The Region

The Macroeconomic Causes and Consequences of The French Revolution

Thomas J. Sargent - Consultant

Published December 1, 1991  |  December 1991 issue

During the 1991 annual meeting of the Minnesota Economics Association, Thomas J. Sargent, economist at the Hoover Institution at Stanford University, presented a speech entitled: "The Macroeconomic Causes and Consequences of the French Revolution." While that subject is certainly of interest to historians, the parallels between France in the late 18th century and the countries of Eastern Europe and Russia today make the topic even more compelling.

The following article is a compilation of Sargent's opening statement at the MEA meeting and an abstract of a work in progress, authored by Sargent and Francois R. Velde, a graduate student at Stanford; also included is a brief statement from that same work in progress.

Think of the following situation: Think about a country that needs to set up a brand new monetary system, a country that wants to establish a hard currency or a convertible currency. Think about a country that faces a privatization issue, that is, it's a country that needs to dispose of large amounts of state-owned property, including enterprises, houses and land.

Think of a country that needs to set up a completely new tax administration with a new set of laws for taxing private enterprises. Think of a country or set of countries that need to establish a whole set of political and economic institutions that cohere in such a way that the individual parts feel compelled to stay with the center.

There are countries in the would that face these problems today. But there was also a country that faced those problems 200 years ago—France. All of the problems listed above, which exist in Russia or Yugoslavia or other Eastern European countries, existed in France in the late 18th century.

France in 1788 was a nation overcommitted. The state had inherited commitments to its creditors, its office holders and its citizens, not all of which could possibly be kept given the state's prospective resources. Previous kings of France had created a nation and raised revenues by selling privileges, salaried offices, future tax revenues and tax exemptions, leaving to Louis XVI a legacy of large government expenditures and a severely restricted capacity to raise revenues. An outcome of overcommitment was a sequence of serious government fiscal crises that culminated in the decision of Louis XVI to convene the Estates General in 1789 for the purpose of redistributing fiscal burdens among the three Orders of France. In some sense, the crisis of 1788 began as a repetition of previous crises encountered by the French monarchy. The outcome had invariably been restoration of fiscal balance at the expense of debtholders, through default. But the last years of the Old Regime had seen displays of intention and incipient reforms which seemed to portend a different solution. A fundamental change in the rules shaping policies and behaviors was in the making, one which would allow France to emulate Britain's successful management of debt and credit, and thereby, it was hoped, its hegemony.

The monetary and fiscal affairs of the French Revolution (1789-1799) centered on a struggle to unwind past commitments and elaborate new ones. The struggle was prolonged because many of the men who administered the French Revolution respected private property and wanted to honor the state's commitments; the alternative of a generalized bankruptcy was postponed as long as possible.

The idea of defaulting on the government's debt was repugnant to them, partly by virtue of their principles and partly by virtue of the interests they represented. These men were aware of the need to abandon the policies of old and open a new era of fiscal discipline and respect for contracts. In their search for alternatives to outright default, they undertook drastic and novel fiscal experiments to raise revenues. They managed to postpone defaulting until 1797, by when the other fiscal expedients that had been used to keep things together had been exhausted.

The French had been inventive in designing ever more ingenious forms of government debts to finance the deficits of the Old Regime; they proved to be equally inventive during the Revolution. The monetary and fiscal expedients of the French revolution in many ways foreshadowed measures used by fiscally stressed governments during the 20th century. The French revolutionaries managed to finance massive deficits by issuing a paper currency, the assignat, and eventually imposing severe legal restrictions to prop up the demand for the paper currency. The ultimate depreciation of that currency and the severity of the legal measures used to prop it up have been roundly criticized, but the magnitude of revenues raised via issues of the assignat during the first six years of the Revolution is impressive indeed, and was a key to the survival of the young republic.

The measures that the revolutionaries took and some of the considerations raised during the deliberations that preceded taking them, were surprisingly modern, in the sense that they present striking parallels with 20th century events and with monetary theories that have been developed during the 1970s and 1980s. The French government provided "backing" for the assignats, at least in the beginning, in the form of newly nationalized church lands. They debated whether such backing was adequate to forestall depreciation and about how the paper money was best to be administered, whether by the government directly or through a privately owned central bank. They debated whether the assignats should be legal tender, and whether it should bear interest. They examined various possible roles for the assignat, and transformed it first from an instrument of short-term credit into a financial instrument designed to reimburse the national debt, and then into a full-fledged fiat currency. They discussed and then adjusted the denomination structure of the assignat: because the first assignats were issued in large denominations, small denomination notes were at first supplied by private banks, until the central government reclaimed a monopoly on that activity. They discussed and implemented measures to demonetize large denomination assignats and assignats with the king's image on them. Later, when a European war broke out, they undertook measures to promote the demand for assignats, by severely restricting individuals' access to other assets, and later by introducing the assignats into newly conquered territories. And when the assignats and a successor note, the mandat, were finally officially demonetized, they passed a law that embodied a version of a clever dynamic currency reform scheme that was proposed in the early 1980s by Jeffrey Shaefer and Axe Leijonhufvud to adjust pre-existing contracts in the face of a dramatic stabilization of the price level path.

