Macroeconomics is stuck in the Dark Ages.
By printing money our generation is making the same mistake as countless generations before us - taking the road to ruin, as it is the one with least initial pain and therefore the one with least resistance for our short term mindset.
Take “fiscal stimulus,” for example, the idea that the government can step in to fill the void when the private sector isn’t spending and boost economic growth in the process.
Economists have been debating the pros and cons of fiscal stimulus since the 1930s, when John Maynard Keynes diagnosed the problem as one of inadequate private investment and prescribed public spending, financed by borrowing, as the cure.
He was hailed as a visionary - but he did nothing new, governments had previously eagerly followed this path of least resistance long before Keynes was born.
There is a saying that the only thing we learn from history is that we don’t learn from history. This seems especially true with regard to economic history.
Those willing to spend the time and effort to learn from economic history get to see things in a different perspective - and it makes it much easier to know what to do in a World of uncertainty - as everything has been done before under different names - human character doesn’t change after all.
History is a guidebook.
In microeconomics certain truths are self-evident - which doesn’t mean economic planners can see them though.
Governments across Asia right now are using subsidies and price controls to ease the pain of higher oil and food prices, even though their actions will exacerbate the crisis.
Lets look at some lessons from history to see how stimulus, aka government printing, and price controls have faired during historic times.
Will we find a comparable period in history, with wars and revolutions and government spending and enforced price controls? - Yep, more than a few - all of them end badly.
Let's start out with the French Revolution:
Hyperinflation in France 2 - Judgement Day
France is not a stranger to Hyperinflation, it happened the first time in 1719.
This was the time of “The Mississippi Bubble” and “John Law”.
A time when the French public were not offended by royalty having body parts intended for Crowns.
Royalty at the time being “Head of State” so to speak, instead of the less comfortable “head off - state” the Royalty endured during the Second hyperinflation, 70 years later.
Today I am going to spend my time on the Second Hyperinflation in France.
The one that happened after Marie Antoinette had her cake eating abilities removed by the guillotine.
If You thought history was boring - then You never read about this Hyperinflation.
France at the time was an indebted superpower*.
*Disclaimer. Any resemblance to a modern day indebted Superpower is entirely intentional and not a coincidence.
BEFORE THE REVOLUTION
In 1789, the year the French Revolution began, the economic outlook for France was surprisingly like any modern day European country = Big debt and a Serious deficit.
To solve the situation would have required patience and restraint, self-denial, frugality and an end to pointless wars.
The situation wasn’t hopeless, but it would take some voluntary suffering to get through this - unfortunately “to live within ones means” was at that time not part of most politicians vocabulary, and the leaders were at the time looking for a short cut to prosperity.
Today we are much more educated and know that such short cuts don’t exist - “there is no such thing as a free lunch”, as the saying goes.
So in todays advanced economies we adhere to the well tried “kicking the can down the road” principle instead.
Which in accepted political wisdom is considered more prudent than the far to old-fashioned “Live within your means” idea - an idea that never really caught on with humanity in the first place.
To be fair though - as France succumbed to revolution shortly afterwards (in June), austerity measures would likely not have improved the mood of the public or changed the course of history - at that time it was already to late. Starving populations tend to be hard to govern.
France had overextended itself through overseas wars (in what was to become USA), and deficit spending.
Somehow sounds familiar.
In 1777 a guy named Jacques Necker was put in charge of Finance.
He pointed out that the tax burden in France was unbalanced as the lower classes had a heavy tax burden, where as the nobility and clergy had ways to evade tax.
Obviously a proposal to redistribute the tax burden didn’t go well with the elite - it was after all not the time to “loose ones head” over such trivial matters, surely someone else could be taxed instead.
As the State finances deteriorated, the King, Louis the 16th, decided in May 1789 to call together the 3 estates of France to solve the financial crisis.
The First estate represented the clergy, Second estate represented nobility, the Third estate represented the people.
In June 1789 the third estate, representing the people, ran out of patience. On the 20th of June they assembled in an indoor tennis court and declared themselves to be the “National Assembly”.
As they were far to many to get a good game of tennis going, they decided instead to take the “Tennis Court Oath” - and this proved the beginning of a revolution.
Jacques Necker supported the third estate in their views, that they ought to have twice the number of representatives as the estates of the nobility and clergy - another suggestion that made him unpopular among those in power.
Consequently on the 11th of July, Jacques Necker was fired.
This didn’t go well with the public, who feared this was the beginning of an action against the “National Assembly”.
