Supplemental 18: Bonds, French Bonds

This is The Siècle, Supplemental 18: Bonds, French Bonds.

Welcome back, everyone. My name’s David Montgomery, and you’re listening to The Siècle, a history podcast in the Evergreen Podcasts network covering France’s overlooked century between Napoleon and World War I.

In the most recent episode, I explored France’s economy during the Bourbon Restoration, and the deep recession it suffered in the late 1820s. If you missed that, be sure to check out Episode 35. Because right now, I’m here to dive deeper into one particular aspect of economic life in the Restoration: finance.

I heard from several of you who were surprised to hear that financial assets represented about 35 percent of all French wealth in this time — comparable to today.¹ That was not a mistake on my part — France at the time had high levels of inequality, and among the rich who owned most of the wealth, bonds and annuities were very common investment sources.

But this seemed like a topic that many of you — as well as me — wanted to learn more about. Well, as it so happens, a friend of the show happens to be a history professor who specializes in Restoration-era financial capitalism.

You’re about to meet Dr. Tyson Leuchter, an Assistant Professor in Modern European History at the University of Cambridge. Tyson studies finance in the period from the French Revolution up through the 1820s, and has a number of published articles as well as a forthcoming book on the topic. But don’t have to wait for his book — you can hear from Tyson in just a minute.

Before we begin, I want to give a very quick and over-simplified explainer of how bond sales work. This stuff confused me the first time I read about it, and I want to make sure no one is left behind by any of our discussion about French government bonds.

In essence, a bond is a sort of commercialized debt. A government or business wants to raise money, so they sell a “bond.” The bond buyer gives the issuer a lump sum of money. In return, they usually receive regular cash payments. The value of those cash payments is determined by the bond’s interest rate. A bond may be issued for a certain length of time, after which the bondholder gets the value of the bond back, or it can be a “perpetual” bond, where the principal never gets redeemed but the interest keeps on coming forever.

Ideally, the issuer of the bond wants to pay as low an interest rate as they can get away with. But set the interest rate too low, and no one will buy it. In this case, the issuer can either offer a higher interest rate, or they can sell the bond at a discount.

To understand bond discounts, imagine you have a 5-percent bond worth 100 francs. This bond pays you 5 francs of interest every year, and thus will take 20 years to make back the initial investment.

But now imagine that for whatever reason, there’s not much demand for this 100-franc, 5-percent bond. The government still needs the cash, but doesn’t want to drive up future expenditures. So instead of raising the interest rate, it sells this 100-franc bond for 80 francs. It’s still a 100-franc bond, so still pays 5 percent of 100 francs per year, instead of 5 percent of 80 francs. But the bond will only cost 80 francs to buy.

In this case, 100 francs is the bond’s “par value,” which stands for “parity.” It’s how much the bond is officially worth. In contrast, the bond’s “face value” is how much it’s worth right now, on the market.

A bond’s face value can fluctuate. If bond traders begin to think an unstable government is likely to default on its debt, they could start demanding a steeper and steeper discount (or higher and higher interest) to purchase that government’s bonds. But if that government later becomes more stable, bond traders may be willing to pay closer and closer to par value for the same bond.

Sometimes, bonds can even go “over par.” That means that traders are willing to pay more than the bond’s official value in order to secure its interest payments. For example, if the French government is offering 5 percent bonds, but no other available investment is paying more than 4 percent, you might maximize your cash flow by overpaying for this 5 percent bond rather than accepting a lower yield elsewhere.

It might also help to know that in this period, French government bonds were called “rentes” — that’s like the word “rents,” but with an “e.” British bonds were called “consols,” short for “consolidated annuities.”²

That’s a lot, and it oversimplifies things, but that should leave you in a better position to follow this fascinating discussion. As always, you can visit thesiecle.com/supplemental18 for a full transcript of this episode.

Now, enjoy the interview:

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SIÈCLE: Tyson Leuchter, welcome to the show.

LEUCHTER: Hi, thanks very much for having me.

SIÈCLE: I have been trying to get Tyson on this show for literally years now, and this seemed like the perfect opportunity because Tyson’s specialty is the history of French financial capitalism. We just talked about the French economy in the most recent scripted episode of The Siècle. So, Tyson, before we get into the topic itself, talk a little bit about why financial capitalism interests you and how you got into this topic.

