Text of “The Death of French Savings, the Russian Bonds Story 1880-1996″

The following text is from the notes I made of a talk that I gave to the “End of The World Club” at the Institute of Economic Affairs on 18 April 2014.

If there is one feature of human society that makes it successful, it is the capacity that human beings have of choosing to satisfy short-term appetites or to defer gratification. This ability to distinguish between short term and long term interests is at the heart of economics.
But why defer consumption? Why save at all?

One reason is the transmission of wealth from one generation to the next. Another is to ensure security in hard times.

A complaint of American academics about French savings in the 19th century is that they were too conservative. Easy for them to say.

The population of France grew more slowly than any other industrialising nation in the 19th century (0.2% per year from 1870 to 1913, compared with 1.1% for Germany and 0.9% for Great Britain). The figures would be even worse if emigration from the British Isles were added to the headcount.

This slower rate of population growth would tend to mean a slower rate of economic growth: smaller local markets, fewer opportunities for mass production. This was well known to be a problem in France. In fact Jean-Baptiste Say was sent to England in 1815 to study the growth of English cities such as Birmingham and its effect on the economy (here in French).

The causes of low investment must surely include political and social instability.

Here are the changes of regime in France during the 19th century:
1800-1804: The Consulate
1804-1814: The Empire
1814: The First Restoration
1814-1815: The Return of Napoleon
1815-1830: The Return of the Restoration
1830-1848: The British Experiment
1848-1851: The Second Republic
1851-1852: The military coup-d’état
1852-1859: The Empire Strikes Back
1860-1870: The Free Trade Experiment (supported by Richard Cobden)
1870-1871: Three sieges of Paris, two civil wars, one foreign occupation
1870-1879: The State Which Dare Not Speak Its Name (retrospectively declared to be a republic)
1879-1914: La Belle Epoque (including the anarchist bombings 1892-1894 and the Dreyfus Affair 1894-1906)

If instability discourages savings, it is remarkable how much there actually was.

Five billion francs in gold, raised by public subscription to pay for the German army of occupation to leave France after the Franco-Prussian War. The amount was supposed to be impossible to pay and designed to provide an excuse for a prolonged German occupation. It was paid in full in two years. 80% of the money (equivalent to over two and half times the national government’s total annual spending, was raised in one day).

What the modern academics decried was that these sorts of sums weren’t invested in industry or agricultural technology. In 1880, French private investments amounted to 7.3 billion Francs, but this was less than half of all investments (48%), versus 52% for government bonds.

You can’t pick up your factory machines and run away from the Uhlans, or the Communards.
Gold was one preferred wealth storage option. It still is in France.

Government bonds were generally considered a good deal: backed by the power of taxation, and, unlike gold, they earned interest.

One constant concern of French governments in the 19th century was the diplomatic isolation enforced by the 1815 Congress of Vienna. Various attempts were made to break this, some successful like the split of Belgium from the Netherlands in 1830, the Crimean War (co-operation with the British), others failed (Napoleon III’s Mexican adventure, the Franco-Prussian War).

By 1882, Germany looked like getting economic and military supremacy in Europe, with an Triple Alliance with Austria-Hungary and Italy. With the British playing neutral, the best bet was to build up Russia.

The first Russian bonds sold in France were in 1867 to finance a railroad. Others followed, notably in 1888. At this point the French government decided on a policy of alliance with Russia and the encouragement of French savers to invest in Russian infrastructure. From 1887 to 1913, 3.5% of the French Gross National Product is invested in Russia alone. This amounted to a quarter of all foreign investment by French private citizens. That’s a savings ratio (14% in external investment alone) we wouldn’t mind seeing in the UK today!

A massive media campaign promoting Russia as a future economic giant (a bit like China in recent years) was pushed by politicians. Meanwhile French banks found they could make enormous amounts of commission from Russian bonds: in this period, the Credit Lyonnais makes 30% of its profits from it’s commission for selling the bonds.

In 1897, the ruble is linked to gold. The French government guarantees its citizens against any default. The Paris Stock Exchange takes listings for, among others: Banque russo-asiatique, la Banque de commerce de Sibérie, les usines Stoll, les Wagons de Petrograd.

The first signs of trouble come in 1905, with the post-Russo-Japanese War revolution. A provisional government announced a default of foreign bonds, but this isn’t reported in the French mainstream media or the French banks that continue to sell (mis-sell?).

During the First World War, the French government issued zero interest bonds to cover the Russian government’s loan repayment, with an agreement to sort out the problem after the war. However, in December 1917, Lenin announced the repudiation of Tsarist debts.

The gold standard was abolished, allowing the debasement of the currency, private citizens were required to turn over their gold for government bonds.

