The financial decline of great powers
By Guy Rowlands
When great powers decline it is often the case that financial troubles are a key component of the slide. The vertiginous decline of a state’s financial system under extreme pressure, year after year, not only saps the strength and volume of financial activity, it also proves extremely difficult to reverse, and the great risk is that a disastrous situation is worsened by misguided and ultimately catastrophic attempts on the part of a government to dig itself out of its hole. So great does the eventual debt become that there is little hope of repaying even a majority of the capital, even with decades of peace and low spending ahead. The protracted financial and economic crisis that began in the West in 2007 provides an appropriate contemporary backdrop for a fresh examination of the decline of France’s financial system in the early eighteenth century under just such a mountain of poorly-backed debt. In the final decades of the seventeenth century France had been the leading great power in the European states system, indeed the only superpower capable of projecting significant force on multiple war fronts. Yet within a quarter of a century it had lost this comparative international advantage, as its financial strength degenerated alongside its military power.
France got into such a terrible mess in the final two decades of Louis XIV’s reign. While war was the essential cause of heightened state spending, as the largest economy in Europe France should have been able to sustain a protracted and extensive conflict, but it could not. The underlying problem was the combination of two classic, fatal ingredients: a weak fiscal base, and a precarious and expensive credit system. The tax base was chronically enfeebled by vast numbers of exemptions and privileges that the government only began to tackle in 1695. But tentative attempts to make the elites — the top 2-3% — contribute more to the costs of the state would, over the following 90 years, prove politically contentious and divisive, sapping the legitimacy of the monarchy. As for the weakness of credit, this arose not just from the problem of weak fiscal backing and the fact much of it was supplied by those entrepreneurs charged with tax collection. It also stemmed from the inherent unreliability of a government dominated by an absolute monarch, which at times was willing to threaten dealers in the foreign exchange and public debt markets with prison and professional proscription for pricing financial instruments on a realistic but unfavourable basis. Compounding these issues were huge concerns over the undependable and sclerotic legal framework for lending money at interest. France was, in short, overregulated, but capriciously so.
In the War of the Spanish Succession (1701-14) this system unravelled spectacularly. As tax yields declined the government pursued dangerous expedients, including the manipulation of the value of the coinage and the issuing of vast quantities of Mint bills: a hybrid of paper money and short-term credit notes. Furthermore, rather than relying overwhelmingly on well-organised advances on tax proceeds from leading tax collectors, the government turned the paymasters of the armed forces into state creditors on a giant scale. Louis XIV’s government became so dependent on these men and other entrepreneurs supplying the army and navy that they were able to make exorbitant demands. Some of them even penetrated the corridors of power as junior ministers, in an early form of military-industrial complex. All this came at a very high price indeed. The financiers and suppliers were rapacious, though they also needed to protect their own solvency and operations by ramping up costs as a form of insurance against arbitrary state management and the increasing number of revenue sources that were failing. These revenue failures played havoc with the system of appropriating revenue sources to expenditure, which was already being disastrously mismanaged by senior officials, and this earmarking chaos in turn threw the state even further into debt in a desperate attempt to keep the failing war effort going. This war effort was pursued much of the time beyond France’s borders, putting yet further strain on the state: Louis XIV needed vast amounts of foreign exchange to pay and supply his armies and allies in Spain, Italy, Bavaria, the Low Countries, and even Hungary. The volume of foreign currency required would naturally have pushed up its price, but the turbulent and deteriorating monetary and fiscal backdrop led international bankers to build astronomical costs into their exchange contracts for moving state money abroad. The failure to control their transactions, the separation of risky payment sources from their additional instruments of guarantee, and the short-selling of this paper precipitated a monumental crash of the exchange clearing system in early 1709 in Lyon, from which the city never really recovered.
By the time of Louis XIV’s death in 1715 French state debt had risen more than three-fold from the size it had been thirty years earlier, and much of that increase was down to a few short years between 1702 and 1708 — the early modern period may in many ways have seen a much slower pace of life than we experience, but financial crises could unfold roughly at a similar pace. The real danger is that it can take as long or far longer to effect a stabilisation and recovery, thus tempting governments into dangerous policy decisions to try to generate swift recoveries. In the years after 1715 the Regency government for the boy king Louis XV took exactly this course, seeking to liquidate much of the state debt by swallowing the snake-oil solution peddled by John Law of hitching debt to a national bank backed by vast speculation on the highly uncertain economic future of overseas trade and colonisation. The subsequent liquidation of Law’s System forced the government into inflicting enormous haircuts on creditors, further eroding confidence in the monarchy, while future generations were still saddled with levels of debt that the state machinery was not designed to cope with. It also condemned the French body politic to a series of destabilising political struggles over state finance that culminated in final breakdown and revolution.
Guy Rowlands is Director of the Centre for French History and Culture at the University of St Andrews, and author of The Financial Decline of a Great Power: War, Influence, and Money in Louis XIV’s France (Oxford, 2012). He is also the author of The Dynastic State and the Army under Louis XIV: Royal Service and Private Interest, 1661-1701 (Cambridge, 2002), for which he was co-winner of the Royal Historical Society’s Gladstone Prize (2002).
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Image credit: Louis XIV and His Family circa 1710. Wallace Collection. Public domain via Wikimedia Commons.