A fear that was fueled by the suspicious number of soldiers starting to arrive in Paris.
The next day, on the 12th of July, riots broke out in Paris, and on the 14th of July the Bastille fortress fell.
The Governor Bernard-Rene de Launay as the “Head of the Bastille” had just been on a tour of the city (on a stick) while his body remained stationary somewhere else.
He was later that day joined by the mayor of Paris, who was butchered and degraded from “Head of the City” to “Head on a stick”.
Conveniently there was now an open job position as mayor of Paris.
This position became occupied by the leader of the “National Assembly”.
The King, alarmed by the violence, backed down for the time being.
The following weeks there were a lot of attacks on wealthy landlords, as there was a belief that the aristocracy would try to put down the revolution.
Many nobles after this violence decided to leave the country.
The peoples “National Assembly” were calling the shots now (and probably firing a few as well). Necker was called back from retirement and given financial dictatorial powers.
In August 1789 the “National Assembly” abolished Feudalism.
France now had a new constitution, with a constitutional monarchy.
The Kings power was reduced to an ability to delay laws - a so called “suspensive veto”.
The clergy, who had previously resisted taxation, now saw all their lands confiscated by the “National Assembly” - that would be 100% taxation then.
AFTER THE REVOLUTION
The National Assembly wanted to revive the economy, and what better way than to increase the amount of money.
The National Assembly wanted Necker to print a little money, for the benefit of France.
As France had previously experienced a hyperinflation in the same century, Necker advised against it - once again becoming unpopular with his employers.
The idea of hyperinflation was ridiculous.
Hyperinflation was obviously only possible under a greedy despot like the King.
Now it was the people of France who would be issuing the paper money.
According to the National Assembly this made a huge difference - and the idea of it ending in another disaster was clearly laughable.
An idea thus took hold in France, that if only there was more money in circulation everything would be well. And this a century before Keynes was even born.
The idea of Free Money caught on well with the public and the press.
Soon there was a public demand for more money.
And it was deemed safe - after all France had only 70 years ago had a devastating experience with paper money, so if any country was able to issue paper money safely it would be France.
Especially since the new money would be backed by the value of the confiscated land of the church.
In April 1790, the first paper money was issued to the tune of 400,000,000 livres.
One livre was officially equal to 4,5 grams of fine Silver.
Interestingly the National Assembly decided to put the portrait of the King on the notes.
These notes were called “Assignats”, and they were not just money as the holders were entitled to 3% interest - so basically they were bonds.
It was at the time believed that these “Assignats” would soon be considered better than Gold and Silver - as Precious metals don’t pay interest, but this wonderful paper money does.
Same argument as is being used today: “Gold doesn’t pay interest”.
When the bonds/paper money came into circulation everything turned out well.
The state got some much needed funds and part of the public debt was paid.
This was the beginning of a typical credit led boom - and the thing is, these only provide temporary fixes.
Sure as daylight (except if one lives North of the Polar circle and it happens to be winter), within 5 moths the government had spent all the 400 million livres received from the bond sales - which somehow seems to correlate well with modern day government approach to spending.
Some fearmongers still recalled the hyperinflation from 70 years ago, just as some today might recall the Weimar inflation in Germany - but then again, people who recall important historic events are usually not taken seriously.
Most therefore agreed that the issue of “assignats” had been a complete success, and it was decided to make another successful issue large enough to cover all the national debt.
This would require the issuance of 2,400 million livres worth of assignats, backed by the wonderful national lands of France.
A law was issued that only assignats could be used for purchasing land.
Necker once again proved he had no understanding of politics, and again advised against an issue of assignats - needless to say that he soon had to look for a new job.
On the plus side, he did manage to leave France with his head still attached - which shortly afterwards could not be taken for a given.
The press was full of joy to see this old fashioned enemy of paper money go - ironically those who had the most oral contempt of Necker later had the body part responsible for uttering oral contempt physically removed by the guillotine.
But now we are getting ahead of ourselves, so far everything is well with paper money, - just look how nicely they have been decorated and with so many signatures to show that it’s serious business this paper money - unlike precious metals that don’t even pay interest.
After Necker had gone only Brillat-Savarin was brave enough to go against the current, and try to prevent a new issue of assignats through logical arguments.
He pointed out that the previous issued assignats were already depreciating in value, and made a prediction that if the National Assembly issued a new round of assignats it would depriciate the value by 30%.
Unfortunately in debates between logic and emotions - logic never stands a chance.
It was decided that a new issue of paper money would not only be good for the economy but “Protect public morals from corruption”.
