Sismondi on money, banking, credit and public debt: an exploratory essay

Abstract

This contribution examines Sismondi’s money, banking and credit theories and explores his public debt analysis (1803–1838) to connect the instability of market economy with his vision of the social contract. A detailed analysis is offered of the evolution in Sismondi’s opinion on the nature of money and the banking system, and the part it plays in his trade cycle theory. Sismondi’s monetary thought is then contextualised with a discussion of his policy-mix in relation to the Napoleonic war financing in Continental Europe. Connections with the upcoming flood of literature in England on the bullion controversy are also offered. Remarks are then suggested on the progressive emergence of an “art of public borrowing” according to which the people who provide the money also control the government. Finally, some reflections are proposed on the explicit connection established by Sismondi between budget deficits, the (ab-)use of inconvertible paper money and the partial collapse of the social contract initiated by banks and the governments using it. The entrenched instability of a market economy (discussed in an earlier article) is reinforced by the banking/credit system that works along similar line than any wealth-producing firm. Hence, thanks to the financial system, wealth does grow faster but at the expense of social justice.

Keywords:

• Sismondi
• Money
• Banking
• Crisis
• Public Debt

1. Introduction¹

This contribution attempts to present Sismondi’s monetary, banking, credit, and public finance theories (1803–1838) and to connect them with his vision of the instability of a market economy linked to his price theory and his approach of the social contract systematically discussed by the present author in earlier articles (Bridel 2021, 2023). These essays recall the multiple reasons why, unlike Smith, Sismondi considers market coordination as dysfunctional, inefficient, and characterised by a price system incapable of intertemporally coordinating the agents’ intentions: the synchronic order (price system) simply does not work. Moreover this 2021 article examines why and how Sismondi also finds this mechanism of coordination morally unacceptable (a “despotic” market). Based on these initial results, the present article intends to pursue this approach further by attempting to connect these conclusions with Sismondi’s monetary and financial analysis. The initial instability of the market economy is reinforced by the banking/credit system that works along similar line than any wealth-producing firm. Hence, and in opposition to most (if not all) of his contemporaries (e.g., Say and Ricardo), the origins of Sismondi’s theory of crises are not to be found in monetary/credit factors but in the very logic of a market economy: money and the financial variables are only reinforcing the inherent instability of capitalist economies.

Surprisingly, very little has been written on Sismondi’s monetary and credit theories. Hence, another aim of this essay is to examine systematically the primary as well as the very few secondary sources linked to Sismondi’s money and banking.² Though showering praises on Sismondi’s dynamic period analysis and his institutional frame of the economic process (1954, 469–71 and 518–519), in his History, Schumpeter (1954) never examines Sismondi’s monetary and/or banking theories. The same goes for Marx who hardly refers to money and banking in his frequent, and sometimes laudatory, references to Sismondi.³ The very small modern secondary literature on Sismondi’s monetary theory is curiously split between authors considering his contribution to economics as mainly “a-monetary” (Grossman 1924, Sowell 1972 and Beaugrand 1983);⁴ those who, like the present writer, judge him as showing a good deal of originality (notably in his banking essay) (Aftalion 1899; Arena and Torre 1985; Arena 2013; Klüh 2014⁵); and those who oddly claim that Sismondi’s monetary theory is novel, pioneering, the best of his generation and his only major contribution to political economy (Barucci 1975).

Discussed together for the first time, the main primary sources used in the present essay are his 1803 Richesse commerciale (Book I, chapters V and VI), his little-studied, but central, 1810 article on paper-money, chapter V, Of Money of his entry “Political Economy” written in 1817 for the Edinburgh Encyclopaedia, the monetary chapters of his New Principles of Political Economy (1819 and 1827, Book V) and his ultimate 1838 discussion of banking and crisis (Études, Essay n° 16).

This article falls into two main parts. Section 2 discusses Sismondi’s money, banking and credit theories and explores his public debt analysis (1803–1838) to connect the instability of market economy with his vision of the social contract. A detailed analysis is offered of the evolution in Sismondi’s opinion on the nature of money and the banking system, and the part it plays in his trade cycle theory. Sismondi’s monetary thought is then contextualised in section 3 with a discussion of his policy-mix in relation to Napoleonic war financing in Continental Europe. Connections with the upcoming flood of literature in England on the bullion controversy are also offered. Remarks are then suggested on the progressive emergence of an ‘art of public borrowing’ according to which the people who provide the money also control the government. Finally, some reflections are proposed in the concluding remarks on the explicit connection established by Sismondi between budget deficits, the (ab-)use of inconvertible paper money and the partial collapse of the social contract initiated by banks and the governments using it. The endogenous instability of a market economy is reinforced by the banking/credit system that works along the same logic than any wealth-producing firm. Hence, thanks to the financial system, wealth does grow faster but, within an unstable market system, it does so at the expense of social justice.

2. Money and the banking system as amplifiers of the entrenched instability of the economic system

This section offers a detailed analysis of the evolution of Sismondi’s opinion on the nature of money and the banking system (2.1) and the part it plays in his trade cycle theory. His initial sympathy with the Smithian fractional-reserve banking system (1803) is progressively replaced by a very sceptical approach (1827 and 1838) to the banking system as a major cause of the increasing instability resulting from an accelerating economic growth rate (2.2 and 2.3). As a matter of fact, but with some reservations for the English banking system, fractional-reserve banking is seen by Sismondi as a major element of his critique of the dominant Ricardian chrematistic approach to economic theory. Hence, to maximise production with the help of the banking system within an intrinsically unstable economic organisation of society is the infallible recipe to ruin the first two components of his trilogy of liberty, happiness, and wealth (2.4).

