because the government's expenditures occurred continuously and were unpredictably distributed over time and geography, the king had a consistent need for credit.

[3] See M. Morineau, "Budgets de l'état et gestion des finances royales en France au dix-huitième siècle," Revue historique October–November 1981: 289–337.

[4] Daniel Dessert, Argent, pouvoir et société au grand siècle (Paris: Fayard, 1984), 242.

A century later, the corporate organization of society would similarly be condemned as useless and corrupt by government officials such as Turgot. Today, historians commonly echo these eighteenth-century denunciations by depicting corporate bodies such as the provincial estates, municipal corps, and village communities as vestiges of an archaic and moribund old order. To explain the relationship between the state and corporate bodies during this period, the range of modes of contracting from which the king could have chosen to organize his finances should be considered. An analysis of the contractual problems of credit exchange under the constraint of absolute monarchy suggests a different interpretation of the relationship between absolutism and corporate society. Corporate bodies were far from moribund; moreover, corporations that handled the king's funds prospered. Corporate groups with fundamentally different origins—such as the chancelleries of royal secretaries, the municipal corps, and the village communities—all flourished during the eighteenth century.^[5] Why would a monarch claiming absolute power allow the proliferation of intermediary bodies whose rights and privileges reduced the Crown's absolute authority and constrained the king's discretion? This counterintuitive outcome seems to have a firm and rational economic basis. As one eighteenth-century administrator explained, "the credit of the estates, the cities and the guilds is the credit of the king."^[6]

The Economic Foundations of Corporate Society: The Evolution of Financial Intermidiation under the Old Regime

One of the most important functions of the corporate institutions that expanded in seventeenth- and eighteenth-century France was the creation of trust among partners involved in state finance. The proliferation of corporate bodies can be linked to the king's reputation for repudiating his promises; corporate institutions evolved, not as methods of enhancing the gains from corruption, but as restraints needed to prevent opportunistic sovereigns from defaulting on their creditors. The king supported the ex-

[5] See David Bien, "The secrétaires du roi: Absolutism, Corporations, and Privilege under the ancien régime, " in Vom ancien régime zur französischen Revolution: Forschungen und Perspektiven/De l'ancien régime à la Révolution française:Recherches et perspectives, ed. E. Hinrichs (Göttingen: Vandenhoeck & Ruprecht, 1978), 153–67; Gail Bossenga, "From Corporations to Citizenship: The bureaux des finances before the French Revolution," Journal of Modern History 58 (1986): 610–42; and Hilton L. Root, Peasants and King in Burgundy: Agrarian Foundations of French Absolutism (Berkeley and Los Angeles: University of California Press, 1987).

[6] BN, Joly de Fleury, 2536, no. 53 (unsigned manuscript, March 1770).

pansion of corporate society because corporate institutions enabled him to obtain credit.^[7] The increasing control of corporations by the Crown was motivated by the need for credible commitments from a monarch who claimed to be above the law.^[8] If the king could credibly commit to honor his obligations, then his credit would be strengthened, thereby increasing his ability to finance his government.^[9]

Historians generally argue that a desire to promote economic individualism and a free market economy led the Crown to attack corporate groups and corporate privilege. Because strong corporate institutions gave the king access to credit at a lower cost than would otherwise have been possible with competitive markets, one may doubt the "modernizing intentions" of the Old Regime monarchy. The Crown could not have acted as a champion of competitive markets because the royal government would have been less capable of financing itself in a competitive environment.

That the principal player—the king—was above the law constituted the main obstacle to efficient state finance under the Old Regime. This meant he could not be compelled to honor his debts and often chose to repudiate

[7] Not all offices had financial functions; many conferred access to lucrative opportunities connected with the office's function. In this chapter, the focus will be on the offices that provided the Crown with financial services. Many offices had purposes beyond helping the king borrow money.

[8] Corporations did not necessarily originate as devices to raise money for the king, but there is considerable evidence that during the seventeenth century, corporations that could be used to raise funds throve, while those that did not were phased out. James Collins argues that the survival of provincial estates during the Old Regime depended on how effectively they raised taxes or floated loans for the king. Those that failed to do so were eliminated. The king would ask the Estates of Brittany for yearly advances on indirect taxes, for example, and because the Estates had to borrow the entire amount, good credit was necessary for their survival. See Collins, Fiscal Limits of Absolutism: Direct Taxation in Early Seventeenth-Century France (Berkeley and Los Angeles: University of California Press, 1987), chs. 1 and 2.

[9] Commit here means agreeing to a binding contract specifying in advance the government's possible actions. In "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy 85 (1977): 473–91, F. W. Kydland and E. C. Prescott argue that rules can produce higher payoffs in dynamically competitive environments than the exercise of discretion. Interest rates on government obligations demanded by competitive markets may be decreased by governmental commitments that increase either the direct or opportunity costs of debt repudiation. This application of the Kydland-Prescott logic allows us to understand the proliferation of institutions under absolutism that increased the costs to the king of behaving opportunistically toward his creditors. For a recent summary of the literature on time-consistency, see Robert Barro, "Recent Developments in the Theory of Rules versus Discretion," Economic Journal 96 (1986 supplement): 23–37.

them.^[10] Under absolutism, the king was the source of law; this meant he could not be held legally accountable by other human beings for the discharge of his sovereign prerogatives.^[11]

Because the reliability of the king's commitments was questionable, his credit was weaker than that of many of his wealthiest subjects. For this reason, the growth of state power during the seventeenth century depended upon the king's cultivation of his wealthy subjects to act as intermediaries in contracting loans needed to support the state's expanding military and bureaucratic apparatus. These individuals constructed networks among themselves through intermarriage and contracted with the king's fiscal agents on a personal basis.

Two new developments characterized the evolution of state finance during the eighteenth century. The general farms, which collected the king's taxes, became more bureaucratic, and officeholders organized into corporations. They were joined by many of the traditional corporations in providing loans to the Crown. However, not all officeholders were linked in corporations, and certainly not all corporations were comprised of officeholders. For example, the receveurs generaux des finances, who collected direct taxes, were officeholders until 1716; the fermiers généraux, created in 1680 to collect indirect taxes, were not officeholders but did enjoy corporate privileges.^[12] The bureaux des finances of Lille did not fully succeed in establishing a strong corporate structure.^[13] In short, financing by corporations supplemented but did not replace individual financiers as sources

[10] For a summary of the extensive literature on sovereign repudiations, see John Hicks, "The Finances of the Sovereign," in A Theory of Economic History (Oxford: Oxford University Press, 1969), 81–100. In "Repudiations, Defaults and Confiscations by the Medieval State: The Italian Bankers in England, 1270–1345," Journal of Economic History 46 (1986), a significant contribution to that literature, John M. Veitch relates medieval interest rates to the probability of default.

[11] Defenders of absolutism wrote as if the sovereign could have the last say and still be accountable to law. This was wishful thinking; it could not and cannot be both ways. If constitutional law is not binding on those who exercise governmental authority, then the conduct of government is no longer subject to the rule of law.

[12] The Ferme générale, which handled the king's extraordinary financing, had grown from supplying 16.6 percent of royal revenues in 1656 to a height of providing 54.7 percent under Louis XIV, stabilizing during the eighteenth century at about 45 percent of all revenue. See Yves Durand, Les Fermiers généraux au XVIIIsiècle (Paris: Presses universitaires de France, 1971), 57–56, or id., Finance et mécénat: Les Fermiers généraux au XVIIIsiècle (Paris: Hachette, 1976,), 21–22. I plan to study the evolution of the contracts of the various fiscal groups to determine how corporate responsibility evolved.

[13] See Bossenga, "From Corporations to Citizenship."

of funds. Nevertheless, corporations involved in the king's finances provided the Crown with important additional borrowing capacity.^[14]

It may be that a causal relationship existed between the decline of government interest rates and the shoring up of corporate institutions by the Crown. The 9 and 10 percent interest rates accorded to certain kinds of annuities under Necker, often deemed responsible for the bankruptcy of 1789, did not come close to the 25 percent interest rates registered at the end of Louis XIV's reign. By strengthening corporate institutions, the king had made royal default more costly in the eighteenth century; lower interest rates reflected the diminished probability of the declaration of royal bankruptcy, so common in the seventeenth century.

Financiers: Public Credit Supported by Private Arrangements

The definition of financiers common during the eighteenth century differed in important respects from what became common in the nineteenth century, when it expanded to include banking and other financial services, both public and private. While the classification of financial activity changed, the functions of bankers remained consistent over time. Many of the royal financiers also financed private projects, and all private financiers had some role in state finance, similar to that of banks in the nineteenth century, which were required to hold government securities as reserves.^[15] Since the financiers were essentially private business people who managed state finance, they can be thought of as surrogate royal functionaries. Unlike functionaries in a modern bureaucracy, however, these eighteenth-century financiers used personal property—much of it actually state apparatus given them as collateral by the Crown—to secure loans intended directly or indirectly for the Crown.^[16] Smaller investors did

[14] The percentage of the Crown's total revenue that was supplied by the new forms cannot be determined, but these new forms were rising and provided fiscal services that enlarged the Crown's capacity to borrow. See Alain Guery, "Les Finances de la monarchie française sous l'ancien régime," Annales: Economies, sociétés, civilisations 33 (1978): 216–39, and "Le Roi dépensier: Le Don, la contrainte, et l'origine du système financier de la monarchie française d'ancien régime," ibid. 39 (1984): 1241–69. Guery and M. Morineau are reconstructing the Old Regime budget but have yet to determine the percentages of total revenues provided by corporations or by officeholders in general.

[15] During the eighteenth century, the term financiers did not have the pejorative connotation of traitants (tax farmers) or partisans .

[16] Although the definition of financiers has changed since the eighteenth century, the arrangements resembled what we normally describe as banking. Even today, most investing is done through intermediaries; we do not generally lend to corporations, small businesses, or homeowners, because we do not know the value of their collateral and are not privy to the debtor's inner workings. The move from intermediated government debt to direct debt is thus part of a more general process. Disintermediation has now spread to corporations (commercial paper) and short-term government debt (money market funds).

not make unsecured loans directly to the Crown; they insisted on making such loans to the highly placed officials of the state whose personal fortunes secured the loans. At all stages of the financial system, the Crown's credit depended on the personal resources of its intermediaries. These officials thus had to possess substantial monetary reserves, enjoy significant credit, and have reliable networks upon which they could call for funds.^[17]

During the years 1610–61, the superintendent of finances was the Crown's chief financial official; the arrangement of credit was his principal function. For instance, financial superintendents like Nicolas Fouquet were appointed because of their ability to attract funds from their networks of clients.^[18] There were two bases from which Fouquet operated to mobilize credit. One involved the use of his own property as security for loans intended directly or indirectly for the Crown; the other involved loans he contracted using the state's resources as security. The superintendent's clerks were appointed to help him to extend links with the financial elites by persuading potential investors to lend money against future receipts of the financial system at large. Success depended on their ability to ensure repayment when necessary.^[19]

The superintendent's clerks often mobilized funds by arranging interest rates for their clients well above the legal limits set by the Crown. Such arrangements had to be made without the formal complicity of the superintendent of finance. The Crown could nevertheless exploit the fact that its agents (the clerks who worked for the superintendent of finance) had acted illegally. The excessive interest rates paid private investors could be cited later as a justification for the Crown to repudiate loans and to persecute its own agents. The financiers could not protect themselves legally from such persecution since they had agreed to interest rates above the

[17] See Julian Dent, Crisis in Finance: Crown, Financiers and Society in Seventeenth-Century France (New York: St. Martin's Press, 1973).

[18] The office of surintendent des finances was abolished in 1661. Colbert became the first controleur générale .

[19] This system was very successful in the seventeenth century, providing the French monarchy with financial resources far greater than those of its rivals. According to a contemporary analyst, Gregory King, Louis XIV possessed 175.5 million units of revenue (King does not specify the currency), while England had 43.6 million and the United Provinces 61.7 million. The French fiscal system provided France with the means to dominate European politics throughout the late seventeenth century. See Emmanuel Le Roy Ladurie, "Les Comptes fantastiques de Gregory King," Annales: Economies, sociétés, civilisations 23 (1968): 1086–1102.

legal limit. Creditors were thus unable to find a legal sanction to employ against the king when he wanted to default.

Repeat Play: The Creation of a Mini-Society

In the absence of public institutions, the Crown relied on networks of family financiers to organize the complex credit transactions that supported state finances between 1610 and 1661. A mini-society of financiers evolved through intermarriage and worked according to the logic known to game theorists as repeat play. Intermarriage among financial families provided a basis for continuity in trade and reasons to limit opportunism. Since the value of the relationship with a family member exceeded the value of a relationship with a stranger—one expects to trade with a family member much more frequently than with a stranger—the future costs of reneging on credit obligations to one's kin were far greater than those of repudiating obligations owed a stranger.^[20] Credit relationships that might be impossible between strangers could exist among family members. Whereas repeat play provided some regulation among family networks, it rarely restrained the king.