Furthermore it was pointed out that the previously issued assignats were loosing value - as there were not yet enough of them.
(So that’s why the Dollar is loosing value - quick, print more :) ).
Admittedly there was still some resistance against another issue of paper money.
One of the most reasonable ones came in the form of a pamphlet that stated:
“Doubling the quantity of money or substitutes for money in a nation simply increases prices, disturbs values, alarms capital, diminishes legitimate enterprise, and so decreases the demand both for products and for labour, that the only persons to be helped by it are the rich who have large debts to pay”
signed by “A Friend of the People”.
(Wow - Austrian Theory a century before Mises was born - interestingly the war between the Keynesian approach and the Austrian approach seems to be older than both the Keynesian and Austrian theory themselves).
Anonymous pamphlets can’t be taken serious though, so other pamphlets with names on them were issued to glorify paper money.
(Pamphlets where the internet at the time then :) ).
A lot of theorists who had never shown any ability to make or increase a fortune for themselves, suddenly abounded in brilliant plans for increasing the wealth for the country at large.
One of them, Royer, wrote on his pamphlet that “the issue of paper money is the only means to ensure happiness, glory and liberty to the French nation” and he predicted (as did many others) that “Gold is about to loose all its value, since all exchanges will be made with this admirable guaranteed paper”.
That does sound a lot like the modern day attitude to Gold as being a barbarous relic, doesn’t it.
Similar to how people in the 1970’s thought that once Nixon closed the window on Gold, Gold would fall in value - as it no longer was backed by the Dollar.
Talking down Gold is NOT a new thing it seems.
In 1790 the main newspapers no longer supported the idea of Gold backing the currency, a Gold backed (solid) currency was seen as inferior to a Real Estate backed (paper) currency - it is the land after all that provides the wealth of any country, not circulating bits of shiny metal.
In those times the media played an important role in misinforming the public - history in reality changes very little.
So, on the 29th of September 1790, the deed was done by a vote of 508 to 423, and a Bill was passed authorizing the issue of 800 million livres worth of “Assignats”.
This was only a third of the amount originally proposed, but still twice the amount of the first issue.
To show how secure this new currency was, it was solemnly declared that the circulating amount of assignats would under no circumstances be allowed to exceed 1.200 million livres.
In other words, it was officially declared that this would be the last issuance of assignats ever - promise!
This new issuance of assignats didn’t pay interest to the holders.
It had been put into law earlier that only assignats could be used for purchase of land from the government. And with this new issue of assignats it was further declared that when the government from time to time would receive payments in assignats for land, those assignats would be taken out of circulation and burned.
In other words, the government would do the right thing and not try to use the notes more than once.
So although the government in theory could benefit from the public not being able to tell which assignats had already been used for land purchases, and keep those in circulation - it would refrain from doing so.
This ensured that a contraction in the amount of assignats was guaranteed by the government.
This made it a no-brainer to convert ones useless metal coins into this nice foldable paper currency.
Not only was it more convenient than carrying heavy precious metals around - it came with a government guarantee that even though pieces of paper could be printed to infinity, the indebted government would refrain from doing so - and even take notes out of circulation from time to time.
How much more security does one need?
GRESHAM’S LAW
Within 2 months the government had received 160 million livres worth of newly printed assignats in payment for land.
Once again everything was going well and business was finally prospering - the government didn’t take this money out of circulation though.
Of course the government remembered that it had promised to do so - but at the same time it realized that there was a demand for assignats in smaller denominations.
Originally assignats had not been intended for small transactions - this was still the job for Silver and Copper.
Despite laws that required citizens and churches to send their Silverware to the Mint, and church bells being melted down for Copper, there was an extraordinary lack of Silver coins in circulation.
Gresham’s Law in effect - bad money driving out good money.
Different districts of France started to issue their own assignats in small denominations, and several “Confidence Bills” started circulating in order to make small transactions possible, as people didn’t want to part with their Silver.
This created a lot of confusion, as in Paris alone there was 63 different kinds of “Confidence Bills” in circulation - and these were not backed by anything, unlike the assignats that were backed by the lands of France.
This guaranteed massive fraud with the “Confidence Bills”, and there was a public demand to set things straight with proper government money, that could be trusted - like the assignats.
So for the benefit of France, the government decided to reuse the assignats it had received as payment for land - but instead of using the same notes it made new ones with smaller denominations.