2.1. On the origins of money: exchange, three functions, trust, and authority

The opening sentence of Sismondi’s 1838 essay refers the complexity of money as a social phenomenon to the Greek philosophers who attribute to the gods (or to some sort of revelation) “the invention of complex social institutions” (Études, 719). Like any language, grammar, or forms of speech, how could one explain the origin and the essence of money? As a matter of fact, how could one conceive ex ante of a social convention like money before it even existed? In Sismondi’s own flowery language:

But what is even more marvellous than the extraction of precious metals out of the mine which concealed them [to make money out of them] is the social use that we proposed to make of them, and which, today, alone gives them their price. This use, or the invention of cash, requires (to conceive of it) the most admirable appreciation of future relationships between men. This use, we have continued to do for three or four thousand years, without yet understanding it at the present time. (Études, 720).

Moving away from a pre-scientific mythological explanation, Sismondi proceeds carefully towards a concept of money as consubstantial to a theory of exchange. Giving short-shrift to barter and the double-coincidence issue, Sismondi introduces money to measure the exchange value resulting from the aggregation of individual utilities: “value is therefore a social idea sets in place of an individual idea” of utility (Études, 720). The notion of value (“The relationship between everyone’s demand and everyone’s production”) is only susceptible to comparisons insofar as the human mind can grasp an ideal unit of measurement (Beaugrand 1983, 305–306). Hence, the progressive apparition of money is concomitant with the extension of an exchange economy: in a sense, money splits any exchange into two parts (New Principles, 112; see also Arena and Torre 1985, 29). Ex ante, money is not part of the rules of the exchange game but does appear progressively during the game. To use a modern distinction, for Sismondi, far from being an add-on element appended to a price theory, money is substantially part of the very mechanism of exchange determining the relative value of goods.

That said, and despite this ambitious initial statement, Sismondi adopts substantially Smith’s quantitativist approach to money and, as shall be demonstrated, does not stray very far from Smith’s banking theory.⁶ His various critical extensions are mainly linked to the countless monetary and banking upheavals which took place between 1789 and the early 1830s.

From the very beginning, and in term of the old Mengerian debate about trust and authority (see Bridel 2014, 2018), and in clear opposition to Menger’s opinion, Sismondi adopts an approach like that of most of his contemporaries: the origin and the positive value of money rely on both authority and trust. The progressive apparition and use of metallic currencies concomitant to the development of market exchanges must be vouchsafed by some kind of authority: “The invention of money gave a whole new activity to trade … Once the value [of the metal] is universally recognised, … its conversion into money [results from] a legal imprint which guarantees the weight and title of each piece of precious metals in circulation” (IV, 57). A lump of gold is difficult to evaluate and hence, difficult to use as an instrument to save on transaction costs. It is only because this lump of gold is struck with the face of a Roman emperor (or that of a king of England) that, thanks to a monopoly called seignoriage (New Principles, 377–378), this coin acquires a positive value by means of the information it carries (notably its ability to be used to pay taxes). Hence, authority without trust is a non-starter; but trust without authority is unstable.⁷

Finally, and very conventionally (even if the terms used are sometimes baffling for a modern reader), Sismondi discusses what he considers as the three main functions of money: instrument of common measure, means of exchange and store of wealth (mesure, signe, gage) (New Principles, 349–351). However, like for most contemporary economists, for Sismondi, only metallic money is “true” money (the bane of fiat money is at the centre of most what follows). Hence, instead of using the term “store of wealth”, Sismondi prefers to use the notion of pledge (gage). The store of wealth being intrinsically contained in metallic currencies (via their costs of production), money is a pledge on other goods because it displays a positive (and stable) store of value. For Sismondi, the introduction of banknotes and, subsequently, of credit and paper money is an infallible recipe to destroy money as a store of value (replaced by intrinsically worthless fiat paper money, metallic money would be driven abroad). Once again, money is very clearly differentiated from credit: a bill of exchange is “a claim on the property of another” while currency is only a right on itself (New Principles, 391). Moreover (and more on this later), credit does not constitute a unit of account or a definitive intermediation mechanism like money, but only a procedure which makes it possible to postpone financing and monetary payments over time.

2.2. From “Clearing Banks” (Banques de compte) to Banknote Banks (Banques à billets/banques de dépôts)

Borrowing heavily from Smith,⁸ and illustrating his argument with the examples of the Bank of Amsterdam, the Lyon clearing system, the banks in Genoa, Venice, Hamburg, and the Bank of England (IV, 105–109), Sismondi is of the traditional opinion that all banks started as clearing systems. The introduction of banknotes turned these systems into banques à billets introducing the standard fractional reserve system emitting banknotes convertible at any time and in any amount into gold and/or silver.

And banknotes are simply short-term “assignments on the bank, payable to the bearer on demand” (New Principles, 398). Emissions of such (interest free) banknotes corresponding to precious metal deposits are precisely meant to save on the demand for metallic real resources. Since banknotes are usually offered to merchants against bills of exchange discounted at three months,⁹ bankers are obviously bound to reduce their reserve holdings to sometimes dangerously low levels to increase their gains: “the art of the banker consists of judging to a nicety the current needs of the market, in order to have in his safe an amount equal to the daily demand”¹⁰ (New Principles, 399). Interest free banknotes are exchanged against interest bearing bills. Sismondi is sophisticated enough to realise that any increase in banknote circulation would only temporarily lower interest rates:

… when notes are issued… more funds are flowing into the marketplace and the interest on money falls, but the fall is short-lived; … real wealth not being increased by the multiplication of notes, after three weeks or a month, the discount rate goes up to the same level it was before the issue of the [extra] notes (Richesse commerciale, 112).

