an overview of the socialist and liberal positions1

21th

Annual ESHET Conference, 18-20 May 2017

1

The French Financial Debates in the Aftermath of the 1848 Crisis:

An overview of the Socialist and Liberal positions1

Clément Coste and Claire Silvant2

Work in progress – please do not quote

Abstract

1848 is considered by the historians as a turning point in French: a major

political crisis takes place, and is accompanied by major financial troubles

for the French government. The economists of that time do not stay away

and actively debates about the economic causes and consequences of the

crisis. Our paper is precisely devoted to the analysis of these financial

controversies around 1848 in the French economic thought. If political and

philosophical debates of 1848 between Liberals and Socialists are quite well

known by the historians of economic thought, their financial side has been

relatively neglected. According to us, it is nevertheless of high interest to

confront Liberal and Socialist ideas in that time, since. This article aims at

investigating this little studied question by raising three main questions: the

first one consists in presenting the different diagnosis of the 1848 financial

crisis from the socialist and from the liberal viewpoints. Secondly we aim at

analyzing the content of the debates between Liberals and Socialists

regarding the ways to overcome the financial troubles, particularly

regarding the trade-off between taxation and debt. Thirdly we emphasize

the role of this period in the forthcoming constitution of a financial

orthodoxy in France.

JEL codes: B.12, B.14.

Key-words: French liberal School. – French Socialists. – Public Finance. – Taxation. – Debt. – Public

expenditure.

1 This article has been written within the scope of the collective project “The trade-off between taxation,

money and debt in the history of public finance crises” supported by the ESHET that the authors warmly thank. 2 Clément Coste, Triangle, [email protected]; Claire Silvant, Triangle, Associate Professor, University

Lumière Lyon 2, [email protected].

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Introduction

The French 19th century has been characterized by a high political instability: three revolutions and

two coups d'état took place, and three types of regime (monarchic, imperial, or republican)

alternated, causing disturbances in public finance. The 1848 crisis is one of these turning points; as

well from a political viewpoint as for an economic one, the years around 1848 are of high interest,

since the crisis aroused abundance of debates and discussions among the contemporary economists.

Before presenting and analyzing the French financial debates around 1848, it seems to us necessary

to give some short and general indications about the historical context. Under the Monarchy of July

(instituted in 1830) inequalities and antidemocratic positions of the government evolved pari passu

with the increase in the aspirations of the working class to social progress and to a republican

regime. France faces a violent economic crisis and financial in 1846-18473, which resulted in a

spectacular rise of unemployment and poverty. Contestation becomes more and more visible,

especially in Paris, and the social crisis end up in February 1848 with a Revolution. On 22 February,

plenty of street demonstrations spread in Paris. In the following days, the king Louis Philippe is

obliged to dismiss his government. On 25 February 1848 the Second Republic is proclaimed. Under

the pressure of the demonstrators, the provisional government of the Second Republic, in which the

Socialists economists4 were represented, constitutes a Committee, named Luxembourg Commission

on 28 February 18485. Its role consists of improving the living conditions and of increasing the rights

of citizens.6 The Constituent Assembly is formed in April; replacing the provisional government, it

gathers many political sensibilities, and some of the economists (to whom this paper is devoted) are

elected, as well among the Socialists7 as among the Liberals8. Louis-Napoléon Bonaparte win the

December 1848 presidential election and stay in power until his Coup d’état in December 1851,

which marks the beginning of the Second Empire.

In this highly sensitive context, two opposite “camps” of economists developed conflicting analyses

about the causes and the consequences of 1848: that of the French liberal economists and that of

the Socialists. Both groups of economists are the most influent of their time9 and regularly come into

conflict each other. Let us describe briefly both “schools”.

What we call the French liberal school is a large group of liberal10 intellectuals and practitioners,

interested in economic theory as well as in economic discussions; they considered themselves as the

heirs of Jean-Baptiste Say on the most of theoretical topics11, and belonged to a classical and

3 The 1847 financial crisis is a crisis of the private sector.

4 Commission du gouvernement pour les travailleurs

5 Louis Blanc (1811-1882) was its president; Constantin Pecqueur (1801-1887), François Vidal (1812-1872) and

Victor Considérant (1801-1893) were members of the Commission. 6 The Luxembourg Commission obtained the following improvements: abolition of slavery, universal suffrage,

freedom of press and freedom of association. See Breton (2005) and Frobert (2014). 7 L. Blanc, V. Considérant et F. de Lamennais, then P. Leroux and P.-J. Proudhon.

8 F. Bastiat, L. Faucher, F.E. de Parieu, L. Reybaud and L. Wolowski.

9 We have to give the following precision: the Socialists authors have been particularly influent during the

1830s and the 1840, whereas the Liberals consolidated their institutions later, from 1841-1842, with the creation of the Journal des économistes et of the Société d’économie politique; they had a complicated relationship to political power, but dominated the diffusion and the teaching of political economy between the mi-1840s and the beginning of the 1870s. 1848 is a pivotal period from that point of view. 10

We use the French acceptance of the word. 11

To have more elements on the intellectual inheritance of these economists, and on the strong influence of J.-B. Say and A. Smith, see the work of Béraud, Gislain and Steiner (2004).

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individualistic tradition.12 The most influent of them around 1848 are Frédéric Bastiat (1801-1850),

Henri Baudrillart (1821-1892), Michel Chevalier (1806-1879), Joseph Garnier (1813-1881), Gustave de

Molinari (1819-1912), Hippolyte Passy (1793-1880), Gustave du Puynode (1817-1898) and Louis

Wolowski (1810-1876). These economists headed the most influent liberal institutions of that time:

the Journal des économistes, the Société d’économie politique, the Académie des sciences morales et

politiques, the publishing house Guillaumin and the first chairs of political economy in the Grandes

écoles. In the mid-19th century they surely exerted a kind of monopoly on the diffusion of political

economy in France; although they had minority ideas from the political point of view13, they

represent the economic orthodoxy which dominates the academic field. After having neglected for

long, the interest of the historians of economic thought for the French Liberal group has been

renewed since many years, thanks to the studies of Breton and Lutfalla (eds) (1991), Le Van Lemesle

(2004), Béraud, Gislain and Steiner (2004) and Dockès et al. (eds) (2000). Nevertheless their analyses

of public finance, especially over the period 1848-1852, have been little studied in spite of relative

abundance of raw bibliographical material (articles in the Journal des économistes, discussions and

debates in the Société d’économie politique and in the Académie, handbooks, textbooks…).