These events are interesting to us as macroeconomists (with rational expectations stripes) because rarely have issues of a regime change in the making of monetary, fiscal and other aspects of policy occupied a more central role in the affairs of a great nation. As macroeconomists, it is natural for us to interpret events during the Revolution in the light of a variety of insights that have emerged from the last 20 years of research on the subject of "rational expectations." To a non-economist, this perspective will no doubt seem odd, for we propose to rely on the hypothesis that men act rationally, in order to analyze as deeply as we can events that appear irrational, such as the Terror. But as we shall see, macroeconomic work on rational expectations time and again directs our attention to central aspects of the events that occurred during the Revolution; and conversely, a careful examination of the ends sought, and the means employed by the French Revolutionaries will often remind us of questions analyzed in recent years by macroeconomists.

Profession of Faith

The French Revolution was a formidable disruption of the European world: not solely because of the ensuing wars and the far-reaching changes brought by the Napoleonic era, but also through its impact on 19th century thinking. This has shaped our vision of the events, a vision from which scholars are now trying to free themselves, taking a closer look at the facts, and bringing tools and concepts from diverse fields to bear upon the multi-faceted mystery of the Revolution. The event itself is so manifold, that it seems impossible to encompass its bewildering effusion of men, ideas and institutions within a single interpretation or even a single field of study. But our goal is humbler: As economists, we hope to shed light on those facets closest to us. As macroeconomists, and of a certain breed, we hope to persuade of the applicability of particular modern theories to this event and thereby perhaps deepen our collective understanding.

One fundamental change brought by the Revolution was in philosophy. Whereas the American Revolution fulfilled the 18th century's promise of a new enlightened order for society, based on the individual as atom and on the contract as mode of interaction; the French Revolution appeared to spectators and actors alike as a terrifying example of how the course of events, la force des choses, the force of circumstances as Saint-Just called it, could overwhelm individuals. History, as a mysterious and awesome power transcending human will, had irrupted into the social order, casting aside the rational and the conventional. The Terror was the culmination of this epiphany, with its rulers intoxicated by power, devout revolutionaries butchering each other, selfless friends of the people engulfed in a whirlwind of violence and repression: As one of its victims had forecast it, "the Revolution may soon, like Saturn, devour its own children."

The 19th century was to be greatly affected by this example, both in its political thinking and in its philosophy. The elements of disruption and chaos came to overshadow the continuities, the absurdities of a runaway Terror masked the underlying political purpose; and observers came to think of this event as one colossal fracture in time, severed from the past, creating its own problems and its own solutions. The Old Regime, whose flaws provided both explanations and justifications, essential and final causes of the Revolution, remained enclosed in the revolutionaries' perception. It was read as a tragedy, or a farce, whose notorious plot leads to a necessary denouement.

Historians have now freed themselves from the corset of history and are studying the 18th century as something more than the prelude to the Revolution. But the economic history of the period has somehow lagged on other fields, and to a large extent it has remained prisoner to old controversies, as economic facts were marshaled mainly in defense of specific, for example Marxist, views of the Revolution. Similarly, the financial history of the Revolution has been framed by the revolutionaries' perception of themselves as innovators, regenerators and founders. When one reads the traditional histories of the Old Regime, one is amazed that it should have survived so long: We see the ancient Regime on its deathbed, crippled by absurdities, and it seems that its sole purpose and destiny was to open the way to the Revolution.

Our approach is that of modern macroeconomics, and we will, perhaps distastefully, insist on the applicability of our field's more recent theories to this event. The actors of the Revolution were in fact dealing with some classic issues of macroeconomics, and far from being haphazard innovators or ignorant victims of incomprehensible phenomena, we see them as drawing upon contemporary economic thinking, as well as recent experiences in various countries. That they may have failed in a great number of respects does not deny them the presumption of rationality; nor of free will. They tried to solve problems they inherited from the Old Regime: both explicit problems, and implicit contradictions of the condemned order; but also problems of their own making. And as they searched for solutions, they relied on known methods, and experimented with new ones, discovering in the process many constraints on human action with which we still grapple today.

Thomas J. Sargent is an economic adviser to the Federal Reserve Bank of Minneapolis, a position he has held since 1971 when he joined the faculty at the University of Minnesota. Currently he is a senior fellow at the Hoover Institution, Stanford University.