France: Bank of France Capital Injection, 1805

In early 1805, the Minister of Treasury, François Barbé-Marbois, began paying the Treasury’s debts using notes with later maturities rather than satisfying the debt with metallic money. As Napoleon and military contractors continued to prepare for the battle of Austerlitz, they sought large loans from the Bank of France. These same borrowers were also presenting notes for redemption of metallic money at a rate of FRF 2 million to FRF 3 million per day. This combination of factors resulted in a drain on the metallic reserves of the Bank of France against a record high of FRF 80 million in circulating notes. On September 24, 1805, after several weeks of heightened redemptions, the Bank held only FRF 782,000 in metallic reserves against FRF 68 million in debt obligations, a reserve ratio of just 1.2 percent. Banks at the time typically maintained metallic reserves of at least 25 percent of their circulating notes, according to the memoir of Nicolas-François Mollien, who was the director of the Caisse d’Amortissement from 1800 to 1806 and later Minister of Treasury (Conant 1915; Des Essars 1896; Liesse 1909; Mollien 1845).

The crisis reportedly began when an unfounded rumor circulated that Napoleon had carried away the metallic reserves of the Bank as he departed for the battle of Austerlitz. The rumors led to a run on the Bank of France, which did not have the necessary gold and silver to satisfy note redemptions. The Bank referenced a delayed shipment from abroad as another reason for the liquidity shortage. On October 6, 1805, the Bank announced a limit on all redemptions of FRF 600,000 per day. The delay in reimbursement damaged the ability of bank notes to function as currency. Some individuals refused to receive them as payment, and those who did valued them at up to 10% or 15% below par value (Banque de France 1805; Courtois 2016; Des Essars 1896; Gaëte 1818; Liesse 1909; Mollien 1845).

Upon hearing of the domestic financial distress, Napoleon committed the Treasury to supporting the Bank. In a letter to his Minister of Treasury, he stated that the Bank always had a source of help in the Treasury, and he committed to suspending the pay of his troops if necessary to support the Bank (Bonaparte 1862a).

The Bank of France’s 1805 annual report emphasized that the Bank was in a strong financial position despite the liquidity crisis. Though the Bank of France faced a significant shortage of liquidity, it maintained a strong reputation, solid holdings of government bonds and commercial paper, and good credit. Therefore, it was able to resupply its liquidity by procuring metallic money from various sources, including from Spain and the Treasury. The Bank avoided incurring losses by significantly reducing its discounting of notes and slowly removing notes from circulation. As a result, commerce suffered from the increase in the price of money and the decline in economic activity. At least 19 Parisian banker-merchants went bankrupt, with a ripple effect being felt in the provinces as well (Banque de France 1805; Courtois 2016; Des Essars 1896; Merino 1982).

After news of victory at Austerlitz on December 2, 1805, helped to restore confidence, Napoleon returned to Paris and convened a council on January 27, 1806, to address the structural issues that had caused the crisis. Napoleon felt that the Bank needed to be brought under closer supervision by the government. The crisis exposed liquidity issues at the Bank, and the capital injection was forced upon it by Napoleon and major shareholders. While detailing the situation of the French empire after the crisis, Napoleon called the Bank’s laws “incomplete.” On April 22, 1806, the government passed a law that created a government-appointed Bank governor and authorized FRF 45 million of new capital for the Bank of France (Bonaparte 1862b; Conant 1915; Des Essars 1896; Government of France 1806; Mollien 1845). The newly appointed Bank governor contextualized the injection of capital, saying that “for a bank of this kind to be eminently useful in a vast empire rich in industry, it must possess a large enough capital, so that it can become the center of the realization of all kinds of credit” (Cretet 1806, 4).

During the acute phase of the crisis, the Bank initially responded by limiting note reimbursements to FRF 600,000 per day. This action damaged the bank notes’ ability to function as currency, intensifying the run by deteriorating their value and leading some individuals to refuse to accept them at all. To procure the metallic money necessary to satisfy claims, the Bank bought gold and silver from various sources. Using its good credit and solid holdings of commercial paper and government bonds, the Bank purchased metallic money from Spain and the French Treasury. The Bank also redeemed its holdings of paper from provincial bankers for metallic money (Des Essars 1896; Liesse 1909; Mollien 1845).

