One Sentence, or, Unpacking the Truth about the Founding of the Bank of France

Andre Liesse, Free banking, Napoleon and money, Roger Lowenstein, The Bank of France
Antoine Jean-Gros, "Premier Consul Napoleon," Circa 1802

FirstConsulNapoleonWhen, 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.[1] "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.[2]

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.[3]  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.


[1]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.

[2]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.

[3]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.

  • Nike38

    This "critique" isn't convincing at all! What you've shown is that Napoleon thought he needed a central bank in order to run his state and control France in the wake of the Revolution. That perfectly meshes with Lowenstein's sentence, as long as you agree with Napoleon! And maybe he does! You've certainly given us little reason to think we ought not to, other than that you think the Free Banking era did well in France and so did some of the bankers it privileged. But why should I believe them?

    An interesting narrative though, thanks for sharing.

    • George Selgin

      Goodness, Nike38, you are a hard one to please! I should think that most people would understand the statement "an antidote to the financial turmoil of the French Revolution" to suggest (1) that when the Bank of France was founded it was in response to prior financial "turmoil"; and (2) that Napoleon's intent in founding it was to cure the turmoil in question. I should also think that most would consider the fact that neither of these statements is true to imply that the original statement is itself misleading. But apparently I failed to understand that by "antidote to financial turmoil" Lowenstein actually meant "means for Napoleon to control France." How can have been so obtuse!

    • Wow, such authoritarianism.

    • Nike38

      Yeah, most people agree that sovereign defaults go hand in hand with financial turmoil — and that no sovereign at all is even worse. So.

      Dusan, what are you talking about? Did I say that I thought Napoleon was a glorious leader? No. Did I say I was against Free Banking? No. Did I say that Napoleon was RIGHT about the need for a central bank? No. Just that Mr Selgin doesn't confront Lowenstein's argument head on. If Napoleon thought there was too much turmoil in the market, such that he couldn't get a loan, and if he thought the solution was a central bank, then the bank was chartered as an antidote to the Revolution.

      What Mr Selgin did (and what your comment makes it obvious his audience will do) was commit a type of mood affiliation fallacy. Lowenstein's narrative makes central banking in America seem inevitable (an historical solecism that many other reviewers have noted — a fact which I suspect has led Mr Selgin to reach for something, anything novel to say about the book), which is bad, not just because its bad history but also because Mr Selgin doesn't like central banks. So then one interprets every sentence that could possibly imply something incorrect in bad faith, as the product of a ignorant (and possibly immoral) authoritarian. Any sentence that could possibly suggest a central bank was useful is to be viciously attacked, and anyone who doesn't agree with the critique is an authoritarian.

      • George Selgin

        "If Napoleon thought there was too much turmoil in the market." But that's the point, Nike38: there is no evidence that "turmoil" had anything to do with it. Napoleon wanted to borrow at rates lower than those at which existing banks were willing to lend. The government's credit was bad, but "turmoil" (Lowenstein's word) had nothing to do with it.

        As for bad faith, it seems to me that if one of us is bending over backwards to read something into Mr. Lowenstein's description of the Bank of France as "an antidote to …financial turmoil," either so as to claim that he errs, or so as to claim that he doesn't, it isn't me. But I will leave it to others to decide this.

        Nor did my picking on the one sentence in Lowenstein have anything to do with my having had nothing else to say about the book, novel or otherwise. On the contrary: I have much to say, and say it an a paper I will publish soon. I did use the sentence to illustrate a general inclination on L's part, shared by many others, to look upon central banks as essentially stabilizing institutions–it is part of what underlies the notion that they are "inevitable" to which you refer. But my remarks are not meant to stand — and I do not present them as standing — as a critique of his book, which I undertake (and which I note that I have undertaken) elsewhere.

        • Rob

          People often forget that the later years of England's campaign against Napoleon were largely funded by the English branch of Rothschild Bank. The English also used the issuance of war bonds.

          Due to their international branch network, the Rothschild Bank was able to purchase the bonds on the market at a significant discount to par as they heard about the success of the Duke of Wellington's campaign much earlier than the wider market. So not only did they provide direct funding to the English, they doubled down on their investment in the English led war effort with the purchasing of war bonds and made a great return. (unfortunately this is where the income tax was invented to pay for the interest on the bonds…another story for another time)
          The key point is that most of the European rulers at the time had to go to banks (a number private family run banks) to source their funding for the war effort, even Napoleon. Napoleon just didn't want to pay the market interest rate. With the English war bonds trading at a significant discount, isn't this a sign that Napoleon probably could still have raised funds (once his success on the field had been demonstrated) cheaper than any other ruler without resorting to his actions in creating a Central Bank? The issue wasn't with the French Banking system, it was with the revenue raising capacity of the French state and the debts incurred by Louis XIV. The Central Bank reform Napoleon instituted was largely an indirect way (and tax) of funding the French state instead of balancing the fiscal policies of its institutions through reform.
          Another interesting post George.

      • George Selgin

        One other point, Nike38: you refer to my "audience." I hope you will consider yourself part of it. I am not here to preach to the choir. Who knows: I may eventually say something you agree with!

  • Rob

    George, if you are ever looking for a next book to read, Jacob Soll's The Reckoning is worth your time. It is an easy read on the history and evolution of accounting with a foucs on state based accounting:
    There is a whole chapter on Louis XIV's accountant. The state's fiscal woes were an issue well before the Revolution and Napoleon. As with most revolutions, the financial agitators prior to the Revolution that were calling for fiscal reform (and property reform), did not envision Napoleon's creation of a Central Bank nor see the need for it. From my recollection of the book, most of those French regional banking families (which were in sound financial position) remained in Switzerland.

  • So, the Bank of France existed to benefit the government and Napoleon. Probably he was resisted by the globalist financiers of that age. The Fed exists to benefit the big banks, as we have moved from a sovereign nation system to a New World Order where the banks and their buddies are pretty much in charge. So, now the Fed exists to make money for the big banks and to protect them from the government, and make them bigger!

  • tmtisfree

    "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."

    It seems the French historian Henri Guillemin had a different handle on these events [1]: according to him, it was businessmen and bankers (the same who had put him in place in fact) who have first proposed to Bonaparte the creation of a private bank named "Banque de France" (to fool people) with the French state's guarantees, privileges and the right to issue its own paper money. There are many historical references (books, quotes, etc) in the video and in the French subtitles as well.

    in French with French subtitles but no English subtitles
    go to 19:00 for the Banque de France story; the claim seems to come from the 1911 "Histoire du commerce de la France" tome 2 pp59-61 by Emile Levasseur (see at 21:31 in the video). Pages 59 and following of the book are available at

    • George Selgin

      Thanks for this very interesting information and video, tmtisfree. Besides giving me an opportunity to practice my French, is also allows me to declare that for every corrupt act of government there is at least one conniving businessman, and usually several. This was of course the case w.r.t. John Law's bank, and it was the case w.r.t. the Federal Reserve, to the extent that it was but a revision of the Aldrich Plan. The solution, in any event, is open competition, that is, a refusal to accept phony "public good' arguments for currency monopoly that play into the conspiracists' hands.

    • George Selgin

      I should add to my comment below, that in almost every case of the founding of an early monopoly bank of issue, the idea was sold to a credit-desperate government by one or more resourceful private entrepreneurs. If I gave the impression in my post that Napoleon was not just the principal beneficiary, but also the brains behind, the bank of France scheme, I should not have.