The French Revolution was the culmination of a century of financial mismanagement. The political disorders only brought about further economic trouble though, and monetary mayhem as well. However, the Revolution did create opportunities in French finance as it eliminated barriers to the establishment of new banking firms. One of those formed in the wake of the Revolution, nearly simultaneously with the rise of Napoleon, was the Banque de France. Napoleon took great interest in the Banque as a possible aid to French industry and commerce as war and blockade threatened it.
France had a financially turbulent 18th century. Mounting indebtedness and high borrowing costs prompted at least three defaults on the government debt before 1780. The inability of the monarchy and the entire ancien régime to resolve the fiscal trouble triggered the French Revolution. Thereafter, a new government inherited a bankrupt state. However, taxation being one of the grievances that caused the revolt to begin with, the government chose to reduce rather than raise taxes.
With its credit never more ruined than it now was, the Revolution confiscated Church landholdings and used them to collateralize new borrowings through the issuance of assignats, a form of debt obligation that soon thereafter became a currency. These assignats were printed liberally during the early 1790s and so were essentially worthless by the middle of the decade. That said, these were not exclusively destructive times, at least financially. The elimination of regulation prohibiting the formation of banks allowed several to be founded; the Revolution liberalized the financial markets in France.
Banque de France
After several changes in government, the Revolution waned and the coup of the 18th of Brumaire made Napoleon Bonaparte the ‘First Consul’ of France in November 1799. One of the earliest acts of the consulat was the creation of the Banque de France, established in January 1800 by the new Finance Minister, Martin-Michel-Charles Gaudin. The Banque’s initial equity capital of thirty million livres was raised by selling 30,000 shares of 1,000 livres each. Within a month, it absorbed another bank established during the Revolution period, the Caisse des Comptes Courants, run by prominent bankers itself. The acquisition added to the size of the new bank.
The Banque de France was given an official charter in 1803 and was bestowed some of the privileges of a central bank, such as broad powers over the printing of banknotes. The Banque secured a monopoly on printing paper banknotes in Paris in 1803. This power was granted in a country which had seen two spectacular failures with paper money in the preceding century, the first being the collapse of John Law’s Banque Royale in 1720 and the latter the recent abandonment of the assignats. This power to issue paper banknotes was also granted by a regime led by a man, the First Consul himself, who was supposedly especially skeptical of paper money. The temptation to allow paper notes to exceed the reserves backing them would surely be too high.
From there, the Banque de France served Parisian bankers by discounting bills they held, providing liquidity they could use to honor obligations. The banknotes it issued to purchase the bills made up the Banque’s liabilities and financed 44% of its assets by 1810; deposits and equity capital financed the rest.
However, whatever their growing importance in Parisian financial circles, Banque de France banknotes were still far from common in the hands of ordinary people, especially in the provinces. Indeed, the first two series of banknotes issued were of 500 and 1,000 livres denominations; 500 livres would have been close to a years’ wages for many commoners. Perhaps surprisingly, the 500 livres notes, and then the 500-franc note, continued to be the lowest denomination banknote issued by the Banque until 1847.
The Banque’s early years were not uneventful. It even experienced a brief panic in 1805 after excessive lending by the Banque to the government, likely encouraged by Napoleon himself, caused rumors of the Banque’s health to circulate. Holders of banknotes and depositors arrived at the Banque’s door to redeem their holdings in greater numbers. This run on the Banque de France caused a temporary suspension in the convertibility of the notes into precious metals. However, the events in France were truly temporary, in contrast to a similar suspension in Britain in 1797 which had not yet ended eight years later. The value of banknotes fell slightly before recovering. Nonetheless, the government learned its lesson and avoided borrowing too much from the Banque de France thereafter.
Napoleon Bonaparte drove many economic reforms during his rule as First Consul from 1799 to 1804. These included the establishment of a monetary standard based on both gold and silver, moving on from the assignat experiment. The franc also replaced the old livre as the national unit of account and new coins were minted. Taxes were increased and repayments of the national debt in bullion and coin resumed. A sinking fund was also established to pay down that large public debt. All this was intended to restore French creditworthiness; to the extent it encouraged stability, it would benefit the Banque as well.
Napoleon strongly supported the Banque de France despite a supposed distaste for paper money after the experience with the assignats and his phobia for debt. His approval may have been encouraged by the fact that prominent bankers supported the coup the brought him to power and the financial community was among the most powerful in Paris especially. Napoleon deposited money with the Banque de France and encouraged others, including in his family and generals, to do the same. The state also became one of its investors, perhaps its largest, by purchasing 5,000 shares in the company. The share subscription list included the future King of Spain and Napoleon’s brother, Joseph Bonaparte, and generals Christophe Duroc and Joachim Murat.
After the First Consul was crowned Emperor at the end of 1804, his focus on the Banque grew. His intention was to use the Banque de France to reduce interest rates by increasing the availability of credit in the country. He pressured the Banque’s management, which was selected by fifteen regents elected by the two-hundred largest shareholders, to cut interest rates from 6% to 4% in 1806-07.
However, Napoleon was perhaps surprisingly concerned with the private, and not only public, benefits of the central bank. Curiously enough, it was is Britain where the central bank was largely founded with an eye to serving the public finances, while that of the étatiste French was more concerned with serving private business, such as by discounting bills for private bankers.
The Banque’s vision was to support French industry and commerce and Napoleon encouraged the provision of cheaper and cheaper credit. It helped that the state’s needs were provided for by the large payments France received from its defeated neighbors as means for supporting its large armies abroad. A sum of 500 million francs was extracted out of the Kingdom of Prussia alone between 1806 and 1812.
“You should tell the governor of the Bank and the regents that they should write in letters of gold in their board room these words, ‘What is the Object of the Banque de France: To Discount the Credits of all Commercial Concerns in France at Four Per Cent’” – Letter from Napoleon Bonaparte to the Treasury Minister, Count Mollien, on May 15, 1810
Napoleon’s concern for the health of his nation’s industry was driven by the blockade then underway in Europe. During the Napoleonic Wars, Britain and France fought an economic war by blockade. France required its vanquished enemies to cut off trade with Britain and Britain used its navy to cut off France from the Americas. During these years, Napoleon believed that cheaper credit was key to holding France over until the military situation improved.
In addition to lowering interest rates, the Emperor specifically wanted the Banque to open branches in other commercial centers outside Paris, against the wishes of his Treasury Minister, Count Mollien, to whom he wrote in the above letter. Operating outside the capital city was peculiar for early central banks. The distances involved posed a problem to ensuring bank reserves were not just ample but well distributed and still other challenges also had to be overcome to please the Emperor. The influence of Napoleon himself over the Banque is illustrated by the fact that these branches were closed as soon as Napoleon fell from power.
French finance was, like perhaps everything about France, transformed by the French Revolution. This includes central banking in France which owes much to the First Consul and Emperor, Napoleon himself. Napoleon ordered the Banque de France’s establishment, deposited money with the bank, and ordered the state to invest in it. He endowed it with various powers he was earlier skeptical of and used those powers to extend credit to French business. The Banque was, like the Napoleonic legal code, and the Légion d’honneur, one of the legacies of the famous, or infamous, Emperor.
More from the Tontine Coffee-House
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