After the acute phase of the crisis, the law authorizing the capital injection included significant changes to the administration of the Bank. These changes, which are detailed in Key Design Decision No. 11, Restructuring, were part of Napoleon’s goal of bringing the Bank under closer supervision of the State (Des Essars 1896; Government of France 1806).

The original charter of the Bank stated that all new capital must come in the form of new shares. The government authorized the injection of new capital by passing a law on April 22, 1806. The decree issued on January 16, 1808, further reiterated the April 1806 legislation, detailing the new basic statutes of the Bank in greater detail. The decree described each share as “one thousand francs in original stock and, in addition, a right to one ninety-thousandth of the Bank’s reserve funds” (Government of France 1808, art. 1). The 1808 legislation also reiterated the changes to the semiannual dividends each shareholder received (Government of France 1800; Government of France 1806; Government of France 1808).

In the immediate aftermath of the panic, Napoleon convened a council of leaders to identify the root causes of the problem. The committee resulted in Napoleon replacing the sitting Minister of Treasury. Napoleon tasked the new minister with preparing a plan for the organization of the Bank. Following this personnel change, the government passed the law of April 22, 1806, which announced the capital injection. The decree of January 16, 1808, detailed the new bank statutes in greater detail, reiterated the capital injection and formally charged the Minister of Treasury with executing it (Conant 1915; Government of France 1806; Government of France 1808).

Despite the role that government credit had played in the Bank’s failure, Napoleon blamed bankers for the onset of the crisis and decided that the administration of the Bank needed to be brought under closer supervision by the state. As such, the law created a government-appointed Bank governor, as well as two deputy governors. The Bank had previously been administered by a Council of Regents, consisting of 15 regents and three censors selected by shareholders. The Council of Regents continued to exist, but the governor’s veto power reduced its role to an advisory one. The law also changed the makeup of the council, requiring five members to be merchants or manufacturers and three more members to be receivers general (Des Essars 1896; Government of France 1800; Government of France 1806).

The law authorizing the capital injection created new committees that were responsible for surveilling the operations of the Bank. Specific to oversight, the law created the Committee of Relations with the Treasury and the Receivers-General. The decree of January 16, 1808, detailed that this committee was responsible for overseeing the relationship with the Treasury and monitoring the public contributions of tax revenues from the Receivers-General (Government of France 1806; Government of France 1808).

The first communication of the capital injection was Napoleon’s passage of the law of 1806. The newly appointed Bank governor, Emmanuel Crétet, also communicated the injection of new capital in a shareholder meeting on May 13, 1806 (Cretet 1806; Government of France 1806).

The capital injection did not have any bail-in features because the Bank did not incur losses during the crisis. To avoid losses, the Bank drastically limited its note discounts and slowly removed notes from circulation. As a result, only banker-merchants and commercial actors suffered losses due to the increase in the price of money, resulting in at least 19 bankruptcies between October and December 1805 (Merino 1982).

Though it did not feature a bail-in, the legislation authorizing the capital injection fundamentally changed the decision-making structure of the Bank. The Council of Regents and shareholder committees continued to exist, but the newly created Bank governor and deputy governors received full administrative power over the Bank. Shareholders also lost their privileged access to discounts from the Bank (Bignon and Flandreau 2018; Government of France 1806).

The founding statutes of the Bank described shareholders as simple funders for the Bank. The decree of January 16, 1808, defined shares as “a right to one ninety-thousandth of the Bank’s reserve funds” (Government of France 1808, art. 1). The decree also specified that ownership of shares could be passed down hereditarily as part of endowments. The law of 1806 specified two dividends for shareholders, one that consisted of at most 6% of the original capital and another that consisted of two-thirds of the excess profit (Government of France 1806; Government of France 1808).

Participants in the August 1807 issuance had the option to pay for their stakes over time or fully pay in at the time of issuance. Shareholders did not receive dividends until their stakes were fully paid up (Ramon n.d.). 

The law passed on April 22, 1806, authorized a capital augmentation of FRF 45 million. This comprised 45,000 shares originally valued at FRF 1,000 each (Government of France 1806).

The law stated that the new shares of capital would be gradually issued to investors. The specific means by which the government purchased shares from the Bank is not explicitly clear. The government had several vehicles for purchasing Bank shares with public funds. When Napoleon founded the Bank in 1800, the Treasury purchased shares using credit from the sinking fund, requiring receivers-general to convert half of their official surety into shares. The public saw bank shares as a sound investment, so private shareholders participated as well (Conant 1915; Des Essars 1896; Government of France 1806; Liesse 1909).