The second group of economists that we consider in our paper is that of the French Socialists. At the

beginning of the 1830s, some young followers of Saint-Simon left the movement because of its

political powerlessness and its authoritarianism. The most important of them were Philippe Buchez

(1796-1865), Pierre Leroux (1797-1877), Constantin Pecqueur (1801-1887) and François Vidal (1812-

1872)14. The “socialisme fraternitaire” (Lanza 2006; Frobert 2014) – to which also Louis Blanc (1811-

1882) belongs – was structured around both concepts of solidarity and equality, considered as

necessary conditions to guarantee individual liberty (Coste 2016a). These socialists largely protested

against the abandonment of the working class by economists and against the drifts of Saint-

Simonism. So, they spread their ideas in favour of an emancipating social economy through several

journals (Bouchet et al. 2015)15. 1848 is a crucial period for the politicization of this kind of socialism:

from there, socialism is confused with republicanism (Démier 2006; Charruaud 2008)16. Propositions

of Louis Blanc, Constantin Pecqueur and François Vidal from the “Commission du Luxembourg” were

particularly significant in this respect (Pecqueur & Vidal 1849; Frobert 2014) since they aim at

rethinking economic institutions through the prism of solidarity. After the fall of “social republic”

(Hayat 2011), Vidal created Le travail affranchi (…) (1849), Blanc Le Nouveau Monde (1849) and

Pecqueur Le Salut du Peuple (1849); the main objective of these journals was to diffuse a social and

republican political economy. If French socialism was recently rediscovered by historians of economic

12

They can be called “classical economists” since they share numerous common analyses with the classical tradition of Smith, Say, Ricardo (in a lesser extent) and Malthus; and they can be called “individualistic” because they align themselves with the spirit of the French revolution of 1789 which placed the individual rights and the individual freedom at the center of their concerns. 13

Around 1848, the majority opinion is mostly in favour of interventionism. On the contrary, the systematic and dogmatic defence of the freedom of trade and of a lower public intervention made them run the risk, many times since the 1830s, to be victim of censorship. For more precision, see Le Van-Lemesle (2004). 14

Andrea Lanza (2006) made a more accurate inventory of these socialist authors. See also Bouchet et al. (2015). 15

For example, L’Européen (1831-1832 for the first), La Revue encyclopédique (1831), La Revue Indépendante (1841), L’Avenir (1844), La Revue du progrès (1839). We also mention the imposing Encyclopédie Nouvelle (…) directed by Leroux and Reynaud (1833-1847). See Forcina (1887). 16

The Socialists are calling for an economic and social republic (Hayat 2014).

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thought (Ege 1992; Benausse 2000 ; Frobert 2014 ; Coste 2017; Bellet 2017 ; Frobert 2017), their

contributions to public finances issues, especially during the crisis of 1848, remains largely unknown.

The 1848 moment is particularly interesting to confront socialist and liberal ideas, because it

simultaneously corresponds to the culmination of the Socialist group and to the rise of the Liberal

one. As far as we know, the idea consisting in confronting liberal and socialist ideas on public finance

around 1848 has never been deeply investigated by the historians of economic thought, except by C.

Coste (2016); however the topic seems to us to be of high importance in its time, since we observe a

flourishing of articles, books, debates on the questions raised by the crisis. If the question is relevant,

if not fundamental, for the mid-19th economists, it should also be the case for the historians of

economic thought. That is why we aim at bringing a contribution on this question. We decide to limit

our analysis to the 5 years following the crisis and the breakdown of the July Monarchy, ending in

1852 with the second Empire. 1852 is also an important year from the viewpoint of public finance

because the government launched a famous annuity conversion; lastly the year 1852 is that of the

publication of the Dictionnaire de l’économie politique by the Guillaumin editing house, Dictionary

which is usually considered as the masterpiece of the French liberal school.

According to us, presenting and analyzing the Socialist and Liberal debates on this period is of high

interest in three respects for the history of economic thought. Firstly, we aim at giving insights on a

little studied question by identifying divergence points in their analysis of the financial crisis;

secondly, we want to present the terms of the debate concerning the financial reforms to adopt;

lastly, we want to put this controversy in line with the constitution of a French orthodoxy regarding

public finance in the French liberal thought; in this respect, the culmination of discussions around

1848 probably played a great role in the later structuration and strengthening of their orthodox

ideas, while socialist ideas about public finance have been discredited for the next decades, because

of the smear campaign undertaken by the Liberals, and also because the topic become a minor one

in their own thought regarding other questions as the definition of property rights or the reform of

credit. In particular, socialist ideas on taxation have been forgotten after revolution of 1848. Without

any doubt, solidarism of Léon Bourgeois has overshadowed their contribution in terms of progressive

taxation. Otherwise, the rediscovery of this type of socialism by authors of the third Republic (Benoit

Malon, Eugène Fournière) did not focus on taxation issues.

The first section of the paper presents an overview of the economic and financial situation of France

around 1848, examining the increase in public debt and the evolution of State revenues. Section 2 is

devoted to a comparison of the different ways the Liberals and the Socialists analyzed the causes of

the crisis. Then, we try to reconstruct the arguments of both camps concerning the solutions to

overcome the troubles in public finance: Liberals and Socialists developed contrasted views on debt

(Section 3). In the 4th section we present the liberal and socialist controversies about taxation.

1. An overview of the economic and financial stakes of 1848

Before exposing the debates between contemporaries of the 1848 crisis, it is necessary to give to the

reader a short overview of the condition of French public finance before and after 1848. Lots of

historians underline the fact that 1848 undoubtedly is a year of major financial troubles (Delalande

2011). Nevertheless it would be false to believe that these difficulties only started with the February

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Revolution. Some studies in the economic history show a degradation of the French public finance

since the beginning of the 1840 decade (La Place de Chauvac 1916, Fontvieille 1976, Bonney 2010).

Financial problems slowly begin to grow under the July Monarchy (1830–1847).

Table 1. Revenues, Expenditure, and Public Debt of the French Government (expressed in millions

of francs)

Source: Calculation by Louis Fontvieille (1976), quoted by R. Bonney (2010), p. 104.