So yeah, the government broke its promise, but it was understandable, as the new paper money was driving Silver out of circulation (Greshams Law), so obviously lower denomination paper notes were required to make smaller transactions feasible.
That this re-issue meant free money for the government, was apparently just an unexpected bonus.
So not only did the public not get upset that the government broke its promise and reused the notes (and added a few more, instead of burning them).
No, the public DEMANDED that the government issued more money.
Show me a government that can resist such a demand :).
On June 19, 1791, the government caved in to the demand of the public, and issued another 600 million livres worth of assignats.
The previously issued 1,200 million were backed by the lands of France, so one has to wonder what the new issue was backed by - as France didn’t acquire 50% more land during the 9 months that had passed since the last issue.
The whole nation cheered this final issue - as surely now everything would prosper, as finally there was enough proper paper money in circulation to enable all transactions, wether big or small.
Hurray.
It is interesting to note that the first issuance of assignats were passed with some difficulty, the second issue was passed with the votes 508 to 423.
The third small issue (reusing the assignats despite the promise to withdraw them) was done pretty easily.
The fourth issue was even DEMANDED by the public.
The point here being that the issuance of paper money became easier and easier, and met less resistance.
The new issuance of paper money resulted in inflation - how could it not.
This inflation was viewed as a sign of prosperity.
Meanwhile the army was experiencing some difficulties, as the officers largely consisted of noblemen.
The noblemen officers were repeatedly being attacked by their own soldiers, in the spirit of the revolution.
One general, Bouille, managed to quell such a rebellion, which lead to him being accused of being anti-revolutionary, and he had to leave France.
He is now remembered in the French National Anthem, “La Marseillaise”, as a detestable counter-revolutionary figure.
Needless to say that these incidents led to a mass desertion of officers from the army.
EFFECTS OF INFLATION
There was a sense of optimism in France now, but warning signs started to appear.
After each new issue of paper money the value of paper money depreciated.
This ought to be obvious, but even today the reasons behind inflation are not understood by the public, so the simple conclusion that a thing becomes less valuable if more of it is created wasn’t made.
A leading member of the National Assembly suggested that the reason paper money was depreciating was because the rural population lacked the knowledge and sophistication needed to appreciate paper money. Therefore they needed to be educated in order to boost confidence in the currency.
La Rochefoucauld addressed the people, to show the absurdity in preferring coin over paper.
It proved an obstacle that people engaged in trades still preferred coins to paper.
Thus there was a widespread believe in the country that if only a sufficient amount of traders were hanged, the value of the assignats could be restored.
Another wide held belief was that the old Arch enemy, England, was involved in the depreciation, by sending agents into France to talk up Gold and create hostility towards paper money.
The plenty of currency had at first stimulated production and created great activity among the manufactures, as is normal during a boom, but when the magic of the new money disappeared, with its depreciation, demand went down.
It seemed the magic boom France had experienced was only caused by a wish to invest the doubtful paper money before it lost further value.
Hence each issue of new assignats was just a quick fix that didn’t provide lasting help to the economy, but instead massive malinvestments - when anyone holding paper rushed to invest into anything that would likely hold value.
Hence each new issue produced a smaller and smaller fix, and didn’t result in a sustainable demand.
France was at the time among the manufacturing powerhouses of Europe, but the manufacturers soon suffered during the rising inflation, which at first had been applauded.
Unemployment went up, and wether or not they at the time realized that unemployment is a leading indicator - meaning that rising unemployment is a sign that things are about to get worse, rising unemployment was not popular.
In the town of Lodeve 5.000 workers were dismissed from the cloth factories, so something had to be done.
To protect the local workers, heavy tariffs were put on imported goods.
It didn’t help.
The rich could protect themselves from the rising inflation by exchanging their assignats for government land.
Normal people who didn’t have enough money to purchase government land, and needed their money from day to day suffered greatly.
As always the losses fell on the poor and the ignorant.
The uncertainty about the value of the currency naturally forced merchants to add a safety margin to the price when they were selling their goods.
You then had a situation where prices naturally were going higher, whereas salaries, due to increased unemployment, were falling.
This is not the formula for a happy society.
Suddenly You had a situation where workers became relatively poorer, despite officially having more money.
In other words, hard productive physical labour was discouraged, and more money could be made on gambling (which overall adds nothing to society) than on being productive (which is the very basis for society).
The inflation led to a massive redistribution of wealth, as those who got access to the new money first prospered, while those who received the money last suffered - as inflation by then had sucked all the value out of the money.