Simultaneously, the price of bullion is bound to rise. However, by saving on metallic circulation, the emission of banknotes (to the extent they are backed by fractional metallic reserves) can and do increase the productive capacities of the economy (Richesse commerciale, 111). Banknotes make the system more efficient.

Hence, following Smith’s original argument, Sismondi acknowledges fully the resource-saving qualities of paper-money if it is fully convertible in gold. Banknotes are a simple addition to the supply of numéraire understood as metallic currency. With a given number of exchanges in an economy, any additional paper money drives metallic currency (both coins and bullions) either out of the money market or out of the country (gold points) raising thus the price of gold in term of paper money.

The temptation to over-issue such banknotes is nevertheless obvious to Sismondi who, in his Richesse commerciale unfortunately, like Smith, seems, at that stage, to fall victim of the real bill doctrine (III, 276). On more than one occasion, he assumes that limiting banks to only or primarily issuing credit that is adequately backed by equally valued assets, will not contribute to “overtrading” and inflation.

However, this opinion will radically change from his New Principles onwards. When he comes to examine the distinction between banknotes and paper money (and the role played by joint-stock banks, large joint-stock trading companies and finally the government), Sismondi hastens to change tack and to assert vigorously that “real wealth is not increased by the manufacture of paper money” (Richesse commerciale, 112). Within the modern “English system”, banks are a crucial part of the institutions leading to overproduction and crises and such notes are nothing more but “dirty, dangerous and useless scraps of paper” (New Principles, 400n). Similarly, and just like a commercial banker issuing more banknotes than his discounted IOUs, a government turning its Treasury bills into means of payment “only multiplies the sign to appropriate reality” (Richesse commerciale, 86).¹¹

2.3. Modern banks: from banknotes to credit

As a matter of fact, the entire background of Sismondi’s discussion on the role played by the banking system in crises is occupied by his incessant battles against remnants of the mercantilist confusion between money (whatever its form) and wealth¹² or, in his own terms, the confusion between “immaterial” and material capital (Richesse commerciale, 106ss):

… a claim, or a portion of immaterial capital … is only a participation right in the income of material capital (Richesse commerciale, 106).

Bearing in mind Sismondi’s first-hand experience of the loss by his father of the family fortune invested in French ancien régime bonds, the massive re-distribution of wealth resulting from the assignats episode, the colossal increase of the British government debt during the Napoleonic wars,¹³ his keen interest in the ability of credit (whatever its form) to increase the wealth of a country (“le crédit créateur”) is fully understandable:

Credit therefore does not really have a creative power; it only gives the person who owns it the disposal of a portion of the already existing wealth probably already in use to maintain productive labour (Richesse commerciale, 110; see also IV, 107–108 and Études, 741).

Far from being isolated, this statement reappears time and again under different guises throughout his entire work, in line with what he considers as the dangerous argument that “the multiplication of signs [allows] an appropriation of reality” (Richesse commerciale, 86). Or, in other words, “credit cannot create material capital that did not initially existed” (Richesse commerciale, 106; New Principles, 405).

However, in his post-war writings, and basing his argument on a clear distinction between paper-money and interest-bearing papers, Sismondi is nevertheless forced to admit that “the creation of banks increases, as long as calm lasts, the mass of capital circulating in the country, to stimulate industry, by a considerable sum” (Études, 741, italics added). However, the interest-bearing credit granted by banks should stay within the limits set by a “wise” ratio with their cash balances.

More technically, for Sismondi, two main ratios must be constantly under scrutiny to avoid liquidity and/or solvency crises. On the one hand, the ratio between paper money and cash balances necessary for circulation; on the other, the ratio between bank credit and the “nation’s material wealth” (Richesse commerciale, 104).

For Sismondi, the crucial issue is that, in banking like in any other business, the “English system” and its “chrematistic theories” encourage bankers to maximise their profit by extending their credit well beyond what is considered as safe limits. Ceasing to be a rational business conducted along prudent lines, and, once again like any other business, banking is turned into a “funeste jeu de hasard” (Études, 732): the over-issue of banknotes (via easy bank credit) eventually turns them into treacherous paper money.

Hence, again, the banking system is eventually reinforcing the intrinsic instability of the economic system.

2.4. The banking system as a crisis amplifier

In 1803, Sismondi adopts a nearly blind faith in the price mechanism to coordinate rational agents in an exchange economy. As a historian, as much as an economist, when faced with the rapid evolution of the English industrial system, he began to denounce with increasing severity the intolerable brutality of a market system characterised by “une concurrence illimitée” (unlimited competition) based on a price mechanism unable to bring some sense of order (in particular intertemporal) to a largely anarchic and oppressive production system linked to a wage system reflecting the severance of all links between labour and property (Bridel 2021). Macroeconomic crises are the systemic result of this inability of the price system to co-ordinate the agents’ intertemporal decisions in a production economy (Bridel 2022b). Hence, the price system is seen as both inefficient and unjust; from liberating (1803), markets are turned in 1819 into “despotic” instruments.¹⁴

The present sub-section shows the exact role of the banking system in this progressive move from a quasi-Smithian approach to a very harsh critique of the “système anglais” theorised in the Ricardian chrematistics approach. Among other elements characterising this economic arrangement and as the crucial institution allowing the investors (and the government!) to access sources of credit, the banking system destabilises even further an already unstable production economy. In particular, the overinvestment/overcapitalisation tendencies already linked to the English “unlimited competition” system is reinforced by bank credit and the modern financial system.

