When, in my days as a professor, I occasionally assigned term papers, I used to smile when students wondered out loud how they could possibly come up with enough to say to fill a whole 20 (or 15, or 5, or whatever) pages. After all, the problem, once you got to be where I was, wasn't having too much space: it was not having space enough to say what needed saying. It was all I could do sometimes to squeeze my ideas into the 25 double-spaced typescript page-limit that prevailed among scholarly economics journals.
These days I'm no longer compelled to wrestle with academic journal editors, thank goodness. But I still face strict length limits now and then, like the one I'm confronting as I finally get around to writing my long-overdue review of Roger Lowenstein's America's Bank: The Epic Struggle to Create the Federal Reserve. I'm supposed to limit the review to 1000 words. Yet I could easily write 20,000 words about that book. In fact I have written 20,000, and then some, in the shape of a Cato Policy Analysis called "New York's Bank: the National Monetary Commission and the Founding of the Fed." Our respective titles give you some idea of where Lowenstein and I differ. Anyway, the PA isn't ready yet. When it is, probably about a month from now, I will let you know.
Despite that PAs length, it also leaves much unsaid. It says nothing at all, for example, about the seemingly innocuous sentence in chapter five of America's Bank that reads: "The Bank of France was chartered in 1800 as an antidote to the financial turmoil of the French Revolution."
It is but a passing statement, in a work concerning the founding, not of the Bank of France, but of the Fed; and it is of no importance to that work's thesis. And yet…and yet that sentence says plenty, for it represents as well as any sentence in Lowenstein's book its author's inclination — a very common one, to be sure — to view even the earliest central banks as sources of financial order and stability, despite the fact that doing so often means overlooking oodles of inconvenient facts.
In the case of the Bank of France, many of these inconvenient facts are, ironically enough, unabashedly set down in one of the volumes published by the National Monetary Commission — volumes that supposedly informed the Aldrich Plan and, indirectly, the Federal Reserve Act. These volumes generally display a bias in favor of central banking, as their sponsors intended them to do. Were one looking for a rose-colored portrayal of the Bank of France's origins, one might expect to find it here.
Nevertheless, according to this particular volume's author, André Liesse, the Bank of France was conceived, not as a remedy for France's post-revolutionary financial turmoil, but as one for Napoleon's fiscal difficulties. What's more, far from having represented an improvement upon the status quo ante, its establishment marked the end of a remarkable though short-lived period of relative financial stability.
The disastrous failure, in 1721, of John Law's Banque Royale, was, according to Liesse, entirely attributable to that bank's involvement with the financial operations of the French government, and to its having secured, in return for that involvement, an exclusive right to issue banknotes. No wonder the bank's failure resulted in an edict establishing complete freedom of note issue. Still, it was not until 1776 that the scars left by its collapse had healed sufficiently for another bank of issue to be established.
The new bank, the first Caisse d'Escompte, also ran into trouble as a result of "repeated state loans and government interference," eventually leading to its becoming "nothing more than a branch of the public administration of finance." The episode led the great economist (and Inspector General to Louis XVI) Du Pont de Nemours, in Liesse's words,
to defend the true principles of banks of issue, asserting that a bank without a privilege, not involved in business relations with a debt-ridden and needy State, without the prerogative of forced currency, can not do otherwise than pay in coin on demand the value of every note issued.
In 1793 what remained of the Caisse d'Escompte succumbed to the financial "paroxysms" of the Revolution. Once again, according to Liesse, an institution that "would have been of real service to commerce if it had not allowed itself to become the State's banker" instead found itself "lending money to the State without sufficient security, and receiving nothing in return but privileges which could not fail to be disastrous to it."
But other banks of issue founded during the first Caisse d'Escompte's lifetime managed to keep going despite the Revolutionary turmoil, including the "dangerous and ruinous flood of assignats" that was eventually to result in hyperinflation. Their owners and managers, mostly Protestants whose families had fled from France to Switzerland after the Edict of Nantes was revoked, had managed, "even in dealing with Napoleon," to avoid being "cajoled into granting the State favors of credit which would cost them dear." Their banks would soon be joined by other private institutions, including the Caisse des Comptes Courants, a central clearinghouse and bankers' bank (it issued only very large denomination notes, meant for interbank settlements) established in Paris in 1796, and the Caisse d'Escompte du Commerce (or Caisse du Commerce, for short) — organized in 1797.