LEUCHTER: Sure, sure, thank you. So, roughly speaking, I’m an intellectual historian of economic life, which means I take an intellectual history approach to quantitative life, to the world of the economy, and I’m particularly interested in French financial capitalism. 

Above: Dr. Tyson Leuchter, Assistant Professor of Modern European History, University of Cambridge. Used with permission.

My current book project looks at the 1789 revolutionary period until 1825, focusing on the Paris Stock Exchange and public debts. So, what I’ve argued in places like my article “Finance Beyond the Bounds of the Fiscal-Military State” in French History and that book I’m currently working on, the 1789 to 1825 period witnesses a kind of intellectual reconstitution of French financial capitalism. In that I’m really interested in the people who made this economic reality in the marketplace, in the courtroom, and on the trading floor, which is why I look at the Paris Stock Exchange, stockbrokers, pamphleteers, grumpy creditors, devious debtors, and so on. I find these guys fascinating and a lot of fun. I like to read the high theoretical stuff too, but I’m interested in the intellectual composition of the grounds of financial reality, and I do think there’s something distinctively post-Revolutionary about the way public debts and politics become entwined in this period. It’s discussed much less as supporting the state’s ability to project force, and much more as enabling an individual to thrive economically.

SIÈCLE: Let’s start out with just some broad overview for listeners. What did finance look like in the Restoration? It was obviously really important, but it was similar but different in some ways from what people thing today of finance as looking like. Tell us about some of the broad strokes of what we’re talking about here.

LEUCHTER: Sure thing. So, the single biggest thing to know about finance during the Restoration is the paradoxical reboot of French finances after the post-Napoleonic settlement. As your listeners may remember from early episodes, or maybe from Christine Hayne’s really terrific work here, the Allied Powers levied this gigantic war indemnity and imposed the cost of military occupation on the young Restoration regime. The total amount of that is around 1.4 billion francs, that’s a staggering sum, and France pays it almost entirely by borrowing it from the Dutch and English banking world. 

But what’s really startling and what’s really distinctive I think about the broad picture of Restoration finances is how effective France is at paying it off, and how quickly Restoration France switches from importing capital to pay off these so-called “liberation loans,” to exporting capital and foreign investments. Rondo Cameron, for instance, estimates there was around 550 million francs in total foreign investment for the Restoration period, which is really impressive for a regime that had so recently experienced military defeat. And that shows up in a couple different ways, this reboot of finances and this quick turnaround of France’s broad financial picture. Yields on the long-term French public debt, and that’s roughly the interest rate on French debts, they started around 9 percent in 1815, which is quite high, but they steadily come down, and by 1824, they are just a smidge above 4 percent, which is about the same as the Dutch perpetual debt and maybe only a percentage point higher than the British consol, so that’s really impressive.

SIÈCLE: And just to put that in context for people, states at this time had to pay much higher interest rates on their debt when investors were less willing to buy it on its own merits.

LEUCHTER: Yeah, exactly, yes. So, the higher the yield, generally speaking, the more risky government debt looks. Lower yields mean investors are accepting a lower payout for a secure investment. My favorite example of this reboot is actually an anecdote from French politician and polymath Brillat-Savarin, and this guy supposedly coined the term “you are what you eat”, and he also lends his name to a really just absolutely terrific triple cream cheese, I can’t recommend it highly enough. Anyways, he claimed that French food was just so darned good, particularly in Paris, that the war indemnity was actually paid down in just a few years because the armies of occupation, they just could not help from stuff themselves at dinner. And that’s a fun story but it’s almost certainly apocryphal. But at the same time, Brillat-Savarin is writing this in 1825, so it does suggest that there’s a kind of socially palpable sense that French public finances had rebounded, and rebounded well. 

So, what does that look like at the more investor picture, for instance? What it suggests is that there was a large but apparently pretty reliable stock of public debt to trade at the Paris Exchange, and that’s mostly what people do trade. Public debt, mostly the 5 percent rentes, which is a 5 percent annuity, a 5 percent bond, is the major investment vehicle, that’s what’s taking up most people’s activity, and there are a lot of reasons for this. There’s a kind of French propensity for public debt, and there are also very few listed private stocks. The Restoration does not see a whole lot of joint stock companies, there are only a couple early on, and they’re mostly insurance and canal companies. It’s not really until the explosion of the railroads in the 1830s that the equity landscape really expands.