Paraphrasing Smith’s famous metaphor of the “great wheel of circulation”, in his New Principles, Sismondi pleads for rigorous banking laws to avoid greedy bankers digging (like greedy land developers) shafts under the great highway of commerce:

… the principle that the law ought not regulate private banks is totally false… Currency is the great highway of commerce; every private bank that replaces currency with paper, excavates a mine under this great highway. There are market savings, but diminution of safety; and the government must never permit this usurpation of its property without an assurance that the public highway is safe from all danger of collapse (New Principles, 413).

Indeed, the risks of crises are reinforced by banks which participate in the systemic tendency of overaccumulation of capital and overproduction due to the dangerous symbiosis between the banking and manufacturing sectors:

But whatever the cause of the embarrassment or the terror of the public, the convulsions of the bank make it singularly worse (Études, 740; see also 737).

If society suffers from reckless enterprises, enterprises made into rivalry with one another to under-sell each other, it must wish that the borrower does not find it too easy to raise capital, that he should feel a little under the lender’s control, that he needs to persuade him of his prudence before getting his money. But where there are banks, especially where banking is free and competitive, it is the lender who will seek the borrower, who tries to seduce him by the facilities he offers him; it is the lender who is especially eager to lend, because a bank is ruined if it does not place its paper (Études, 743).

Clearly, for Sismondi, competitive banking creates more credit than future expected earnings should allow. And in a banking system lacking a lender of last resort, liquidity and solvency crises would inevitably induce bank runs and bankruptcies (Études, 738–739).

Reinforced by the banking system, the instability of the private sector is made even worse by public borrowing. As a matter of fact, always short of funds, most government are naturally tempted to use the banking system as a source of public finance (see below section 3.2). And well short of regulating their trade, governments will add their own deficit-driven demand to an already dangerously high level of bank credit. Anticipating perfectly well a “too big to fail” argument, Sismondi demonstrates with great accuracy the mechanism through which the government is ultimately bound to drag the financial system into the abyss of paper money:

Every day some new speculator comes forward with a gigantic project; that he will ruin himself together with those who will trust him, is already a great misfortune; but, if he succeeds in drawing into his project the wealthiest capitalists in the nation, he will perhaps succeed in turning his speculation into a national cause… [T]he legislature will interpose itself to save him from bankruptcy and, … will perhaps adopt the dangerous expedient of giving his notes forced circulation, and the nation will fall into the abyss of paper money (New Principles, 409).

Whatever the wisdom of the bankers, and in any country, the creation and the establishment of new banks should be considered with the greatest cautiousness. The very nature of a banking system is, for Sismondi, “to help the movement of commerce in calm times, but to swell all storms for it, to offer resources to prosperity, and to withdraw them violently whenever adversity arrives” (Études, 741). The very nature of banks being to encourage overtrading and random trading (commerce aléatoire) turns them into a danger to society and to the freedom of its members. In his 1838 ultimate essay on banking, Sismondi does not shy from asserting vigorously that “where no bank exists, yet it is an act of wisdom on the part of the government not to allow any to be established» (Études, 745).

Eventually, and putting together the two components of his argument, Sismondi concludes by drawing an interesting parallel between the identical logic behind manufacturing and banking –both leading to crisis and reinforcing the instability of the economic system:

There is this relationship between banking and manufacturing trade that, in both cases, the end seems contrary to the means. The aim of the public in promoting the establishment of factories is to provide work for the poor, and the means employed by the factory is to do the same work with far fewer hands than before; the aim which the public proposes in favouring the establishment of banks is to spread money into circulation, and the means employed by the bank is to export the money out of the country or to melt it. The result of both is also the same, as one would expect from this contradiction: they both flatter for some time by the appearance of disappointing prosperity; then, as soon as a moment of crisis arrives, they increase the convulsions disproportionately (Études, 737).

But clearly, even if bank credit remains within “wise” limits compatible with sound banking principles of fractional reserves (New Principles, 428) what Sismondi considers as a bank-induced artificial acceleration of the growth rate has ultimately to be judged with reference to its social results:

Without doubt, the invention of banks made it possible to make large savings, and to add to the productive capital of a nation all the value of its money. But what are the advantages to the economy, of increased production? Is wealth the goal of society, or the means to achieve its goal? And if it is only a means, if it is to be aimed at buying happiness, what more profitable job can society do than buying the security of all, the stability of all fortunes? (Études, 365).

In the end, banks are part of the set of institutions reinforcing the systemic instability leading to overproduction and crises¹⁵ which are the main characteristics of the industrial system of production analysed by the English economists of the chrematistic school led by Ricardo. And, in this process, the part played by governments and its debt should not be underestimated.

3. Applied monetary analysis: policy-mix, war financing, public debt, and fiat money

This section tries to contextualise Sismondi’s monetary thought and his policy-mix in relation to the Napoleonic war financing in Continental Europe. In connection with his Smithian source of inspiration, Sismondi’s analytical framework is presented and discussed. Connections with the upcoming flood of literature in England on the bullion controversy (3.1) are also offered for the first time and the following questions are raised: (i) why Sismondi did not take part in a debate he partly anticipated in his 1810 article; and (ii) how he dealt theoretically with the Austrian 1797 suspension of convertibility; and (iii) how his urge to a prompt return to such a convertibility was based on a discussion of the comparative states of Continental and English banking systems (thanks to her banking system England can afford a Ricardian scheme which is out of reach for Austria). Remarks are then offered on the author’s opinion on the progressive emergence of an ‘art of public borrowing’ according to which the people who provide the money also control the government (the so-called Anglo-Dutch model) (3.2).

