When his efforts to increase tax receipts met with resistance from the nobility, Louis XVI first called an Assembly of Notables to deliberate with him. That Assembly consisted of the most powerful noblemen in France, who outright refused to grant new revenues to the crown. Louis reluctantly agreed to revive France's ancient representative assembly, the Estates General, in the hope of persuading that body to provide more revenue. For the first time in the history of French absolutism, a king was thus required to formally negotiate with his subjects simply to stave off bankruptcy.
The Estates General had not met since 1614. Like the British parliament, its original function was to serve as a venue for the French king to bargain with the entire nation for money, almost always in the service of war. The Estates General was a gathering of representatives of the three estates - clergy, nobility, and everyone else - in which the French king could ask for tax revenue in return for various bargains and promises (often the promise not to ask for more taxes in the future). This had not happened for over 150 years, and thus no living French person had any experience of what to expect.
The result in the spring of 1789 was a surprisingly democratic election, with the majority of the male population voting for delegates to the Estates General. Many hoped that the meeting would result in royal intervention in a host of perceived injustices, not just more money for the state. Before the estates met, many voters and their representatives drew up lists of grievances demanding relief from unfair financial burdens imposed by the nobility, of better representation of townsfolk and peasants, and of royal intervention on behalf of the people of France, among other things. These political expectations rose at the very moment when the price of bread was skyrocketing - 1787 and 1788 had both seen very poor harvests, and there was widespread fear of outright famine. Even as members of the Third Estate drew up their lists of grievances, rumors were spreading that nobles and wealthy merchants were hoarding grain to drive up prices.
In the past, the Estates General had consisted of three separate groups, representing the clergy (the First Estate), the nobility (the Second Estate), and prosperous townsfolk (the Third Estate). In turn, voting was done by estate, not by proportional representation, with the first and second estates generally joining together to outvote the third. Thus, the small minority of the population that consisted of nobles and clerics could always outvote the majority of the population in this traditional system of voting. The problem for the political stability of the kingdom was that French society had changed enormously since the last meeting of the Estates General. Many of the representatives of the Third Estate thought of themselves as the representatives of France itself, since the immense majority of the population consisted of commoners and laypeople. The key issue was whether the king would allow voting to follow the number of representatives, which would give the Third Estate a clear majority, or if he would insist on the old model in which the clergy and nobility dominated.
The king vacillated on this question for weeks, but as the representatives came together in June of 1789 he confirmed that voting would be by estate. This prompted a spontaneous, and for the moment peaceful, act of defiance on the part of many of the representatives of the Third Estate, joined by some sympathetic nobles and priests. First, they declared themselves to be not just the representatives of the Third Estate, but of France itself as a whole: they were the “National Assembly” in whom the will of the French people would be expressed. Then, discovering on the morning of June 20 that their meeting hall was locked (by accident, as it turned out, although they feared royal interference), they occupied the tennis court of Versailles and pledged not to leave until they had drafted a constitution and the king had accepted it - this came to be known as the Tennis Court Oath, generally considered to be the moment at which the French Revolution truly began.
The King was, as was typical for Louis XVI, unsure of how to proceed. He addressed representatives of all three estates a few days later, promising reform, and when faced with continued defiance, he ordered the representatives of all three estates to join together in the National Assembly. As the crucial weeks of late June and early July unfolded, however, a faction of conservative nobles and the queen tried to persuade Louis to use force to eliminate what they correctly perceived to be a fundamental challenge to royal authority, and he cautiously moved forward with a plan to summon troops to watch over the proceedings.
In Paris, about twenty miles away, rumors spread that the king was going to crush the new National Assembly with force. As a result, crowds took to the streets on July 12th. On the 14th, a crowd searching for weapons overwhelmed the Bastille, a royal prison and arsenal, and murdered its guards. Soon, royal troops started abandoning their posts and joining with the rebels. This event, when a popular uprising in Paris spontaneously employed force to stave off the threat of a royalist crackdown, remains the national holiday of the French Republic to this day, commemorated as Bastille Day. On July 16th the war minister advised the king that the army could no longer be relied upon. The king accepted the appointment of a liberal nobleman, Lafayette, as commander of a new "National Guard" and, reluctantly, committed himself to working with the National Assembly.
Meanwhile, rioting had spread to the countryside as peasants, learning of the developments in Versailles and Paris, sought to both feed themselves and to lash out against the nobility who, they thought, were driving them into destitution. Rumors spread among the peasantry that nobles were hoarding stores of grain, driving up prices and starving the peasants into submission. The result was the “Great Fear,” in which peasants attacked and looted noble manors. Their main target was the debt ledgers that nobles kept on their peasants, which the peasants gleefully burned (thereby erasing their debts entirely - there was no such thing as a "backup copy" in 1789).
Under these circumstances of anarchy in the countryside, the National Assembly needed to do something dramatic to maintain control of the situation. On August 4, 1789, it voted to end feudal privilege (the landlords' rights to coerce labor and fees of various kinds from the peasantry), on August 14th it abolished the sale of offices, and on August 26th it issued a Declaration of the Rights of Man and Citizen, modeled in part on the American Bill of Rights. In October, in a single bold stroke, the Assembly seized church lands and property, selling them at auction to fund the Revolutionary state itself. Finally, in early 1790 it abolished noble titles altogether, something that was almost redundant since those titles no longer had legal privileges associated with them.
The abolition of privilege meant that government - especially in the matter of taxation and law - should treat people as individual citizens rather than as members of social classes. People differed quantitatively in the amount of wealth they owned, but not qualitatively according to social rank or estate. Thus, in a shockingly short amount of time, the French state was forced to accept that legitimate power belongs to the nation as a whole, not to the king, and that every citizen should be equal before the law. The Revolutionaries summarized their ideals with the motto of “Liberty, Equality, Fraternity” - to this day, the official credo of the French state.