SIÈCLE: What kind of people were investing in stocks, these rentes? Who is buying them, and for what purposes?

LEUCHTER: That’s a great question, and again, like all good historians, I’m going to tell you that the answer is complicated. We can say that during the Restoration, the market was still pretty pricey, as far as things go, at a broad level. The absolute minimum purchase for the 5 percent bond, the 5 percent rente, was for an inscription with a face value of 50 franc, and that’s not chump change by itself, and that’s the absolute minimum. In a lot of the materials I have looked at, I have regularly seen transactions in the hundreds of thousands or even millions of francs. In one sense, the major folks participating in the Paris financial market, which is the main place where public debt was traded — we’re dealing with a social and financial elite. At the same time, if you drill down a little bit, the picture gets a little more complicated. We do know that there was a rising public interest in investing in French funds. So, for instance, in 1800, there may be no more than 10,000 individual holders of public debt and inscriptions. By 1830, there may be more than 190,000, so that’s a dramatic increase. Those are back of the envelope figures, but clearly there is a spike in public interest. 

And also, who exactly owned the debt, who could afford to buy into it, and who was involved in the market didn’t necessarily always line up exactly. You could assign the revenue stream from a debt inscription to someone else, and I’ve seen instances where people peel off interest payments on their own debt holdings, and they assign them to elderly parents or relatives, almost a kind of pension or old age wage supplement. People of more modest means could and did, not necessarily at the rate of the social or financial elite, they could and did participate in the market, usually in the aims of maintaining a very low, a modest payout, but a safe one, one that you could actually rely upon. If you’ll forgive me for punning here a little bit, you invested in the securities market for a little security.

SIÈCLE: I remember being really struck reading some of the fiction of the time, especially Balzac’s realist fiction, and the way that plots and character descriptions are just marinated in references to finance. The opening chapter of Balzac’s Père Goriot introduces almost all the characters by talking about how much they own in rentes, and how much they take in.

LEUCHTER: Yeah, so I think there are a lot of reasons for that. One is, again, think of the relatively constrained number of things you could actually invest in, it’s French public debt and then other nations’ public debt as well. Not so much, in the Restoration at least, equity, is what we might call stocks today. And so, given this rising activity, it’s going to glom onto the rentes, and especially the way that the rentes investing in the public debt market can kind of ramify to the social sphere, and then you get more and more people interested in it. It takes up this really sort of real estate, if you will, in the social brain. And it’s fun, too, to think about the drama, the dramatic scene, of what financial intermediation was actually like. People described it at the actual time as almost literal pandemonium, people yelling and shouting at each other, “I have” or “I sell” would be the phrasing. So, it’s both socially and physically dramatic in the scene, but then also it spreads out to touch people beyond this relatively thin band in 1800, to a much wider band of society by the time of the Restoration.

SIÈCLE: One of the things that I have been struck by reading historical accounts of the various events that I’ve covered in this show is after describing some big political crisis, a historian will often contextualize by saying “the Paris stock market went down 3 percent” or “went up 2 percent,” something like that, as a way of sort of characterizing how the public was reacting, or a certain important share of the public. Can you talk a little bit about, maybe give a couple examples, of how finance was impacting some of these major political events of the Restoration period?

LEUCHTER: Sure. So, a lot of this is, I think, due to the dominance of trading of public debt, not only France but mainly France in this period, and since, as you were talking just a minute ago, that the yield on the debt is a rough kind of political judgment, it’s sometimes called a financialized political judgment, investors basically saying how much or how little they trusted the government to make its payments, and so political events often had a very big effect on fluctuations in the debt. It’s not necessarily one-to-one, there are a lot of reasons why you might buy or sell a debt, but it does really have a major effect. I think perhaps the signature example of politics and finance, one would surely be the émigrés’ indemnity. I believe you sort of touched on this in previous episodes. Now you have what are sometimes called two types of property: people who owned the biens nationaux, former property of the émigrés, and now the émigrés themselves. Villèle, the prime minister, wants to close this “last wound of the Revolution,” and he does so by trying to issue new debt. The finance behind this is that France, the public debt at the time that he is doing this, is actually above par value for a little while. That suggests that it could actually receive better terms, it could actually accept or receive a lower rate of interest from the market were it to refinance its debt. So, there’s a kind of financial drive in addition to a social one. In fact, the two are, I think, really connected for Villèle, and the émigrés’ indemnity. He both wants to close this last wound of the Revolution, to finally purify property of any lingering competing claims, but also save the French state a nice chunk of change.