Since the early 1840s the grow rate of government revenues is quite low (+ 11% between 1840 and

1847), while public expenditure increased twice this rate (almost 20%). As shown in the Table 1, in

the same time, the rise in public debt is above 28%. This can be explained by the financing choices of

the Monarchy of July. As a consequence, problems began to occur to finance the ordinary expenses

as well for the extraordinary ones (railways, canals, other public utilities, etc.) before 1848.

In November 1847 the Finance minister of the July Monarchy negotiated a loan of 250 Millions of

Francs; it is a contestable success since only 85 million francs have been collected. The situation will

logically get worse after the February Revolution.

We have to add a word about the long-term historical context. In contrast with Britain, France

traditionally had a strong defiance since its experiences of payment defaults in the 18th century

(Bonney 2010, p. 102-103), what would have led the French economists to loathe the risks of an

excessive public debt. The link between political instability and financial crisis would have prevailed

among the economists until the mid-19th century.17

17

“It was not until the 1850s that the psychological connection between political stability and financial crisis was finally broken. In the first half of the nineteenth century, credit markets were thus clouded by the continuing threat of political instability and its dire financial consequences’ (Hoffman, Postel-Vinay, and Rosenthal 2000: 208).

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1848 and 1849 show an interesting change: in the beginning of 1848, the situation of French public

finance is considered as apocalyptic by the Minister Goudchaux,18 who simultaneously had to deal

with the suppression of some indirect taxes (tax on stamps, tax on salt) and the payment of the debt

service, in the context of a credit crunch and of a strong defiance towards perpetual rentes which

price dramatically falls (see Graph 1). In March, Goudchaux abandons his functions and is replaced by

Garnier-Pagès, which is considered as the emblematic Finance Ministry of the Post-revolution area.

Garnier-Pagès arrival at the Finance Ministry gives a signal for a financial change; the government

aimed at implementing some principles claimed during the February days while reassuring the

French bourgeoisie in order to restore its confidence in public annuities... Paradoxical financing

choices are made by Garnier-Pagès. On the one side, some measures are undoubtedly in line with

socialist ideas consisting in providing a more equitable taxation system (decree of February 29th) in

the sense of more proportionality: the temporary government removes some indirect taxes

considered as harmful to the working class (taxation on salt, stamp on journal, excise duty on meat

and on the circulation of beverages).19 In the line with the Saint-simonian ideas since the 1830

decade, Garnier-Pagès launched in March 1848 a massive public loan of 100 Millions of Francs to

honor its commitments and to finance the current expense. This public loan is at the end a total

failure since it succeeded in levying only 500 000 francs (that is 5 % of the objective…). On the other

side, some other financial measures are more surprising: one of the first adopted is an effort to

partially reimburse depositors. At the same time, a paradoxical fiscal policy is implemented by

government that we could call orthodox: the creation of the “45 cent tax” on direct taxes which

results in an increase by 45% of the direct contributions of small taxpayers, or the selling of some

symbolic public assets (woods, lands, minting of the silverware of the State, etc.).

As a consequence, we observe that public revenues and public expenditure have simultaneously

grown in 1848; but one year later, public revenues dramatically fall regarding corresponding

expense, leading to an explosion of French public debt (+ 17,5% between 1848 and 1849).

18

This situation is well described by Léon Faucher in the Revue des Deux Mondes (1849a), and also by Gustave du Puynode (1849a). 19

Progressively, facing difficulties to finance public budget, all these consumption taxes will be reintroduced by the Government between June and December.

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Graph 1 – Price of rentes during the Second Republic

Source : C. Coste, with datas given by Jacques-Marie Vaslin20.

The following years show a taking in hand from the French government (Table 2): public resources as

well as public expense strongly decrease. These “efforts” of the government are the consequence of

a tightening of the Ministry of Finance who took many sudden and abrupt measures to avoid an

excessive growth of the debt (see below, 2nd section).

Table 2. Revenues, Expenditure, and Public Debt of the French Government (expressed in millions

of francs)

Source: Calculation by Louis Fontvieille (1976), quoted by R. Bonney (2010), p. 105.

This policy had notable consequences on the interest rate (see Graph 2): the government

management of the panic movement around 1847 leads to a stabilization of the interest rate at the

end of the 1840 decade.

20

The graph can be read as follows: before the February Revolution, the 5% rente is above the par (around 115 francs). It will strongly decrease and return to the par only with the taking up of power by Napoléon III. The financial world mistrusted the 2nd Republic.

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Graph 2 – Evolution of the long term interest rate on rente on the State

(rente 5% until 1825, then rente 3%)21

Source: C. Coste, with datas of Monnet & Levy-Garboua, 201622.

To summarize, until the conversion of annuities realized in 1852 (with which the 5% annuities almost

disappear, replaced by 3% rente (annuity)), most of financial measures taken between the end of

1848 and 1852 could be called austerity measures (reinforcement of consumption taxes, diminishing

of the payroll of the State). We will see that most of economists, either Liberals or Socialists, will

strongly criticize this choice of policy, accused of being short-sighted.

To be synthetic, what is particularly interesting for our study is the fact that a large sample of

financial measures (that we cannot describe extensively in this short introductive section of our

article) has been experimented during the period 1848-1852. It is thus a formidable moment for the

historians of economic thought to observe and study the reactions of the contemporary economists.

2. Contrasted evaluations of the 1848 financial crisis in socialist and liberal thoughts

Before going further, it seems to us necessary to raise the question of the contrasting diagnosis

of the causes of the financial trouble made by the Liberals and the Socialists. Do they disagree even

on the evaluation of the grounds of the crisis, or only on the ways to overcome it?

21

The long term interest rate is calculated on the basis of the rate of return of the rentes on State. Its peaks are obviously related with the political crises which have occurred during the 19

th century.

22 Clément Coste thanks Eric Monnet for having accepted to put these datas at his disposal.

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The origins of the crisis from the liberal viewpoint

We find among the liberal writings (articles of the Journal des économistes, discussions at the Société

d’économie politique) quite contrasting analyses about the causes of the 1848 crisis.23 They can be

synthesize in two categories: the criticisms towards what they consider as wrong choice of financial

policy around 1848; and the denunciation of more structural “vices” of the French economy.

