Deflation Made Simple (Part III)
A falsely vilified phenomenon (Entry 180)
In 1680 shortly before his death Jean-Baptiste Colbert wrote to his Majesty, Louis XIV as follows:
“Si Votre Majesté voulait bien se faire représenter les temps et les années passées, depuis vingt ans que j’ai l’honneur de la servir, elle trouverait que, quoique les recettes aient beaucoup augmenté, les dépenses ont excédé les recettes, et peut-être que cela convierait Votre Majesté à modérer et retrancher les excessives… — Je sais bien, sire, que le personnage que je fais en cela n’est pas agréable; mais, dans le service de Votre Majesté, les fonctions sont différentes; les unes n’ont jamais été que des agréments dont les dépenses sont les fondements; celle dont Votre Majesté m’honore a ce malheur qu’il est difficile qu’elle puisse rien produire d’agréable …; mais il faut se consoler en travaillant à bien faire.”
François Guizot (1787-1874). Lettres et Mémoires de Colbert. Histoire de France.
In translation from French to English,
“If Your Majesty were to describe the past twenty years that I have had the honor to serve you, you would discover that — despite a large increase in revenue — expenditures have exceeded receipts, and that this difference has perhaps encouraged you to moderate your expenses. I know well, Sire, that my person in these matters has not always been agreeable, but one must distinguish between my person and my official obligation in your service — this latter being the priority with which you have honored me, and that I have fulfilled well despite any ill-feeling that this fulfillment has caused you.”
In 1661, when Colbert assumed office upon the death of Cardinal Mazarin, the gross revenue (everything received in taxes) of the French monarchy was 84 million livres (the French government’s primary unit-of-account during the 17th century). Of these 84 million 52 million were spent on rent paid to the officials of the French court and on the discharge of other fixed-costs including service of the royal debt. This left only 32 million livres of net revenue (gross revenue less fixed-costs) to pay for the operating expenses of the king and his court. At the time these latter expenditures amounted to 43 million livres per annum resulting in a revenue shortfall of 11 million livres — about 13 percent of gross receipts. Within five years Jean-Baptiste Colbert, the new Contrôleur général des finances (Controller General of Finances), had increased gross receipts by 8 million livres, reduced fixed expenditures by 18 million livres, and created a 15 million livres surplus.
By 1683 — 22 years later — the Crown’s gross revenue had risen to 112 million livre per annum, a 33 percent increase. Total fixed costs, on the other hand, including fixed rents and interest payment had fallen to 23 million of which only 8 million were in the form of outstanding debt service. In effect, net revenue available to the king for the purpose of expenditure had risen from 32 million in 1661 to 89 million livres in a period of 22 years. Mind you, during these two decades of Jean-Baptiste’s dedicated royal service to the king several major wars were fought. Among these wars were the War of Devolution (1667-1668) during which France occupied large parts of the Spanish Netherlands and the Franco-Dutch War (1672-1678) during which Louis XIV led the French army into the United Provinces after failed peace negotiations with the States General at The Hague. This latter war cost the French monarch about 100 million Livre per year!
Despite these enormous expenditures, between 1679 and 1683 the French monarchy enjoyed an average budget surplus of approximately 2 million livres per annum!
During his more than two decades of service Jean-Baptiste Colbert was not only the Controller General of Finances, but he was also the Ministre de la marine, the office in which he groomed his son, Seignelay, and Surintendant des bâtiments et des arts (Superintendent of Buildings and the Arts). Upon his death Colbert’s duties were split among several officials, and the administration of buildings was turned over to Louvois at the Office of War.
There were two ways to please an absolute monarch who took pride in his military prowess and self-image vis-à-vis his court and the other royalty with whom he had to negotiate in matters-of-state: one could flatter one’s king with whatever resources were available in the moment; or one could insure that one’s king lived within his means so as not to endanger either his own long-term well-being or that of his kingdom. Unfortunately, Louvois was of the former type.
In 1682 shortly before the death of Jean-Baptiste the building expenses of the Royal Court were 6 million livres per annum, by 1686 they had nearly tripled at 15 million livres. How had this money been spent?
Worse off was the Royal fund that Jean-Baptiste had created to cover revenue short-falls and finance state investment projects. For within two years after Colbert’s death it was dissolved. This fund is of some interest, so let us tarry a moment.
At its outset the fund raised 20 million livres against which Colbert offered one million livres in fixed interest payments — an ROR of money-ad-prodigo of five percent, a rate competitive with that offered in the United Provinces. The success of the fund encouraged Jean-Baptiste to raise another 16 million at a somewhat higher ROR between 7 and 8 percent — a rate still competitive with London. The net ROR to investors on the total fund was about 5.5 percent. Note, these were not bond issues, but direct loans from the French kingdom’s famed treasury-bankers (Entries 159 and 176).
Now, in order to keep this fund alive while Louvois diligently depleted it, Louvois offered an ROR of ten percent. Within two years the fund was closed, because it could not meet its payments. Louvois had built an aqueduct to Versailles, destroyed a French village in so doing, and exhausted a healthy investment fund used to finance revenue-increasing state investment projects.
The king was pleased that he now had running water!
In liberty, or not at all,
Roddy A. Stegemann, First Hill, Seattle 98104