Thursday, June 3, 2010

Out of the Depths, Part V: Ça Ira!

In 1989, the French government sponsored a great celebration in honor of the bicentennial of the French Revolution. Feelings about this in France were in marked contrast to the festivities surrounding the bicentennial of the American Revolution twelve years earlier. In the United States, virtually the only complaints concerned the expense and the commercialization of the event. Even the government against which the American Revolution had been directed had obviously forgotten old scores (and governments are notorious for never forgetting an injury, only benefits). The British Queen was an honored guest at the official national banquet, and who could forget actor Robert Morley's British Airways' ad campaign at the time: "Come home, America . . . all is forgiven."

The celebration of the French Revolution, on the other hand, inspired a great deal of acrimony among many people. Most of this had to do with the basis of the revolution. The American Revolution originated in a claim that the British government had become illegal through egregious transgressions against the natural law, particularly as it related to the rights of life, liberty and access to the means of acquiring and possessing property, and obtaining and securing happiness and safety.

The French Revolution was different. Even the Revolutionaries maintained, at first, that the king represented the legitimate government. Louis XVI was, as historians recall, executed for his personal acts, whether real or, as many people today believe, imagined. Not that it made any difference: the revolutionaries had granted poor Louis Capet personal immunity for all acts as king, public and private, in the constitution he had been forced to sign. (The general outline of events and many of the facts about the Revolution have been taken from Warren H. Carroll's The Guillotine and the Cross. Manassas, Virginia: Trinity Communications, 1986.)

Away We Go!

The French Revolution has been described as a series of social earthquakes. People who considered themselves republican radicals one day might find themselves redefined as monarchical reactionaries the next, all without having changed their opinions. A great many of those who voted to execute Louis XVI, for example, were themselves guillotined months later for presumably supporting the monarchy. Society fell into complete chaos. Nowhere was this reflected more accurately than in the coinage and currency of the Revolution.

When the Revolution began in mid-1789, France was deeply in debt from various wars, but the currency was still fairly sound. Adequate provision was made for commerce with coin supplemented by small numbers of banknotes in denominations ranging from 200 to 1,000 Livres to facilitate large transactions and float the State deficit. A bank of discount — Caisse d'Escompte du Commerce (The Bank of Commercial Discount) — established by a financial consortium in 1776 issued notes. The available credit was frequently resorted to by the State, and there were a number of irregularities associated with the bank's administration. With the coming of the Revolution, however, there was a growing discontent with leaving such control over money and credit in the hands of private interests. (Conant, op. cit., 40-43.)

A full range of coin denominations was minted, from the Liard (Three Deniers), 1/2 Sol (Six Deniers), Sol (Sous) and Two Sols in copper, silver coinage of Six, 12, 24 Sols and 1/2 and One Ecu, and a gold coinage consisting of 24 Livres (the Louis d'Or) and 48 Livres (Two Louis d'Or). The regal designs were continued unchanged immediately after the beginning of the Revolution, but in greatly reduced quantities. One of the most serious problems facing the new Revolutionary government was, in fact, the scarcity of money. (Moulton, Principles of Money and Banking, op. cit., 144.)

Much to the surprise of the Sans Culottes, the great houses and chateaux they sacked did not have vast quantities of gold and silver lying about. There were valuable art treasures and silver and gold plate, of course. There was, however, nothing near the amount of cash on hand and other portable wealth that popular fancy has always attributed to the coffers of the rich. While vague, the image of the riches held by the wealthy usually conjures up something along the lines of Scrooge McDuck's Money Bin. It would be astonishing, however, if even Bill Gates or Warren Buffett have any significant amount of cash immediately available. The greater amount of the accumulations of the wealthy has always been tied up in investments, whether in land, factories, or some kind of financial assets, such as securities or commercial paper.

In any event, supplies of precious metal ran low, and the tax base virtually disappeared. Naturally, while the new government was little concerned about the money and credit needs of businessmen and other such profiteers and criminals, it still needed funds to run the growing government. Where the royal government had let the country suffer from too much neglect, the Revolutionary government was intent upon regulating every aspect of the people's social, religious, and economic life. This required a huge expansion of government, and massive numbers of bureaucrats and other functionaries, as well as enormous amounts of cash.