The first category of argument is related to the criticism of wrong choices of recent economic policy

(particularly regarding their financing), as well from the end of the Monarchy of July as from the

immediate reaction of the new governments after the February revolution.

The first cause of the crisis has to be searched in the wrong choices of economic policies before 1848.

Some extremely influent liberal economists of the time, like Joseph Garnier, Horace Say or Gustave

du Puynode) the slow but certain increase in public debt associated with insufficient interest rates

caused from 1847 a degradation of the perceived quality of the French Treasury bills, and then of the

capacity of the French government to levy sources of funding. As a consequence, the State had

difficulties to get rid of its bonds: “it seems to us that better results could have been obtained by

offering to the buyers of treasury bills a higher interest rate and by promising a higher prime to the

subscribers of the direct loan” (Garnier, 1848b, p. 335).

Obviously, the situation does not get better, according to the Liberals, with the February Revolution.

Of course, all the French liberal economists agreed on one point: they all strongly criticized the

impact of the choices of the temporary government in terms of public finance. They consider them as

responsible for the exhaustion of public resources of the young Second Republic (Coquelin 1848,

Parieu 1848). They also insist on the errors committed by the governments after the Feruary

Revolution to find immediate remedies to the financial risks. By selling symbolic assets of the State,

the French government (especially Garnier-Pagès) has caused a major risk of amplification of the

crisis; H. Say briefly alludes to a mechanism according to which selling assets in a crisis moment

contributes to keep lowering their prices (H. Say, 1848b). In that, public resources are lower than

expected and moreover the operation contributes to compromise forthcoming assets sales due to

the fall in price… Debt reduction in a period of finance troubles should not be done through assets

selling.

Before going to the diagnosis made by the Socialist, we have to add the fact that some other liberal

economists insist more on structural causes to explain the French problems of public finance. The

arguments are well-known since Jean-Baptiste Say (we remind that the French liberal economists

considered themselves as the heirs of Say). It is particularly the case of Gustave de Molinari and

Charles Dunoyer, who belong to the most orthodox side of the French school. They attribute financial

troubles to an excessive growth of the size of the State (number of civil servants, excessive extension

of its attributes, to many discretionary intervention and less rationale than private actors). A public

finance crisis may consequently occur when commercial troubles suffocate public revenue, without

any possibility to decrease expense… As a result, crisis is viewed as a consequence of an excessive

rigidity. Particularly, Charles Dunoyer, one of the most conservative economists of the Liberal school,

added an aggravating feature of the French economic: the crisis would also be caused by an

excessive centralization.

23

An attentive reading of the reviews of that time could also show a controversy about the quantitative appraisal of the amount of debt. Lots of publicists disagree about the way of calculating it properly. See Garnier (1848b), Vitet (1848) for example.

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Finally, to conclude the first part of this section, it seems to us that the liberal group seems on this

question of the diagnosis to be divided between a conservative aisle24 which puts the accent on the

structural defaults of the French economy, and a most reformative one (close to the moderate

republicans).

The socialist diagnosis: public finance crisis as a result of the commercial crisis

Logically, the Socialists rejected the liberal according to which the public finance crisis would be

explained by a too low interest rate offered to the creditors of the State. Indeed, the interest rate on

the public debt is, according to them, a transfer from work to idleness (Menger 1900).

An attentive reading of the Socialists writings shows that they also dissociate two kinds of grounds to

explain the financial troubles around 1848.

First, some reasons to the crisis can be found in the economic conditions of the 1840 decade. To

them, one of the major causes of the 1848 crisis is a brutal and excessive contraction of the credit

(credit crunch) which is largely due to the laisser-faire allowed by the regime of free competition.

This is for example the argument developed by François Vidal and Louis Blanc. The deep causes have

to be searched for the Revolution; if the February Revolution happened, it is according to them

because of the high unemployment; they view unemployment as a consequence of the agricultural

and commercial difficulties since 1846 which have been reinforced by free-competition and absence

of State regulation. This economic situation impoverishes many different social groups: the working

class of course, but also the industrials25 and the small capitalists who suffer a decrease in their

outcomes. Finally, their difficulties to pay tax raised the specter of a crisis in public finance. The great

disorganization introduction by free competition (at national scale) is according to them responsible

for the propagation and the transformation of a crisis of private finance onto a crisis in public

finance.

In a more astonishing way, many Socialists also strongly criticized the choices made by the temporary

government of March 1848, as well from a philosophical as from an economic viewpoint. Blanc Vidal

and Pecqueur developed a particularly virulent criticism of the National Workshops (Ateliers

nationaux), which paradoxically aimed at being an application of the right to work dear to the

Socialists… But these National Workshops, created by Marrast, appeared to them as far from their

originate goals, since they simply gather unemployed people from different professions without

taking into account their skills26. This error also has financial consequences for the State: as the salary

becomes a kind of charity, they do not hesitate to characterize it as a dilapidation of public finance

(Vidal 1848, Blanc 1848a, 1848b, 1849, 1870).

24

This part of the liberal school is largely influenced by Adolphe Thiers and its Parti de l’ordre, still very influent during the period we study. Also belong to this party François Guizot, Odilon Barrot or Alexis de Tocqueville. Incidentally Thiers has massively intervened in the Journal des economists in 1848 to express his – conservative – viewpoint on property rights. 25

Louis Blanc collected many testimonies by many captains of industry, letters that he considered as “testimonies of death of the French industry based on competition” (Blanc, 1848a: 382). 26

Louis Blanc considered that the creation of National Workshops was a part of a strategy designed to discredit the socialist program.

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To conclude this section, we showed the Liberals and the Socialist did not provide the same diagnosis

of the 1848 financial troubles. It is then not a surprise that they do not elaborate the same proposals

to overcome it.

3. How to overcome the financial troubles: debt as a remedy?

We examine in this third section the arguments of the French economists related to debt as a way of

going out of crises and to avoid other financial troubles. The discussions among Socialists and Liberals

have been numerous especially after the national loan launched by the Minister Garnier-Pagès in

order to finance the immediate needs of government. Both of them considered with a severe view

Garnier-Pagès’ initiative to launch a new 100 million loan. Liberals considered it as inappropriate, in a

situation of excessive public debt, and dangerous, since it validates the doubts towards the financial

solidity of the State. We find also in the socialists writings a strong criticism: Louis Blanc considered

that the Minister has overdone and underestimated the role of the capitalists and the bankers who

massively refused to borrow to the State. The government is accused of having implemented a naïve

policy without respecting the fundament of Socialist ideas. Nevertheless French authors realized then

the fact that public debt seemed to become if not uncontrollable, but at least a permanent issue.