3.1. Sismondi as a precursor to the English bullion controversy

Sismondi’s analysis of government debt, debt financing and monetary policy appears as early as 1809 during his stint as a temporary adviser to the Austrian government. The first half of Sismondi’s 1810 neglected article is a detailed and extremely thorough analysis of the various techniques used by the Austrian government from the beginning of the 18th century down to the suspension of convertibility in 1797 to finance a growing part of its rocketing deficits via paper money.

Sismondi’s main argument is straightforward and very much akin to the upcoming Bullionist position in Britain (see Arena and Torre 1985, 23). If banks (public or private) are not required to convert notes into gold, then they will be tempted (or forced by the government) to issue notes in excess of the gold in their vaults. This will lead to an excess supply of money and hence, in their view, a cheapening of the price of money, i.e., inflation. They argued that to avoid inflation, required convertibility of notes into gold should be restored. Among the spokesmen for the Bullionists were Henry Thornton (1802) and, slightly later, John Wheatley and, of course, David Ricardo (1810, 1811).

Following Thornton (1802), Sismondi provides an admirable critique of Smith’s real-bill doctrine via the indirect interest rate mechanism (Richesse commerciale, 110).¹⁶ Namely, he asks, who guarantees that the demands of commerce are limited? Suppose actual capital yields returns higher than the rate of interest (or discount) charged by the banks? Would not merchants demand endless amounts of notes - however “real”? Bills offered for exchange into notes, he argues, might not readily be “limited” as the real-bill advocates maintain. Inflation and forced savings must thus ensue. Similarly, to turn an initial (and perfectly legitimate) issue of government paper money by the central bank to save on real resources and increase the efficiency of tax gathering into a systematic technique for raising taxes via inflation would lead to the same result. The distributional effects would simply be in favour of the government – and not in favour of the private beneficiaries of the commercial banks’ over-issue.

In that respect, and in line with Thornton, Sismondi’s analysis seems to form one of the many contemporary seeds for the later “cumulative process” formalised by Knut Wicksell (1898): the drop in market interest rates resulting from deficit financing via paper money would only be temporary; the rise in money prices resulting from a rise in the demand for a given quantity of goods would rapidly (“three weeks to a month” argues already Sismondi in his Richesse commerciale, 112) bring the interest rate back to its higher initial level (see above p. 6). Anticipating in a somewhat crude fashion Cagan’s modern hyperinflation model, Sismondi is in fact using the then recent assignats episode to warn the Austrian government about the cumulative and accelerating inflationary process leading to higher and higher inflation rates forcing the Treasury to print more and more paper-money to end up in hyperinflation (implying the value of money falling to zero). The real value of interest payments and the capital of the initial funded debts are rapidly brought down to zero; interest-bearing Treasury bills are turned into paper money and the exploding budget deficit leads the government to bankruptcy.

The timing of the writing and the date of the publication of Sismondi’s essay are particularly intriguing. Both are raising many more questions than can be answered here. Without mentioning any of the already abundant theoretical literature resulting from the suspension of the convertibility of the Pound sterling on 26th February 1797,¹⁷ Sismondi’s text written in April 1808 is finalised in May 1809, six months before the beginning of the flood of pamphlets linked to the Bullion Controversy which only erupts in England in the Autumn of 1809.

As a matter of fact, and oscillating with the fortune of war, and for the third time since 1797, in the Autumn of 1809, the price of gold rose temporarily above its parity in term of paper money (or, in other words, the Bank of England banknotes were depreciating on their definition in gold). Hence the celebrated Bullion Controversy (implicating in particular Ricardo, Malthus, Trower, Horner, and the crème de la crème of the English political and financial establishments) began well after Sismondi had put the final touches, to his pamphlet on May 12th, 1809. Ricardo publishes his first (anonymous) article in August 1809, the House of Commons Bullion Committee is appointed on February 19th, 1810, the Bullion Report is submitted to the House of Commons on June 8th, 1810, and made public the following month. Ricardo’s celebrated theoretical answer – the High Price of Bullion - is already published in January 1810. And during this very same month of January 1810, the first part of Sismondi’s pamphlet eventually appears in Weimar. Ricardo’s pamphlet will reach its third edition during the summer of 1810. During the same period, Malthus establishes his first contacts with Ricardo precisely in connection with the Bullion Report. A series of pamphlets and articles under his pen followed from 1811 onwards.

One can only be perplexed by the total absence of connection between the two simultaneous discussions on the very same theoretical problem. Clearly, no direct cross references can be found during this 1809–1811 period in either Sismondi’s, Ricardo’s, or Malthus’s works. Even much later neither in Ricardo’s 1816 Proposals, nor in his 1817 Principles, nor in Sismondi’s 1819 New Principles, nor in Malthus’s 1820 Principles can one find a single trace or developments of this central monetary issue. Ricardo’s well-known critique of Sismondi bears mainly, if not exclusively, on ‘pure principles’,¹⁸ not on monetary questions. Of course, many explanations are readily available and could be followed (intellectual isolation due to the war, lack of interest from English economists in Continental reflections, confidential circulation of Sismondi’s pamphlet, Sismondi’s lack of further interest in monetary questions, etc.…) but none is satisfactory.

Once again, one is faced here with an interesting illustration/demonstration in philosophy of science. This small episode at the turn of 19th century seems to confirm that multiple discoveries à la Merton (at least in monetary theory) are not born of chance but of necessity.