Kingly Discretion

"Discretion" refers to rules adopted or contracts entered into at one point in time that do not restrict the parties' later actions. By this logic, the king was free to do whatever best furthered his subsequent aims.

When it proved convenient, the king used a kind of special court, the Chambre de justice, to prosecute individual financiers. These special court sessions were often spectacles designed to inspire public indignation against financiers. The language used to describe financiers in the edicts announcing the Chambre of 1716 was typical: "the immense and lofty fortunes of those [the financiers] enriched by criminal means, the excess of their luxurious living insults most subjects: it is not surprising that they dissipate with profusion what they have acquired by injustice. The riches they [the financiers] possess are the spoils of our provinces, the subsistence of our people, and the patrimony of the state."^[21] In 1629, the principal minister of King Louis XIII, Cardinal Richelieu, had gone so far as to

[20] Anthropologists and economists like Pranab K. Bardhan use the term multiplex to refer to multistranded relationships such as those between family members. See Bardhan, Land, Labor, and Rural Poverty: Essays in Developmental Economics (Delhi: Oxford University Press, 1984).

[21] "Edit portant etablissement d'une Chambre de justice," cited in Dessert, Argent, pouvoir et société, 243. The same words were used in the opening of the edict creating the Chambre of November 1661.

propose that the Chambre then in session could save the Crown many millions of livres by confiscating the offices of all the financiers.^[22] Nevertheless, the most spectacular example of such prosecutions was that of the surintendent des finances, Fouquet, in 1659, resulting in the confiscation of his property and his life imprisonment.^[23]

In effect, the courts were created to drum up public support so that the Crown could cancel its debts to private financiers. The prosecutions generally set off a wave of private bankruptcies among financiers. Even the vague threat of punishment for ill-defined crimes could cause an individual financier to lose his credibility among his peers and force him into bankruptcy. The surviving financiers inevitably demanded more favorable rates from the king and more costly guarantees for the future.^[24]

Another measure the French monarchy commonly employed to cancel its debts was currency reform. The Crown could repudiate debts by reducing the value of the unit of account in which such debts were denominated. Since coinage (the louis d'or) was written up in terms of the unit of account (the livre), by allowing the value of the unit of account to decline, the Crown somewhat reduced its debt. For example, between 1689 and 1726, the equivalent of a livre in silver declined from 8.33 grams to under 4.45 grams.^[25]

In summary, kingly discretion characterized the private arrangements between individual financiers and the Crown. Financiers, as individuals or networks, could do little to protect themselves from repudiations.^[26] The king reneged by using devices ranging from devaluation to prosecution to outright default, because he assumed that networks of financial families

[22] See J. F. Bosher, "Chambres de justice in the French Monarchy," in French Government and Society, 1500–1800: Essays in Memory of Alfred Cobban, ed. id. (London: Athlone Press, 1973), 19–40.

[23] See Daniel Dessert, "Finances et société au XVII siècle: A propos de la Chambre de justice de 1661," Annales: Economies, sociétés, civilisations 29 (1974): 847–71.

[24] Not all of these trials were a product of the Crown's high discount rate; they can be seen as a form of callable debt factored into the price in advance. Callable debt exists to cap the upside return to the security holder. The Crown borrowed at a high rate in wartime, serviced that high rate until peace came, and then reduced the rate unilaterally. The Chambre de justice seemed to target financiers who accumulated particularly large fortunes and posed a threat to the Crown.

[25] See James Riley, The Seven Years War and the Old Regime in France (Princeton: Princeton University Press, 1986), 167.

[26] Samuel Bernard loaned Louis XIV 15 million livres in 1703, 20 million in 1704, and 30 million in 1708. When Bernard refused further advances in 1709, he was denied payments on the outstanding debt. Unable to repay his creditors, Bernard went into bankruptcy. After the war he was able to recover what he was owed only after agreeing to a fine of 6 million livres. See Charles P. Kindleberger, A Financial History of Western Europe (London: George Allen & Unwin, 1984), 95–96.

could easily be replaced by rival families.^[27] Nor did the king repudiate only his debts to large financiers. The Crown constantly reneged or "held up" small officeholders by demanding additional payments for offices already purchased, threatening, for instance, to discontinue interest payments for the office, to cancel tax exemptions, or to withhold the promised payments of salary or pension due on offices.^[28] The Crown would claim it was renegotiating the contracts owing to changed conditions. In addition, the Crown squeezed officeholders by selling new offices, which diminished the value of those that already existed. The new offices might be designated to supersede the functions of existing offices. Current officeholders, then, were often compelled to purchase the new offices to minimize their losses from the creation of additional offices. However, the additional office creation led officeholders to demand collective organization. As collectives, eighteenth-century officeholders presented the state with a new terrain for loans, at interest rates less onerous to the Crown than those required in the direct sale of government bonds or annuities.

The Demand for Corporate Governance: Constraining Kingly Discretion

Although, as we have seen, there were few restraints in the seventeenth century that prevented the king from engaging in opportunistic behavior, he nevertheless paid a price. When he reneged on his debts to officeholders, he decreased the value of the offices they often used as surety for loans. The officeholders found it harder to borrow when it was perceived that these offices could easily be confiscated. The possibility of the king reneging on his officeholders by increasing either the supply of offices or his demands for repayment reduced their ability to trade on his behalf.

To protect themselves from the depredations of the Crown and to preserve the value of their offices, officeholders demanded the right to establish public corporations. They wanted to limit their individual liability and, more important, to increase the sanctions against default by the king.^[29]

The evolution of corporate liability is examined in David Bien's essay "The secrétaires du roi: Absolutism, Corporations, and Privilege under the ancien régime ." In the seventeenth century, the secrétaires bought the

[27] By the eighteenth century, however, the scale of operations had become too vast and too centralized for the king to use that strategy.

[28] Those salaries were normally one-eighth of the capital cost of the office a year plus an additional pension.

[29] Bosher, too, has argued that the corporation's efficiency was enhanced by its strong corporate organization (French Finance: From Business to Bureaucracy [London: Cambridge University Press, 1970], 76).

office as part of a family strategy to acquire the status of tax-exempt nobles, Bien notes; the offices involved few real governmental functions and could be viewed as useless. As individuals, however, the secrétaires were subject to frequent fleecing and revocation of privileges. In fact, from 1701 to 1707 alone, the Crown made four separate requests for additional capital sums from officers. Those who did not pay would lose their privileges and salaries (gages ). In fear of losing their investments, all paid—sometimes with funds borrowed from networks of friends and relatives. Later, by organizing, they would be able to borrow from the public at large.

In the 1720s, the secrétaires began to establish procedures of corporate governance that permitted them to use their collective credit to supplement the credit of individual members. The ability to borrow directly from the public as part of a collective unit protected and enhanced the value of their offices. The members established the principle of limited liability: a member's responsibility for the corporation's debt was limited to the value of his office. Potential office buyers wanted assurances that an officeholder's private property would not be subject to seizure for payment of the corporation's debt and that, when an officeholder's office was sold, his obligations ceased and would be assumed by a new member. Once these assurances could be established, the offices would be worth more and the corporation could borrow from the public at lower interest rates.^[30]

The institutions devised to impose corporate liability on the financiers emerged from a bargaining process between the Crown and private groups. The Crown had much to gain from strengthening the corporations. It was easier for the king to ask for funds from the corporation as a group than to attempt to contact and negotiate with individual officeholders or separate family networks, many of whom might be difficult to locate or unable to pay. With corporate responsibility, the group had to provide the sum and it was their responsibility, not the king's, to see that all members paid

[30] Determining private interest rates accurately will be very difficult. Since it was a crime to loan above the legal interest rate of 5 percent, businesspeople had to dissimulate in order to contract loans at higher rates. Nevertheless, qualitative sources suggest that interest rates were higher in France, where rates of 10 or 12 percent were not uncommon, than in England. Public interest rates declined significantly after 1720, falling from peaks of 16–20 percent during the War of the Spanish Succession. To determine the interest rates for government bonds, it must be determined how much they were discounted when sold. Because the Crown was legally restricted from increasing the rate over 5 percent, it sold its perpetual bonds at a discount. Discounts of 40 percent were common, bringing the real interest rates up to 6.7 percent. See Herbert Luethy, La Banque protestante en France de la révocation de l'Edit de Nantes à la Révolution (Paris: S.E.V.P.E.N., 1959), 2:58. In A History of Interest Rates (New Brunswick, N.J.: Rutgers University Press, 1963), Sidney Homer cites only nominal interest rates.

their share. When one member was unable to pay, another member could provide the share in exchange for a lien on the office. This way, the king got his money quickly. The corporation could then go out and raise additional capital, if needed, from the public more easily than an individual officeholder. Whereas an individual financier could borrow from his personal network of friends and relations, the corporations could borrow from a much broader segment of the public because lenders had more faith in them than in the king. Bien concludes that corporate organization facilitated borrowing from a wider range of individual citizens, so that corporations could mobilize funds on a far grander scale than could individual financiers or the king. For example, in 1726, the fermiers généraux were syndicated, allowing the corporation to negotiate with the king as if it were a single financier. In order to loan the king 25 million livres at an interest rate of 5 1/2 percent in 1741, the Ferme générale, as a corporation, was able to borrow from the public at large.^[31] Corporate liability was established, so that the corporation, not specific members, was responsible for outstanding debts.

The corporation could act as an intermediary between the king and the investing public because the public could bring the corporation to court in case of default, which it could not do with the king. Consequently, members of the public who might invest in bonds issued by a corporation had greater assurances that their investments were protected than if they had lent to the king directly, or to an individual financier or officeholder. The ultimate effect of corporate organization was to increase the direct sanctions the king suffered if he defaulted. By organizing into a cohesive unit, the secrétaires made it more difficult for the king to default and simply replace them, as he had replaced Fouquet with Colbert in 1661. The institution of the secrétaires du roi provides one of many examples of the expansion of corporate privilege by the absolute monarchy. The clergy, perhaps the most important corporate body, gave the Crown an annual "free gift" and, in turn, borrowed heavily from the public. Other prominent corporate groups that had state financial functions were the Ferme générale, the Regie générale, the Administration des domains, the Ferme des postes, the Trésor royale, the procureurs of the Chambre des comptes, the notaires of Paris, the huissiers du Chatelet of Paris, the professors of theology at the Sorbonne and Navarre, and the faculties of law and medicine at the University of Paris.^[32] In addition there were hundreds of mu-

[31] Morineau, "Budgets de l'état," 305.

[32] See BN, L397053, vol. 2, Recherches et considerations nouvelles sur les finances (London: M. le Bon de Cormere, 1779).

nicipal corporations, professional associations, and guilds that provided revenues for the king during the eighteenth century.

Government Bonds

The government's rentes perpetuelles worked according to the same principles as offices. Just as owners of offices received a yearly gage, or salary, from the Crown, the owners of rentes perpetuelles or perpetual annuities (to be referred to as perpetuities) were entitled to a permanent revenue. An owner could sell these rights to another individual, but he could not cash them in. The market value of the perpetuities fell when the king did not pay the interest due, just as the value of offices diminished when the king delayed payments of gages . A tendency to late payment inevitably diminished the long-term value of both perpetuities and offices, making additional perpetuities or offices harder to sell. There was one important difference between these two fiscal expedients. Although the owners of offices could organize into corporations to protect the value of their possessions, the owners of perpetuities were too scattered to do so. (Perpetuities circulated privately and their circulation is difficult to trace. Moreover, the prices of perpetuities are not available, which makes it difficult to determine their real interest rates.)^[33] This difference should help to explain why offices held their value and were generally easier for the Crown to sell than perpetuities. Unable to sell perpetuities, the Crown had to depend on more costly short-term loans or on the sale of life annuities. The annuities proved more marketable but were, in the long run, much more expensive for the king than perpetuities.^[34] In light of these difficulties, the factors motivating the Crown to place great value on its relationship with the corporations, which were able to provide funds at lower cost than any of the available alternatives, become more evident. The French Crown's inability to sell perpetual bonds contrasts sharply with the success enjoyed by the Bank of England, which was able to finance an important percentage of the nation's debt through the sale of perpetual bonds that held their face value and carried low interest rates.

Toward More Public Finance

As noted, during the reign of Louis XIV (1661–1715), the Crown concentrated on building up the corporate character of already-constituted bodies

[33] The perpetuities were often used in business transactions—i.e., the purchase of real estate—which often lacked an alternately defined market price.