SIÈCLE: And it turns out he sort of stirring up two hornets’ nests there.

LEUCHTER: Yeah, exactly. He really steps in both at the same time. It doesn’t work out all that great. Current bond holders are not at all happy, having their interest payments forcibly reduced, so he has to actually step down and make it a voluntary version rather than a forced one. This doesn’t necessarily even help him that much, it goes down as the “émigrés’ billion,” and it’s actually very effective political mobilization, this idea that you’re financializing claims and sending money to the émigrés at the cost of good French property owners who had bought from the Revolution, that’s very effective political mobilization into the 1860s and 70s.

SIÈCLE: Some of the most important political figures during the Restoration were bankers or otherwise involved in finance. People like Jacques Lafitte, Casmir Perrier, Villèle of course the famous prime minister came to prominence as a financial administrator. Can you talk a little bit about some of these famous names and the names in which finance was driving their wealth and political participation and things like that?

LEUCHTER: Yeah. Let me focus on Jacques Lafitte actually because he’s one of my favorites here. Again, if you’ll forgive the punning, some wags would call him Jacques La Faillite, which is a pun on bankruptcy in French, because he almost declares bankruptcy during the Restoration. He’s actually a liberal deputy, an extremely wealthy person. 

The world of these hautes banques, the high bank in France at the time, is pretty circumscribed. It’s a very tight social network, anything as a whole is very thin on the ground until the 1830s and 1840s, so they still all know each other, they all have a lot of wealth, they can all rise through the ranks or enter the formal political world. And Lafitte himself actually intervenes in interesting ways in the émigrés’ indemnity debates that we were just talking about. He pens a pamphlet in support of Villèle’s plan, which is striking. Villèle is deeply conservative, Lafitte is a liberal, so he’s crossing political lines here, and he’s doing this because he thinks that refinancing France’s public debt, increasing the public debt load, is actually going to help send capital into the countryside. He has this very interesting social theory, a political economy of debt, where public debt credit functions as a mediating term between capital and labor, and he’s very concerned that capital is really scarce in the countryside, in the provinces, and interest rates are very high, and he thinks this is stopping national unity. He says it’s impossible to see France in the countryside, you only see it in the big cities, because that’s where interest rates are relatively modest, that’s where investment can happen. And so, if we follow Villèle’s plan, if we refinance the debt, we will send public debt inscriptions into the countryside, we will unify these rural counties to the literal capital, through capital. In Paris, we’ll drive down the rate, we’ll produce development and investment. 

So, his familiarity with things like banking and finance, the ins and outs, figuring interest rates and so on, is really driving both his ability to cross political aisles, and his political program, I think, writ large.

SIÈCLE: While also helping to fund a lot of his political activities.

LEUCHTER: Yes, exactly, he’s not above doing that at all. He’s one of the major underwriters for a lot of major public debts and loans, and in some of these pamphlets he has to add a little disclaimer saying “Yes, I am one of the underwriters for this and will make a lot of money but I assure you, trust me, this is not influencing what I’m about to tell you at all.”

SIÈCLE: We’ve talked a lot about French public finance, but of course France was just one of the countries at the time that had a financialized system. Can you talk about how France was different from other countries at the time, and I think especially Great Britain?

LEUCHTER: France and Britain are the two financial centers of the time. They eclipse Amsterdam, France eclipses Amsterdam, and it takes a long time for the United States, New York especially, to really climb to first position. So in terms of the difference in the financial world, Britain has a much more robust equities landscape. There are more private industrial ventures, and that’s not really necessarily a surprise. Britain’s population is exploding at this time, France remains relatively flat. 

For a long time, there had been this view that France was something of an economic laggard, though for awhile now, we know that if you look at per capita figures, France’s economy actually looks quite good. 

