Saturday, July 11, 2009

11 July 1789: Dismissal of French Finance Minister Jacques Necker

Imagine that the President of the United States dismisses Federal Reserve Chief Alan Greenspan, whereupon 5,000 to 6,000 people take to the streets of Washington in protest, bearing busts of Greenspan draped in black mourning, and then imagine that revolution breaks out but days later. Okay, that's hard to believe, though stupid people and some intelligent ones have been willing to believe far more preposterous things (as the Stephen Glass scandal showed). The more appropriate parallel, in political significance if not branch of government, would be the "Saturday Night Massacre" under the Nixon administration. Still, you get the point.

July 11, 1789: Dismissal of the popular Finance Minister Jacques Necker, along with the massing of army troops (mostly of foreign origin) near Paris, contributes to the fears of a royal coup and the rise of rebellious sentiment that culminates in the attack on the Bastille three days later.

The Swiss Protestant banker enjoyed power and prestige that can be hard for us to imagine. With equal parts genius, self-promotion, and sheer charlatanism, he managed to achieve a reputation for almost supernatural financial expertise.

He opposed the free market in grain advocated by the Physiocrats and other reformers or advocates of what would in our time be called deregulation or shock therapy, believing instead that problems could be solved by economies—budget cuts. Ironically, however, Necker achieved his greatest successes by borrowing. The problem was, first, that there was no easy way to pay the money back, and second, that he cooked the books. French support for the American revolutionaries (the real aim was less to support democracy than to stick it to arch-enemy England) nearly bankrupted the government, for the royal debt mushroomed from 93 million in 1774 to more than 300 million in 1789. His infamous Compte-rendu of 1781 purported to share with the public for the first time the financial state of the nation. The only problem was that he lied, and that the false picture of balanced books boxed in his successors by depriving them of a justification for either cutting budgets or raising taxes. Dismissed from office (scholars disagree as to whether he miscalculated or deliberately invited this fate) in 1781, he was called back in 1788, when Louis XVI found himself forced to convene the Estates-General in order to confront the fiscal crisis of the state. Whereas each of the three Estates—clergy, nobility, and commoners—by tradition had only one vote, Necker in 1789 joined other reformers in advocating the new proposals to increase the votes of the Third Estates—which accounted for some 98 percent of the population—and moreover proposed a reform program of his own. When the aristocratic reaction regained the upper hand a few days later, Necker and his allies were dismissed.

One's first thought at turning to the case of Necker is to say to oneself that it was a very strange and different time. On second thought, however, as one considers the current financial crisis, the hopes and fears of the people, and the proposed solutions of the politicians, not only the desire for social justice, but also the faith in simple solutions and longing for a financial savior become much more comprehensible.

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