[34] M. Morineau has calculated that since 1739 the real interest rate for life annuities had been 10 percent, or double the nominal value of perpetuities ("Budgets de l'état," 306).

like the village communities, the guilds, the provincial Estates, and the chancelleries of royal secretaries. The Crown had discovered that traditionally constituted bodies could help contribute to the establishment of sound public credit. To create conditions for the public to have confidence in their financial predictability and solvency, the Crown in many cases expanded the privileges and protected the property belonging to constituted bodies.

For example, giving cities the right to collect taxes on goods entering and leaving their jurisdictions allowed municipalities to sell bonds or annuities for the king, using the anticipated revenues from the taxes (octrois ) as surety. Here, too, local privilege was reinforced in the collection of local taxes, so that the Crown could expand its fiscal resources.^[35] A good example is the right to collect tolls on all traffic using the Saône, given the Estates of Burgundy by the king in exchange for a yearly payment in advance.^[36]

Similarly, as we saw in chapter 6, fiscal incentives led the Crown to reinforce guild monopolies over local production. By using state power to protect their monopolies, the Crown guaranteed the solvency of the guilds. In exchange for that protection, the Crown could extract rents from the guilds in the form of forced loans. This, in turn, made it possible for the guilds to borrow money from the public to loan to the king.

The Failure of Reform

The king never explicitly stated his dependence on corporate groups and mechanisms. There is no evidence from memoirs, speeches, or decrees in which the Crown acknowledged the rationality of binding its hands. If the monarch and his advisers did not consciously acknowledge the rationality of what had in effect become practice, it was because that rationality directly conflicted with the official rhetoric of divine right monarchy. In the public rhetoric, the king never admitted responsibility to human institutions and repudiated any contractual theory of kingship.^[37] Nevertheless, corporate management of the debt advanced with the king's consent. Bargaining between societal groups and the king defined the structure of the Old Regime's financial institutions. The king could have used his legal authority to challenge or veto the development of corporate rights. The fact that corporate charters were often granted by the king suggests that

[35] See Jacques Maillard, Le Pouvoir municipal à Angers de 1657 à 1789 (Paris: Presses de l'Universite d'Angers, 1984).

[36] AN, H-144 (October 1773).

[37] Michel Antoine, "La Monarchie absolue," in The Political Culture of the Old Regime, ed. Keith M. Baker (London: Pergamon Press, 1987), 3–24.

his cooperation was necessary for the concept of corporate liability to become credible. Assurances of protection by the king's courts were needed in order for the public to believe in corporate solvency. The king's dependence on corporate groups may have evolved as part of an implicit understanding, never formally stated by the king or his officials. It was an understanding that may have benefited both sides, even though societal groups such as the financiers may have initiated the bargaining that led to the establishment of the corporate management of the king's debt.

The Irony of Absolutism

In sum, claiming full discretion, the king had less real power. Claiming to be above the law in fiscal matters made it more difficult for him to find business partners. The use of discretion reduced his payoffs in equilibrium because invoking absolute power destroyed royal credibility. Creditors took into account the king's reputation for repudiating debts and therefore demanded higher interest rates than would otherwise have been needed to elicit loans. Actually, because he was above the law, the king had to pay more for loanable funds than did his wealthy subjects. In short, the Crown had a problem asserting its credit because it had a history of reneging on commitments.

An attempt to resolve this dilemma was made by encouraging the growth of intermediary powers in the contracting of loans. Among the intermediaries the king called upon were the traditional corporations: the village communities, the guilds, and the provincial Estates. In return for official recognition and privileges, the corporate groups acted as bankers for the king. They increased the liquidity of the financial system by underwriting transferable securities. There was greater opportunity cost to the king if he defaulted on a group of financiers than on individual financiers. Individuals could more easily be replaced than a corporation that included hundreds of families. Thus, by diminishing the king's temptation to renege, the offices held by members of a corporation became more valuable than those belonging to isolated individuals. Because the offices were more valuable as sources of credit, the king was less likely to default.^[38] Such additional discipline was beneficial to the king, because his temptation

[38] Consistent with my predictions, William Doyle has argued that "the overall trend was for office prices to rise" during the second half of the eighteenth century. I would like to determine if increased corporate organization was a factor that contributed to increasing the value of offices like those of notary and procurer, which Doyle reports benefited from rapidly escalating prices. See Doyle, "The Prices of Offices in Pre-Revolutionary France," Historical Journal 27 (1984): 831–60.

to renege, and thereby the equilibrium interest rate, could be reduced by increasing the sanctions against default.^[39]

When many of the corporate institutions became insolvent during the late eighteenth century, the king found he was unable to reform or eliminate them. As managers of the king's funds, the corporations were able to dominate the nation's financial resources. On the eve of the French Revolution, the corporations were thus able to impose their terms on the Crown and block efforts to overhaul the fiscal system.

[39] In his study of French finances during the Seven Years' War (1756–63), James Riley argues that the financial authorities late in Louis XIV's regime did not understand the system they administered. He observes that after 1725, royal officials "became convinced of the usefulness of paying the royal debt" and were more reluctant to exploit officeholders than before. Even after incurring "a burden of debt that could not be borne," methods of reducing interest payments—either through conversion, a partial debt repayment in paper currency, or a tax on debt service—were all rejected, however, by what Riley calls an inflexibly cautious financial administration. This bears out the expectation that increased corporate backing of the debt would reduce the temptation of royal officials to renege on their commitments to officeholders. Riley's position differs slightly from the one presented here in that he contends that the financial authorities were excessively cautious "because they did not possess an understanding of finance." See Riley, Seven Years War, 162–91.

9—
The Fiscal Origins of Democratic Revolution

At the time when they were made, many of the vast political consequences of the French king's efforts to remain the central political deal maker were unforeseen. Compared to his English counterpart, it seemed to contemporaries that the French king was in the enviable position of bargaining from strength. A comparison of the two financial systems suggests another conclusion.

Financial institutions specializing in credit assessments were needed to reduce risk, since neither the French nor the English Crown could sell its debt in financial markets. The governments of both nations looked to financial intermediaries as substitutes for nonexistent markets. The intermediaries developed diversified portfolios of loans based on private spread and credit assessments, thereby reducing monitoring costs to the Crown. Fixed-interest debt forms or instruments were developed, supported by the collateral of the intermediaries. The system was buttressed by bankruptcy penalties, since the intermediaries could be held legally responsible for their debts. The similarity between the English and French systems of public finance ends there, however.

In England, a system evolved in which the king's creditors became holders of equity in the state. In France, shares in the royal debt were sold by intermediaries who traded on the presumption of privileged access to political decisions, which significantly enhanced their credibility as deal makers. The French king's intermediaries were private brokers of private information, and their assets and those of their clients were confidential; secrecy was essential to their deal-making role. The resulting information asymmetry put the entire financial system at great risk.

In England, the existence of publicly available information moderated the information asymmetry, thereby reducing interest rates. In France, by

contrast, the lack of public information reduced liquidity and increased interest rates above the English levels. Moreover, because French bills were privately traded, any revelation of instability could have a domino effect—the result of incomplete financial markets and limited, asymmetrically distributed information about the kingdom's debts and assets. Uncertainty about some of the king's bankers quickly led to uncertainty about the entire financial system. Indeed, it was a default spiral that triggered the French Revolution.

Rules over Discretion

To explain the fiscal origins of the French Revolution, historians have traditionally emphasized the central government's inability to raise taxes. The underlying reason was the unwillingness of key groups to endorse tax increases in the absence of stated rules of monetary and fiscal policy. Economists have given considerable attention in recent years to the question of economic uncertainty. Uncertainty raises the cost of acquiring capital and discourages investment, which in turn results in a lower level of output than might otherwise be possible. A major cause of uncertainty in Old Regime France was irresponsible government fiscal policy. The threat of late payment of interest, for example, continually hung over the heads of the holders of government securities and offices. Reduction of this uncertainty would have reduced interest rates and increased investment even given a constant but insufficient rate of taxation. French capitalists of the eighteenth century were well aware that uncertainty affects accumulation of capital by increasing interest rates. French industrialists did not invest in projects that their counterparts across the Channel would have pursued, because the higher French interest rates discouraged investment in all but the most profitable of enterprises. Government-guaranteed monopolies satisfied the highest requirements of profitability, whereas productive, unregulated enterprises might not. The government's fiscal irresponsibility thus burdened the nation's economic development.

In the years before the French Revolution, a burgeoning pamphlet literature expressed a clear preference for rules over discretion in government fiscal policy. The authors of the pre-revolutionary pamphlets hypothesized that greater certainty through limits on government fiscal discretion was the primary benefit that parliamentary institutions had brought to England. They enthusiastically endorsed the calling of the Estates General, inasmuch as it might remedy the regime's chronic financial uncertainty. The pamphlet authors affirmed that more public control over fiscal policy would impose restrictions on the previously unfettered fiscal discretion of government ministers.

Did members of the French public value this promise of stability enough to accept the prospect of new taxes? Many pamphleteers expressed the concern that additional taxes without an end to governmental discretion and secrecy would do little to reduce the risks and uncertainty that kept interest rates high. In fact, interest rates stabilized briefly after the reinstatement of Necker in 1787 primarily because of his promise to pay creditors on time and in coin, unlike the previous finance minister, Loménie de Brienne, who proposed payments partly in paper to holders of government securities and offices.^[1] The fiscal ideals of 1789 were monetary stability, the timely payment of interest, rules over discretion, and the reduction of uncertainty.

Although many members of the 1789 Constituent Assembly called for equal taxation across regions and social groups, this did not mean they wanted more taxation. During the Revolution an increase in taxation led to resistance in those regions where taxation had traditionally been low. While calling for a more equal distribution of the tax burden, many in France envisioned eliminating particularly unpopular taxes, including the salt tax, the tithe, and the internal tariffs and tolls. An end to the Ferme générale was also desired, as were cuts in government spending on the court. No consensus existed in 1789 in favor of increasing the government's ability to tax as a means of resolving the fiscal crisis. Both Adam Smith and Jean-Baptiste Say pointed out that the French Crown's ability to wage warfare was limited only by its ability to fund wars. Greater tax revenues might have meant longer wars, not greater fiscal and monetary stability.

Representative Governments and Fiscal Stability

The collapse of France's disastrous experiment with the schemes of the Scots financier John Law in 1720 contributed to the French government's failure to institute paper money or establish a national bank. Conversely, the rise of the Bank of England and the fact that the principal British state creditors essentially controlled the government, and thus guaranteed the debt, gave England a considerable advantage in the War of the Austrian Succession (1740–48) and the Seven Years' War (1756–63). France's failures in these wars highlighted its lack of national representative government and inability to mobilize confidence among creditors (as compared to

[1] The crucial role of investor confidence is confirmed by David Weir's study of French and English interest rates, "Tontines, Public Finance, and Revolution in France and England, 1688–1789," Journal of Economic History 49 (1989): 95–124. Weir found that Controller General Terray's partial default in 1770 pushed rates upward until 1774, while English rates remained stable until 1776.

England), causing higher interest rates and reduced possibilities of credit. In the absence of a parliamentary system, the French increased royal credit by developing a corporate debt secured by the sale of offices and channeled through the tax farmers and urban guilds. As noted in the previous chapter, reinforcement of the corporations made it more costly for the Crown to renege on its creditors and thus had the salutary effect of restraining royal currency manipulation and bankruptcies. Nevertheless, by reinforcing the corporations, the Crown had created powerful vested interests in the tax system, making fundamental reform all the more difficult.

The links between representative government and fiscal stability were made public for the first time in a few pamphlets prior to the Revolution. At the time, the Crown was willing to accept and even to initiate discussions aimed at introducing a representative forum in the hope of resolving the fiscal crisis. The Crown's eagerness for discussion may be attributed to two motivations. First, the creation of representative institutions may have been viewed by the Crown as a way to circumvent the power of the financiers, especially the Ferme générale. Second, the Crown may have hoped that the nation's elites would ultimately surrender their fiscal exemptions in exchange for the right to be represented. To negotiate in good faith for the renunciation of exemptions, the Crown resisted declaring bankruptcy. The negotiations on ending fiscal privileges would have been doomed from the start if the Crown were unable to convince potential interlocutors of a commitment to respect the property of its subjects.

Direct negotiations with the nation's elites might have resulted in the creation of an aristocratic body like the British Parliament if the Crown had been willing to share its political authority. In any event, hoping it would be more accommodating than the influential elites had been, the king called a meeting of the Estates General.^[2] The Crown welcomed the idea of members of the Estates General considering themselves the nation's representatives precisely because this might give that assembly the prestige needed to override the elites and local groups who opposed the elimination of exemptions. Failure to achieve a settlement with the financial interest groups, however, brought into the political debate participants for whom fiscal issues were secondary. The result was the French Revolution, which replaced one fiscal crisis with another. France continued well into the nineteenth century to lack banking and fiscal facilities similar in scope and capacity to those of the British.