Proposals were advanced to nationalize the Discount Bank, and so restrict the power over money and credit solely to the central government. This, however, would still leave the "capitalists" in charge of the operation. The decision was made to abolish what was effectively a privately owned central bank, and turn all power over money and credit to the State. The carrying argument was that, while paper money issued by private persons or under a despotism is dangerous, that difficulty is removed in a constitutionally governed people's republic "which takes care of its own notes, which determines their number and use." (Ibid., 145.)

Consequently, the bank was suppressed August 17, 1792. To replace the discount bank, the new government proposed to issue interest bearing "State bonds," payable at sight (i.e., on demand) to cover the government's deficits. Not surprisingly, no interest was ever paid, and the provision was dropped from subsequent issues. (Ibid.)

Existing national lands and the assets recently confiscated from the Catholic Church would provide the security for these issues. The face value of the first issue amounted to one fifth of the value of the confiscated lands. The assets were put in escrow, set aside in a "Designated Fund" called Le Caisse de l'Extraordinaire. That was the plan, anyway. Soon, however, just as the United States government "borrowed" money from the Social Security fund and replaced it with government bonds, the lands and other assets illegally alienated from their rightful owners were sold at sacrifice prices to raise immediate cash for the mounting deficits. This left the "bonds" without any backing other than the State's promise to pay.

This was similar to the way that Henry VIII Tudor of England received no lasting benefit from his confiscations of 800 years' worth of contributions to the English Church, held in trust as "the Patrimony of the Poor." Old Coppernose's "take" was frittered away in less than four years, a record unmatched until the French Revolution. (William Cobbett, A History of the Protestant Reformation in England and Ireland, 1827, §§ 169-170.)

Increase Spending to Reduce Deficits

Although opposed by Tallyrand, (Moulton, Principles of Money and Banking, op. cit., 145.) almost immediately the new government began printing money with wild abandon and spending it into circulation to cover its enormous deficits. The new paper money was not called currency or banknotes, of course. The John Law scheme was still within living memory, giving people distaste for the name, if not the fact of paper money. During the debates a new name was invented for the bonds in order to give the illusion that the State was not issuing paper money. The new issues were called "assignats," or, loosely, "promissory notes." The first issue was simply the older notes of the Discount Bank with an added legend, Promesse d'Assignat.

These particular notes were not printed in any great quantity, and are very scarce today. The other issues more than make up for any lack, however. Between December 1789 and January 1795, twenty-four separate issues of assignats were made, with sixty-four different notes, not counting varieties. Note that this figure includes only national issues, not territorial, provincial or local paper. The quantity was so huge that today's collector can obtain specimens of many of the notes for less than a dollar, and even an uncut sheet for less than $40 is not unheard of. There are some scarce items, of course, but a student or collector on a limited budget can readily assemble a representative collection of France's Revolutionary fiscal and monetary disaster.

Some denominations of assignats are as low as 10 Sols or Sous. This fractional currency was necessary because of rapidly declining coin mintages. The first redesigned issues rolled out of the mint in 1791, and featured the bust of Louis XVI on the obverse, but reverse designs of appropriate revolutionary symbols, usually the fasces and liberty cap, but in the higher denominations Genius writing in a book of law. Americans usually describe this last as an "angel."

Rising Discontent

A combination of bad harvests and inflationary paper money issues, along with some extraordinarily stupid government policies led to widespread discontent. Grain rioting was widespread in the northeast during the winter of 1791/92. In February the mayor of Étampes was lynched for refusing to order a decrease in the price of wheat, while three days of rioting rocked Dunkirk when the government attempted to export grain in order to generate badly needed hard currency.