In terms of the financial world in particular, I think looking at the Paris stock exchange is really interesting. The Paris stock exchange is a monopoly corporation, and that’s really odd in the post-Revolutionary world. Corporations, the private corps of the old regime, had supposedly all been demolished during the Revolution as a way of getting rid of any intermediary body standing in between the private citizen and the state. But a few survive, and the stock brokers of Paris are one of them. They had exclusive rights for financial intermediation in the public debt in Paris, so they really are a monopoly. And moreover, there aren’t many of them. There are 60 total stock brokers for Paris who intermediate the entirety of public debt transactions in Paris, and that’s quite different than a lot of other nations, where there were quite a bit more stock brokers.

Also, quite interesting is that the stock brokers essentially have offices, almost like a venal office during the old regime. What we might call their seat licenses, their ability to trade in the public debt in Paris, was a kind of business property. What happened was that you would normally have kind of a silent investor, silent partner, investing with the actual stock broker. So, the silent partner and the stock broker together would pool their capital and they would purchase these seat licenses, and then split up the profits depending on the share of capital that went into it. These were very expensive, these contracts for the office of stock broker, the ability to intermediate public debt, it could go easily for hundreds of thousands or over a million francs. And more than that, after 1816, the Restoration actually grants to the stock brokers the right to name their successors, so it’s a very tight-knit social circle, and you could be essentially almost hereditary lines of stock brokers being passed down either from father to son or within a tight social network. It’s a very insular and almost private world.

SIÈCLE: Whereas the British financial scene was much more free-wheeling?

LEUCHTER: Yeah, exactly.

SIÈCLE: To what degree were these new developments in French financial capitalism over this time driven by changes in mindset, changes in intellectual conceptions of money and the role of the state and how they intertwined? Were people thinking about debt and speculation differently under the Bourbon Restoration than they were under Napoleon or the ancien régime?

LEUCHTER: I think it’s a longish process that begins during the Revolution and continues through Napoleon, into the Restoration. It certainly is, I think, different than what happened, the mindset under the old regime, and the post-Revolutionary context is really important here. We might think here of some of the major milestones of the French Revolution: The demolition of legal privilege, so the establishment of legal equality, and the great simplification of property rights into something like modern private property. And that is paired, I think — this is one of the things i’m trying to argue — with something of a fallow period in formal empire during the Restoration. 

What does that all mean? There is a very different relationship between the state and the citizen in terms of transacting in the public debt. You are doing, if you are an investor in the public debt, it’s less to fund imperial competition — France and Britain are in peaceful relations at this stage — and it’s much more in terms of transacting with private property as a way to make your way, to make your mark, to socially navigate the social world of the Restoration regime. 

So financial speculation, which is perennially controversial, gets defended and gets separated, or they try to separate it intellectually from gambling, as a relatively everyday private property interaction. Yes, it’s very abstract and complicated, given the nature of finance, but when you get down to it, it isn’t that different, people like the stock brokers, creditors, and debtors will argue in court, some pamphleteers will argue, it’s not that different than contracting someone to sell someone a barrel of wine in a couple of months. That’s not that different from a futures contract. What I think that means is that you have this developing sense that what the state is trying to do is create the rules such that something like economic growth can happen. Something that these individual private interactions, even in finance, can redound to the public good. This is somewhat embryonic, somewhat haphazard, and it’s always controversial, but that, I think, is the political change in mindset, the intellectual and political valence of finance at the time.

SIÈCLE: The big topic that the podcast narrative is covering right now is France’s late ’20s economic recession, which is tied up in some hard to disentangle way from the political crisis that the Bourbon Restoration entered in the late 1820s. What was the role of finance in these economic troubles that were hitting France and other parts of Europe at the end of this decade?

LEUCHTER: Let me actually roll it back a little bit to 1825, if that’s okay, because there is the first really big global public debt crash in 1825, and that originates in a series of failed public debt speculation in Latin America. It strikes Britain first, but the contagion spreads, and there’s also a global crash in commodity prices around this same time. That can have somewhat ironic or almost counterintuitive effects, since the crash in commodity prices can actually send investors back to more stable securities, like what you perceive as a safe public debt. And so, interestingly, French bonds actually declined after 1825, which is to say that investors think that French public debt is actually a safe investment, it suggests that they’re moving money into the public debt, accepting a lower payout, a lower rate of interest, in return for security. 