[2] The Estates General was an assembly of the three orders, or estates, of the kingdom: the clergy, the nobility, and the third estate, or unprivileged classes. It was only summoned in times of difficulty, and its meetings had rarely led to fruitful results.

Documents shedding light on the Crown's financial decision making have not been uncovered and perhaps never will be. In his many books on the French Revolution, François Furet has taught that we should distance ourselves from the explanations given by the actors themselves to understand the meaning of the events. The immediate and visible consequences may be in accord with their stated positions. History, like economics at its best, should look beyond the stated intentions of the participants and attempt to explain the underlying structure of incentives, as well as the hidden consequences and costs of decision making. As Karl Popper puts it, "the main task of the theoretical social sciences ... is to trace the unintended social repercussions of intentional human action."^[3]

Sustained Polarities: State Finance in Early Modern France and England

During the eighteenth century, even by our standards today, the governments of both England and France borrowed a large proportion of their gross national products.^[4] It was nevertheless more costly for the French than the English to borrow. The English government was thus able to borrow a much larger percentage of national wealth, putting France at a comparative disadvantage in its competition with England. The competition peaked in the Seven Years' War, which produced a decisive English victory over France. The subsequent French commitment to the American War of Independence required a level of borrowing that the government was unable to support from current revenues. Nor could it find a way to raise taxes without major social and political reform.^[5]

Despite the severe penalties that would inevitably follow direct criticism of the Crown's behavior, many in France acknowledged that the king's claim of absolute power—to being above the law—had undermined the

[3] Karl Popper, "Predictions and Prophecy in the Social Sciences," in Conjectures and Refutations, 2d ed. (New York: Harper & Row, 1965), 342.

[4] BN, L40b 2401. Using figures from Arthur Young, M. de Casaux estimated that the GNP of England was about 2,800,000,000 livres, of which the government paid 384,000,000 in interest to creditors—that is, "between 7 and 8 percent of total revenues" (Casaux, Reflexions sur la dette exigible et sur les moyens proposés pour la rembourser 1789 [Paris, 1790], 21).

[5] James Riley has demonstrated in The Seven Years War and the Old Regime in France: The Economic and Financial Toll (Princeton: Princeton University Press, 1986) that the high interest rates that underlay the crisis of the 1780s had their roots in the 1760s. Riley is the first modern author to notice that no published authority of the eighteenth century recognized that restructuring the debt and reducing the costs of a possible bankruptcy might have helped the monarchy exit the crisis situation with less damage.

government's fiscal credibility.^[6] The first public discussions of this problem occurred during the Regency, when, under the influence of John Law, the government tried to create a national bank in imitation of the Bank of England. The experiment failed, and it was not repeated during the Old Regime. The failure was itself the result of the Crown's claims to absolute power: the royal bank failed because of the Crown's inability to make credible fiscal commitments.

By the late eighteenth century, the failure of the Law system led many to argue that fiscal reform was impossible without the establishment of a representative body to inhibit the Crown's exercise of unfettered discretion in state financial matters. The theory elaborated in chapter 8 about the need for credible government commitments in financial matters helps to explain why a number of eighteenth-century observers believed that the creation of representative institutions would help the king establish credibility with those French whose opinions counted and whose resources were necessary to resolve the crisis at hand (see chapter 8). Many of the French government's financial problems arose from the difficulty of obtaining credible commitments from the Crown; they could not be resolved merely by reorganizing the Treasury or establishing a national bank.^[7] Like that of the French fisc, the management of the British fisc during this period was chaotic and inefficient,^[8] but because of the greater credibility of British government promises, that inefficiency did not have the same impact on interest rates. France's comparative disadvantage stemmed directly from the structure of its political institutions. Indeed, many contemporary French observers asserted that Britain's military success and consequent emergence as a world power were owing to its innovative financial organization and superior state finances. France could not emulate this success because the government was unable to tap its citizens' wealth as efficiently, either through taxation or by borrowing.^[9]

[6] A declaration of March 28, 1765, forbade the publication of any writing or project concerning the reform or administration of finances.

[7] J. F. Bosher, French Finances, 1770–1795: From Business to Bureaucracy (Cambridge: Cambridge University Press, 1970).

[8] See ibid., 22–25, 42, on the success of Britain's parliamentary fiscal administration and the relative failure of the French Crown's fiscal administration. "The high rate of interest on the French debt was another clue to the fundamental differences between the administrative systems of the two countries. Those differences were sufficient to determine that in the decade between the peace of 1783 and the war of 1793, England would take one road to stronger public finances and France would take another," Bosher observes (ibid., 24).

[9] In the eighteenth century, the grouping of financiers into public corporations gave the French state a borrowing capacity it had not possessed in the seventeenth century, owing in large part to the ability of corporate groups to attract funds from a wider segment of the public than could individual financiers. A more impersonal debt was created, with numerous small investors sharing the profits of financing the state by buying portions of the debt offered by the corporations. David Bien estimates that in the 1780s the corporations collectively supplied about one-third of the king's loans. The success of this system, which Bien calls the surrogate or functional equivalent of England's national debt, made bankruptcy and reform more difficult. See Bien, "Offices, Corporations, and a System of State Credit: The Uses of Privilege under the Ancient Regime," in The Political Culture of the Old Regime , ed. Keith M. Baker (London: Pergamon Press, 1987), 89–114. And see also id., "The secrétaires du roi: Absolutism, Corporations, and Privilege under the ancien régime ," in Vom ancien régime zur französischen Revolution: Forschungen und Perspektiven / De l'ancien régime à la Révolution française: Recherches et perspectives , ed. E. Hinrichs (Göttingen: Vandenhoeck & Ruprecht, 1978), 153–67.

Efforts to reform the fiscal system in France were blocked by the provincial parlements , whose consent was necessary to raise taxes. The monied groups that grew rich under the Crown's sponsorship were also an obstacle to reform. They would not, without compensation, surrender their control over the nation's fiscal resources and institutions. The kingdom's wealthiest families had invested heavily in the Ferme générale and had acquired privileges through the purchase of offices. They had thus acquired assets that could not easily be renegotiated under a new regime, since the Crown could not afford to buy back the privileges or portions of public authority alienated to individuals. Nor would the king have been capable of replacing the fermiers généraux . As information brokers they were indispensable to the Crown, inasmuch as they substituted for incomplete financial markets. Put differently, the king could not replace the fermiers généraux because they had information that no one else had. The investment they had made in information gathering allowed for the pricing of shares in the debt, thus creating a market in state debt.^[10]

An analysis of the economic logic of England's fiscal organization can be found in the crisis years 1787–88, when a burgeoning pamphlet literature flourished in France. England was cited as an example of the ways in which representative institutions were more efficient than either individual financiers or corporate institutions in achieving credible commitments from the government. The literature addressed the investing public at large and rarely represented the opinion of established financiers. The French Crown's inability peacefully to reform the nation's financial structure reveals how the democratic implications of the fiscal or economic functions of representative institutions led to revolution.

To explain the decline of the Old Regime, Tocqueville emphasized the

[10] The fermiers généraux created a market that revealed information about state debt allowing for the pricing of shares to the debt.

fiscal imperatives underlying the Old Regime's political structure. The tax-exempt status of the French nobility, he argued, altered the evolution of France's political institutions and caused the great divergence in the institutional development of the two nations. Building upon Tocqueville's insight, the growing demand for representative institutions that preceded the French Revolution can be related to the imperatives generated by the government's fiscal crisis. Three questions arose out of that crisis: a social question, who would pay? a political question, who would decide? and a constitutional question, what mechanisms would be needed to coordinate the decision-making process? Had the Crown been willing to resolve these issues with the kingdom's notables, it might not have incurred the social upheaval that followed the calling of the Estates General. The discussions at the Estates General quickly focused on equality before the law, raising issues that went far beyond the need for equal responsibility for taxes and requiring far more radical solutions than those needed to solve the fiscal crisis.

Fiscal Crisis in France

By the mid eighteenth century, both England and Prussia could challenge France's traditional hegemony in European politics because their governments could more efficiently harness the resources of their subjects than could the French. The relative efficiency of England's financial machinery allowed the magnitude of government borrowing in relation to national wealth to be much greater in England than in France. While the English were particularly successful at tapping capital reserves throughout Europe,^[11] the French king had difficulty paying his creditors at home. With his ability to borrow in jeopardy, the king looked for new ways to increase his income. Expanding the existing fiscal structures, however, was not considered feasible. The king would have found little support from the parlements for the sale of new offices, since as officeholders the parlementaires were concerned that sales of additional offices would diminish the value of those already existing.^[12] Because of a general economic reces-

[11] Foreign holdings of English government securities were considerable between 1723 and 1780. See P. G. M. Dickson, The Financial Revolution in England: A Study in the Development of Public Credit, 1688–1756 (New York: St. Martin's Press, 1967), 311–12.

[12] Moreover, the king could not sell new offices at the price of his choosing. As a durable goods monopolist—the king was the sole creator of new offices—he was compelled to sell at the competitively determined rather than the monopoly price. When he increased the price of new offices, he had to compete with existing officeholders, who might sell existing offices if the price was high enough. See R. H. Coase, "Durability and Monopoly," Journal of Law and Economics 15 (1972): 143–49.

sion, increasing direct taxes on the peasantry would have made taxes even harder to collect.^[13] According to J. F. Bosher, investors would have rejected new loans and the parlements new taxes because both had lost confidence in the Crown's credit system. Despite the fact that the general tax farms had become more bureaucratic and operated more explicitly as public institutions, the Crown's solvency still depended upon the personal credit of its financiers. A series of financial failures occurred among some of the king's financiers during the first six months of 1787, and others were rumored to be on the verge of failure or to have difficulty finding credit. Furthermore, the fear that the general economic depression would diminish tax revenues and contribute to further failures among prominent financiers raised doubts about the solvency of the Crown.^[14]

Parliamentary Institutions, The Public Debt, and Public Interest Rates

The first step on the road to more stable public finances in Britain was the chartering in 1689 of the Bank of England with a monopoly on loans to the government, so that potential investors had no alternative.^[15] Since the common law courts were independent of the Crown, the Bank of England could call upon them to block the government from seeking alternative credit sources. Small independent lenders were thus barred from competing among themselves or with the bank, leaving the Crown without alternative sources of funds. The ability to use the courts to prevent the Crown from seeking additional sources of credit gave the Bank of England

[13] On the economic recession, see C. E. Labrousse, La Crise de l'économie française à la fin de l'ancien régime et au debut de la Révolution française (Paris: Presses universitaires de France, 1944), 473.

[14] Bosher, French Finances , passim. "The simultaneous bankruptcies of de Baudard de Saint-James et de Megret de Secilly, in 1787, and that of Morquet, suis de le Normond, were the coup de grace to royal finances under Calonne" (Guy Chaussinaud-Nogaret, Les Financiers de Languedoc au XVIII siècle [Paris: S.E.V.P.E.N., 1970], 249).

[15] By ordering in 1697 that henceforth all sums due the Crown must be paid through the Bank of England, the British government gave it a monopoly on holding state funds. It was also provided that no other bank could establish itself by act of Parliament. These privileges were renewed in 1742. The same legislation limited the liability of bank investors. "No act of the Governor and Company of the Bank of England was to subject or make liable to forfeiture the particular or private and personal property of any member of the corporation, a clause which bestowed on it the privilege of limited liability" (Vera C. Smith, The Rationale of Central Banking and the Free Banking Alternative [repr., Indianapolis: Liberty Press, 1990], 12–13).

access to significant rents and subjected it to the criticism that it served a small elite of City bankers at the expense of national interests.^[16] Barry Weingast explains that centralizing the kingdom's loan decisions in a single intermediary had an additional motivation: it allowed the Bank of England to enforce a credit boycott, greatly increasing the penalties the government would experience if it defaulted.^[17] By reducing the likelihood of default, this arrangement increased the credibility of the government's commitments to the bank.^[18]

Although the English may have disagreed about the merits of the Constitutional Settlement of 1688, few questioned its impact on public finances or on England's rise to power in the eighteenth century. Like numerous contemporary observers, the English financial historian P. G. M. Dickson notes that the government's increased power to borrow was essential to war financing. At the outset of the War of the Grand Alliance against France in 1688, the British Crown was able to borrow £1,000,000. By the end of the war in 1697, the government had borrowed nearly £17,000,000, and this was supported by a GNP estimated to have been no larger than £41,000,000.^[19] Government debt grew from between 2 and 3 percent of the GNP to about 40 percent in fewer than ten years.