Inflation changed France from a thrifty population of savers and producers, to a population crazed with gambles and speculation (which makes sense in a scary kind of way, as savings and salaries became worthless) - again, not the proper basis for a healthy economy.
This resulted in a massive redistribution of wealth on stock market speculations with the abundance of currency flooding the country.
Speculators in the city became rich, as workers in the country became poor.
(Somehow a bit similar to how the banks today pay out record bonuses from their wild gambles, while more and more people get on food stamps - no?)
Inflation not only led to redistribution of wealth and crazed gambling to protect what one had left - it also led to a rise in corruption.
People unfairly enriched by inflation could now afford to pay politicians to legislate in their interest and journalists to influence public opinion on questionable affairs.
Although this is not defined as corruption - it’s called lobbying.
Again - the way politics and “independent” media works in USA springs to mind.
Admittedly parts of the National Assembly where in it for the benefit of the nation and uncorrupt - nevertheless the amount of corruption was enough to cause distrust and cynicism.
One of the proudest sons of the country, Mirabeau, who had risked imprisonment and death to establish the constitutional government, was (after his dead) found to have received regular payments from the Royal court - which could help to explain why the national assembly didn’t get rid of the royalty at once during the revolution.
So far the addition of paper money had not saved the economy, but only led to redistribution of wealth, reduction in production and an increase in speculation and corruption.
All in all this raised a few people to a life in luxury, while the majority descended into poverty.
Clearly the amount of money printed hadn’t been enough.
A new class arose in France that preferred depreciation of the currency - this was the debtor class, people who had bought land with very little pay down and had an interest in inflation making their debts more manageable - or people who had incurred large debt to gamble on the stock market.
Before long the major debtor class became influential in politics, and pushed for further issues of paper money.
Although each issue of paper money eventually made things worse, there was still a belief among the people that if only enough money was issued, and cleverly handled, the poor would become rich.
It was thus more or less inevitable that in December 1791 - half a year after the last issuance, another round of assignats, to the tune of 300 million livres, was released upon the nation.
Again one could ask what these new assignats were actually backed by - and the answer was simple: the value of the lands of France had obviously been underestimated, and this new issue of assignats corrected that mistake.
Some argued that obviously the lands of France were worth far more than this total 2,100 million livres worth of assignats - making these newly issued assignats stunningly good value - especially since the government made another guarantee that this was the last issue, ever - just like the last one, and the one before that.
Apparently some people in France were not patriotic, as the purchasing power of the assignats immediately fell 15% after this last issue.
This meant that the old fashioned Gold and Silver were increasing when measured in assignats - quite the opposite of what had originally been predicted.
Naturally the newspapers at the time declared that Gold and Silver was an unsatisfactory standard for measuring value.
On the other hand it was a blessing to have a currency that could depreciate to make the manufacturers more competitive - and as the assignats were only legal tender in France, one could be sure that the currency wouldn’t leave the country like Gold and Silver tended to do during times of trouble.
The press was enthusiastic.
IF ALL ELSE FAILS - GO TO WAR
Somehow prosperity seemed to diminish despite all the new paper currency.
The next issuance of assignats didn’t happen until 4 months later in April 1792, when another 300 million was put on the market.
One of the proud inventors of the assignats had by then become minister of finance and saw it as his finest duty to share more of his invention with the people of France, despite that the government had promised to stop printing.
Despite all the new paper, the financial state of the government was still not good, and it was decided to suspend payments of public debt for all amounts exceeding 10.000 livres.
In July 1792 yet another 300 million was printed.
Prices naturally increased wildly with all these new issues, but as manufacturing was suffering and unemployment was rising, salaries remained stationary.
People suffered.
There was anger in the air.
What better way to distract the population, than to go to war?
This is the approach that Gerald Celente, Marc Faber and others expect America to resolve to, once the true scale of our current financial difficulties are felt.
Well, to prove that nothing in history hasn’t happened before, the “National Assembly” decided to declare war on Austria, on the 20th of April 1792.
The King could have vetoed this decision, but he felt that a war would make him more popular, and any defeat could be politically exploited - either result would make him stronger and improve his chances of becoming a proper King again.
As mentioned earlier, the army did have some difficulties with its leadership.
The first few battles didn’t go well for France, and French soldiers started to desert and in one case killed their own general.
This sign of weakness inspired zhe Germans (or Prussians as they were called at the time) to join forces with Austria and have a go at France.
The allied forces against France were in the beginning successful - until they declared their intent to restore the King of France to his full powers.