Views on debt in liberal and socialist theories

Since many decades, Saint-simonians economists have a strong interest in the debt instruments to

finance public policy. In 1848 the Socialists remain strong advocates of public loans. According to

Louis Blanc, this is a good way of giving an impulsion to the workers associations, in a climate of

economic crisis. By levying resources through credit, the government can avoid massive increase of

taxation which could be harmful to working classes. Public debt is viewed in a dynamic way:

“But taxation? How to increase taxes? Though Mr. Thiers pretends ignoring that aside

taxation, there is public credit! He pretends to ignore that public loans is the best way in

which the future can contribute to the charges of the present time! If a war is declared, the

government borrows; what it can do in order to organize destruction or, if we want, its

defense, is it unable to do the same to impregnate production? (…) A war has most of time

less return than its costs, whereas the labor nearly always yields more revenue than it costs.

On the other side, don’t imagine that it would need high financial advances. By studying with

attention the system described above, we will notice that it has a strong elasticity which

would allow starting its application in small proportions (…). The essential principle consists

in setting it in motion; it would then grow by its own powerful force. The last objection of Mr.

Thiers falls down by itself. Taxation! But the most secure way to extend its sources would be

to establish a better economic regime and to increase by this way the general wealth. Yet the

following principle must not be forgotten: the association [between workers] is admirable in

this that it produces a more legitimate repartition of products, but also that it multiplies the

fruits of production.” (Blanc, 1848a, p. 386).

Debt is also preferable to a reduction in public expense which cannot be a solution to overcome

financial difficulties. Moreover one of the ways to go out the crisis is to undertake courageous social

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reforms; these are as well a question of social justice, as for economic efficiency, could we write with

more actual words. According to François Vidal, “if we do not hurry to enter boldly and frankly the

way of social reforms, we will observe a run out in our public finance” (Vidal, 1848, p. 10).27 What

Vidal understands by social reform is a revival in economic policy, because only economic activity and

industry can ensure sufficient tax levy. Concretely Vidal and other Socialists propose deep economic

and social reforms; among them the most important is probably the recognition of the right to work

(droit au travail), which is a right to live from his work and which is not a right to be funded even if

people are unemployed (Vidal, 1848, p. 18).

Believing that the State could have an interest in public borrowing, the Socialists nevertheless

condemned the unlimited credit theory developed by the Saint-Simonians (Coste 2016b).

Simultaneously, Socialists challenged the liberal theory explaining the state's use of public debt by

the deficiency of fiscal resources (Garnier 1848c; Coste 2016a).

Naturally the liberal economists do not share the same enthusiasm than the Saint-simonians towards

public loans. For most of liberal economists, public debt is viewed as a charge and as a generally bad

way of financing of public expense. The reasons invoked are numerous. We propose hereafter a

synthesis of the arguments given – not exhaustively - by Garnier (1848b and 1848c) Puynode (1849

and 1852) or H. Say (1848b), since they developed the most consensual liberal arguments at the

time. Nevertheless, before going further, we precise that they share the idea that public debt should

only be a limited solution,28 in comparison with taxation which should according to them bring the

vast majority of public resources. Contrarily to the Saint-simonians they also refuse to understand

that debt also can be a resource: “Public debt is however a strange resource; how many rich people

in that case would lack bread!” (Puynode 1852, p. 511).

The first argument against public credit is that of its cost – higher than the implementation cost of

any tax. When the State borrows on capital markets, he must – whatever the form taken by the

credit29 – reimburse it with interests. This reimbursement will necessarily be obtained through a new

increase in taxation, a through an additional loan…

“The interest rate paid on public debt overloads the tax burden; taxation increases

production costs, and these elevate the price of commodities that the consumer cannot

afford anymore.” (Garnier 1848c, p. 360).

The second argument focuses to the relative inefficiency of public credit because it would slow the

growth of private sector. They mention a kind of crowding-out effect: by exerting a high pressure

over the capital markets, the financial needs of the State cause an elevation of the interest rate,

which is harmful to the industry (Puynode, Garnier, H. Say). In particular, Puynode considers in this

27

« Si l’on ne se hâte pas d’entrer franchement et hardiment dans la voie des réformes sociales, nous verrons

les finances épuisées » (Vidal 1848, p. 10). 28

Garnier considered that the only reason to increase the public debt is the temporary incapacity to balance public revenue and expenditure. The selling of public estate is the last resort solution if government is unable to borrow. See Garnier (1848c, p. 350-52). 29

All the handbooks and dictionaries of that time – either in Law or in Economics – established a distinction between the floating debt and the consolidated debt. See Le Rat de Magnitot (1841), Garnier (1848c), Puynode (1852). These works often rely on the contributions of Smith, Say, Ricardo and MacCulloch regarding public finance.

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respect that it could easily be observable that an industrial crisis often follows the issuance of new

public loans (Puynode 1852). And of course, from our Liberals faithful to their spiritual father J.-B.

Say, a public use of private resource levied by public borrowing is always worse than its use by

private industries…

Thirdly, a systematic resort to public credit could also have bad long-term effects: by spending in

advance resources on the cost of future generations, public expense financed by credit would have

an inflationist effect (Garnier 1848c). In this respect they would be no equivalence between taxation

and public credit. The last argument of the Liberals against financing through public debt is the

danger it conveys for the credibility of the State. If the State is so indebted that it can suffer any panic

movement on capital market, there is an unbearable danger.30

Yet the management of public debt needs particular skills from the government since it is not

dissociable from the question of public confidence. Consequently, bad choices of wrong financial

orientations could have dramatic consequences for the credibility of the State. For example there is a

risk concerning the sustainability of consolidated debt, a risk of abuses of the floating debt. As

Garnier writes “a weak State cannot find any credit” (1848c, p. 354).

Nevertheless, we have to precise that in some cases, public credit can be admitted only in few cases:

in order to prepare military conflicts or to repair the consequences of revolutions (Garnier 1848c,

Puynode, 1852). After the end of the short period we studied, we will notice some inflexions in the

liberal thought. Joseph Garnier for example will regard public debt with less negativity and accept

more cases for its use (See Silvant 2017).