According to Dickson, this spectacular increase in war finance was brought about by the creation of the Bank of England, which permitted a

[16] P. G. M. Dickson reports that many contemporaries thought that the influence of wealthy citizens on the government was sinister. If a bank became a monopoly lender to Parliament, bankers would be able to dictate national policy in their interests. "It was alleged that the National Debt had been created to meet not an economic need, the need for greater revenue, but a political need: to secure for the political settlement of 1689 the support of powerful groups concerned in government loans" (Dickson, Financial Revolution , 17). The Bank of England was designed as an intermediary to float the government's loans, much as the U.S. Federal Reserve System does today in its open-market transactions, but it was not a part of the British government. Not being the actual lender, the bank thus lacked monopoly power to set unreasonably high interest rates. Loans and interest rates were determined by parliamentary legislation, and whether or not to subscribe to the loans lay in the discretion of individuals.

[17] International trading companies like the East India Company offered an alternative source of loanable funds, since they were not banks.

[18] This intepretation of how the bank functioned can be found in Barry Weingast, "Institutional Foundations of the 'Sinews of Power': British Financial and Military Success Following the Glorious Revolution" (mimeo, Hoover Institution, Stanford University, July 1991).

[19] Estimates of England's GNP are from Emmanuel Le Roy Ladurie, "Le Comtes fantastiques de Gregory King," Annales: Economies, sociétées, civilisations 23 (1968): 1086–1102. After England's entry into the war against France in 1689, public expenditure increased from under £2,000,000 a year to an average of from £5,000,000 to £6,000,000. See Dickson, Financial Revolution , 46.

new system of government borrowing based on long-term loans,^[20] as well as the establishment of a permanent national debt. Under the new system of borrowing, investors drew interest on their loans as long as they lived. The Bank of England was permitted to borrow money on security of Parliament, to deal in bullion and bills of exchange, and to act as pawnbroker. By the end of 1694, by leveraging liabilities to the public, the bank had advanced sums greater than its total capital to the state in the form of bills, which the Exchequer accepted in lieu of tallies used to pay government creditors. The Bank of England thus became indispensable to the government as a source of credit and a channel for making remittances to soldiers overseas. As the issue of bank notes grew and became standardized over the course of the eighteenth century, the bank's ties with the government became more intimate.

The next big step toward expanding the British government's credit-worthiness—the creation of the funded debt—came in 1715. A political agreement with Parliament established that a specific loan had to be secured by Parliament's vote of a specific tax designed to fund the loan's repayment. As a result of Parliament's backing of the public debt, the interest rate on English government bonds fell from 10 percent in 1689 to 3 percent during the eighteenth century, greatly expanding the English government's capacity to use the nation's savings.^[21] The lower interest rates reflected the fact that loan repayment had become more probable. In contrast, across the channel the French king paid interest rates (taking into account the discounted prices of rentes and life annuities) that greatly exceeded the interest rates paid by corporations and estates. In 1707, for example, Samuel Bernard agreed to supply 13.2 million livres in cash to pay French troops in the Spanish Netherlands, and an additional 6 million for troops in Spain. His contract stipulated payment in various forms, including the right to collect receipts from the taxes. Bernard's "fee" for supplying the loan was equivalent to an annual interest rate of 15 percent, and he was promised an additional 1,100,000 livres until the funds were repaid.^[22] Herbert Luethy reports similar interest rates of 16–20 percent for loans made by Swiss bankers that same year (1706–7) but adds that the

[20] Dickson, Financial Revolution . This liquidity transformation also existed in France in the form of rescriptions, because most people held liquid short-term notes or zero-term notes (currency).

[21] The most significant indication of the success of parliamentary borrowing was that the public interest rate had fallen beneath private interest rates. Private interest rates in England were about 4 or 5 percent throughout the second half of the eighteenth century, while in France they varied from 5 to 12 percent.

[22] See Daniel Dessert, Argent, pouvoir, et société au grand siècle (Paris: Fayard, 1984), 194–95.

bankers were not always able to collect the 4 to 5 percent in interest owed each quarter when the payments were due.^[23]

French interest rates did decline after 1720. Lüthy provides examples of interest rates of 4 to 5 percent on bonds issued by the Crown but notes that the bonds generally sold at a 40 percent discount.^[24] The Crown was legally restricted from increasing the rate over 5 percent and hence sold the perpetual bonds at a discount instead of adjusting the interest rate. Taking the discount into account, the real interest rate rose to 6.7 percent, more than twice the interest rate on English government bonds sold during the same period. The interest rates on the more popular rentes viagères (life annuities) varied from 8 to 10 percent amortized over fifteen to eighteen years.^[25] Once we discount the effect of capital loss (capital effect) and compound the interest, at twenty years we get an interest rate of 6.7 on 8 percent rentes viagères .^[26]

The relatively lower English interest rates suggest that the costs of government credit in England were diminished by the use of parliamentary institutions. A perpetual public body—rather than the individuals who comprised it or a monarch who was above the law—was responsible for repayment of these obligations. There were fewer incentives to default than for a king; the personal fortunes of individual MPs could not be served by repudiation: if Parliament chose to default, individual legislators did not come into the funds thereby conserved. Since MPs did not have as great an incentive as the king to default, the investing public could feel protected from arbitrary seizures of concentrated assets like those that had occurred in 1640 and 1672.^[27]

As representatives of the government's creditors, members of Parliament had more to gain by increasing taxes to honor all debts than from repudiating part of the debt. By contrast, a king could benefit personally

[23] See Herbert Lüthy, La Banque protestante en France, de la révocation de l'Edit de Nantes à la Révolution (Paris: S.E.V.P.E.N., 1959), 2:180–81.

[24] Lüthy reports that rentes perpetuelles were negotiated at 50 percent of value in 1752 (ibid., 58).

[25] Life annuities appealed to investors without families, since they expired on the death of the lender.

[26] The "head," or person named on the annuity, would have had to live more than twenty years for the interest rate to surpass the real interest rates of the rentes perpetuelles . Over a thirty-year period, the real interest rate rose to 7.6 percent. If the head lived to age fifty, the interest rate rose to 7.9 percent. Interest rates of 10 percent, equivalent to a real interest rate of 9.19 percent over twenty years, were available to individuals over age fifty.

[27] "The royal creditors must have reflected that had their loans been 'on parliamentary security,' instead of being backed only by the Crown's promises, they would not have been repudiated" (Dickson, Financial Revolution , 45).

and directly from repudiation, especially when the alternatives were the alienation of public authority or greater power for corporate groups or legislative bodies. In this sense, kings might have to sell the family jewels to support the state's debt, unlike representatives in a legislative body. At a time of financial exigency, an MP, as a government creditor, would prefer to increase taxes rather than default on obligations, since taxes were spread over a broader segment of the population than was the debt. The taxes an MP (or his constituents) might pay to support the nation's debt were likely to be smaller than the costs of defaulting. Moreover, MPs might also be indirectly hurt by repudiation, since friends and relatives might hold public securities. Certainly, an important part of a member's political support came from individuals who held portions of the debt.^[28] Following the creation of a funded debt controlled by Parliament, English investors recognized that the government's incentive was to repay rather than renege, and hence interest rates no longer needed to reflect a default risk.

An additional advantage of establishing a public debt was that a legislative body did not have the same incentive as a king to withhold information about the state's debt. Information about the scale of revenues and services was needed in order for the public to assess the long-term ability of the government to service its loans from existing revenues. Such information was an investor's only way of judging the likelihood of a royal bankruptcy. In France, the fact that such information was not public knowledge diminished the government's credibility and increased interest rates. Necker made this same point in explaining England's financial advantages to the king in 1781:

Indeed, if we fix our attention on the immense credit which is enjoyed by England, and which constitutes at this day her prin-

[28] On British finance in the seventeenth and eighteenth centuries, see Peter Mathias and Patrick O'Brien, "Taxation in Britain and France, 1715–1810: A Comparison of the Social and Economic Incidence of Taxes Collected for the Central Governments," Journal of European Economic History 5 (1976): 601–50; John E. D. Binney, British Public Finance and Administration, 1774–1792 (Oxford: Oxford University Press, 1958); S. Dowell, A History of Taxation and Taxes in England from the Earliest Times to the Present Day , 3d ed. (London: F. Cass, 1965); Fredrick C. Dietz, "English Public Finance and the National State in the Sixteenth Century," in Facts and Factors in Economic History: Articles by Former Students of Edwin Francis Gay , 1st ed. (Cambridge, Mass.: Harvard University Press, 1932); W. Kennedy, English Taxation, 1640–1799: An Essay on Policy and Opinion (New York: A. M. Kelley, 1964); Sydney Charles Buxton, Finance and Politics: An Historical Study, 1783–1885 (London: J. Murray, 1888); Elizabeth Boody Schumpeter, "English Prices and Public Finance, 1660–1822," Review of Economic Statistics 20 (1938): 21–37; E. Hughes, Studies in Administration and Finance, 1558–1825, with Special Reference to the History of the Salt Tax in England (Manchester: Manchester University Press, 1934).

cipal force in the war, we shall not be hasty in attributing it entirely to the nature of her government....

But another cause of the great credit of England is, undoubtedly, the public scrutiny to which the state of her finance is submitted.... The money lenders, being thus regularly informed of the balance between the receipts and disbursements, are not upset by chimerical suspicions and fears....

In France, the state of Finances has constantly been made a matter of mystery.^[29]

France's outstanding economist Jean-Baptiste Say, who was born twenty years before the Revolution, later echoed this thought in his authoritative fashion: "Public credit is the confidence that exists in the kings.... Credit rises to the highest degree [of confidence] only when the government by virtue of its structure cannot easily violate its promises, and when its resources are equal to its needs. It is for this last reason that public credit is weak where the financial accounts of a nation are unknown."^[30]

By providing avenues for participation in the formation of government policy, the Constitutional Settlement of 1689 provided a way to reduce the costs to the state of gaining the cooperation of those members of the nation whose wealth and authority made them especially capable of helping the English king finance his state.^[31] By contrast, the growth of state finance in France was restrained by the absence of a public institution bound by law to protect the interests of investors. When compared to the commitment technology of French absolutism—bilateral exchanges with royal financiers and corporations—the parliamentary institutions of England were relatively efficient at producing credible commitments from governments over time.^[32]

[29] Jacques Necker, State of the Finances of France Laid before the King (London: G. Kearsly et al., 1781), 2–3.

[30] Jean-Baptiste Say, Traité d'économie politique, ou simple exposition de la manière dont se forment, se distribuent, et se consomment les richesses (Paris: Crapelet, 1803), 2:526.

[31] Many contemporary authors agreed that the English government gained credibility because it possessed a continuous institution that made its public debt credible. John Hicks makes a similar point in A Theory of Economic History (New York: Oxford University Press, 1969).

[32] One of the reasons constitutional monarchies replaced absolute monarchies in most of western Europe was that parliaments could borrow at lower interest rates than kings. See Herbert Rowan, The King's State: Proprietary Dynasticism in Early Modern France (New Brunswick, N.J.: Rutgers University Press, 1980). William and Mary's advisers recognized these advantages when offering proposals on how to raise the revenue necessary to contain French power. The ability to borrow liquid assets made possible the comparatively enormous state power of the western European democratic nations by contrast with eastern European countries.

Charles Nicole Ducloz-Dufresnoy, one of France's most important fiscal theorists prior to the Revolution, understood the incentive structure of the English system in the terms presented here. "Ten or twelve months after the last peace there was general desolation in London and the fear that business would undergo an inevitable convulsion," he explained. "In the heat of this universal alarm, M. Pitt [the Younger] was placed at the head of finances."^[33] Pitt declared war on the deficit rather than contemplate state bankruptcy. "To liquidate the debts, Parliament decided to increase its revenue by levying new taxes" advocated by Pitt, Ducloz-Dufresnoy noted. "In a word, to increase taxes to the level of expenses was the new plan, just as it had been the program of Pitt's successors under similar circumstances. The House of Commons understood the wisdom of this approach and adopted it. In 1786 Pitt received the payment for his courage when he was able to show the Commons that receipts and expenses were once again in tandem."^[34]

Napoleon Bonaparte also understood the incentives of the English fiscal system. In a conversation he is reported to have said:

In England everything is based on something imaginary. Her credit depends entirely on confidence, since she has no surety to cover it—although I admit that the English government has something better than that, since the individual fortunes are linked to that of the State. The system of successive loans, which continually tie the present to the past, in a manner compels confidence in the future. By giving every individual proprietor a stake in the wealth of the State, the government creates something better than a material surety, which it lacks; for it

[33] Charles Nicole Ducloz-Dufresnoy, one of the principal notaries of Paris, is outstanding among contemporary writers on finance for his grasp of practice and attention to detail. See BN, L39b 655, Discours de M. Ducloz-Dufresnoy sur l'offre d'un crédit de six millions prêté au roi par la Compagne des notaires (Paris: Clousier, 1788); BN, L39b 4227, Reflexions sur l'etat de nos finances, a l'epoque du premier mai et du 18 Novembre, 1789 (Paris, 1790); BN, L39b 762, Judgment impartial sur les questions principales qui interessent le tiers-état (Paris, 1788); BN, L39b 6648, Encore quelques mots sur les questions de savior si le tiers-état peut être representé par des ordres privilégés (Paris: Chez Clouzier, 1788); Origine de la Caisse d'escompte, ses progrès, ses révolutions, au lettre de M. Ducloz-Dufresnoy, notaire à M. le comte de Mirabeau (Paris, 1789); BN, L32b 3233, Observations de M. Ducloz-Dufresnoy, sur l'état de finances (Paris: Chez Clousier, 1790); BN, L39b 4083, Observations rapides sur l'impossibilité d'adopter le plan de la municipalité de Paris, Calcul du capital de la dette publique, reflexions sur les causes de discrédit (Paris, 1790).

[34] BN, L32b 3223, Observations de M. Ducloz-Dufresnoy sur l'état des finances (Paris: Chez Clousier, 1790), 20–21.

thereby creates an unlimited surety resting on individual self-interest.^[35]

Although documents have not been found that reveal in what terms the Old Regime French government understood England's fiscal advantages, French fiscal theorists of the late eighteenth century often compared the English and French systems.^[36] French tracts of the late eighteenth century on political economy typically concentrated on why the English Crown did not resort to bankruptcy even in times of great fiscal distress and often warned of the reprehensible consequences that would follow a royal bankruptcy.

French Views of Government Finances on the Eve of the Revolution

A cost-benefit analysis of the net advantages of a parliamentary organization to government fiscal affairs can be found in a number of pamphlets published during the years 1787–88, when confidence in the Old Regime was eroding. A speculative boom that had begun in the early 1780s seemed ready to burst, and anxiety was widespread. Contemporaries complained of the exhaustion of credit and the proliferation of bankruptcies as loans bought on credit were called in. The panic in private finance paralleled the governmental crisis.^[37] Pamphlets began to appear stressing that representative institutions would provide greater fiscal responsibility than could the institutions of absolutism. The fiscal advantage of representative institutions was not a new idea in French political discourse, but it could be stated with greater urgency in an environment of uncertainty, apprehension, and fear. As French people scrambled to safeguard their fortunes, the need for fundamental fiscal and related political reforms was no longer mere speculation.

The crisis of 1787 reopened public discussion of state finances for the first time since the Regency of 1715–20. During the Regency, the problems posed by the Crown's fiscal irresponsibility became the subject of heated public debate, focusing on the creation of a national bank that could issue paper money. England already had such a bank, but in France many believed that the necessary political conditions were lacking. Mistrust of the

[35] Conversation, December 1812, from The Mind of Napoleon , ed. Christopher J. Herold (New York: Columbia University Press, 1955), 94.

[36] The most statistically rigorous of these comparisons is located in BN, L76f 122 (unsigned), Situation actuelle des finances de la France et de l'Angleterre (Paris: Briand, 1789).

[37] George Taylor, "The Paris Bourse on the Eve of the Revolution, 1781–1789," American Historical Review 67 (1962): 951–77.

Crown's ability to manage the nation's finances was widespread, especially since the king had altered the value of the currency forty-three times between 1689 and 1715.^[38] What was to prevent him from annulling the bank's debts, confiscating its funds, or issuing money without limit? In his Mémoires (published for the first time in the late eighteenth century), the duc de Saint-Simon (1675–1755) suggested that the establishment of a national bank could only be of benefit "in a republic or a monarchy such as England, where finance is governed absolutely by those who furnish it, and who only furnish as much as they want to; or in a weak state rather than in an absolute state like France, where confidence is lacking since in cases of extreme necessity, such as those in which [Louis XIV] found himself in 1707, 1708, 1709, and 1710, a king, or in his name a mistress, a minister, or a favorite, could topple the bank by consuming its resources."^[39]

To convince a largely skeptical French public that a national bank could indeed exist under conditions of absolutism, John Law argued that national economic expansion would benefit if all credit flowed from the king. The principal obstacle to economic growth, he believed, was that if left in private hands, gold and silver would not be employed in the public interest, inasmuch as private individuals tended to hoard the nation's supply of precious metals. To overcome this reluctance to invest, Law argued, an enlightened monarch could use his authority to guarantee that the nation's treasure would be circulated to promote industry and commerce. Moreover, an enlightened monarch could ensure that the bank honored its debts.^[40] Nevertheless, under Law's directorship, the bank issued paper currency that quickly became worthless, leading to a massive state bankruptcy. The Law experiment was the point of reference for discussions in the late eighteenth century of the question of creating a national bank when hopes resurfaced that the king would call the Estates General.

[38] A. D. Vuitry, Le Désordre des finances et les excès de la spéculation (Paris, 1885), 156. Between 1726 and 1785, the value of currency was unchanged.

[39] Louis de Rouvroy, duc de Saint-Simon, Mémoires , ed. A. de Boislisle (Paris: Nouvelles éditions, 1925), 37:178–79. I would like to thank Thomas Kaiser for introducing me to these passages. See his "Money, Despotism, and Public Opinion in Early Eighteenth-Century France: John Law and the Debate on Royal Credit," Journal of Modern History 63 (March 1991): 1–28.

[40] See BN, ancien MS FR 7768, esp. folios 200–220, "Recueil de mémoires concernant la banque de Law (1716–1717)." Contemporaries generally believed that an absolute monarchy was incompatible with the creation of a national bank, because the government would be able to manipulate the currency or confiscate holdings with impunity. In BN ancien MS FR7774-79, "Mémoires sur le gouvernement en général et en particulier sur les finances vers 1726," there is further discussion of why a national bank would not function properly under absolutism.

A new fiscal crisis raised the possibility of another royal repudiation. Opponents of absolutism hoped that Louis XVI would summon the Estates General to avoid a masked bankruptcy, involving employment of the Chambre de justice against financiers, or outright bankruptcy, which had been resorted to by earlier kings. Jacques Brissot de Warville (1754–93) was one of the many who wrote pamphlets to generate public support for summoning the Estates General. His first pamphlet, Point de banqueroute , written from London, advocated putting the Estates in charge of the nation's finances in order to restore public faith in the state's credit. "The Estates General can verify, determine, and grant taxes needed to cover it, and it can establish an administration designed to prevent forever the return of depredations [by the Crown]," he observed. To achieve these ends, he recommended that the Estates General demand that

1. The amount of the deficit be made public.

2. Taxes be levied only with the consent of the Estates.

3. A regular system of finances be established to avoid a return to the disorders of the past.

4. Its next meeting establish the amount of the deficit and the amount and the kind of taxes, as well as requiring free and open annual discussion of the nation's accounts.

In a second pamphlet, written from Paris in 1787, Brissot wrote that summoning the Estates and establishing constitutional principles

should interest the creditors of the state no less than other citizens, since their investments would become more secure once the Crown's arbitrary powers were diminished. National bankruptcies would become increasing rare when perverse ministers found it less easy to borrow, to impose, and to waste, and if all were required to subject their accounts to the nation's scrutiny every year. Then wasteful measures would disappear, along with the shady maneuvers that accompany them; then the interest rate that the state's creditors receive would stay intact; the average citizen would pay less, and creditors would collect more easily. When the English Parliament registers a loan, it guarantees that the nation will pay the capital and the interest. It also certifies that the loan carries the nation's consent. Registration by Parliament is an order to each citizen to pay; it is the sign of good faith that money is advanced to the government. The nation's credit would be infallibly compromised in the eyes of foreigners should it appear that the loan was not consented to by the nation.^[41]

[41] Jacques Brissot de Warville, Point de banqueroute (first part, London, 1787; second part, Paris, 1787). BN, L39b 6308.

Brissot's ideas appeared in a number of other pamphlets as well. In support of the creation of a national debt placed under the supervision of the Estates General, Etienne Clavière (1735–93), another pamphleteer writing from England, related England's success in expanding public credit to the creation of the public debt: "On this island it is the people who spend; it is they who borrow; it is they who engage ... unlike in France, where the Crown directly incurs the nation's financial obligations. In England the debt is guaranteed by the nation itself, which is solidly behind the expenses incurred by its Parliament." He reasoned that in England public spending expanded more than revenue as a result of the creation of the public debt. "While public spending has quintupled since the times of [Charles] Davenant [political economist, 1656–1714], the GNP has only increased in a ratio of 5 to 2."^[42]

Another extensive study of public credit, undertaken by Nicoud D'Umons, concluded with a call for the establishment of a constitutional monarchy in which taxation and the creation of money would be in the hands of the Estates General. D'Umons wrote that public credit would not be established until some restraints were imposed on the Crown's discretion.

If the public accords little confidence to royal notes, it is because the king alone stands behind them, and reasons of state can force him to delay payments. Confidence will be reestablished once, under sanction of the Estates General, a national bank is created that consolidates or reimburses the debt and offers the public notes of its own. The administration cannot achieve the solvency it needs by relying on individual [financiers] ... but when the notes are solidly backed by a bank that represents the interests of all citizens, including the controller general and the king's ministers, then all fear and uncertainty will cease. One cannot expect fifty thousand individuals to compromise their fortunes and allow themselves to be seduced by the government.^[43]

Many of the pamphlets written against bankruptcy linked the crisis in public credit to high interest rates and a commercial bankruptcy crisis. On the eve of the Revolution, contemporaries reported numerous private bankruptcies. One author noted: "Everyone is convinced that there is not enough specie in France, that interest rates are excessive in comparison

[42] Etienne Clavière, De la foi publique envers les créanciers de l'état: Lettres à M. Linguet sur le N. CXVI de ses annales (London, 1788). BN, L39b 516.

[43] Nicoud D'Umons, Essai sur le crédit public (Paris, 1789), 199–200. BN, L39 7148.

with those of our neighbors. Since all commerce depends on credit, the advantage is always with France's neighbors because the king pays from 5 to 12 percent; or even more, which is exorbitant."^[44] To correct this lamentable situation, "Each state where receipts are not sufficient to pay the obligations it has contracted must act like a banker in the same situation. This banker is served by his good reputation: he floats his paper in the marketplace to get some money in order to fulfill his obligations by their due date. Good banking houses never lose on their paper; why should the state not follow suit? Because public capital costs too much in France. The government does not have the means to break even with its creditors." This should not be a problem, he adds: "The king's debt is that of the nation, so it is up to the nation to pay and for the king to supervise that it is paid." He goes on to advocate the creation of a national debt under the jurisdiction of the Estates or some body that represents the nation's credit holders.^[45]

Finally, the calling of the Estates raised new hopes of the creation of a national bank. However, the new bank would have to distance itself from association with the failure of the Law system. As one pamphleteer pointed out, under Law, ministers had the capacity to increase the money supply without the public being able to know how much specie was in circulation. The public never knew either what, if anything, stood behind the bank notes in circulation.^[46] This would be impossible under the new system, because the money could not be manufactured without the nation's consent. Under the new system, "the public would have nothing to fear, because the quantity of notes in circulation could never exceed the proportion determined by the nation. The two systems would be completely different. Under Law, the bank's notes were issued when the king was too young to know the interests of his people. The paper money I am proposing would be created by the nation and backed by it."^[47]

The Financial Preconditions of Revolution in France

On February 22, 1787, Controller General Charles Alexandre de Calonne (1734–1802) convened an assembly of the kingdom's notables to discuss

[44] P. L. B. W. K., Mémoire pour l'establissement d'une caisse publique nationale ou française (BN, L39 6536), 6.

[45] BN, L39b 6536:3.

[46] Nothing needs to stand behind a currency except the promise to accept it as payment for something such as taxes. Thus one never "knows" whether these promises will be kept in perpetuity; one can only have expectations.

[47] BN, L39b 6536. L39b 6539. 30 pages.

general problems of administering the kingdom. One subject dominated the discussions: the deficit, which Calonne had made public for the first time in the nation's history.^[48] Discussions among contemporaries regarding the reduction of the deficit and the reform of existing fiscal practices, however, often raised fundamental questions about the nature of government.

During the plenary session, Calonne presented six memoranda, which proposed two principal reforms. First was the establishment of a proportional tax to be paid in kind by all landowners. Second was the creation of provincial assemblies to assist the intendants with local administration in all the pays d'election . The assemblies would be consultative bodies, not administrative or legislative, and would participate in assessing local and royal taxes but not in policymaking. The pays d'états were excluded from the reforms essentially because local estates already facilitated bargaining agreements between the Crown and the provinces. The existence of such estates reduced the cost of borrowing to the king. The expectation of similar reductions in transaction costs was the principal reason the king was willing to authorize the creation of these consultative bodies throughout the kingdom. He clearly did not wish to share political power with them.

