GREAT COLLECTIBLES at GREAT PRICES

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FIAT MONEY INFLATION IN FRANCE

How It Came, What It Brought, and How It Ended

by

Andrew Dickson White

In view of the fact that the well-to-do citizens were thought to be lukewarm in their support of the politicians controlling the country, various demagogues in the National Convention, which had now succeeded the National, Constituent and Legislative Assemblies, found ample matter for denunciations long and loud.  The result outside the Convention was increased activity of the guillotine; the results inside were new measures against all who had money, and on June 22, 1793, the Convention determined that there should be a Forced Loan, secured on the confiscated lands of the emigrants and levied upon all married men with incomes of ten thousand francs, and upon all unmarried men with incomes of six thousand francs.  It was calculated that these would bring into the treasury a thousand millions of francs.  But a difficulty was found.  So many of the rich had lied or had concealed their wealth that only a fifth of the sum required could be raised, and therefore a law was soon passed which levied forced loans upon incomes as low as one thousand, francs,--or, say, two hundred dollars of American money.  This tax was made progressive.  On the smaller proprietors it was fixed at one-tenth and on the larger, that is, on all incomes above nine thousand francs, it was made one-half of the entire income.  Little if any provision was made for the repayment of this loan but the certificates might be used for purchasing the confiscated real estate of the church and of the nobility.[46]

But if this first expedient shows how naturally a “fiat” money system runs into despotism, the next is no less instructive in showing how easily it becomes repudiation and dishonor.

As we have seen, the first issue of the assignats,--made by the National Assembly, bore a portrait of the king; but on the various issues after the establishment of a republic this emblem had been discarded.  This change led to a difference in value between the earlier and the later paper money.  The wild follies of fanatics and demagogues had led to an increasing belief that the existing state of things could not last; that the Bourbons must ere long return; that in such case, while a new monarch would repudiate all the vast mass of the later paper issued by the Republic, he would recognize that first issue bearing the face and therefore the guarantee of the king.  So it was that this first issue came to bear a higher value than those of later date.  To meet this condition of things it was now proposed to repudiate an that earlier issue.  In vain did sundry more thoughtful members of the Convention plead that this paper money, amounting to five hundred and fifty-eight millions of francs, bore the solemn guarantee of the nation, as well as of the king; the current was irresistible.  All that Cambon, the great leader of finance at that time, could secure was a clause claiming to protect the poor, to the effect that this demonetization should not extend to notes below a hundred francs in value; and it was also agreed that any of the notes, large or small, might be received in payment of taxes and for the confiscated property of the clergy and nobility.  To all the arguments advanced against this breach of the national faith Danton, then at the height of his power, simply declared that only aristocrats could favor notes bearing the royal portrait, and gave forth his famous utterance: “Imitate Nature, which watches over the preservation of the race but has no regard for individuals.”  The decree was passed on the 31^st of July, 1793, yet its futility was apparent in less than two months, when the Convention decreed that there should be issued two thousand millions of francs more in assignats between the values of ten sous and four hundred francs, and when, before the end of the year, five hundred millions more were authorized.[47]

The third outgrowth of the vast issue of fiat money was the Maximum.  As far back as November, 1792, the Terrorist associate of Robespierre, St. Just, in view of the steady rise in prices of the necessaries of life, had proposed a scheme by which these prices should be established by law, at a rate proportionate to the wages of the working classes.  This plan lingered in men’s minds, taking shape in various resolutions and decrees until the whole culminated on September 29, 1793, in the Law of the Maximum.

While all this legislation was high-handed, it was not careless.  Even statesmen of the greatest strength, having once been drawn into this flood, were borne on into excesses which, a little earlier, would have appalled them.  Committees of experts were appointed to study the  whole subject of prices, and at last there were adopted the great “four rules” which seemed to statesmen of that time a masterly solution of the whole difficulty.[48]

