Fiat Money and the French Revolution

Weimar Germany’s hyperinflation is well known, as are more recent hyperinflations in Argentina and, most recently, Venezuela. Perhaps fewer people have heard of John Law’s Mississippi Scheme in France and the issuance of paper money that underlay it. And perhaps even fewer still have heard that the issuance of paper money by the government contributed to the French Revolution and the Reign of Terror.

One of the best sources on this subject is Andrew Dickson White, a mid-nineteenth-century American student at the Sorbonne, diplomat, cofounder/first president of Cornell University, and author of Fiat Money Inflation in France. During his stay in Paris, White had unusual access to primary sources about the French Revolution, lectured on the subject as a professor of history at the University of Michigan, and subsequently made it a lifelong pursuit.

Excluding the excellent introduction by Henry Hazlitt in the 1959 edition, Fiat Money Inflation in France covers the subject in a mere 90 pages, 83 of which are essentially chronological and descriptive, with only seven pages dedicated to a “logical order — the order of cause and effect.”

Several terms require definition before exploring this subject. Fiat money is money issued by government decree. During the French Revolution, fiat money referred to money created on paper, not monetary coins. Those slips of paper became a medium of exchange in the transfer of goods and services, or currency.

Today, currency plays a minor role in the money supply of the United States. Most transactions occur through the use of bank credit. A much misunderstood term, inflation, is the expansion of the money supply itself, not the effect it has on prices, although significant inflation does cause a rise in the general price level.

The roots of the French Revolution

Fiat Money Inflation in France documents one of the causes of the French Revolution and the triggering cause that pressured Louis XVI to convene the Estates General in May 1789. The first sentence of Fiat Money Inflation describes the challenges the delegates faced: “Early in the year 1789 the French Nation found itself in deep financial embarrassment: there was a heavy debt and serious deficit.”

The cause can be traced as far back as the wars waged by Louis XIV as well as by his luxurious spending. At his death in 1715, a regency government faced a similar challenge and pursued a similar paper money strategy in order to avoid the harsh actions that economics dictated. The result was the disastrous Mississippi Scheme engineered by a charismatic Scot, John Law, who had made his way into the position of Controller General of Finances in France. The Mississippi Scheme collapsed spectacularly in 1720, less than 70 years prior to the crisis that the Estates General (soon to be renamed General Assembly) attempted to address. Although the danger of paper money was well known and there was adequate financial knowledge in the General Assembly, “oratory prevailed over science and experience.”

The rationalization for the issuance of irredeemable paper money was the familiar appeal to ignore history — “This time is different.” Part of the argument was that the money was backed by the value of land seized from the Catholic Church by the General Assembly. In addition, according to one paper money supporter:

Paper money under a despotism is dangerous; it favors corruption. But in a nation constitutionally governed, which itself takes care in the emission of notes, which determines their number and use, that danger no longer exists.

It was the ultimate statement of faith in the wisdom of the majority.

The first issue of assignats occurred in April 1790 in the amount of 400 million livres (later, francs). Initially, this was to be the only issue of paper money, but in five months the promise was broken, and 1,200 million francs were in circulation. Two years after the first issuance of paper money, the fifth issue had occurred, and 2,800 million francs circulated. In 1796, when the machinery, plates, and paper for printing assignats were finally destroyed, there were 40,000  million assignats in circulation, 100 times as many as were initially issued. Assignats were then replaced with new notes, mandats, which suffered a similar devaluation a year later when legal-tender protection of both paper currencies was revoked, rendering them worthless.

The immediate challenge for the government in 1790 had been the elimination of the deficit, but the Revolution’s leaders had another goal: “to get this land distributed among the thrifty middle classes, and so commit them to the Revolution and the government that gave their title.”

Who paid the price?

For some, the plan worked very well, as they paid off their obligations to the government with future devalued assignats. But overall, the plan had a flaw: “One simple fact, as stated by John Stuart Mill, … was that the vast majority of people could not afford to make investments outside of their business.”

Nor was the alleged relief of the debtor class relief of the poor. The wealthy could accumulate debt, but the poor live hand to mouth. Additionally, increasing unemployment from failed business and wages unable to keep up with price increases on necessities resulted in a situation in which “all that saved thousands of laborers in France from starvation was that they were drafted off into the army and sent to be killed on foreign battlefields.”

Inflation impacted the poor more than the wealthy. The washerwomen of Paris found they could no longer pay, nor could shopkeepers afford to sell the soap for the depreciated assignats.

[Radical revolutionary journalist Jean-Paul] Marat declared loudly that the people, by hanging shopkeepers and plundering stores, could easily remove the problem.

This was followed by forced loans on the wealthy, by repudiation of the first issue of paper money that was considered more valuable because it bore the image of the king, and by a decreed “maximum” of prices that might be charged. None of these measures addressed the underlying economic problems but served only to introduce further chaos into the economy. Those who did not comply with the government’s coercive measures found themselves at the guillotine, followed by those who were merely suspected of infractions or just lack of support for the Revolution. The Reign of Terror was on.

White observed moral deterioration: “Out of the inflation of prices grew a speculating class; and, in the complete uncertainty as to the future, all business became a game of chance, and all businessmen, gamblers.”

Some speculators were successful and became immensely rich, but the French nation in general abandoned thrift, which ultimately is the basis for sound investment in future improved productivity:

Financiers and men of large means were shrewd enough to put as much of their property as possible into objects of permanent value. The working classes had no such foresight or skill or means. On them finally came the great crushing weight of the loss.

The lessons of Fiat Money Inflation in France appear to have been lost to twenty-first-century Americans. The French at least had the supposed security of lands seized from the Catholic Church to back their initial paper-money inflation. What security has been offered to Americans for the inflation their government has created?

This article was originally published in the February 2023 edition of Future of Freedom.

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