The Assembly of Notables failed to reach an agreement with the king. The notables seemed to approve the principle of equality of tax responsibility, but rejected the measures proposed by the Crown for the implementation of the reforms. Calonne's proportional tax ignored the fiscal privileges of individuals, corporate bodies, and provinces. Not surprisingly, the notables did not want to give up their fiscal privileges without compensation. Tax exemptions were, after all, a form of property that had either been inherited or purchased. Calonne's proposed provincial assemblies were rejected because they were perceived as having little real power, although the notables were being asked to surrender significant financial privileges. "If the assembly serves only to levy taxes ... [it] will be compromised in the eyes of the nation," the prince de Beauvau warned his peers.^[49] With his proposals defeated, Calonne was removed from office, and the assembly was disbanded.

Loménie de Brienne replaced Calonne as principal minister (1787–88), although he was not appointed controller general. An admirer of Necker, he made many concessions to the notables. Instead of the proportional tax of undetermined extent proposed by Calonne, Brienne proposed an as-

[48] It has been subsequently determined that Calonne's estimates were low.

[49] Jean Egret, La Pré-révolution française, 1787–1788 (Paris: Presses universitaires de France, 1962), 62.

sessed tax whose total amount would be determined by the needs of the state.^[50] He presented more accurate estimates of the deficit and reiterated the government's commitment to restricting spending, but his proposals were also rejected. The notables wanted a unified Treasury—the centralization of all receipts and payments, so that it would be possible to know "the actual financial situation day by day, and, limiting the accounting to one source, all payments would be made into a single fund."^[51] Furthermore, they demanded a record of the actual receipts and expenses for the current year and wanted to know all the financial details, such as the amounts of the pensions and subsidies the king provided his favorites, and even about abuses in the postal system. In addition, the notables wanted military reforms and control over the king's stables. Brienne was sympathetic to these demands and offered to work with the notables to economize. In the struggle against the deficit, the notables insisted on controls over future spending. They claimed that only active collaboration between the wealthy and the king could provide the accountability needed to restore confidence in state finances. However, Brienne was unable to provide the notables with sufficient political guarantees that investors would have the power to prevent the recurrence of future deficits and fiscal disorder. He decided to dismiss the notables on May 25, 1787, when it became clear that they would not agree to increased taxation without further concessions by the king.^[52]

Bankruptcy Had Become Unthinkable

With the failure of the notables to resolve the fiscal crisis, state bankruptcy seemed imminent; yet it did not occur. Earlier, in 1770, the government

[50] Brienne was responding to a request from the notables for a land tax that was reapportioned annually in proportion to the deficit.

[51] Egret, Pré-révolution française , 62.

[52] This account is based on Egret, Pré-révolution française . The notables refused to support tax reforms, arguing that since they were not a representative body, their consent was not binding on the nation. See Albert Goodwin, "Calonne, the Assembly of French Notables of 1787 and the Origins of the revolte nobiliaire ," English Historical Review 61 (1946): 373. Vivian Gruder has argued that the notables repudiated the repartitional tax they had originally demanded because they desired to redefine political authority. In other words, their principal objective was to establish institutional restraints on "ministerial despotism." Gruder believes that opposition to the Crown by the privileged orders went beyond a narrow defense of fiscal privilege. Many notables were seeking institutional changes that would subject royal policy to a consensus-generating institution. See Gruder, "A Mutation in Elite Political Culture: The French Notables and the Defense of Property and Participation, 1787," Journal of Modern History 56 (1984): 598–634. This tendency is confirmed by John Markoff's work in progress on the Cahiers of the second estate.

had restructured a significant portion of its debt to head off a fiscal crisis under Abbé Joseph-Marie Terray, contrôleur général from December 1769 to August 1774. Twelve years later the government seemed careful to avoid similar tactics. Even though the fiscal crisis that led to the calling of the notables had begun in 1782, the chief minister, Brienne, waited until August 1788 to suspend payments on the debt.^[53] Necker, who immediately replaced Brienne, reversed this policy and restored payments to the rentiers .^[54]

Historians of Old Regime France continue to be perplexed by the Crown's efforts to avoid repudiating its debts, since it had resorted to repudiation so often before under similar pressures. Why did the king resist repudiation in 1788–89? Three reasons dominate. An especially important component of public opinion could no longer be mobilized to persecute the financiers. As financiers became increasingly leveraged, confidence increased; consisting more of claims holders, they became less distinct as a group. Gabriel Senac de Meilhan observed that the financial officials, no longer rogues but public servants, "are drawn to financial employments by their talents; and hold their posts in much the same way that magistrates and military officers hold theirs. Many financiers are related to great families: these talented individuals could have distinguished themselves in other careers; most have been carefully educated."^[55] Similarly, Count Nicolas-François Mollien, who became minister of the Treasury during the Empire, commented that "the majority of fermiers génér-aux , through their culture, spirit, and the amenity of their habits, take their place among the highest ranks of French society. By the direction they have taken in their studies, they are better disposed to serve the state."^[56] In the seventeenth century, the financiers were viewed as part of

[53] The infamous arrêt of August 16, 1788, has been too loosely interpreted as a bankruptcy, according to Bosher. "Only to believers in the traditional system of depending upon the private credit of accountants and tax farmers, admittedly the majority of observers in 1788, did this seem like bankruptcy" (Bosher, French Finances , 198). Bosher sees the edict as part of Brienne's efforts to suppress and consolidate financial offices and to nationalize the Treasury and the currency. "His suspension of payments was interpreted at the time as a royal bankruptcy; in fact it was a precocious attempt to replace private short-term credit with national or public credit" (ibid., 309).

[54] Salaried officers of the government and rentiers received three-fifths of the gages in treasury notes.

[55] Gabriel Senac de Meilhan, Considerations sur les richesses et le luxe (Amsterdam, 1787), 346–47, cited in French Government and Society, 1500–1850: Essays in Memory of Alfred Cobban , ed. J. F. Bosher (London, 1973), 38–39.

[56] Mollien quoted in Marcel Marion, Dictionnaire des institutions de la France aux XVIII et XVIII siècles (Paris, 1923; repr., New York, 1968), 234.

the vile bourgeoisie and were treated as quite distinct from the old aristocracy. During the eighteenth century, distinctions between the old aristocracy and the new financial elites had eroded, creating a more homo-geneous elite.^[57] Yves Durand found that, by the late eighteenth century, the fermiers généraux were culturally indistinguishable from the rest of the French nobility; only 10 percent of them were not aristocrats.^[58] The strategy of dividing the elites, so effectively used by Louis XIV, was ineffective under Louis XVI. The Crown could no longer arouse the old aristocracy against the monied upstarts.

There is a second reason why it had become much harder to persecute individual financiers. Again Senac de Meilhan explains: "Things have changed. Administration has become a science of which the principles are better known. The various branches of the financial administration are more efficient." After 1770, financial administration was increasingly looked upon as a public activity to be managed by experts. The tax farms had become impersonal bureaucracies and were less easily associated with the fortunes of particular individuals. "Business is no longer concentrated within the small circle of people who once grew rich by public usury and who could dictate the laws in difficult times." Persecution of individual financiers was no longer a viable alternative. There was widespread public recognition that the financial system was in need of wholesale reform.

Protecting the integrity of the bargaining process was the third reason for avoiding the behavior of the past. The monarchy initiated and invited discussion with the nation's elites on the possibility of exchanging political authority for fiscal exemptions. If the Crown had resorted to another bankruptcy, it would have compromised its credibility, thereby undermining its ability to negotiate for the voluntary surrender of exemptions. The Crown needed to appear to be negotiating in earnest and convince property owners that for the first time the king had come to recognize the absolute property rights of his subjects.^[59] The need to maintain the integrity of the negotiating process thus prevented the Crown from acting as it did in 1770, when it repudiated part of its debt. Ironically, the monarchy's actions at the end of the Old Regime were much more in accord with the principle

[57] "At the beginning of the century, the marriage of the count of Evreaux to the daughter of Crozat caused indignation; later, when the Mazade married Aumont, no one raised an eyebrow," notes Chaussinaud-Nogaret (Financiers de Languedoc , 250), who concludes that the financiers were fully integrated into the society of the Old Regime as allies of the aristocracy, spread throughout the robe (ibid., 271).

[58] See Yves Durand, Les Fermiers généraux au XVIII siècle (Paris: Presses universitaires de France, 1971).

[59] By "absolute property rights," I mean the right to be paid interest at the time and in the manner stated in a contract.

of the sacredness of property than were the actions of the Constituent Assembly.^[60]

The Failure of Reform in France

Despite the increased emphasis on corporate liability and public responsibility, secrecy continued to characterize the French financial system at the end of the Old Regime. The French controller general still did not have a complete picture of national finance, since there was no unified Treasury. The financiers still maintained personal and discretionary relationships with each other and with the public. Many were paid fees by members of the public whom they served or were entitled to a portion of the public's funds they handled; some were even expected to draw revenues from their private investment of public funds.

By contrast, the British Parliament in the eighteenth century demanded an annual budget from the king that anticipated all receipts and expenditures. Parliament could thus predict and control spending and find the means to meet the king's demands. One way for the French to achieve a

[60] A number of French authors have suggested an additional reason why the monarchy avoided bankruptcy in 1778–89: whereas in previous crises the Crown had been able to generate public support for persecuting the financiers and repudiating its debt, by the late eighteenth century a broad segment of the population had invested in government securities and had a stake in preventing a royal bankruptcy. A royal declaration of bankruptcy, Brissot de Warville observes in his pamphlet Point de banqueroute , would be especially disastrous for the poor. This broad participation in government finance is confirmed by the research of the historian Daniel Roche, who found government rentes mentioned in the wills of relatively modest Parisians: "Rentes can be found everywhere.... With estates between 500 and 3,000 livres, journeymen, assistants, casual and manual workers, valets, lackeys and servants all had government bonds.... In short, the Parisian servant became a rentier very early, and the wage earner who had made his fortune quickly followed suit" (Roche, The People of Paris , trans. M. Evans [Berkeley and Los Angeles: University of California Press, 1987], 82–83). "A larger percentage of the nation's wealth is now held by the populace in the form of money or in securities," Senac de Meilhan reflected in his book on state finance, Considerations sur les richesses et le luxe , written in 1787. Clavière calculated that there were about three hundred thousand state creditors. "These investors are found among all classes; the extreme subdivision of the nation's securities and the ease with which they can be bought and sold cause securities to circulate from the wallets of the wealthy, through the artisan's shops and even through the hands of servants, all of whom purchase securities to prepare for their retirements" (Clavière, De la foi publique ). Subleases of tax farms were often broken down into very small denominations, so that tax-farming responsibilities penetrated the entire social system and a wide range of the population participated in tax farming. In Brittany, for example, the indirect tax farms were subleased parish by parish. For an example of how extensively taxes were subfarmed, see P. Heumann, "Un Traitant sous Louis XIII: Antoine Feydeau," Revue d'histoire moderne 1938: 5–45. I know of no study, however, that discusses this topic for the eighteenth century.

unified state budget would have been to increase the royal treasury's central control over finance. With the exception of Necker, none of the controllers general who served the Crown in the decade before the Revolution attempted to terminate the system of basing public credit on the private resources of the financiers entirely.^[61] When Necker was replaced as controller general by Joly de Fleury (1781–83), the latter reported to the king on the need to reestablish the system of financiers that Necker had attempted to eliminate. He claimed that the public would not be well served by salaried officials, who "guided by no personal interest are less zealous in their work." Fleury insisted that the Crown was having difficulty raising funds because "the twelve administrators who were substituted for the forty-eight Receivers General [by Necker] sign these rescriptions, it is true, but they are not the guarantors of them. The people who lend their money want to have a rich guarantor behind the rescriptions."^[62] Louis XVI's controllers general, including Calonne, who replaced Fleury, believed that maintaining the confidence of the investing public was most reliably ensured by the personal wealth of the financiers. Calonne did not produce a plan to eliminate the system of caisses and financiers.^[63] He believed in basing royal credit upon the private credit of the financiers and tax farmers, and that the state's credit needed to be supported by groups of separate financiers acting as private business agents.^[64]

Insistence upon greater public control over spending was ignored by the king's advisers. With the exceptions of Necker and Brienne, controllers general were chosen because they were influential figures among the financiers. (Necker's influence was among bankers rather than financiers.)

[61] The absence of a central treasury and reliance on private resources are not the same. One can have a decentralized public system or centralized private system like that of England. The line between public and private is not as clear-cut as one would like to think. Even today the low rates available to the U.S. government are owing to the liquidity and underwriting services provided by private intermediaries, all of whom are well capitalized.