First, the price of each article of necessity was to be fixed at one and one-third its price in 1790.  Secondly, all transportation was to be added at a fixed rate per league.  Thirdly, five per cent was to be added for the profit of the wholesaler.  Fourthly, ten per cent was to be added for the profit of the retailer.  Nothing could look more reasonable.  Great was the jubilation.  The report was presented and supported by Barrère,--“the tiger monkey,”—then in all the glory of his great orations: now best known from his portrait by Macaulay.  Nothing could withstand Barrère’s eloquence.  He insisted that France had been suffering from a “_Monarchical_ commerce which only sought wealth,” while what she needed and what she was now to receive was a “_Republican_ commerce—a commerce of moderate profits and virtuous.”  He exulted in the fact that “France alone enjoys such a commerce,--that it exists in no other nation.”  He poured contempt over political economy as “that science which quacks have corrupted, which pedants have obscured and which academicians have depreciated.” France, he said, has something better, and he declared in conclusion, “The needs of the people will no longer be spied upon in order that the commercial classes may arbitrarily take advantage.”[49]

The first result of the Maximum was that every means was taken to evade the fixed price imposed, and the farmers brought in as little produce as they possibly could.  This increased the scarcity, and the people of the large cities were put on an allowance.  Tickets were issued authorizing the bearer to obtain at the official prices a certain amount of bread or sugar or soap or wood or coal to cover immediate necessities.[50]

But it was found that the Maximum, with its divinely revealed four rules, could not be made to work well—even by the shrewdest devices.  In the greater part of France it could not be enforced.  As to merchandise of foreign origin or merchandise into which any foreign product entered, the war had raised it far above the price allowed under the first rule, namely, the price of 1790, with an addition of one-third.  Shopkeepers therefore could not sell such goods without ruin.  The result was that very many went out of business and the remainder forced buyers to pay enormous charges under the very natural excuse that the seller risked his life in trading at all.  That this excuse was valid is easily seen by the daily lists of those condemned to the guillotine, in which not infrequently figure the names of men charged with violating the Maximum laws.  Manufactures were very generally crippled and frequently destroyed, and agriculture was fearfully depressed.  To detect goods concealed by farmers and shopkeepers, a spy system was established with a reward to the informer of one-third of the value of the goods discovered.  To spread terror, the Criminal Tribunal at Strassburg was ordered to destroy the dwelling of any one found guilty of selling goods above the price set by law.  The farmer often found that he could not raise his products at anything like the price required by the new law, and when he tried to hold back his crops or cattle, alleging that he could not afford to sell them at the prices fixed by law, they were frequently taken from him by force and he was fortunate if paid even in the depreciated fiat money—fortunate, indeed, if he finally escaped with his life.[51]

Involved in all these perplexities, the Convention tried to cut the Gordian knot.  It decreed that any person selling gold or silver coin, or making any difference in any transaction between paper and specie, should be imprisoned in irons for six years:--that any one who refused to accept a payment in assignats, or accepted assignats at a discount, should pay a fine of three thousand francs; and that any one committing this crime a second time should pay a fine of six thousand francs and suffer imprisonment twenty years in irons.  Later, on the 8^th of September, 1793, the penalty for such offences was made death, with confiscation of the criminal’s property, and so reward was offered to any person informing the authorities regarding any such criminal transaction.  To reach the climax of ferocity, the Convention decreed, in May, 1794, that the death penalty should be inflicted on any person convicted of “having asked, be- fore a bargain was concluded, in what money payment was to be made.”  Nor was this all.  The great finance minister, Cambon, soon saw that the worst enemies of his policy were gold and silver.  Therefore it was that, under his lead, the Convention closed the Exchange and finally, on November 13, 1793, under terrifying penalties, suppressed all commerce in the precious metals.  About a year later came the abolition of the Maximum itself.[52]

It is easily seen that these Maximum laws were perfectly logical.  Whenever any nation intrusts to its legislators the issue of a currency not based on the idea of redemption in standard coin recognized in the commerce of civilized nations, it intrusts to them the power to raise or depress the value of every article in the possession of every citizen.  Louis XIV had claimed that all property in Prance was his own, and that what private persons held was as much his as if it were in his coffers.  But even this assumption is exceeded by the confiscating power exercised in a country, where, instead of leaving values to be measured by a standard common to the whole world, they are left to be depressed or raised at the whim, caprice or interest of a body of legislators.  When this power is given, the power of prices is inevitably included in it.[53]