Of course, a very easy solution is proposed by the Liberals to avoid either an increase in public debt

or the urgent situation consisting in selling the assets of the nation: this solution is the reduction in

public expense… In this regard, Garnier-Pagès financial measures are severely judged by the liberal

economists (H. Say, J. Garnier). Numerous contributions establish the necessity to reduce the size of

public expense (as well the ordinary as the extraordinary), especially by reducing public employment.

This is for example Horace Say’s appeal, since he considers that such an effort would have been

sufficient to resolve public finance troubles in 1848:

“The resources of the Treasury are obviously sufficient to satisfy all the reasonable needs of

the moment; all the danger [of the 1848 context] lies in the exaggeration of public expense;

this is the most concerning problem for the future.” (H. Say, 1848b, p. 17).

Why and how to manage public debt?

After having briefly presented the arguments of liberals and socialists about the legitimacy of

increasing public debt, we now examine what analysis of debt management they propose: should the

government act, through a sinking fund or through conversion of annuities, to reduce its costs? Or

are these methods a danger for the credibility of public credit?

30

In this regard, they particularly targeted another measure taken in March 1848, that is the suspension of the repayment of the Caisses d’épargne. In a context in which the French public debt is perceived as being too high, and then in a context of high defiance toward the French State, Garnier considered that “this decision was regrettable (…). Treasury bonds are not exchanged anymore; the rentes suffer a significant decrease (…). A panic can emerge from a preventing measure” (1848b, p. 336).

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The controversy about the sinking fund (Caisse d’amortissement) and the reduction of the

amount of debt

The principle of a sinking fund exists in France since many centuries (Lutfalla 2006). By certifying to

future State creditors that they would always find a buyer for their rentes, the sinking fund was set

up to attain the “public’s faith” (Aglan et al. 2006) – it is worthwhile noting the synchronicity

between the creation of the sinking fund (1816) and the rise of the French rente (cf. graph 1). By way

of an initial endowment from the public Treasury, the sinking fund repurchased rentes on the Stock

Market, which it then immobilised within its assets in order to receive the interest payments, thus

increasing its capacity for amortisation.

Numerous socialists in the first half of the 19th century were very early interested in this method of

reducing the amount of debt – it is the case, in particular, of the Saint-Simonians. The idea is indeed

seducing: it offers to the government a simple and economic way of diminishing the liabilities of the

State by continuing purchase of public bonds.

But the observation of the operating of the Caisse left them a bad taste. The fund is subject to a

major theoretical criticism.

According to the Saint-Simonians, the sinking fund absorbed a considerable portion of France’s

capital whether through the form of a) the annual endowment; b) the issuance of new rentes

destined to buy back older rentes; or c) interests that corresponded to the payment of rentes

immobilised by the sinking fund: all the capital available to the sinking fund is provided by the

taxpayers (Enfantin 1831). Socialist arguments will be taken up by Liberals in the 1840s.

Indeed, the Liberal economists developed a particularly strong criticism about the Caisse

d’amortissement whose role consists in finding solutions of installment or reimbursement of public

debt (by purchasing public bonds). Since 1833, this organism has difficulties to fulfill its initial

function, as his capital is entirely absorbed by the financing of the ordinary public deficits and the

extraordinary expense. What about giving it a new breath, or what about founding another Caisse

d’amortissement, on the same model?

This hypothesis is refused by the Liberals. Their arguments are the following: 1) The Caisse is without

any doubt less efficient to reduce debt than a primary budget surplus… It is neither necessary to give

a new impulsion to the ancient Caisse, nor to create a new one. 2) According to them, the experience

has shown that the political power can easily make a misuse of it, by forcing it to finance the current

deficits rather that fulfilling its ordinary goals31. 3) Lastly, the economists, especially Coquelin (1852)

and Puynode (1852) point out the fact the substantial principle of a Caisse d’amortissement is less

efficient than expected in the case of an expensive State which goes on borrowing for its new

expense…

Such as the Liberals, the Socialists do not want systematically to resort to the sinking fund.

Nevertheless, among them, Vidal disputed the argument that the only way to amortize the debt is to

generate a surplus.

In 1848 the needs of the current financial situation give to the Socialists the idea to short-circuit the

sinking fund to push away the risk of financial panics. One of the most innovative authors in this

31

The Liberals were opposed on this point to the Saint-Simonians who claimed in the 1830s an alternative use of the sinking fund - notably the young Michel Chevalier (1832) who proposed to encourage the realization of public utility works by the payment of a premium levied on the sinking fund.

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respect is François Vidal. How to do this? Vidal elaborates in 1848 a proposal of purchase of public

debt by the State. The principle is quite easy to understand: rather than giving high dotation to the

Fund, which could use it to purchase public bonds, the State could make an economy by purchasing

directly its own bonds (by adding 0,5% on the annual interest rate for its amortization), during 59

years.

How to reduce the public debt service: the conversion of annuities

Another advantage of public debt, rather than other ways of financing the State, aroused the interest

of the Saint-simonians and Socialists since the 1830 decade: the possible conversion of annuities (by

replacing the return rate – for its holder – by another one, generally lower). Annuities conversion is

often undertaken at particular political moments, when its acceptance by people is considered as not

antagonistic. Why is the conversion of annuities viewed with benevolence by Socialists?

After the saint-simonian enthusiasm of 1830s for the conversion, Pierre-Joseph Proudhon declared

(in 1840) that it was an efficient way to attack private property by eroding the estate of the owners.

In the same way, Louis Blanc views it as “a way of bring to an end the idleness of certain capitalists

and to obviate the laziness of some capitals [holding these bonds]” (Blanc 1844, p. 947). However,

against the Saint-Simonian enthusiasm for regular conversions of rents (Coste 2016), Louis Blanc

explained that the Saint-Simonian position imposed to be dependent on the Stock Exchange, what he

refused. Indeed, the stock market prevents the direct connection between capital and labor (Blanc

1845).