Income tax was introduced (with a top rate of 2%) after the assassination in Sarajevo of the Archduke Ferdinand and his wife.

In 1923, a French parliamentary commission established that 9 billion Francs had effectively been stolen from French savers in the Russian bonds affair. Bribes had been paid to bankers and news outlets to promote the impression of massive economic growth in Russia. Many of the later bonds were merely issued to repay the interest on earlier debt.
For the next 70 years, protest groups attempted to obtain compensation, either from the Russian government or from the French government that had provided “guarantees”. You won’t be surprised to know that some banks managed to sell their bonds to private investors after 1917, having spread false rumours that the Soviets would honour the bonds.

Successive French governments found themselves caught between the requirements of “normal” relations with the USSR and the clamour of dispossessed savers and their relatives.

In November 1996, the post-Soviet Yelstin government agreed a deal to settle the Russian bonds for $400 million. The deal covered less than 10% of the families demanding compensation. Despite this, 316,000 people are thought to have received some compensation, suggesting that over 3 million families were affected by the Russian bonds scandal.

There are similarities with the present day but also significant differences.

First, the role of government guarantees and links with favoured banks, ensuring savers were complacent.

Second the manipulation of economic data by the Russian government, which looks a lot like what’s been happening in China.

Third the fragility of the situation: war can break out. All sorts of assumptions we can make about safe investments go out of the window.

One specifically French response to all this is something I would like to see an academic study of. What changes to consumption and savings would follow from growing up in a family where savings have been wiped out by government action (Russian or one’s own)? If three million people were directly involved, most French people would have known someone who had deferred consumption and been robbed. To what extent does the post-1945 explosion in mass consumption in France reflect a view that deferring consumption is foolish when savings can be stolen with the connivance or lack of concern of one’s own government?


Matt Ridley on the values of Richard Cobden

Matt Ridley, in The Times [paywall restricted], considers the political relevance of the values of 19th century Liberals, including Richard Cobden.

Surely wanting government to stay out of the economy should go with wanting government to stay out of society too. They went together in the 19th century, after all. Radical liberals who campaigned against war, colonialism, slavery, politicial patronage and the established church were usually furiously free-market libertarians on economics: people such as Richard Cobden, Harriet Martineau, Herbert Spencer or WE Gladstone.

Cobden, said one of his biographers, “believed in individual liberty and enterprise, in free markets, freedom of opinion and freedom of trade.” But he also was an implacable pacifist and refused a barontcy from a monarch he disapproved of. Nobody would have dreamed of calling him a rightwinger.

Mr Ridley also suggests that these values would be useful for politicians to build a coalition around: people who want the government out of “the boardroom and the bedroom.” That is not a cause that the Cobden Centre has any business getting involved in. But it is nice to see someone noticing the relevance of Cobden’s ideas.


Statman’s tour of Britain: are average wages falling?

Incoming from Tom Paterson, chief economist at “Gold Made Simple”:

I’m currently travelling around Europe in my VW campervan with my my wife and 9 month old daughter! Well, why not!

I’ve picked up a gig at the Daily Express making short videos about the UK economy – the first one can be found here [video]:

I’ve filmed another 5 (covering the UK debt, Deficit, Govt Spending and BoE money printing)… and a new one will go live every Monday…

The Walls sausage advertisement threw me for a moment before the proper video started. Looks like a good series to watch out for.

Tom Paterson can be contacted by email here.

Free Trade

Straight talk

The Cobden Centre has no position on any proposed takeover by one pharmaceutical firm of another. On the plus side, the move by Pfizer is an instance of a global market looking for efficency gains, for which shareholders of both the US firm and its intended target, AstraZeneca, can hope to benefit. If the deal fails, hopefully this will be a spur to both companies to develop better medicines. What matters is the free movement of capital and goods, for the benefit of humanity as well as private interests.

What caught my attention is that Pfizer’s chief executive, Ian Read, carries a gold coin with him. Sadly, this isn’t because the world has suddenly returned to the gold standard, which would provide enormous efficency gains to global firms like Pfizer, which could price its products and pay for its goods in gold.

Instead, the gold coin carries a message on each side, “Straight Talk” and “Own It.” Call me an egalitarian, but I would like to see everyone carrying gold coins in their wallets. Nice to know that Mr Reid has at least some hedge against a collapsing paper currency…


Ludwig von Mises and the a priori approach to economics

Cobden Centre Senior Fellow Detlev Schlichter has published the text of a recent talk about the a priori approach of Ludwig von Mises to economics. A video of the presentation can be found here.

