How Revolutions Solve Debt Crises

Using the French and Russian Revolutions as Examples

It looks now that the spat between Elon Musk and Donald Trump was a short-lived tempest that quickly blew over. But the deep structural contradictions between various factions making up the MAGA coalition remain. The proximate cause for the falling-out between the two most powerful members of the coalition was, apparently, a disagreement on what to do about the enormous, and rapidly growing, US Federal debt. This is probably the most intractable problem facing the American presidency (the current administration, the next—until it is resolved).

At least, it is intractable for a government operated by the established elites. Revolutionary regimes have much greater latitude. For example, the two paradigmatic examples of revolution—the French and the Russian ones—both had a serious debt problem, and both dealt with it, although using different approaches.

France

(This account is mainly based on White, E. N. 1995. The French Revolution and the Politics of Government Finance, 1770-1815. The Journal of Economic History 55:227-255.)

By 1788, France's monarchy found itself in a severe fiscal crisis, which triggered the French Revolution next year. Jack Goldstone’s 1991 book is still the best exposition of the structural-demographic causes of this crisis. The traditional historical analysis, on the other hand, attributes the development of this crisis, on the expenditures side, to costs incurred by fighting wars, such as the Seven Years' War (which France lost) and the American Revolutionary War (which France won). On the revenue side, the problem was an inefficient and regressive tax system coupled with the inability to reform royal finances due to elite resistance (notably by the Parlements and privileged orders). As I discussed in a recent post (The French Wars of Religion II), the deep structural reason for both the increase of expenditures and decline of revenues was elite overproduction. While in that post I illustrated how this mechanism worked in the sixteenth century, a similar dynamic was responsible for the crisis two centuries later.

After the Ancien Régime was overthrown, the revolutionary governments tried several approaches to solve the debt crisis. First, the National Assembly confiscated Church lands and issued paper currency (assignats) backed by this land. Although initially this approach was intended to pay down the national debt, the assignats instead led to hyperinflation due to over-issuance, collapse of confidence, and the destruction of the French state’s credit.

Early French banknote issue during the French Revolution (Assignat) for 400 livres, (1792) Source

Finally, in 1797 the Directory formally repudiated two-thirds of its remaining debt in a move called the banqueroute des deux tiers (“two-thirds bankruptcy”). Bondholders were issued worthless paper for the repudiated portion.

In summary, the French Revolutionary governments dealt with the debt crisis by a combination of defaulting on most of it and hyperinflation that ate the rest. The main losers were members of the elite, nobility and bourgeoisie, most of whom were financially ruined in the process. This was one of the largest sovereign defaults in European history, which undermined trust in the state and fueled political instability throughout the revolutionary period.

Russia

(This story is well known, see for example the Wikipedia article)

By 1917, the Russian Empire had accumulated a massive public debt, most of it owed to foreign creditors, particularly French and British investors. This debt had financed military expansion and industrialization during the late 19th century and wars in the early twentieth century, the Russo-Japanese War (1904–05) and World War I (1914–18). Especially the cost of fighting WW I pushed Russia’s finances to the breaking point. However, fiscal crisis was not a major factor in bringing the Russian Revolution (for a structural-demographic analysis of this revolution and civil war, see Chapter 9 in Secular Cycles). Nevertheless, the first revolutionary regime, the Provisional Government, had to deal with this debt. They printed new money, which resulted in hyperinflation.

When the Bolsheviks seized power, they simply repudiated the state debt of the Tsarist regime (as well as the debts of the Provisional Government, incurred between February and October of 1917). They also expropriated all assets held by foreigners, as part of the general program of nationalization.

Default was an easy solution for this revolutionary government, because the Bolsheviks viewed Tsarist and capitalist debts as illegitimate tools of exploitation and refused to honor them, arguing that the working class should not pay for the crimes of the bourgeoisie and monarchy. Thus, while this default shocked the international financial community, it was essentially costless for the Soviet regime, as the main losers were external enemies (France and Great Britain). In fact, the debt issue didn’t prevent the alliance of the USSR with France and England during World War II. Geopolitical considerations ruled the day.

Take-home lessons?

These two examples illustrate the idea that the best strategy for a revolutionary regime is not to prolong the agony. The Bolsheviks cleanly repudiated the Tsarist debts as soon as they grabbed power. They still had to fight a bloody civil war and foreign intervention, but at least fiscal problems were not a source of instability for them. The French revolutionaries needed seven years of failed financial experiments and political instability to realize that they had to bite the bullet and default.

Are there any useful lessons for us? In a previous post, I argued that a fiscal collapse of the American state is possible, but not very probable. But what are possible ways in which this debt problem might be solved? I’ll return to this question in a future post.