3.2. The art of public borrowing and the role of a well-functioning banking system

Tract for the time in 1808 on a burning issue in war-torn Europe, Sismondi’s 1810 article on paper-money offers not only a very original and early contribution to inflation theory and public finance, but also a much wider discussion linked to the nature of political regimes using such war-financing techniques (Austria, Russia, and Denmark). Initially written in two parts¹⁹ during a stay in Vienna with Germaine de Staël from April to June 1808, the manuscript was immediately read by the emperor himself and discussed at length with the finance minister Zizendorf. Obviously without any success! However, and under the constant suspicion de Staël and Sismondi suffered from Napoléon, an agent of the French secret police working in Vienna sent a report to Paris to inform his superiors about Sismondi’s activities. Similarly, manuscript versions of this text reached Denmark²⁰ and were immediately confiscated and a potential translation forbidden. Slightly altered to include Russian and Danish data, the final version was published in French at Weimar (i.e., outside the reach of Napoléon’s police!) in an obscure German journal for “military art” called Pallas: Eine Zeitschrift für Staats- und Kriegskunst.²¹

A few offprints of this text were circulated in a confidential manner in countries outside French control. This text met apparently with some success but bizarrely remained totally unknown in England (even after the start of the Bullionist controversy). No evidence has been found so far to indicate that any of the leading Bullionist debaters read Sismondi’s piece. Despite all his efforts, Sismondi never managed to have it republished. One of the most original and novel of Sismondi’s contributions to the theory of public finance is the connection he draws between a possible successful use of paper-money, the solidity of the banking system and the confidence lenders attribute to the government. Per se, as seen earlier, paper money is a rational way to save on real resources (gold and silver) and to raise taxes more efficiently. However, and echoing arguments already discussed in Richesse commerciale, “in order to implement it, the morality of the government must inspire the most perfect confidence and reassure the fear of seeing it multiply the sign to appropriate reality. But … this morality of government, when it exists, is not an unalterable thing” (Richesse commerciale, 86). He goes as far as to admit that his critique of paper-money applies only partly “to America and almost not to England … because the principle of the banks being [there] very well understood … they avoid on everything to issue too much paper” (Richesse commerciale, 304, footnote 25). Similarly, in his New Principles (1819 and 1827), Sismondi makes England an exception to his critique of paper money financing of public debt because, in this country, “the note issue was confined to proper limits, and where a much smaller sacrifice was sufficient to make the Bank [of England] capable of resuming redemption” (New Principles, 436).²² Highly critical of the use of paper money by the Austrian, Russian and Danish governments, albeit briefly, Sismondi argues in his 1810 paper that “because of a better understanding of the banking principles” England and the United States do not run similar inflationary risks.²³ By a “better understanding of the banking principles”²⁴ one must understand the ability of the government to finance its deficits (and those arising in Europe at the time due to the Napoleonic wars) by borrowing and not exclusively via paper money.²⁵ Sismondi, citizen of Geneva was indeed sympathetic to the Anglo-Dutch public finance tradition which slowly realised during the 17th and 18th centuries that the relative advantage of England and the United States over Russia and Austria (and to a lesser extent France) simply arose from the fact that, in the English-speaking countries, there is a nearly perfect match between the class of people providing the money and those in charge of public affairs. Hence, “sound principles of political economy” run better chance to be upheld in countries where people who provide the money by subscribing to government loans are also those controlling the government. In such a political set-up, a government does not need to use paper money (i.e., to print money) because it can freely borrow on a properly functioning bond market.

Without exploring in detail such a central question, Sismondi’s main thesis is broadly that once borrowing could finance wars, the outlook for autocracies of the Austrian and Russian (and of course French) type would look dim. Hence, when the art of public borrowing developed by Sismondi’s cherished Italian city-states of medieval Italy as a “democratic” alternative to the traditional treasure chest, plunder or of course paper-money techniques was properly understood, the autocratic regimes were doomed. Even if such a process took centuries to reach its apex with the bourgeois-rentier citizen-creditor between 1850 and 1950, Sismondi sees thus the roots of the classical 18th-century constitutional democracy being also largely explained by the rise of … the bond market: for him it is no coincidence that public borrowing and parliamentary government both originated in Europe, and more precisely in England (and, may be, on a smaller scale in his beloved Geneva). Hence, the connection between political philosophy and economic theory within preferably smallish republican (but not necessarily democratic) states is central to Sismondi’s argument. In other words, the interdependence between politics and the economy emerged as one, if not the central topic of political theory. Hume, Smith, Turgot or Burke, Mirabeau and Necker are obvious predecessors to Sismondi that come to mind. Further explorations in his Italian Republics volumes would probably confirm his very Genevan vision of this connection between the way to run public finance and a Republican political regime: Sismondi’s mythic celeste Ginevra.

However, Sismondi is not naïve about the realities of the English financial and banking system -particularly when it comes to public debts. There is no reason why His Majesty’s Government should be more virtuous than bankers or private borrowers. In his 1838 ultimate essay on banking, Sismondi displays a perfect understanding of the use of the sinking fund by the government to support the price of its bonds/Treasury bills:

We have by no means reached the end results to which the public credit system can lead us. Once powerful people have discovered this way of appropriating the fortune of their children, and enjoying what is not theirs, they are not likely to stop. Government debts are generally contracted during war and for war; but nothing is so rare as to see them later paid back in peace. Before the public had become accustomed to the system of perpetual loans, the government felt obliged to flatter it with an expectation of repayment, and for this purpose a sinking fund was created. Soon, it was made an instrument to support the price of public paper, by making appear on the stock exchange a buyer who every day made a new request, and thus determined the increase in [the price of] funds. But it was not long before the public noticed the deception of an amortization that redeemed while the state borrowed again; and since the public began to understand more clearly, governments have also started to give up this juggling.

Since the last peace, the English government has worked with zeal and in good faith to reduce its expenses, to discharge some of its debts; but it cannot entertain any hope of compensating by its present parsimony for past lavishness; everyone else has not even thought about it; loans have greatly exceeded repayments, and the mass of public bills has increased greatly. It was once said that free governments could only borrow, and that there was credit only to those who displayed with clarity the state of their finances. But the negotiation of loans has become such a profitable business for bankers (and they are moreover so indifferent to what may happen to the loans they have taken on after they have placed all the coupons), that they do not refuse their good offices to anyone, no more to despotic governments which hide their deficit than to revolutionary governments which proclaim their disorder. Most borrowing governments are obviously on the verge of bankruptcy, and yet they always find a place to place their loans in one of the two or three countries where capital is plentiful (Études, 763).

With hindsight, Sismondi anticipates with perceptiveness the evolution of nearly two centuries of public debts (and the role of bankers) in Western democracies.

In this perspective, the concluding remarks offer some reflections on the explicit connection established by Sismondi between the financial sector, budget deficits, the (ab-)use of inconvertible paper money and the partial collapse of the social contract initiated by banks and governments using it. On top of the already entrenched instability of a market system based on the English “unlimited competition” system, by its very existence, the financial sector adds additional harm to the social fabric.

4. Concluding remarks: money, the banking system, and the social contract

Well within an 18th-century tradition, Sismondi’s overall vision of a general interdependence between the various branches of what he is one of the first to call the social sciences (Richesse commerciale, 8), led him eventually to reflect on the connection between the use and abuse of paper money and the breach of the social contract within a market economy.

True to a methodology he upheld during his entire life, and after having established the “first principles” of monetary theory (and “the immense, even incalculable pains resulting from paper-money”), Sismondi devotes a large part of his 1810 contribution to a thorough discussion of the policies to be followed to limit and eventually to suppress paper-money. And his propositions are very much akin to those made later in England by the Bullionists: a return to a system in which gold and silver are the only proper legal tenders (or at least in which paper money is freely convertible in coins and bullions).

And building explicitly on his earlier argument in Richesse commerciale, for Sismondi, this policy of a return to a fully convertible currency system is much more than a mere technical problem. Short of such a move, the Austrian and Russian governments would not work for “la félicité des peuples”, for their people’s happiness. As a matter of fact, and the assignats experience is still very vivid in his memory, debauching one’s currency for financing public spending (even war financing) amounts to nothing else but to a breakdown of the social contract.

Sismondi’s argument dating back to his Recherches sur les constitutions des peuples libres and his careful reading of Smith’s Wealth of Nations is simple, but powerful. Since the agents’ interests cannot be coordinated through contracts negotiated by individual agents on markets and sanctioned by a dysfunctional price mechanism, the social contract on which rests the government’s legitimacy must take over. And if, as in the case of money as a social contrivance, the government does not abide by this contract which obviously excludes arbitrary distributional effects between agents via paper money and/or inflation, then the government’s legitimacy is wiped out and the social contract breaks down.

Recalling his anti-protectionist position in Richesse commerciale and anticipating his critique of the post-war English industrial society in New Principles, the asymmetry between agents’ access to credit introduced by paper-money is, hence, for Sismondi, yet another example of a failure of the social contract. Once again, the stability of the value of money, the sophistication of the banking system, the ability of the government to borrow on organised bond markets and, above all, competitive markets in which consumers are not exploited by monopolies and protectionism are all central parts of a well-functioning Republican system. And it is precisely because all these elements are eroded by the overtrading “système anglais” (linked to a breakdown of the intertemporal coordinating abilities of the price mechanism made even worse by the banking system) that this exclusive and obsessive quest for wealth will be to the detriment of liberty and welfare (Bridel 2020). The instability of the market economy is reinforced by the banking/credit system that works along similar line than any wealth-producing firm. Hence, wealth might grow faster but at the expense of social justice. In Sismondi’s own words, “universal competition” leads inevitably to overproduction crises: the “English system” in which money and banks play no small parts threatens the very core of social stability i.e., the idea that each and every member of society must benefit from the social organisation.

Notes

1 Except for New Principles, for which references to the 1991 American Richard Hyse translation are given, other references are from Sismondi’s six-volume Oeuvres économiques complètes (2012–2018). Accordingly, quotations from the New Principles are drawn from the 1991 American translation while the author takes sole responsibility for the translation of all other excerpts. For simplicity’s sake, quotations from Richesse commerciale and Études are referred to by these abbreviated titles followed by page numbers from volumes II and VI of Oeuvres économiques complètes. All other quotations are referred to by the Oeuvres économiques complètes volume numbers.

2 This systematic approach to Sismondi’s monetary and banking theories has been made possible by the recent edition of his Oeuvres économiques complètes (2012–2018).

3 See e.g., Rubel (1976), Dupuigrenet-Desroussilles (1976) and for recent introductory surveys on Marx on Sismondi, Eyguesier (2018) and Mazzei (2018). Interestingly, in his critical edition of Das Kapital, the French editor of Marx’s complete works mentions the fact that “Sismondi was one of the first economists who saw in the credit system one of the main sources of crises. Marx had proposed to submit this idea to a critical analysis in the part of Das Kapital devoted to “the real movement of capital” (Theories of surplus value, vol. III). He was unable to carry out his project, but his judgment of Sismondi remained, overall, very positive” (Marx 1968, II, 1775). As often, Rubel’s opinion is highly contentious. As a matter of fact, even if Marx never brought to fruition a systematic discussion of Sismondi’s money and banking analysis, a few pages later, in his final assessment of Sismondi’s approach, Marx argues precisely the opposite (idem, 1682–83): the instability of capitalism is not to be attributed to the financial sector alone but is, like for Sismondi, but for different reasons, intrinsically part of the capitalist mode of production.