The government created FRF 60 million in sinking fund bonds on April 24, 1806, in preparation for executing the new finance minister’s economic plan. Mollien, the new Minister of Treasury, created the Service Fund in the summer of 1806 to serve as a vehicle of credit and give the imperial state greater control over the allocation of public funds. This service fund, alongside the sinking fund, constituted a disguised method of monetary creation, and Mollien partnered this by organizing a larger and safer mobilization of private funds as well (Branda 2016; Gaëte 1818).

The actual injection of capital did not occur until August 5, 1807, when Napoleon’s government purchased 30,000 shares at a premium rate of FRF 1,200 per share. An additional 15,000 shares remained with the Bank for it to allocate. The law of 1806 stated that the Bank should allocate shares gradually. On August 7, 1807, the Bank reported that it held approximately FRF 75 million in metallic reserves (Banque de France 1807b; Bergeron 1999; Government of France 1806).

Though shares were seen as a sound investment, limited interest in the remaining shares resulted in the Bank secretly buying back 8,209 shares to appease Napoleon and maintain the share value (Manas 2019). Napoleon himself became one of the Bank’s largest shareholders in 1808, with 1,000 shares (Manas 2019; Plessis 2000).

News of Napoleon’s victory at the Battle of Austerlitz helped restore confidence among noteholders, ending the acute phase of the crisis. Upon his return to Paris, Napoleon called together a council of key financial actors on January 27, 1806, to figure out the issues that had led to the panic. After this council, the law of April 22, 1806, authorized the capital injection. The law stated that the shares were to be issued gradually, with the pace being regulated by the administration of the Bank (Conant 1915; Government of France 1806; Mollien 1845).

In service of the goal of bringing the Bank under closer supervision of the State, the law of April 22, 1806, changed the administration of the Bank and the role of its shareholders. These administrative changes are detailed in Key Design Decision No. 12, Treatment of Board and Management. These administrative changes resulted in an overhaul of the Bank’s discount authorization process (Government of France 1806, art. 17).

The law also specified changes to shareholder dividends. Prior to the new law, shareholders received a dividend that did not exceed 6% of their original capital. After the bank paid out these dividends, it placed any excess profits in a reserve fund, which itself was consolidated at 5%, creating a second dividend for shareholders. The new dividend protocol paid 6% of the original capital, and another dividend equal to two-thirds of the excess profit, with the final third being placed in the reserve fund. The law did not include the consolidation of the reserve fund at 5% (Government of France 1803; Government of France 1806).

Napoleon directly blamed the Minister of Treasury and the management of the Bank of France for the crisis, attributing the drain on liquidity to bad management and a lack of government control over the bank. Upon his return to Paris, he removed the sitting Minister of Treasury, François Barbé-Marbois, and installed Mollien to the position. The law passed on April 22, 1806, took administrative power away from the Council of Regents, and created a position of Bank governor. Napoleon appointed the new Bank governor, Emmanuel Crétet, and his two deputy governors on April 25, 1806 (Conant 1915; Cretet 1806; Des Essars 1896; Government of France 1806).

The law also altered the makeup of the Council of Regents. Of the 15 regents and 3 censors who made up this council, the law stated that five members should be shareholders who made their living as manufacturers or merchants. The law also required that three other regents should be selected from among the receivers-general (Government of France 1806).

The law of 1806 took away the privileged access of existing shareholders to bank discounts. Prior to the crisis, the Bank’s discounting operations were administered solely by the Discount Council, a 12-member committee of shareholders, with no limits on the discounting of their own bills. Following the new law, the Discount Council remained in existence but required final approval from the governor for all actions. The law also forbade the governor and deputy governors from discounting their own notes (Bignon and Flandreau 2018; Government of France 1803; Government of France 1806).

Research did not reveal any evidence of regulatory relief.

Napoleon intended to bring the Bank under closer supervision of the State with the passage of the law of April 22, 1806. Therefore, the law did not detail an exit strategy for public shares purchased in the Bank. The government fully nationalized the Bank’s capital in 1945, ending the practice of private shareholding in the Bank of France. The government became the sole shareholder, and the 46,485 shareholders received a 2% government bond as compensation (Des Essars 1896; Government of France 1806; Manas 2019).