Now that might not necessarily be such a bad thing, since, and this is something as we were mentioning that Lafitte was really keen on. Lower yields on the French public debt could actually help exert downward pressure on other interest rates, making investing cheaper, so hopefully spurring development. The big problem, though, is that depends on growing capital supply and healthy economic demand, which is exactly what gets smashed by the national crisis of the late 1820s. And yields on the public debt do spike, it seems much more risky by late 1829 and 1830, so that economic crisis that you were talking about shows up in the financial market, too, sometimes in deadly ways. There’s a wave of bankruptcies and stock brokers actually driven to suicide. So, the financial world and the what is sometimes called the real economy, they are deeply connected, but the connection isn’t always linear.

SIÈCLE: We’ve talked about how the yield on the French public debt was related to people’s confidence in the regime, in a certain sense, that how risky the investment seemed, that how likely it seemed that the country would default on its debts, do we see for example when someone unpopular like Jules de Polignac gets appointed, did the bonds react in a way that the investors seemed to think that Polignac’s appointment makes French bonds a more risky investment?

LEUCHTER: It depends on how far you want to zoom in or zoom out. Because trading could be really furious at the Paris Stock Exchange, and people are very keen to integrate as much information as possible. 

There’s a lovely guide to investors, I believe from the 1820s, it’s describing the ideal day of an investor, and he says what you have to do is you got to wake up early, read all the newspapers so you get all the information, but as you’re walking to the Paris Stock Exchange, you gotta keep your ears open, you want to hear all the scuttlebutt, all the rumors, that maybe haven’t made it into print yet. And then when you finally enter the Paris Stock Exchange and send your orders to your stockbroker, then you’ll have as complete a picture of the day’s events as possible.³

So day’s events, political events could move prices, they absolutely could, but if you zoom out, a lot of times those fluctuations will get smoothed out, so there can be a yearly downward trend or a yearly upward trend or something like that. Financial markets will react to political appointments, but if that doesn’t immediately trigger a crisis or a revolution or something, then oftentimes there will be what we might call a market correction that will then smooth out what was now perceived as an overreaction.

SIÈCLE: Well this has been a very interesting conversation. Tyson Leuchter, can you tell people a little bit about where they can find your research and where they can follow you?

LEUCHTER: Thank you, yes, I’ve written a few articles, I have an article in French History, “Finance Beyond the Bounds of the Fiscal-Military State”, Modern Intellectual History, “The Illimitable Right”, and La Révolution Française on “The New Regime of Corporate Property”, and I’m also working on a book that I hope will come out within the next year or so on this broad topic, 1789-1825, on public debts and the Paris Stock Exchange.

SIÈCLE: Tyson Leuchter, thank for your time and your insights, and thank you for coming on the Siècle.

LEUCHTER: Thanks very much, I’ve had a great time, thank you.

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Thanks for listening!

If you remember the teaser reel at the start of the episode, there’s an upcoming event on Nov. 4 called Intelligent Speech. It’s an online one-day conference for history fans, by history podcasters. I’ve participated in this event for years, and will be one of dozens of great presenters giving talks this year.

This year’s theme is “Contingencies: when history meets the back-up plan,” and I’ll be speaking about Louis-Philippe, the Duc d’Orléans — the human back-up plan for the Bourbon Restoration, whether the Bourbons wanted it or not.

Tickets for Intelligent Speech cost $30, but you can get 10 percent off by using the couple code “siecle” at checkout. That’s s-i-e-c-l-e. You can find more about the 2023 Intelligent Speech conference at intelligentspeechonline dot com. I hope to see many of you there on Nov. 4!

My thanks to Heather Hughson for transcribing this interview, and to Robin Beasley for providing editorial assistance to last episode.

Thank you especially to my own band of Jacques Laffittes who support The Siècle financially. Unlike Restoration stockbrokers, you can join this august company for far less than 1 million francs. The latest patrons to pledge as little as $1 per month on Patreon are Giselle, Jason Stanley, Carl Bialik, Noelle Martoiu, James Breckenridge, Ellen Harold, and Deez-art. My thanks also to Jim, who made a one-time donation on Ko-Fi.

They, and all supporters on Patreon receive an ad-free feed.

You can find out more about how to support the show online at thesiecle.com/support.

In the meantime, the next episode will switch gears from public debt to cannibal deaths. Join me next time on board a doomed frigate for a tour of the Bourbon Restoration’s tiny colonial empire, in Episode 36: Wreck of the Medusa.