Thus began a brief but at least relatively glorious free banking interval. "It can not be denied," Liesse observes,
that after the terrible years of the Revolution, in the midst of the confusion and anarchy of the Directory, these credit establishments, in spite of difficult conditions, survived, maintained their credit, and were of real services to the commerce and bankers of Paris. They gave not the slightest occasion for complaint or interference on the part of the public authorities. Without any sort of privilege, having no connection with the Government, they were able to meet their obligations even in the midst of serious panics.
In short, freedom in banking worked just as Du Pont DeNemours said it would.
Yet this success was not allowed to last. As Charles Conant puts it (History of Modern Banks of Issue, p. 44), the established banks
were doing an active and safe banking business when a new turn was given to the economic history of France by the coup d'état of the Eighteenth Brumaire (November 9, 1799), which made Napoleon Bonaparte First Consul and virtually supreme ruler of France.
Napoleon did not hesitate, despite the lessons of the past, to make plans for yet another government-controlled and privileged bank of issue, the Bank of France. For Liesse this development, far from seeming perfectly sensible (as modern central bank enthusiasts would have it), was astonishing. How could it happen, he wonders,
that this most satisfactory state of freedom came to an end and that in the course of a few years there was organized in Paris a bank with the exclusive privilege of issue? Is it due to a series of natural causes? No. Not one of the Caisses just described had occasioned disaster or invited suppression. The new state of things came from the idea of credit which existed in the mind of General Bonaparte, as well as from his tendency to centralize everything, and because the government at the moment was in great need of money.
The "idea of credit which existed in the mind of General Bonaparte" boiled down to this: that he might have all the credit he wanted, if only he could establish a bank he could control, and award it a monopoly of currency extending throughout all of France.
At very least, Napoleon could have a lot more credit for a lot less than France's then-existing banks were either willing, or even able, to supply. According to notes left by a member of Napoleon's Council of State, to which Professor Liesse refers, the First Consul had "determined to lower" the interest rate at which the government could borrow to something less than the rate of 3 percent permonth banks were then demanding, thanks to the government's poor credit. Napoleon "could not get what he wanted from the free banks. On the other hand, he felt that the Treasury needed money, and wanted to have under his hand an establishment which he could compel to meet his wishes. …It would certainly seem that here originated the idea of creating a new bank of issue."
Given the circumstances, raising capital for the new bank was no easy proposition. To address that difficulty, the government first persuaded the Caisse des Comptes Courants to merge with it. To make further shares attractive, the new bank secured the privilege of holding various government deposits. Still, less than 7500 of a requisite 15,000 shares (half of the Bank's stipulated capital stock) were taken, with Bonaparte's friends and relatives having pride of place among the subscribers. (Napoleon himself was the Bank's first subscriber, with 30 shares.) Further privileges were duly awarded it, until they sufficed to allow the remaining shares to be disposed of.
At first, the Bank of France had to compete with other banks of issue, including the Caisse du Commerce. When attempts to persuade the older bank to merge with the Bank of France failed, and especially after the Caisse du Commerce refused the government a loan it sought, Napoleon resorted to coercion. The details remain obscure. According to one account (admittedly in an English newspaper) at first the Bank of France, with Napoleon's support, tried to bring its rival to submission by staging note-redemption raids. When that strategy failed, Napoleon simply had some of his troops shut the bank down. What's certain is that the law of 24 Germinal, An XI (April 14, 1803), against which the Caisse du Commerce protested vehemently, awarded the Bank of France the exclusive right to issue banknotes in Paris, compelling all other banks of issue to surrender their assets to it.
"The Bank of France was chartered in 1800 as an antidote to the financial turmoil of the French Revolution." It is one of those sentences that exposes a dominating — but distorted — worldview no less effectively than it obscures aspects of reality itself.
This was, in fact, the second such interval in French banking history. The first was still a still briefer episode, lasting only from 1790 to 1793, during which hundreds of "caisses patriotiques" flourished. According to Eugene White, that episode also "provides evidence of the success of free banking." It ended when the government closed down the caisses in November 1793. See Eugene N. White, "Free Banking during the French Revolution," Explorations in Economic History 27 (1990): 251-276.
For a more recent, but equally favorable, assessment of France's 1796-1803 free banking episode, see Philippe Nataf, "Free banking in France," in Kevin Dowd, ed., The Experience of Free Banking (London: Routledge, 1992), pp. 123-36.
Nor did suppressing inflation have anything to do with it. The raging inflation brought about by the Revolutionary government's overissuance of assignats had come to a sudden end when, on July 16, 1796, the National Assembly decreed that people might conduct business using whatever money they chose, while allowing mandates, which had superseded assignats, to be accepted at their current value in specie. From that moment on, France was effectively back on a metallic standard.