The Liberals interest for the topic emerged in 1840s. Horace Say legitimized the principle in the

reissue of his father’s Cours complet (Say 1840, II: 469) ; in the Revue des deux Mondes (1843), Léon

Faucher deplored the status quo with reference to the conversion of debt taken on at 5% - Faucher

demanded that the debt’s nominal rate be made conform with its actual rate ; in 1845 Charles

Coquelin who emphasised the legitimacy of conversion in the same Revue des deux mondes, arguing

that the rentier should not be exempt from a decrease in interest rates that occurred across the

board ; finally, in the Journal des économistes (1845), Dussart circumvented the accusation of

“bankruptcy in disguise” by arguing that the alternative of redemption was always proposed to any

unsatisfied creditors. Dussart concluded that, “Conversion represents bankruptcy for clairvoyants,

just as bankruptcy represents conversion for the blind” (Dussart 1845: 54).

However, Charles Dunoyer – one of the most conservative liberal economists – challenged the

principle of conversion by denouncing the right of reimbursement claimed by the State. According to

him, the conversion is unfounded in law because the State is not entitled to reimburse at par (100

francs per annuity title) the debt it has contracted at variable prices (Dunoyer 187? [1845]: 366).

In any case, reducing the service of the debt by a conversion is impossible as long as the price of the

annuity to be converted (5%) is less than 100 francs. Indeed, in such a situation, no annuitant would

accept it. It was therefore necessary to wait until 1852 for a conversion (see graph 1) to reduce the

long-term interest rate (see graph 2).

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4. The debates on taxation

Between 1848 and 1852, taxation also becomes a central topic of discussions in the economic in

intellectual circles. Debates focused as well on the commentary of fiscal policies undertaken by the

successive governments, as on propositions of fiscal reforms which aroused at the Parliament or in

some booklets in that time. To have a right idea on fiscal debates in this period, we confront in this

section liberal and socialist arguments on taxation around 1848. In 1848, the Gouvernement

Provisoire took two important tax measures: the "over-taxation" of property through the tax of 45

centimes and the abolition of certain indirect taxes. In addition, the provisional government

discussed the introduction of an income tax. So we identify two central questions in this respect

which have interested Liberal and Socialist economists: that of the trade-off between properties or

consumption taxes, and that of the relevancy of an income-tax (in the British fashion) or of a capital

tax in the 1848 context.

Tax on properties or on consumption?

Firstly it is important to note that the Liberal economists, over the period studied, did not find any

consensus about taxation as a remedy to the public finance crisis. We will show that some of them

considered that it was a last resort solution, preferable to an increase in debt, but could not reach an

agreement on the way to implement it. Nevertheless they share a common view about taxation: the

idea that “it is a necessary privation, that must be diminished as far as possible, up to the limits of

the needs of society” (Garnier 1848c, p. 341).

In general, the Socialists wanted the substitution of indirect taxes (in particular consumption taxes)

by an increase in taxes on ownership (in particular the land tax). But in 1848 both socialists and

liberals rejected the tax of 45 centimes considering it as an excessive contribution demanded to

property owners.

Concerning indirect taxation, a major of academic writings of Liberals condemn the multiplication of

indirect taxes - apart from Molinari (1849), for example, who, with Thiers (1848), claimed the

distribution of tax (la "diffusion de l'impôt"). According to them such taxes are in efficient, because

they cause a distortion on the market of consumption goods. And they also must be rejected because

they are often used by the politicians to deceive people, as consumption taxes are the most invisible

for the consumer (since they are confused with the price of commodities) (Garnier 1848c)32. In this

perspective, liberals and socialists could welcome with the same enthusiasm the first measures of

the temporary government… If we now examine their more applied analyses, for example in the

discussions at the Société d’économie politique, things seem to be more contrasted.

The socialists (Louis Blanc and Constantin Pecqueur for example) are not surprisingly strongly

opposed to indirect taxation (particularly on ordinary consumption goods). To them, this type of

32

“Les meilleurs impôts, dissent-ils, sont ceux que le public paye sans s’en douter. Mais c’est là de la ruse et non de la véritable politique. En effet le sacrifice n’existe pas moins, et tôt ou tard, les contribuables en portent la peine (…). L’impôt indirect prive le pauvre de sel, de son véritable sucre (…) ; il oblige les sept huitièmes des Français qui possèdent les vignobles les plus étendus et les plus féconds du monde à se priver de vin (…)” (Garnier 1848c, p. 346).

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taxation is “a progressive regressive tax” (Pecqueur, AN : 17 (17)). They promote the necessity of an

equal sacrifice between all the citizens: the only way to ensure the equality of sacrifice is to remove

indirect taxation, which means always a heavier burden for the poor (the worker) than for the rich

(the capitalist and the landowners).

Léon Faucher (1849) challenged this socialist assertion, rejecting "the inequalities of the tax often

denounced"33. According to him, taxation weighs heavily on capitalists, landowners and captains of

industry through four direct contributions, stamp duties and registration (enregistrement), which

together accounted for 52% of the 1847 budget – the working class would pay only 13.5% of the total

taxes, 18,5% for the middle class (Faucher 1849: 73)34.

Income tax vs Capital tax

Socialists and Liberals also strongly discussed about the opportunity to create an income tax or a

capital tax in order to solve public finance crisis and to introduce more redistributive justice. This is

related with many attempts from the Finance Ministry as well as from intellectuals thirsty for more

equality: the Minister Goudchaux tried two times to establish a new income tax35, but the latter was

unanimously refused by the French Parliament (F. Esquirou de Parieu was the writer of the report). In

the following months, Pierre-Joseph Proudhon and Hippolyte Passy both tried to propose the

establishment of an income tax: both times their projects are refused by the Assembly… What were

the positions of the Liberal and Socialists in these debates?

Not surprisingly, a part of the liberal economists supported the idea of an income tax; it is the case of

Cherbuliez, H. Passy and Garnier in 1848. As the question is sensitive from a political viewpoint,

Joseph Garnier cautiously considers that an income tax in the British fashion (like Robert Peel had

implemented it) would have been a better option than the increase of the debt. The trade-off

between both ways of financing the State should balance in favor of income taxation for the

following reasons (1848b and 1848b); a unique income tax is the better way to organize a just and

not arbitrary contribution and to comply with proportionality, which is considered (in that time and

in the following decades) as the most important principle for any fiscal system:

“Tax should be proportional that is levied so that every taxpayer contributes in proportion of

its private income. This is by far the most important rule. It complies with the most

elementary principles of equity.” (H. Passy, 1852, p. 900). “The income tax is the most

proportional, is better adapted to the real faculties of taxpayers” (ibid., p. 903).

