Philip the Fair is known for having expropriated the Jewish and Lombard creditors, the treasurers of the temple, and for having manipulated the currency, but, unlike several of his successors, he did not have the opportunity to default – for good reason : there was no “public debt” at his time, at least in France.
It was François I who was the first to borrow on public markets, at a market rate. At the time, when the State borrowed, it did not inspire confidence, and it had to go through the cities. The town halls, in Lyon, Paris or Rouen, guarantee the royal debt on their tax revenues, this being sold in the form of perpetual “rents”. This is because cities inspire more confidence: they are endowed with great freedoms, administered by bourgeois sensitive to financial interests. We know the financial successes of city-states like Venice. Lyon, in particular, was one of the first cradles of public debt, because it had plenty of capital to invest. In addition to benefiting from Rhone trade, it had become a center for printing, had major fairs and served as a crossroads for relations between France and Italy which had intensified since the start of the Italian Wars.
These first loans did not bode well for the future: gradually, the royal administration swallowed up that of the cities, the volumes borrowed grew disproportionately while the fight against the Spain of Charles V dragged on, and the burden of interest on the loans became higher than the costs. tax revenues. The Lyon philosopher Jean Bodin saw his city suffer from the resounding default of Henry II in 1559. According to him, the public debt and its vain promises of returns ruined many merchants who had subscribed to it. “The merchant for the sake of profit becomes a homebody, the artisan despises his shop, the plowman leaves his work […], to draw four or five hundred pounds of accrued income, instead of a hundred pounds of land rent; and then the annuity built up disappears and the money goes up in smoke.”
Lyon’s faults were the first in a long series, from which few kings escaped, even when they had wise ministers. Sully, Richelieu and Colbert have one thing in common: they did not honor the royal debts. These defaults ruined the credit of the State and their repetition inspired a lot of mistrust among investors: while Holland and England borrowed in the 18th century at interest rates of around 5%, France, for its part, did so at more than 10%. To remedy this problem, the State demonstrated creativity: from the end of the 17th century, France resorted to quite astonishing financial innovations, such as tontines, life annuities whose pension increased as the other subscribers increased. were dying. However, this made little difference to the situation: the State was borrowing too expensively. Even if he had wanted to avoid bankruptcy, he would soon have been suffocated by the burden of his exorbitant interests.
This is the bitter experience that Louis XVI had. Perhaps because he was interested in England, whose debt management had become a model in the 18th century, he wanted to improve finances by recruiting more rigorous ministers. Turgot, in particular, wrote him a famous letter which made a program: “No bankruptcy, neither admitted nor hidden […]. Point of tax increase […]. No borrowing, because any borrowing always reduces free income; After a while it requires either bankruptcy or an increase in taxes.” This did not prevent Louis XVI from waging “his” war: the American War of Independence, financed by loans. Unable to increase the contributions of peasants, unable to better tax the income of the privileged, Louis XVI convened the Estates General. We know the rest.
The Revolution marks a real turning point in this area: even if the First Republic, born in extraordinary circumstances, had poorly maintained finances, its supporters understood the importance of trust and were reluctant to go bankrupt. Forced by events, in 1797, the Directory announced default, and the discontent of creditors allowed a young general, Napoleon Bonaparte, to rally financial support before 18 Brumaire. This was actually the last flaw.
Subsequently, the signature of the State gained its credibility and inspired greater confidence, partly because its resources had increased considerably, and also because the base on which it levied the tax had considerably broadened with the end of privileges. In addition, the rapid growth of the economy made it possible to hope for increased tax resources and to guarantee better solvency.
Thus, the State was able to maintain a relatively high debt, close to its current level, throughout the 19th century, and rent became a sure value, as sought after as land property. In the Ancien Régime, rich French people willing to risk their savings were interested in island trade or the royal debt. In the 19th century, the adventure was found in the Ottoman public debt, the Austrian railways or the Russian bonds: although the regimes succeeded one another, the rates of the French debt remained stable and the State agreed to repay part of its tax revenue to its creditors each year.
The two world wars disrupted this market: military spending and reconstruction aid were financed largely by borrowing, and ultimately paid for by inflation. The rise in prices allowed France to emerge from the two world wars without being suffocated by its debt. That of public debt, which had become negligible, dates from the 1980s and especially 1990, with the accumulation of deficits, driven by the increase in social spending. In 2011, the fear of no longer being able to borrow on the markets, following the Greek crisis and uncontrolled movements on the financial markets, inspired a policy of budgetary moderation, which played an important role in prolonging the crisis in Europe, while it was gradually forgotten in the United States. France had to drink this bitter potion, but still maintained, until 2017, a deficit higher than the 3% provided for by the now old budgetary stability rule. However, debt service was decreasing with interest rates even becoming negative in the second half of the 2010s.
Faced with a higher deficit than expected in 2023, the government must now seek compensation measures to control the evolution of the public debt. Nevertheless, France today maintains a borrowing rate close to that of Germany, and the gap has not increased since the announcement of the revised deficit figure.
The real challenge is in the long term: our economy must prove that it is capable of remaining solvent, in a context of slowed growth, demographic aging leading to an explosion in retirement and health spending, and increased need for investment, to meet the challenges of education and ecological transition. There are two pitfalls: that the reduction in the deficit compromises growth, while productivity, the key to our wealth, slows down; let debt increase indefinitely and take the risk that a panic attack will resurrect our old demons.
* Charles Serfaty is an economist at the Banque de France
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