[62] Joly de Fleury quoted in Bosher, French Finances , 175. Bosher explains that the taille was collected by receveurs , venal officers pledged to disburse funds according to a fixed timetable. Rescriptions , claims made on the receveurs , were owed to the Treasury and due a year later. The Treasury could sell these claims at a discount for cash, and the money was at the receveurs ' disposal for the year. In addition, receveurs collected a commission, or taxation , on the sums collected. The taxations issued by the Ferme générale under the name of billets were sometimes known as "anticipation notes." A floating debt was created by allowing these notes, for which the receveurs were personally responsible, to be used by the government.

[63] Bosher calls these individuals "accountants." In French they were called comptables , which meant simply that they were personally accountable for the management of the king's funds.

[64] For a discussion of Calonne's view of reform, see Bosher, French Finances , 215–30.

Finance ministers could not be expected to pursue policies that would terminate the financiers' control over the nation's financial system without sacrificing their ability to act as intermediaries between the financiers and the king. At best, the so-called reforming ministers wanted only to increase royal control over the financiers. Even these controls were too radical to sell to their financial constituencies. The financiers opposed efforts at fiscal centralization because they considered it essential to conserve their personal discretion and to maintain secrecy in their affairs. Nor did they want the assets that they possessed in the form of offices to be terminated. Over the course of the eighteenth century, the syndicate of fermiers généraux had increased in independence and strength because greater public confidence in the tax farms increased their ability to borrow from the public. Because the Crown depended on the syndicate's advance payments on tax-farming contracts, the syndicate had sufficient leverage to prevail against government efforts to centralize finance.^[65] As administrators of indirect taxes, the farmers general supplied the French government with more than 40 percent of its operating capital. By threatening to withhold advances and keeping monthly payments low, the farmers general could undermine public confidence in state credit. The leverage of this group prevented the Crown from pursuing radical reform.

In short, the irony of absolutism discussed in chapter 8 led to the demise of royal authority. Instead of creating institutions with which to negotiate for loans and taxes, the Crown circumvented public consent by relying upon private contracts with privileged special interest groups. Now the fiscal foundations of the Crown's absolute authority, its ability to rule without the consent of its subjects, was jeopardized by some of the very financiers and corporations it had used to evade direct accountability to the nation's creditors. The financial interests and groups that the king had built up were strong enough to block reforms that threatened their profits or their control over the kingdom's financial system. Financial families and corporations would not surrender the privileges they enjoyed without compensation. By threatening to withdraw financial support, they left the Crown with no alternative but to call the Estates General. The Crown was thus the victim of the very groups it had cultivated in order to avoid consulting with its subjects on fiscal policy.

The Crown's hopes of resolving the fiscal crisis by establishing greater central control over financial contracts were doomed from the start. The

[65] The fermiers généraux were not all-powerful. They could not prevent the government from attempting to eliminate internal tolls.

fermiers généraux opposed such measures, and they were not alone in their hostility to them. As already noted, the unification of the Treasury under the Crown's direction did not appeal to the Assembly of Notables. Who could trust greater centralization if it were carried out under the auspices of a king whose principal ministers were viewed as rogues? Informed members of the public insisted on the need to subject economic policy to public discussion and to design institutions that would limit the Crown's discretion in matters of finance.^[66]

Restricting the king's control over government finance was one of the first and most consistently implemented reforms carried out by the Revolutionary government. From the outset of the Revolution, the Constituent Assembly fought the Crown for control of government finance.^[67] It set up the Treasury as an alternative to the Department of Finance, which remained under the king's control. On July 17, 1790, the assembly transferred to the Treasury the government bureaus authorized to make payments, so that the Department of Finance could no longer distribute funds without the assembly's jurisdiction. By the autumn of 1790, the assembly's Committee on Finance assumed full control over the nation's finances by dismantling the Department of Finance. As a final step toward the establishment of full legislative control over the Treasury, the assembly suppressed the Chamber of Accounts by decrees of September 17 and 29, 1791. The Crown was left with virtually no leverage over state finances.^[68]

This concern to assume control over the nation's finances was not matched by a concern for responsible finance. Before embarking on a course of monetary irresponsibility, many of the representatives in the Constituent Assembly argued that bankruptcy was a socially equitable solution to the nation's fiscal problems. The comte de Mirabeau argued eloquently that only a minority of the population, the rich, would be affected. Many in the assembly, like Mirabeau, reasoned that a bankruptcy would only fall on the rich, since they held the debt. Bankruptcy further presented itself as way of settling scores with the capitalists for their past sins and excessive profits. Why not sacrifice this minority for the good of the larger number? Florin Aftalion speculates that bankruptcy was avoided because the creation of the assignat offered a politically safer solution: it

[66] An extensive pamphlet literature proliferated during the 1780s that solicited public support against the threat of an impending royal bankruptcy. Brissot, Clavière, and Mirabeau were noted authors of such pamphlets.

[67] Contemporaries often referred to the Constituent Assembly as an "assembly of the nation's shareholders."

[68] See Charles Gomel, Histoire financière de l'Assemblée constituante (Paris: Guillaumin, 1896).

irritated an even smaller percentage of the assembly members' constituents. Aftalion also reports that certain deputies considered that the continued existence of the king's debts would highlight the Crown's dependence on the Constituent Assembly and thus reinforce its power. He speculates that perhaps only the desire not to let the Crown off the hook for its previous engagements prevented the deputies from indulging in their hostility to the world of high finance.^[69]

Conclusion

Because the French king could not solve the nation's fiscal problems, he ended up with a social crisis. By calling the Estates General, the king invited individuals into the political debate for whom fiscal and economic matters were secondary. In the king's address to the Constituent Assembly, he emphasized the need to settle the fiscal crisis. However, social and legal inequalities seemed more pressing by far to the delegates. The very first question of importance discussed by the assembly, that of suffrage (vote by head or by order), was linked to legal and social status. Had the king acted earlier, he might have avoided such issues, and the reform of the nation's political institutions might have been guided by fiscal considerations.

The quest for equality before the law desired by many of the third estate's delegates and that of fiscal stability desired by the king and his ministers could have produced very different constitutional outcomes. Fiscal stability could have been achieved without broad democratic participation in the political process. Equality before the law could have been achieved without representative institutions. If the monarchy's political power had been absolute in reality, it might have been able to complete the social and legal revolution it had begun without making political concessions to either the elites or the populace. The Crown, however, was too dependent on the financiers to steer an independent course, and too dependent on the sale of privilege to establish the principle of the equality of all citizens before the law. Instead, the Crown reinforced privilege and inequality by exchanging tax-exempt offices for short-term revenue. The assembly's efforts to unravel the web of privilege and exemptions woven by the Crown led to increasingly radical measures. In one sense, the French Revolution began once the debate in the assembly shifted from fiscal to social and juridical reform. Introducing the issue of equality before the

[69] Florin Aftalion, L'Economie de la Révolution française (Paris: Hachette, 1987), 84–85. In May 1794, thirty-six fermiers généraux were arrested; twenty-eight of them were subsequently executed. Their estates were confiscated for the benefit of the Republic. See also Chaussinaud-Nogaret, Financiers de Languedoc , 266.

law, the delegates transformed the political debate and set the stage for drastic solutions. Ducloz-Dufresnoy accurately depicted the danger in a pamphlet entitled Jugement impartial sur les questions principales qui intéressent le tiers-état [An Impartial Assessment of the Third Estate's True Interests], in which he cautions the third estate to avoid "the dangerous principles in the works lately published." The only issues the third estate should discuss with the privileged orders were "the subsidies or impositions necessary to restore public order, the choice of impositions, the manner of distributing them and the rules needed to ensure that their proper use is respected." Concentrate on consolidating the nation's debt and respect the fundamental order of the kingdom, he cautioned. Raising the question of legal equality would invite disaster.^[70]

Louis XVI's vacillating character must bear some of the blame for the Crown's failure to resolve the fiscal crisis before it provoked a social revolution. The king seemed incapable of making a decision or of taking a position. Under pressure he abandoned each one of his ministers, undermining his own credibility and that of the negotiating process. At several stages of the crisis a more decisive king might have imposed a settlement.

While the personalities involved played a role, the evolution of financial intermediation, the technology of contractual relations in Old Regime France, followed a generally consistent pattern. Under the Old Regime an important constraint on the expansion of state power and economic growth was the need to devise institutions that could restrain and compensate for the Crown's discretionary authority over fiscal and monetary policy. The need to design mechanisms to enforce commitments—to make the government's repayment promises credible—was the driving force behind the evolution of corporate institutions (see chapter 8). A regime of privileged corporations throve under absolutism and had the effect of economizing on the costs of gaining credible commitments from the monarchy.^[71] Parliamentary institutions eventually replaced the institutions of absolutism because they made possible credible commitments from government at an even lower cost to the general population. Expanding upon this insight offers a possible explanation for the French Crown's inability to negotiate a peaceful transition from corporate to parliamentary management of the

[70] Charles Nicole Ducloz-Dufresnoy, Jugement impartial sur les questions principales qui intéressent le Tiers-Etat (Paris: Chez Clousier, 1788). BN, L39b 762. Citing Montesquieu, he reminds the third estate not to lose sight of the nobility's role of defending the nation from the despotism of ministers.

[71] Depending on one's point of view, the entire system of financial intermediation developed by the Crown can be viewed as either a transaction cost or an economizer of transaction costs. On transaction costs, see Oliver E. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985).

nation's debt. French kings recognized the need to develop more effective sources of credit because, during the eighteenth century, the ability to borrow at low cost had altered the proportion of national wealth needed to support the military force required by Europe's diplomatic and commercial rivalry.^[72]

In effect, taking into account their preference for giving up as little control as possible, we can look on the Old Regime French kings as having created the most efficient system possible. Viewing monarchy as a firm, a king could obtain financing by issuing either debt or equity. If he issued debt and did not go bankrupt, he stayed in command. Using a parliament to finance the state is a way of creating equity, but it cedes control of the firm to the shareholders. This is in effect what happened in England, where the king, having lost control of the state to his shareholders, was put on salary. Considering the institutional constraints with which it was forced to comply, the English monarchy had reached the limit of its ability to raise funds on its own; the constitutional crisis and defeat in the Civil War that ensued left the Crown with no alternative but to increase equity. The French king was more successful, in that he did not have to convoke a representative body; increasing his debt rather than his equity allowed him to stay owner of the firm. To seventeenth-century observers, even the

[72] The thesis of this chapter is neatly summarized by Jean-Baptiste Say, who wrote:

Where power rests in the hands of a single man, the government has difficulty in enjoying great credit. It cannot offer the good will of the monarch for security. Under a government where legislative power rests in the people or in their representatives, one has an added guarantee; the interests of the people who are creditors as individuals and at the same time debtors of a nation, and who can only receive what is due them in their first role if it is paid in their second. This single consideration can lead one to presume that at a time when nothing great is achieved except at great cost, and when great costs can only be supported by loans, representative governments will make marked progress in the political system (in Europe, in general) because of their financial resources, independent of all other circumstances.

(Say, Traité d'économie politique , 2:526–27)

For an example of the credit advantages of parliaments, see James D. Tracy, A Financial Revolution in the Habsburg Netherlands: Renten and Rentiers in the County of Holland, 1515–1565 (Berkeley and Los Angeles: University of California Press, 1986). Tracy contrasts the insolvent Spanish Crown's dependence on enormous short-term debts at high interest rates with the Dutch system based on long-term loans guaranteed by public authorities. The Dutch withstood the superior resources of Philip II's Spain because they could borrow at moderate interest rates a sum equivalent to twelve times their annual revenue. A representative assembly of the county (the Estates of Holland) accepted collective responsibility for the loans and voted taxes on which the loans were secured.

best-informed with the most foresight, it seemed that French kings were in a far better situation than the English. The French financiers had cultivated all the trappings of solidity and permanence; they built the most ostentatious quarters in the most fashionable sections of the capital and behaved as if they had been around since the beginning of the monarchy, marrying into the most illustrious and oldest of France's noble families. Nevertheless, possessing new fiscal technology, Britain's financial system rapidly shifted the ground beneath what seemed to be one of Europe's most enduring edifices—the French fiscal establishment.

Competition between France and the other European states was critical in precipitating the preferences for institutional change within France. The decentralized competition among European states dramatically rewarded nations for successful organizational innovations and just as dramatically penalized those nations whose organizational structure lagged. The rise of Britain's funded public debt presented an alternative that ultimately invalidated the French system. In the absence of a central authority that could impose uniform governance on the entire continent, there was no way to prevent an interloper from introducing a more efficient method of public finance that disrupted the entire international system. The diffusion of diverse fiscal institutions among rival European states meant that the splendid structure built by the Old Regime kings had to be torn down. It was invalidated by an upstart, Britain, which during the seventeenth century had hardly seemed worth taking into account.