Income tax also avoids most of market disturbances (on the contrary to indirect taxes with exerts

crowding out effects or under consumption). The case of Léon Faucher is quite interesting and in

some extent representative of the Liberals hesitation; if he seems to agree with the spirit of the

young Republic in 1848, particularly about taxation, he pronounces him radically against the income

tax in 1849, in an article published in the Revue des Deux Mondes. In this article he pretends that an

income tax complies only with infant societies, whereas the types of taxes should be more and more

diversified as societies improve, that is as the forms of wealth diversify. According to him, the

33

« Les inégalités de l’impôt dont on fait tant de bruit » (Faucher 1849: 73). 34

There is no explicit reference to the notion of inequality of sacrifice. 35

The first attempt of the Minister Goudchaux in 1848 foresaw a tax on movable revenue and mortgage debt. His second attempt after June was a proportional 2% taxation over every type of income.

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comparison with Britain on this point is not relevant, since Britain is an aristocratic country and

would have much more fiscal inequalities than France, which would require a more corrective tax

system (like the income tax). Because, write Faucher, the progressive taxation would be the natural

outcome of each system of income tax.36 Faucher uses, as the majority part of his Liberal colleagues,

the traditional liberal arguments against progressive taxation: firstly they consider it a profoundly

unfair, since it would modify the social order; it would be inefficient by discouraging any efforts; and

it would carry arbitrariness since it needs a political definition of the rate of progression…37

The case of Joseph Garnier is also of interest. In his 1848 Handbook (Eléments de l’économie

politique), he takes over the benefit principle (so defined by Seligman 1895) considering that a

proportional taxation is unfair to the working class, who should neither contribute in a proportionate

way to funding the National Opera or to financing ornamental gardens or promenade that they will

never enjoy. The distributive justice would require that the poor pay a lower rate than the rich:

“There is in every non-progressive tax a radical cause of inequality which collides with the

notions we developed about the laws of distributive justice. For no one it is equitable that a

poor peasan contributes either for the financing of the Paris Opera whose existence he

ignores, or to the embellishment of a promenade (…)” (Garnier 1848c, p. 337).

Nevertheless we observe a resistance towards income tax, particularly in the writings of Thiers and

Molinari. These hesitations illustrate the tensions inside the Liberal school between a progressive

aisle which considered income tax as an instrument of rationalization and of compliance with

efficiency and justice, and a conservative one which believes it would ineluctably be perverted

towards a progressive taxation system.

Taxation of capital is as controversial among the French liberal economists. Most of them rejected it

and defended the idea according to which taxation should hit the revenue and not the capital

(Cherbuliez, 1848 : 419). Emile de Girardin’s proposal consisting in taxing the capital (1849) by the

means of a voluntary insurance contribution, or that of Léon Walras to tax with high rates landed

properties, are thrown out by the Liberals.

From the socialist viewpoint, the necessity of an income tax is fundamental to establish more justice

in society. That is why Louis Blanc and Constantin Pecqueur actively defended a unique and

progressive income tax:

“The unique and personal tax is the only one which complies with justice; because it is

possible to hit the wealth or the capital, the property and the income, only if we have a total

appraisal of what he owns and what he annually earns.” (Pecqueur, AN: 17 (17)).

By defending progressive income tax, the Socialists want to establish a new definition of tax: it

should not anymore be the price of the protection service rendered by the State (the benefit-

principle), but the individual contribution in function of everyone’s resources (the ability-to-pay

principle). Thus direct taxation of income is viewed as a “principle of association to the common

utility expense” (Blanc 1849, p. 113).

36

« Oui, l’impôt progressif est au bout de l’impôt sur le revenu » (Faucher, 1849a : 94). 37

We do not treat this question in details here because it was dealt with in a separate article. See Silvant 2010. In this article, we show than some liberal economists are not hostile to progressive taxation.

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On the other side, many Socialists also advocated a capital tax. Constantin Pecqueur defended

taxation of landed properties and of capital based on a criterium of justice: as movable and landed

capitals are unequally distributed in a society, it is fair that those who benefited them support a tax;

it complies with the principle of equality of conditions. A capital tax is perceived as an interest

received by the State for the benefit of the whole society. It could be redistributed to the working

class, as a compensation of what the capitalists retire from their labor. Rather than the payment of a

kind of mandatory insurance, as in Girardin, Pecqueur perceives his capital tax as the payment of a

debt due to the members of the working class, the capitalist being debtors of their salaries since they

do not permit them to earn a fair portion of the capital they contribute to create.38

Conclusive remarks: On the way of a French financial orthodoxy

We have shown that 1848 was an important year with regard to many subjects related to the

question of public finance. Our study has allowed us to confront socialist and liberal ideas in three

respects: their diagnosis of the causes of the crisis; their views on debt as an advisable way to finance

a State; and their conceptions of taxation.

According to us, our paper has given new insights on two points. Firstly, we propose to make a

reconstruction of the socialist and liberal debates about a technical question, that of public finance

troubles, what had never been done. In this regard, we tried to give to the reader a clear view of the

financial controversies of that time. We aimed at underlining the permeability between theoretical

and “applied” questions. Secondly it showed that neither the Socialist group nor the Liberal one are

“monolithic” groups; it means that if a kind of orthodox line can obviously be highlighted in both

groups, there were also a room for discussions among them, what results in very rich discussions at

the Parliament or in the reviews of that time.

The following decades (from the 1840s to the 1870s) shows a diverging destiny for Liberal and

Socialist ideas. While the liberal group will expanded through their powerful institutions (particularly

the Journal des Economistes, the Société d’économie politique and the Chairs of higher education)

and spread its thoughts over the political power, the Socialists will lose influence until the 1870-1871

events which rekindle the necessity of a social Republic.

As a consequence, the ideas about public finance developed by the French liberals around 1848 are

probably the early developments of a modern area of finance ideas which will be undertaken from

1858 to the 1870 by Joseph Garnier and Paul Leroy-Beaulieu who will give to finance a new

respectability by constituting a real science of finance.

38

« Il faut demander à l’impôt sur le capital une compensation qui se rapporte à la privation où sont tous les

prolétaires de toute participation à l’usage et aux fruits du sol » (Pecqueur, 1849-1850, n°3).

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an overview of the socialist and liberal positions1

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