Decline in the value of the paper money was rapid. Between June 1791 and March 1792 the silver Livre fell 20% against other currencies, while the assignats were down to 82% of face in November 1791, another 63% by the end of January 1792, and maintained a steady decline throughout the spring. By February of 1796, a note with the face value approximately equal to a U.S. "Double Eagle" ($20 gold piece, c. an ounce of gold) was worth about six cents in purchasing power, a decline of about 99.7%. Not unexpectedly,
In the spring of 1791 no one knew whether a piece of paper money, representing 100 francs, would, a month later, have a purchasing power of 100 francs, or 90 francs, or 80, or 60. The result was that capitalists declined to embark their means in business. Enterprise received a mortal blow. Demand for labor was still further diminished. The business of France dwindled into a mere living from hand to mouth. This state of things, too, while it bore heavily against the interests of the moneyed classes, was still more ruinous to those in more moderate, and most of all to those in straitened, circumstances. With the masses of the people the purchase of every article of supply became a speculation — a speculation in which the professional speculator had an immense advantage over the buyer. Says the most brilliant apologist for French Revolutionary statesmanship, "Commerce was dead; betting took its place." (Ibid., 146-147.)
In other words, once the creation of money was divorced completely from the present value of existing and future marketable goods and services, the economy not only stagnated, but to all intents and purposes disappeared. Whatever the laws might say, in spite of the platitudes the incorruptible Robbespierre might mouth, despite whatever end the government might have had in view, regardless of the change promised under the Revolutionary leaders, the new system encouraged gambling and speculation to the detriment of production.

In light of the worthlessness of the assignats, the Revolutionary government took the simple expedient of renaming them "mandats" ("Territorial Mandates"), calling in the assignats at an exchange rate of 30 to 1 . . . and printing the new notes at a rate almost equal to the old notes. (Ibid.) While these at first passed as high as 80% of their face value, the inflationary pressures were just too much for what was left of the productive capacity of the nation to resist. The mandats soon passed at less than 1/1000 of their face value. Even before the assignats could be retired, however,
It was evident that the end had come. Before the assignats were withdrawn, the Government resorted to various expedients to hold up their value by legislative decrees. The use of coin was prohibited; a maximum price in assignats was fixed for commodities by law; the purchase of specie was forbidden under penalty of imprisonment in irons for six years; and the sale of assignats below their nominal value was forbidden under penalty of imprisonment for twenty years in chains. Investment of capital in foreign countries was punishable with death. All these efforts were as futile as similar efforts had been in John Law's time. (Ibid., 147.)
The problem, of course, should be obvious. Under the illusion that production is a derivative of money instead of the other way around, the Revolutionary government created money as fast as it could. All this did was create more demands on a shrinking amount of goods. Consistent with the laws of supply and demand, as the amount of currency increased and the quantity of goods and services available for sale decreased, the price level rose rapidly.

This is the lesson that the United States has learned to its cost over the past couple of years. Financially speaking, sound and sustainable economic growth has at least three requirements. One, all new money creation must be based on the present value of existing and future marketable goods and services. Two, all new money created must be linked directly by private property to that same present value of existing and future marketable goods and services. Three, ownership of the means of production, whether capital, labor, or some combination thereof, must be broadly owned; there can be neither chattel slavery nor wage slavery if an economy is to achieve long-term stability, sustainability, and growth.

An economy can sometimes survive for a while, sometimes very well, if two of these three requirements are met. Eventually, however, the discontinuity will cause disruption of the social order. If none of the three are present, and the State simply takes over money creation for its own benefit, all that has been accomplished is a complicated and expensive redistribution of existing wealth and a tremendous increase in the power of the State.

It wasn't long before the mandats were just as unpopular as the assignats had been. Food supplies in Paris disappeared and the government was forced to make emergency distributions in order to quell the rioting. Finally, on July 16, 1796 (Conant, op. cit., 43), the government gave up trying to force people to accept paper money in any form other than at its real value. The Revolutionary government on that date issued a decree permitting people to transact business in any money they chose. As described by MacLeod,
No sooner was this great blow struck at the paper currency, of making it pass at its current value, than specie immediately reappeared in circulation. Immense hoards came forth from their hiding places goods and commodities of all sorts being very cheap from the anxiety of their owners to possess money, caused immense sums to be imported from foreign countries. The exchanges immediately turned in favour of France, and in a short time a metallic currency was permanently restored. And during all the terrific wars of Napoleon the metallic standard was always maintained at its full value. (MacLeod, op. cit., 258.)
And so another mismanaged political experiment that tried to circumvent basic principles of economics and finance came to an end.


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