Customer Reviews

Fiat Money Inflation in France: How It Came, What It Brought, and How It Ended

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As a slice of financial history this is entertainingly written, and worryingly relevant today. (The complete beginner in economics would best read Professor Thomas Sowell's `Basic Economics' before this.) This Dodo edition is adequate as an interested layman's read, but I would not recommend it for professional or research use. Errors in the typesetting of the text are clearly from an OCR scan of an old text. Proofreading was omitted, although it may have been given a cursory once-over with a spell checker, or maybe not. For this reason I give four stars, not five. The errors are generally easily spotted and the correct word guessed (`Prance' on page 33, can only be `France'), but sometimes the statistics appear to contradict the text (on page 45, in a period of extreme inflation `A cartload of wood' supposedly went down in price from $500 to $250 - in dollar equivalent prices of around 1912 - I suspect a zero is missing from the $250).

CHAPTER 1
France, 1789. The national debt is severe. The Terror, aka the French Revolution, is in the air. France is on the gold standard, one `Louis d'or' is worth 25 francs. `Irredeemable' paper money not backed by the right to redeem at the bank in gold equivalent has a bad reputation as a scheming Scots banker named John Law had caused financial ruination in France with paper money in 1720.

[At this point a definition of inflation is required. Professor White assumes too much for the casual reader of today. Inflation is not merely the general increase in prices - if prices double and your wages double you are no worse off. But if prices treble and your wages double you are much worse off. That is caused by government expansion of money supply by printing irredeemable paper money, backed by legal tender laws forcing you to use official `money', economists call it `fiat money'. Of course the point of it is, that it costs almost nothing to print the money and the *government* can spend it before it gets into circulation - but workers still have to work for their cash, whether wages go up or not. In France at this time, the wages of the poorest did not go up, as so many businesses went to the wall there was an excess of labour supply. Supply-demand-price law.]

Issue of very large denomination paper money called `assignats' suggested, redeemable against church lands and properties recently `confiscated' (legal stealing, not all laws are good and right then...) by the French state, and later against the confiscated lands of those aristocracy and landed folk who fled France. The notes are a form of bond, bearing 3% interest. Real estate, not gold will back the paper. The paper will not normally be directly usable as currency, but will stimulate business and clear government debt. There will be strict limits on the issue of paper. Assignats that are exercised and changed for land will be destroyed and not be re-issued - so they say.

M. Necker, Minister of Finance, is against issue of paper money, as are Cazales, Maury, Talleyrand, and many others who remember previous inflationary fiascos. Matrineau, de la Rochefoucauld, and many others are for it. They say the virtual mortgage is sound money. And so the first issue in April 1790 is indeed sound money. But it is so easy to do it, that the excess issue of unbacked and non-interest bearing assignats is the drug the government cannot resist. Money supply increases without corresponding proportionate increase in goods and services, paper money drives gold and silver out of circulation as people hoard it [Gresham's Law - bad money drives out good]. Rampant inflation takes off, people starve, businesses are ruined, the lying politicians blame greedy shopkeepers who are robbed, fined, imprisoned, and executed for raising their prices. By May 1791 France is showing all the classical signs of disorder due to extreme inflation.

CHAPTER 2
In December 1791 a new issue of assignats is ordered, already greatly in excess of the original guaranteed limits. By February 1792 money is worth about half of what it was in April 1790. Claviere is now minister of finance and he promotes assignats. Occasionally the value of the currency rises as France wins territory in its wars, but falls back as paper money inflation continues. In September 1793 legal price control is brought in, in defiance of the above laws of economics. It fails. People are urged to spy for personal gain on those who are undermining the absurd money laws. Fines, imprisonment, and the guillotine are used to scare people, all to no avail. In 1793 government bonds bearing 5% interest are offered for assignats to reduce money supply, to no avail. Currency controls and fixed exchange rates imposed, to no avail. 1794 harvest is abundant but food is scarce in autumn, and winter brings distress as price control hurts the farmers. In February 1796 the printing presses, plates, and paper for assignats are publicly broken and burned. A gold `Louis' worth $25 francs face value, but exchanges for 15,000 francs paper money. Church bells are stolen and melted to mint small change.

CHAPTER 3
Madness restarts February 1796 as new paper `mandats' replace the assignats. By August they have devalued by 97%. May 1797 mandats and assignats are virtually worthless and abandoned. Gold and silver begin to spontaneously reappear in use. Unemployment falls. The government is bankrupt. Napoleon Bonaparte rises to power and vows to never use irredeemable paper money [parallels rise of Hitler]. It takes forty years for the economy to recover.

The infamous hyperinflation of 1920s Germany was the same scenario. Currently it is Zimbabwe's turn. Who's next?