This suddenly made the King very dangerous to have around, and in August 1792 the Paris Commune (that supported the constitutional Monarchy) was overthrown by a new Revolutionary Commune who then attacked the Royal Palace to get rid of the King once and for all.
Later the Revolutionary Commune locked down Paris and massacred 1200 people who were thought to be anti-revolutionaries - this became known as the September Massacres.
This made it a bit unclear who was actually in charge of France - but it became quite clear that the King was now out of the picture (although still alive).
The Germans continued advancing until they reached Valmy on the 20th of September and encountered the superior French artillery.
Although the battle was a draw, it gave a great boost to the French morale that the Germans had been halted.
The next day the First Republic was declared in France, formally abolishing the monarchy.
After this battle the German army decided to retreat from France.
Wars are expensive, so clearly more paper money was needed.
Luckily the minister of finance was also the inventor of assignats, so he was just the man for the job - every few months another issue of assignats followed.
With all this money, it was only a matter of time before prosperity would return.
The nobles didn’t like the way things were going. Many had either come to sudden inexplicable deaths, or had been leaving France for a while.
This gave the government an opportunity to confiscate the property they had left behind.
The value of this newly confiscated property was loosely valued at 3,000 million livres.
This confiscated land was then used as guarantee for yet another major issue of assignats.
The assignats were thus still sound money backed by land.
Even though all the money officially was backed by land, the larger and larger amount of currency in circulation created serious inflation - and no matter how much money the government printed, they couldn’t kill the inflation.
Up until January 1793, all issues of assignats had been public, and it was known that 3,000 million Livres of assignats where in circulation at the time.
Since France was now a Republic, it was considered a bit old fashioned to have a King walking around - so he was put on trial, accused for high treason.
On the 21st of January 1793 the King was guillotined.
This caused Spain and Portugal to enter the coalition against France.
After this date, new issues of assignats were done in secrecy.
France was now pretty much cornered from all sides, but realizing that all they had going for them was the element of surprise - France decided to show their strength by simultaneously declaring war on Great Britain and the Dutch Republic.
Clearly more wars were needed for the population to support their government.
300.000 more men were thus drafted to the army - which at once helped to relieve the youth unemployment issue.
The revolutionary armies proved surprisingly successful, and soon the battles were fought outside of France.
This meant that the government could concentrate on its attempts to revive the economy through money printing - thereby ironically destroying the country better than any foreign army could manage trough conquest.
LAW OF THE MAXIMUM
As a result of the issue of assignats now being done secretly, no one knew how many assignats were circulating.
The committees that were overseeing these secret issues were called “Public Safety and Finance” - You just gotta love names like that (a bit like Orwell’s ministry of truth in the classic “1984”).
It was here the inflation started to go hyper - so one has to think that these secret issues were larger than anything the government had previously dared to do publicly.
In September 1793 the value of assignats had sunk 70% from their nominal value.
Many explanations were sought for why prices were rising - obviously it was because of the intrigues from the emigrant nobles whose lands had been confiscated.
No one seemed to connect the depreciation of the currency with money printing.
Some merchants refused to sell their goods for paper money, and the public who could barely afford bread demanded that their paper money be accepted.
Marat declared that the people “by hanging shop keepers and plundering stores could easily remove the trouble”.
The result of this was that on the 28th of February 1793 a mob began plundering the stores of Paris. At first they demanded only bread, but soon they seized anything they could lay their hands on.
That night 200 stores were plundered.
The shop keepers where not pleased with this development, and complained to the City Hall.
In response to the complaints Roux declared, to great applause, that “the shop keepers were only giving back to the people what they had previously robbed from them”.
Clearly the government didn’t feel any responsibility for the development.
It was clear though that the government was still in need of money, and an idea was formed to force the people to lend money to the government - after all, the government was good for the money, so this would be in everybody’s best interest.
The forced loans provided less money than predicted, so naturally the health of government affairs fell back to the printing press - and 2,000 million crispy new assignats were approved in July 1793.
But the pesky inflation problem persisted, no matter how much money was printed.
In order to keep the public content it was necessary to do something about the rising prices.
This led to “The Law of the Maximum” in September 1793 - which purpose was to set price limits.
It was declared that the previous increases in prices had been driven by typical commerce under a Monarchy - only seeking wealth.
Now that the King was dead and France was a Republic, everything had changed.
Now commerce would seek only modest profits, and everything would be well - no longer should the commercial class take advantage of the people - hence prices wouldn’t increase beyond what was allowed according to “The Law of the Maximum”.
Price control then - anyone care to guess how that played out?.
