Tuesday, September 2, 2014

ON FRENCH INTEREST RATES: 1770 & 1771

AM | @HDI1780

"Un despote ne doit pas obtenir du crédit" — Diderot

In an influential paper, François Velde and David Weir painstakingly calculated the internal rate of return on several French government (or quasi-government) bonds between 1746 and 1793 (*). They took securities prices mostly from Gazette de France. As a benchmark for a "safe asset" that would serve as a proxy for French sovereign risk, they chose the yield on billet d'emprunt d'octobre, also known as billet d'emprunt or Emprunt d'octobre.

* * *

Here are the results, with annual yields expressed as the are average monthly estimates of the internal rate of return:

1746 - 6.54%; 1747 - 6.10%; 1748 - 5.89%; 1749 - 5.42%; 1750 - 4.82%; 1751 - 4.79%; 1752 - 4.59%; 1753 - 4.57%; 1754 - 4.18%; 1755 - 4.70%; 1756 - 5.04%; 1757 - 5.10%; 1758 - 5.19%; 1759 - 5.42%; 1760 - 6.78%; 1761 - 6.87; 1762 - 6.93%; 1763 - 5.95%; 1764 - 5.67%; 1765 - 5.93%; 1766 - 6.30%; 1767 - 6.75%; 1767 - 6.36%; 1768 - 7.11%; 1769 - 7.11%; 1770 - 9.52%; 1771 - 10.12%; 1772 - 9.08%; 1773 - 7.59%; 1774 - 6.75%; 1775 - 5.69%; 1776 - 5.68%; 1777 - 5.86%; 1778 - 6.15%; 1779 - 6.15%; 1780 - 5.94%; 1781 - 5.97%; 1782 - 5.90%; 1783 - 5.82%; 1784 - 5.82%; 1785 - 5.54%; 1786 - 5.50%; 1787 - 5.70%; 1788 - 6.02%; 1789 - 6.47%; 1790 - 6.34%; 1791 - 5.14%; 1792 - 5.44%; 1793 - 5.77%.

There is a sizeable downshift in yields between 1763 and 1765, no doubt reflecting the end of the Seven Years' War. But then look at the years 1770-1772, which Ferdinando Galiani saw as "un moment critique pour la France." The increase in yields shows the market reaction to the stern measures taken by Contrôleur des Finances Joseph-Marie Terray, including the forceful conversion of tontines into life annuities and the unilateral reduction of cash-flows on several types of securities. As Velde and Weir note, rates of return never went back to the 5% levels of the early 1750s—although they declined as soon as Terray and Maupeou were out of office. They rightly conclude: "Terray's partial defaults in 1770 launched rates upward". Brilliant stuff indeed!

But I also think that chancellier René-Charles de Maupeou deserves part of the blame—much more on that ... in early 2015!

(*) François R. Velde and David R. Weir: "The Financial Market and Government Debt Policy in France, 1746–1793", The Journal of Economic History, Vol. 52, No. 1, March 1992, pp. 227-255.
_________________

1 comment: