Louis XVI ascended to the throne in the middle of a financial crisis in which the state was faced with a budget deficit and was nearing bankruptcy. This was due in part to France's costly involvements in the Seven Years' War and later the American Revolution. In May 1776, finance minister Turgot was dismissed, after failing to enact reforms. The next year, Jacques Necker, a foreigner, was appointed Comptroller-General of Finance. He could not be made an official minister because he was a Protestant.
Necker realised that the country's extremely regressive tax system subjected the lower classes to a heavy burden, while numerous exemptions existed for the nobility and clergy. He argued that the country could not be taxed higher; that tax exemptions for the nobility and clergy must be reduced; and proposed that borrowing more money would solve the country's fiscal shortages. Necker published a report to support this claim that underestimated the deficit by roughly 36 million livres, and proposed restricting the power of the parlements.
This was not received well by the King's ministers, and Necker, hoping to bolster his position, argued to be made a minister. The King refused, Necker was dismissed, and Charles Alexandre de Calonne was appointed to the Comptrollership. Calonne initially spent liberally, but he quickly realised the critical financial situation and proposed a new tax code.
The proposal included a consistent land tax, which would include taxation of the nobility and clergy. Faced with opposition from the parlements, Calonne organised the summoning of the Assembly of Notables. But the Assembly failed to endorse Calonne's proposals and instead weakened his position through its criticism. In response, the King announced the calling of the Estates-General for May 1789, the first time the body had been summoned since 1614. This was a signal that the Bourbon monarchy was in a weakened state and subject to the demands of its people.
Factions within the Assembly began to clarify. The aristocrat Jacques Antoine Marie de Cazals and the abb Jean-Sifrein Maury led what would become known as the right wing, the opposition to revolution (this party sat on the right-hand side of the Assembly). The "Royalist democrats" or monarchiens, allied with Necker, inclined towards organising France along lines similar to the British constitutional model; they included Jean Joseph Mounier, the Comte de Lally-Tollendal, the comte de Clermont-Tonnerre, and Pierre Victor Malouet, comte de Virieu.
The "National Party", representing the centre or centre-left of the assembly, included Honor Mirabeau, Lafayette, and Bailly; while Adrien Duport, Barnave and Alexandre Lameth represented somewhat more extreme views. Almost alone in his radicalism on the left was the Arras lawyer Maximilien Robespierre. Abb Sieys led in proposing legislation in this period and successfully forged consensus for some time between the political centre and the left. In Paris, various committees, the mayor, the assembly of representatives, and the individual districts each claimed authority independent of the others. The increasingly middle-class National Guard under Lafayette also slowly emerged as a power in its own right, as did other self-generated assemblies.
The Assembly abolished the symbolic paraphernalia of the Ancien Rgime armorial bearings, liveries, etc. which further alienated the more conservative nobles, and added to the ranks of the migrs. On 14 July 1790, and for several days following, crowds in the Champ de Mars celebrated the anniversary of the fall of the Bastille with the Fte de la Fdration; Talleyrand performed a mass; participants swore an oath of "fidelity to the nation, the law, and the king"; the King and the royal family actively participated.
The electors had originally chosen the members of the Estates-General to serve for a single year. However, by the terms of the Tennis Court Oath, the communes had bound themselves to meet continuously until France had a constitution. Right-wing elements now argued for a new election, but Mirabeau prevailed, asserting that the status of the assembly had fundamentally changed, and that no new election should take place before completing the constitution.
In late 1790 the French army was in considerable disarray. The military officer corps was largely composed of noblemen, who found it increasingly difficult to maintain order within the ranks. In some cases, soldiers (drawn from the lower classes) had turned against their aristocratic commanders and attacked them. At Nancy, General Bouill successfully put down one such rebellion, only to be accused of being anti-revolutionary for doing so. This and other such incidents spurred a mass desertion as more and more officers defected to other countries, leaving a dearth of experienced leadership within the army.
This period also saw the rise of the political "clubs" in French politics. Foremost among these was the Jacobin Club; 152 members had affiliated with the Jacobins by 10 August 1790. The Jacobin Society began as a broad, general organisation for political debate, but as it grew in members, various factions developed with widely differing views. Several of these factions broke off to form their own clubs, such as the Club of '89.
Meanwhile, the Assembly continued to work on developing a constitution. A new judicial organisation made all magistracies temporary and independent of the throne. The legislators abolished hereditary offices, except for the monarchy itself. Jury trials started for criminal cases. The King would have the unique power to propose war, with the legislature then deciding whether to declare war. The Assembly abolished all internal trade barriers and suppressed guilds, masterships, and workers' organisations: any individual gained the right to practise a trade through the purchase of a license; strikes became illegal.