4 Largely followed by Beaugrand (1983, 305-306), Grossman (1924, 49) assigns to Sismondi the traditional Marxist position according to which the contradiction between use value and exchange value is the root cause of crises which are not transitory but constitutive defects of the capitalist system (see also Bridel 2021, 712–713).

5 To the best of the present author’s knowledge, Klüh is the only modern commentator to suggest, nearly in passing (2014, 282), that the origins of Sismondi’s crises are not to be linked exclusively to money and/or banking but to the inner logic of a capitalist system.

6 In his crisis theory, and in opposition to Smith and other Classical economists, Sismondi displays a firm grasp of the part played by changes in the velocity of circulation and by hoarding (more on these two issues in part 2.4).

7 It is shown below how the misuse of authority by governments having recourse to paper-money to finance budget deficits is seen by Sismondi as breaking both the authority of the government and the trust of agents in money.

8 “The theory of banking has been thoroughly investigated since Adam Smith, and it cannot be said that this branch of the science has made, after him, any kind of progress. […] Since we cannot add anything to the analysis Adam Smith has made … we will try at least to expound his principles with more clarity” (New Principles, 405).

9 As Sismondi explains in detail, “Interest bearing paper is exchanged against paper payable at sight”.

10 “Comptant sur la confiance et la nonchalance publiques”, Sismondi goes as far to estimate that, under ideal conditions, the banker would be safe by keeping a metallic reserve equal to 0.5 to 1% of the amount of his banknotes (Études, 736).

11 The law of reflux does not apply when there is an inconvertible paper money.

12 His bitter and lengthy attacks against Herrenschwand and Canard’s confusion between debt and paper money are two very good examples at hand (see Richesse commerciale, 106–108 and III, 75 and 77).

13 As discussed below, Sismondi was also directly involved in the public debt issues of other belligerent countries, in particular Austria, Sweden, and Russia.

14 For a full treatment of this argument, see Bridel 2021.

15 In his analysis of systemic crises, Sismondi discusses nearly en passant two important elements linked to the quantity theory of money which set him apart from the dominant Smithian approach (see also Arena and Torre, 22, 26-29 and 44). On the one hand, the velocity of circulation is not constant, in fact decreases during crises (Richesse commerciale, 91, 98 and 117; Études, 730 and 733); on the other, and very logically, hoarding is taking place (Études, 730). As a matter of fact, Sismondi adds a precautionary demand to the traditional transaction demand for money. Hence, hoarding ceases to be interpreted only as one of the involuntary factors triggering crises, it is also becoming a consequence and an accelerator of such crises. He goes as far as to argue in favour of a counter-cyclical monetary policy to counterbalance increased hoarding resulting from the “terror panic” (Études, 148, 739–740) initiated by a bank run. In the absence of a Central Bank, Government bank regulation is the only way to avoid such an accelerator effect (Études, 746–747).

16 The monthly Bibliothèque britannique turned Geneva into a quasi-English intellectual city in the middle of a French dominated Continent. Ricardo, Malthus, and Thornton made in Geneva their first appearance in French (Paris editions only appeared after the fall of Napoléon). In particular, the sophistication of Genevese bankers allowed them – and Sismondi- to understand fully the importance of Thornton’s slim volume which appeared in French (1803) barely ten months after the original 1802 London edition.

17 Followed the same year by the suspension of the convertibility of the Austrian currency.

18 In his correspondence and his diary, Ricardo mentions at least on several different occasion the nature of his discussions with Sismondi (The Works and Correspondence of David Ricardo, vol. VIII, 376; vol. IX, 218, 220, 235–36, 243–4, 248; vol. X, 270, 278, 281).

19 In three letters written to his mother on April 29 and 30 and on May 12, 1808, Sismondi describes in great details his Viennese stay and the circumstances which led him to write initially two separate memoirs which were finally merged into one for the 1810 publication (Sismondi 1983, 69, 74, 76, 79 and 85).

20 A member state of the anti-Napoleon coalition.

21 This essay is reproduced and annotated in volume III of Sismondi’s Oeuvres économiques complètes, Écrits d’économie politique 1798-1815, 273–307.

22 Or slightly differently, “England gave itself a paper money […] but it had well avoided the dangers of a superabundant currency, multiplying its notes beyond what the circulation could absorb” (idem, 434).

23 Of course, and in opposition to Ricardo’s Proposals, Sismondi does not go beyond generalities when discussing coins vs bullions convertibility. And despite his perfect grasp (i) of the distinction between nominal and real interest rates and (ii) the convergence process of the former towards the latter, he does not enter in any discussion about Ricardo’s crucial argument about the change of the quantity of banknotes which was to vary inversely with the sign of the spread between the market price of gold bullion and the legal price at which it could be obtained against notes at the Central Bank. The state of the Austrian finances and banking system were well beyond such theoretical niceties…

24 Sismondi develops again this argument in his New Principles, 433–435.

25 In fact, and for that very reason, the distinction between interest-bearing banknotes (a credit instrument) and paper-money so important to Sismondi and to most Continental economists is never properly made by no less than Ricardo. Even if the Bank of England is issuing temporarily unbacked paper-money, it is used as a means of payment and not as a credit instrument by the government.