It may be said that these measures were made necessary by the war then going on.  Nothing could be more baseless than such an objection.  In this war the French soon became generally successful.  It was quickly pushed mainly upon foreign soil.  Numerous contributions were levied upon the subjugated countries to support the French armies.  The war was one of those in which the loss, falling apparently on future generations, first stimulates, in a sad way, trade and production.  The main cause of these evils was tampering with the circulating medium of an entire nation; keeping all values in fluctuation; discouraging enterprise; paralyzing energy; undermining sobriety; obliterating thrift; promoting extravagance and exciting riot by the issue of an irredeemable currency.  The true business way of meeting the enormous demands on France during the first years of the Revolution had been stated by a true statesman and sound financier, Du Pont de Nemours, at the very beginning.  He had shown that using the same paper as a circulating medium and as a means for selling the national real estate was like using the same implement for an oyster knife and a razor.[54]

It has been argued that the assignats sank in value because they were not well secured,--that securing them on government real estate was as futile as if the United States had, in the financial troubles of its early days, secured notes on its real estate.  This objection is utterly fallacious.  The government lands of our country were remote from the centers of capital and difficult to examine; the French national real estate was near these centers—even in them—and easy to examine.  Our national real estate was unimproved and unproductive; theirs was improved and productive—its average productiveness in market in ordinary times being from four to five per cent.[55]

It has also been objected that the attempt to secure the assignats on government real estate failed because of the general want of confidence in the title derived by the purchasers from the new government.  Every thorough student of that period must know that this is a misleading statement.  Everything shows that the vast majority of the French people had a fanatical confidence in the stability of the new government during the greater part of the Revolution.  There were disbelievers in the security of the assignats just as there were disbelievers in the paper money of the United States throughout our Civil War; but they were usually a small minority.  Even granting that there was a doubt as to investment in French lands, the French people certainly had as much confidence in the secure possession of government lands as any people can ever have in large issues of government bonds: indeed, it is certain that they had far more confidence in their lands as a security than modern nations can usually have in large issues of bonds obtained by payments of irredeemable paper.  One simple fact, as stated by John Stuart Mill, which made assignats difficult to convert into real estate was that the vast majority of people could not afford to make investments outside their business; and this fact is no less fatal to any attempt to contract large issues of irredeemable paper—save, perhaps, a bold, statesmanlike attempt, which seizes the best time and presses every advantage, eschewing all juggling devices and sacrificing everything to maintain a sound currency based on standards common to the entire financial world.

And now was seen, taking possession of the nation, that idea which developed so easily out of the fiat money system;--the idea that the ordinary needs of government may be legitimately met wholly by the means of paper currency;--that taxes may be dispensed with.  As a result, it was found that the assignat printing press was the one resource left to the government, and the increase in the volume of paper money became every day more appalling.

It will doubtless surprise many to learn that, in spite of these evident results of too much currency, the old cry of a “scarcity of circulating medium” was not stilled; it appeared not long after each issue, no matter how large.

But every thoughtful student of financial history knows that this cry always comes after such issues—nay, that it must come,--because in obedience to a natural law, the former scarcity, or rather insufficiency of currency recurs just as soon as prices become adjusted to the new volume, and there comes some little revival of business with the usual increase of credit.[56]

In August, 1793, appeared a new report by Cambon.  No one can read it without being struck by its mingled ability and folly.  His final plan of dealing with the public debt has outlasted all revolutions since, but his disposition of the inflated currency came to a wretched failure.  Against Du Pont, who showed conclusively that the wild increase of paper money was leading straight to, ruin, Cambon carried the majority in the great assemblies and clubs by sheer audacity—the audacity of desperation.  Zeal in supporting the assignats became his religion.  The National Convention which succeeded the Legislative Assembly, issued in 1793 over three thousand millions of assignats, and, of these, over twelve hundred millions were poured into the circulation.  And yet Cambon steadily insisted that the security for the assignat currency was perfect.  The climax of his zeal was reached when he counted as assets in the national treasury the indemnities which, he declared, France was sure to receive after future victories over the allied nations with which she was then waging a desperate war.  As patriotism, it was sublime; as finance it was deadly.[57]