Well if one can’t make profit, then why should one exchange ones items, which have value, for paper money, which is loosing value?
Price control always leads to deficits, and so it did in France.
To circumvent this, tickets were issued that authorized the bearer to receive a certain amount of necessities at the official price - the official price being the price level in 1790 (before the severe inflation and money printing) plus 30%.
Or in other words - the official price was below cost of production for most items, hence producers and farmers were forced to sell at a loss to curb inflation.
Needless to say that this didn’t go down well outside the governments strongholds, and that the “Law of the Maximum” couldn’t be enforced in large parts of France.
Clearly the commercial class was once again being unpatriotic, - and those that were patriotic and followed the law for the benefit of France went bankrupt.
It was thus more or less guaranteed that those merchants/farmers/producers who survived, would be the less patriotic ones who valued self preservation more than allegiance to the government.
To detect goods concealed by farmers and shop keepers, a spy system was established which rewarded informers with one third of the value of hidden goods discovered.
To persuade the commercial class to follow “The Law of the Maximum”, the Criminal Tribunal of Strassburg ordered to destroy the dwelling of anyone found guilty of selling goods above the price of the law.
As Strassburg is now the center of the “world famous” travel circus of the European Parliament 12 times per year, - one could say it’s keeping up its proud traditions of unreasonable demands.
These actions did temporary bring more goods to the market as goods were confiscated from farmers who had held them back.
This confiscation was often done without reimbursing the farmers the official price, so not only did the farmers loose money by bringing products to market - if they didn’t bring products to market they could loose everything through confiscation.
This made it impossible for farmers to grow new crops as they were then completely without finances to do so.
Of course these “niggles” where magnified in the cases where the farmers property was burned in revenge. Not to speak of the cases when farmers were guillotined.
Although a scary punishment in itself, the guillotine couldn’t increase the productivity of a farmer after it had been applied.
Confiscation (after price control removes products from the market) did apparently have its drawbacks.
Nevertheless the same approach was followed by Zimbabwe during their recent hyperinflation - where it was realized that the culprits where the white farmers who were then driven off their farms.
Food production in Zimbabwe collapsed completely - and the country went from the bread basket of Africa to not being able to feed its own people (despite continuing to print money).
Another case of history repeating, no?
THOSE PESKY GOLD BUGS
Despite all the destruction of property, the French government did realize that confiscation was only a temporary fix, and that for the Law of the Maximum to work, and France to prosper, the currency needed to stop depreciating.
This law hadn’t been enough to curb inflation, and other draconic government measures where needed.
The only thing to do was to outlaw transactions in Gold and Silver (and just a few years earlier the difficulty had been in encouraging people to use Silver for small transactions).
It was decreed that selling of Gold or Silver coin should be punished with imprisonment for six years (in iron).
Anyone refusing payment in assignats should pay a fine of 3.000 livres.
If this offense was found repeated a second time, the person should be imprisoned for 20 years (in iron).
Apparently this still didn’t curb inflation, and shortly afterwards it was agreed that the death penalty should be applied for transactions not in assignats - with a reward for those informing such transactions to the authorities.
In Quillebeuf a considerable amount of Gold was found in the possession of a citizen. The Gold was confiscated and send to the National Assembly.
The people of the town considered this Gold hoarding an act of madness, and naturally death was considered the proper penalty for such unpatriotic wickedness.
Gold hoarders beware - the public might not like You when the SHTF.
Gold and Silver at the time were considered enemies of the State, and all transactions in them were suppressed under mentioned terrifying penalties from 1793.
From May 1794 the death penalty was extended to include anyone: “having asked, before a bargain was concluded, in what money payment was to be made”.
So preventive death penalty on anyone suspected of being likely to commit a crime.
At the time the steps in these laws seemed perfectly logical - draconic, but logical.
Any person with some common sense would at this point think that the inflation was due to the continuous increase in the money supply by the printing press.
This is not how it was conceived though.
People only realized that they didn’t have enough money, because prices were going up.
The public didn’t ponder to much about why prices were going up. To most it seemed obvious that the price increases were due the evil commercial class chasing profits, and the mad Gold holders suppressing paper.
In other words - the public only understood that they didn’t have enough money for their expenses, and demanded to get more money.
Tax receipts for the government were at the same time collapsing, due to the fall in commerce - so the government had every insensitive to speed up the printing presses to cover the difference.
Of course France had long exhausted the credibility of backing the assignats with land, and as the printing was now done in secrecy, it was even harder to justify that new issues of assignats would be “sound” money.