I include the following extract, which gives a sense of the difference between Mises and other contemporary economic theories:

Brief sketch of Mises’ position

Mises argued that economics was an a priori science. Economics is fundamentally different from the natural sciences in terms of subject matter, method, and the type of statements it can make. The natural sciences are (mainly, at least) empirical sciences (a posteriori as opposed to a priori). Economics is not an empirical science. It does not discover the regularities that constitute its laws through observation (for example, the collection and interpretation of statistics) or laboratory experiments (difficult in economics) but through careful logical deduction from certain starting propositions (axioms), although some observation may be involved in establishing these starting propositions. Because it is not an empirical science, it does not make empirical predictions and its key theses are not testable by empirical means. (If this sounds strange to you, don’t worry. Most economists today disagree with Mises and practice, or believe they practice, a different kind of economics, though in my view, they are quite mistaken.


Cobden Centre trustee elected to UK parliamentary committee

Steve Baker MP, one of the Cobden Centre’s trustees, has been elected to the House of Commons’ Treasury Select Committee.

The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Conduct Authority.

He said: “This result shows that a growing number of people in Parliament as well as across the UK see ideas about honest money as a crucial part of today’s economic debate.”

A recent interview with Steve Baker was posted by the Cobden Centre last week here.


Baker on Bitcoin, Britain and Banking (video)

Steve Baker has given an interview at the Antigua Forum on Bitcoin, Britain and Banking. The Forum is an annual gathering of market-liberal reformers from around the world. It brings together current and experienced reformers, political strategists, Nobel laureates, and others who are dedicated to reform for an intense weekend of collaboration.

The video can be streamed here.

Some quotes from the interview follow.

On the possible roads to monetary reform:

Two routes to get there. Either, go through constitutional money, so 100% reserves, then back it with a commodity, and then get rid of the central bank. Or go the other way, get rid of some of the implicit and explicit state guarantees, and then gently work towards backing it with commodities and getting rid of the central banks.

It’s not really surprising [free market economics don’t agree on banking and credit] because if it was a function of the market, it would emerge spontaneously, and nobody allows that to happen. This is why Bitcoin’s exciting.

On the impact of Bitcoin:

We shall see if people are happy to have fractional Bitcoin deposits! And at the moment it looks like they’re not. So it will be interesting to see how Bitcoin plays out.

On the Cobden Centre:

The Cobden Centre creates an international network of scholars to advance some of these ideas. Right now we’re focussed on keeping the ideas pumping out. What we want to do is move from talking about honest money to talking about free trade and peace.

On how the ideas are received.

Opposing central banks is seen as ‘radical’, but the rest of the program is seen as just principled old classical liberalism.

On the Future of Bitcoin, Steve considers the digital currency unsuitable at present: “I recently bought $30 worth of Bitcoin and in a matter of hours it had dropped 30% and then gained some value.” A currency that is so volatile in the short run isn’t useful for storing value or planning purchases. However, Steve argues that the logic of digital currencies is “unstoppable” and there should come a point in a few years time where the supply is more or less fixed and the demand is stable. At that point it will be interesting to see how people use this currency without going through the banking system. And of course, how the political authorities will react!

Book Reviews

Paper Money Collapse 2nd edition teaser

One of the interesting things that happened at the End of the World Club on Monday evening, was a teaser of what’s new about Detlev Schlichter‘s Paper Money Collapse (2nd edition). We are promised some discussion about Bitcoin (which really got going about the time PMC first appeared on bookshelves).

Also promised is an update of Detlev’s views and he hopes to include discussions that have taken place in various forums (such as on his blog).

Further updates as we get them.




A response to Huber

Editor’s Note: Austrian Economics and New Currency Theory on 100% banking – A response to Huber, by Philipp Bagus, is an important response to the New Currency Theory. Joseph Huber’s own paper criticised Prof Jesus Huerta de Soto’s position of defending a 100% reserve system of competing private currencies. Taken together, they provide a valuable insight into the debate between the two sides. Prof Bagus’ paper is reprinted in full with grateful thanks:

Continue reading “A response to Huber”


The Death of French Savings, the Russian Bonds Story 1880-1996

I shall be giving a talk at the Institute of Economic Affairs in Westminster this evening, 6.30pm, to the End of The World Club. The topic is The Death of French Savings, the Russian Bonds Story 1880-1996.

Among the issues covered are collusion between governments, favoured banks, and a compliant media to fleece savers by mis-selling investments. Nothing we should worry about in the present day?

One thing I learnt while researching this talk was the scale of capital flows: about 3.5% of France’s gross national product was exported to Russia for over 25 years (1887-1913) in the form of private purchases of bonds.

I aim to speak for about 15 minutes with a discussion afterwards. Formal proceedings end at 8pm.