Everything was tried.  Very elaborately he devised a funding scheme which, taken in connection with his system of issues, was in effect what in these days would be called an “_interconvertibility scheme_” By various degrees of persuasion or force,--the guillotine looming up in the background,--holders of assignats were urged to convert them into evidence of national debt, bearing interest at five per cent, with the understanding that if more paper were afterward needed more would be issued.  All in vain.  The official tables of depreciation show that the assignats continued to fall.  A forced loan, calling in a billion of these, checked this fall, but only for a moment.  The “_interconvertibility scheme_” between currency and bonds failed as dismally as the “_interconvertibility scheme_” between currency and land had failed.[58]

A more effective expedient was a law confiscating the property of all Frenchmen who left France after July 14, 1789, and who had not returned.  This gave new land to be mortgaged for the security of paper money.

All this vast chapter in financial folly is sometimes referred to as if it resulted from the direct action of men utterly unskilled in finance.  This is a grave error.  That wild schemers and dreamers took a leading part in setting the fiat money system going is true; that speculation and interested financiers made it worse is also true: but the men who had charge of French finance during the Reign of Terror and who made these experiments, which seem to us so monstrous, in order to rescue themselves and their country from the flood which was sweeping everything to financial ruin were universally recognized as among the most skillful and honest financiers in Europe.  Cambon, especially, ranked then and ranks now as among the most expert in any period.  The disastrous results of all his courage and ability in the attempt to stand against the deluge of paper money show how powerless are the most skillful masters of finance to stem the tide of fiat money calamity when once it is fairly under headway; and how useless are all enactments which they can devise against the underlying laws of nature.

Month after month, year after year new issues went on.  Meanwhile everything possible was done to keep up the value of paper.  The city authorities of Metz took a solemn oath that the assignats should bear the same price whether in paper or specie,--and whether in buying or selling, and various other official bodies throughout the nation followed this example.  In obedience to those who believed with the market women of Paris, as stated in their famous petition, that “laws should be passed making paper money as good as gold,” Couthon, in August, 1793, had proposed and carried a law punishing any person who should sell assignats at less than their nominal value with imprisonment for twenty years in chains, and later carried a law making investments in foreign countries by Frenchmen punishable with death.[59]

But to the surprise of the great majority of the French people, the value of the assignats was found, after the momentary spasm of fear had passed, not to have been permanently increased by these measures: on the contrary, this “fiat” paper persisted in obeying the natural laws of finance and, as new issues increased, their value decreased.  Nor did the most lavish aid of nature avail.  The paper money of the nation seemed to possess a magic power to transmute prosperity into adversity and plenty into famine.  The year 1794 was exceptionally fruitful: and yet with the autumn came scarcity of provisions and with the winter came distress.  The reason is perfectly simple.  The sequences in that whole history are absolutely logical.  First, the Assembly had inflated the currency and raised prices enormously.  Next, it had been forced to establish an arbitrary maximum price for produce.  But this price, large as it seemed, soon fell below the real value of produce; many of the farmers, therefore, raised less produce or refrained from bringing what they had to market.[60] But, as is usual in such cases, the trouble was ascribed to everything rather than the real cause, and the most severe measures were established in all parts of the country to force farmers to bring produce to market, millers to grind and shopkeepers to sell it.[61] The issues of paper money continued.  Toward the end of 1794 seven thousand millions in assignats were in circulation.[62] By the end of May, 1795, the circulation was increased to ten thousand millions, at the end of July, to fourteen thousand millions; and the value of one hundred francs in paper fell steadily, first to four francs in gold, then to three, then to two and one-half.[63] But, curiously enough, while this depreciation was rapidly going on, as at various other periods when depreciation was rapid, there came an apparent revival of business.  The hopes of many were revived by the fact that in spite of the decline of paper there was an exceedingly brisk trade in all kinds of permanent property.  Whatever articles of permanent value certain needy people were willing to sell certain cunning people were willing to buy and to pay good prices for in assignats.  At this, hope revived for a time in certain quarters.  But ere long it was discovered that this was one of the most distressing results of a natural law which is sure to come into play under such circumstances.  It was simply a feverish activity caused by the intense desire of a large number of the shrewder class to convert their paper money into anything and everything which they could hold and hoard until the collapse which they foresaw should take place.  This very activity in business simply indicated the disease.  It was simply legal robbery of the more enthusiastic and trusting by the more cold-hearted and keen.  It was, the “unloading” of the assignats upon the mass of the people.[64]

