Caisse d’Escompte

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The Caisse d’Escompte performed some of the functions of a central bank in pre-Revolutionary France. After the hyperinflationary fiasco of John Law’s Banque Royale in the 1720s, the term bank acquired a negative connotation in France, and it was not used until the foundation of the Bank of France in 1800. Despite its name, the Caisse d’Escompte was a bank.

The failure of John Law’s Banque Royale thoroughly soured the French people on banks that issued bank notes, thus retarding the continued development of French banking for several decades. In 1767 a so-called Caisse d’Escompte was established to purchase commercial paper and government securities, paying 4 percent interest (5 percent during war) and charging a 2 percent commission. The Caisse d’Escompte also enjoyed a monopoly on the issuance of coinage.

The first Caisse d’Escompte failed, but Finance Minister Turgot established by government decree another Caisse d’Escompte in 1776. This institution was empowered to discount bills of exchange and commercial paper at 4 percent, buy and sell gold and silver, and act as the government’s bank. It could accept deposits from the public, but could not borrow funds at interest, or accept any debt that was not payable on demand. It could issue bank notes, because they paid no interest and were payable on demand, but could not issue less liquid assets, such as interest-bearing bonds. At first the bank notes were not legal tender. Perhaps as a lesson learned from the Banque Royale, the Caisse d’Escompte could not engage in any commercial or maritime enterprise, including insurance.

By 1783 the French government was already inching toward the abyss of bankruptcy that would provide the spark for the French Revolution. The Caisse became overly generous issuing bank notes to purchase government debt, and public confidence suffered. The government, however, was able to float a lottery loan and repay its debt to the Caisse. Also the capital of the Caisse was increased from 12 million to 15 million livres, the term of discounted commercial paper was restricted to 90 days, and the minimum coin reserve against bank notes was raised to 25 percent. The interest rate on commercial paper maturing past 30 days was increased to 4.5 percent. With these reforms, the Caisse won a reprieve from public distrust.

By 1783 the fiscal crisis of the Ancien Regime had deepened, and the Caisse and its stockholders became captives of the French government. In February of that year the Caisse was granted a privilege to issue bank notes for 50 years in return for a loan of 70 million livres to the French government. Now the state absorbed virtually all the financial capital of the Caisse. In August public confidence crumbled, panic erupted, and the Caisse had to redeem 33 million livres in bank notes before the panic subsided. The governing council of the Caisse refused a government offer to make the bank notes legal tender, but did request that the government repay the 70 million livre loan. The government was in no shape to meet such a request, as that money would never be seen again. Public confidence continued to wane, mainly because of the close association between the Caisse and government. Panic broke out again in August 1788, draining the Caisse’s coin reserves from 50 million to 25 million livres, and convertibility was suspended. Although repayment of the 70 million livre loan was out of the question, the government came to the aid of the Caisse by making its bank notes legal tender. It also authorized the redemption of bank notes in discounted commercial paper.

The Caisse advanced more funds to the government before revolution broke out in July 1789. The revolutionary government continued to receive advances as the National Assembly debated proposals to transform the Caisse into a national bank. The National Assembly issued its own paper money, the infamous assignats, and the Caisse received payment in these inconvertible, legal tender notes. The Caisse wobbled on, still making advances to the government, until August 1793 when the revolutionary government took over its assets.

The first two French experiments with public banking, the Banque Royale and the Caisse d’Escompte, ended in hyperinflation, a reminder of the importance of discipline in note-issuing banks. England had a much more successful experience with the Bank of England. Despite two unhappy experiences with public banks, France under Napoleon established the Bank of France, and the organization of the Bank of France strongly influenced the design of the Federal Reserve System in the United States.