France was in a war however, and one has to admire the patriotism of the Treasury. They announced that obviously France would be victorious in the war - and what better way to celebrate the future victory over the allied nations, than to print merrily and back the new assignats with the land that France was sure to conquer, plus the war compensation that the allied nations would be forced to pay France once she was victorious.
Sound money indeed.
To the surprise for the majority of the people of France, the assignats continued to fall in value. Even though people had more money, they could buy less.
No sooner had their demand for more money been met, than they experienced that it wasn’t enough. Still there was a belief that if only everybody had enough money things would be well.
At the end of 1794, the amount of assignats were 7,000 millions - 5 months later that had increased to 10,000 millions or 10 billions.
3 months later in july 1795, 14 billions were in circulation.
No matter how much was printed, it was never enough to keep up with the rising prices.
In august 1795 a gold coin with face value of 25 francs would cost you 920 paper francs (if you survived the exchange without getting your head separated by the guillotine).
Come 1st September, gold price 1200 francs.
1st November, gold price 2600 francs.
1st December, gold price 3050 francs.
1796, February = 7200 francs.
Gold in other words increased 6 times in “value” in 6 months.
Let’s make that into a graph:
To save money in paper was obviously fruitless.
During such circumstances no one felt confidence in the future, and few dared to make business investments for any length of time.
A demoralization of society took place under which thrift, integrity, humanity, and every principle of morality were replaced by increasing chaos and cruelty
Before the end of 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 wealth or land.
Financiers and wealthy people 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 came the great crushing weight of the loss when eventually the assignats became worthless.
THE NEW PAPER
Approximately 50 billion assignats had been printed by February 1796 - roughly 100 times more than the first issue in 1790.
The assignat terror ended on the 18th of February 1796, when it was finally realized where all the inflation came from - it was that pesky machinery.
Consequently the printing machines and copper plates where brought to “Place Vendome” and destroyed in public.
At this time France had made peace with Germany and Spain, and an officer by the name of Napoleon had made a name for himself by successfully invading Italy.
Now that the true cause of the inflation had been realized, France could get back to prosperity - and I kid you not, this was done trough printing paper money.
The new money was called “mandats”.
Surprise, surprise - 6 months after the printing of mandats had started their value had fallen 97%.
The severe penalties for talking dirty about assignats were expanded to cover mandats also - predictably the result was the same as it had been for the assignats.
No matter how many people were guillotined for looking funny at funny money - the joke was on the value that kept depreciating.
On the 14th of February 1797, is was decreed that that the machinery and copper plates for printing mandats should be destroyed.
In April 1797 Austria made peace with France after Napoleon successfully invaded Tyrol.
40.000 EXECUTIONS - and counting
The nation had been plunged into financial ruin and 40.000 people had been executed - of those 16,594 were guillotined.
All these deaths to prop up the value of assignats and to keep goods flowing during price controls.
Was it worth it?
Did it work?
There was a great fear of how the economy would manage now that the printing had stopped, and there was clearly a lack of circulating money.
It turned out that the economy did much better when prosperity came naturally instead of being printed.
As soon as the economy picked up, coins started to flow into the economy again.
The lack of money wasn’t felt, as coins that had been withheld by the public started to come back in circulation as it was wanted.
It took a full 40 years before the level of production and commerce were back to pre-revolutionary levels.
In 1799 Napoleon overthrew the government and became dictator of France.
Apparently Napoleon was clever enough to realize that the financial distress and meaningless executions and falling production, was a result of overissue of paper money.
During Napoleon, France went back to sound money made of metal.
When the Great European Coalition was formed against the French Empire, Napoleon was hard pressed financially and one of his ministers suggested to resort to paper money - to which Napoleon replied:
“While I live, I will never resort to irredeemable paper”.
And he never did.
This was the story of the second hyperinflation in France.
If You decide to learn from History, then learn this:
During crisis Gold and Silver keep their value.
People who are ignorant to events that should be obvious, might hate You for holding Precious Metals when TSHTF.
Governments might try to scapegoat those who have taken precautions to protect themselves against what is an obvious crisis approaching.
Protect Yourself, but don’t gloat about it.
Those who prospered during this chaos were the speculators.
Those responsible for the chaos were the government.
Those who will be blamed for all the misery will be speculators and gold hoarders.
Those who will bear the losses will be the ignorant and the poor.
Quite often after the distress of a hyperinflation, a strong dictator takes control.
Whatever happens in the future has most likely already happened in the past.
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