Interesting is it to note in the midst of all this the steady action of another simple law in finance.  Prisons, guillotines, enactments inflicting twenty years’ imprisonment in chains upon persons twice convicted of buying or selling paper money at less than its nominal value, and death upon investors in foreign securities, were powerless.  The National Convention, fighting a world in arms and with an armed revolt on its own soil, showed titanic power, but in its struggle to circumvent one simple law of nature its weakness was pitiable.  The louis d’or stood in the market as a monitor, noting each day, with unerring fidelity, the decline in value of the assignat; a monitor not to be bribed, not to be scared.  As well might the National Convention try to bribe or scare away the polarity of the mariner’s compass.  On August 1, 1795, this gold louis of 25 francs was worth in paper, 920 francs; on September 1^st, 1,200 francs; on November 1^st, 2,600 francs; on December 1^st, 3,050 francs.  In February, 1796, it was worth 7,200 francs or one franc in gold was worth 288 francs in paper.  Prices of all commodities went up nearly in proportion.[65] The writings of this period give curious details.  Thibaudeau, in his Memoirs, speaks of sugar as 500 francs a pound, soap, 230 francs, candles, 140 francs.  Mercier, in his lifelike pictures of the French metropolis at that period, mentions 600 francs as carriage hire for a single drive, and 6,000 for an entire day.  Examples from other sources are such as the following:--a measure of flour advanced from two francs in 1790, to 225 francs in 1795; a pair of shoes, from five francs to 200; a hat, from 14 francs to 500; butter, to, 560 francs a pound; a turkey, to 900 francs.[66] Everything was enormously inflated in price _except the wages of labor_.  As manufacturers had closed, wages had fallen, until all that kept them up seemed to be the fact that so many laborers were drafted off into the army.  From this state of things came grievous wrong and gross fraud.  Men who had foreseen these results and had gone into debt were of course jubilant.  He who in 1790 had borrowed 10,000 francs could pay his  debts in 1796 for about 35 francs.  Laws were made to meet these abuses.  As far back as 1794 a plan was devised for publishing official “tables of depreciation” to be used in making equitable settlements of debts, but all such machinery proved futile.  On the 18^th of May, 1796, a young man complained to the National Convention that his elder brother, who had been acting as administrator of his deceased father’s estate, had paid the heirs in assignats, and that he had received scarcely one three-hundredth part of the real value of his share.[67] To meet cases like this, a law was passed establishing a “scale of proportion.”  Taking as a standard the value of the assignat when there were two billions in circulation, this law  declared that, in payment of debts, one-quarter should be added to the amount originally borrowed for every five hundred millions added to the circulation.  In obedience to this law a man who borrowed two thousand francs when there were two billions in circulation would have to pay his creditors twenty-five hundred francs when half a billion more were added to the currency, and over thirty-five thousand francs before the emissions of paper reached their final amount.  This brought new evils, worse, if possible, than the old.[68]

The question will naturally be asked, _On whom did this vast depreciation mainly fall at last_? When this currency had sunk to about one three-hundredth part of its nominal value  and, after that, to nothing, in whose hands was the bulk of it? The answer is simple.  I shall give it in the exact words of that thoughtful historian from whom I have already quoted: “Before the end of the year 1795 the paper money was almost exclusively in the hands of the working classes, employees and men of small means, whose property was not large enough to invest in stores of goods or national lands.[69] 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.  After the first collapse came up the cries of the starving.  Roads and bridges were neglected; many manufactures were given up in utter helplessness.”  To continue, in the words of the historian already cited: “None felt any confidence in the future in any respect; few dared to make a business investment for any length of time and it was accounted a folly to curtail the pleasures of the moment, to accumulate or save for so uncertain a future.”[70]

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