Hyperinflation History: La Terreur

A while back a reviewer dismissed the idea of a dollar collapse by asking “Collapse against what?” His argument was that the other major currencies are a mess too, so in relative terms the dollar will be fine. This of course misses the point, but in a useful way because it illustrates how words that seem clear to a field’s insiders (in this case gold bugs and other gloom-and-doomers) can be confusing to normal people.

After all, “collapses” do happen all the time. The stock market craters once a decade at least, and oil and houses have seen epic bear markets in just the past couple of years. It’s bad if you own this stuff, but life goes on, so what’s the big deal? And since, as the reviewer said, the dollar is valued in relation to other currencies that also seem shaky, why would it have to collapse at all?

Reasonable questions. Taking the second one first, it’s true that the dollar is quoted in terms of its exchange rate versus the euro, yen, and pound. But its value lies in the amount of stuff it can buy. It is thus possible to for the dollar buy a lot less oil, wheat, and land (that is, to collapse) while maintaining a stable exchange rate, if the euro and yen are falling just as fast.

But the first question is the big one: Is a currency collapse different from oil going from $150 to $40 or the NASDAQ falling by 80%, and if so, how? The answer is that it’s very different, because money is more than just another commodity. It’s the glue that holds a society together. Savers work in order to store value for later in life. In the U.S. their savings take the form of dollars, and the effort they expend today depends in part on how much they expect their dollars to be worth tomorrow. Borrowers, meanwhile, calculate their obligations in currency, and moderate their borrowing based on their sense of how much the currency they’ve promised to pay back in the future will be worth. In other words, all that’s holding them back is fear of having to repay their loans. So when you devalue a currency and you hurt the ants and enbolden the grasshoppers.

Historically — and there’s a lot of history on which to draw — when a country’s currency is trashed, so is its national character. The relationships between work, savings, debt and more generally honesty and fair play, are all perverted when money ceases to function as a store of value.

Governments, meanwhile, can only do their thing if they can pay for it, and as the value of their monetary reserves and tax revenue falls, they go absolutely crazy. Frequently, hyperinflation equals dictatorship.

Because there hasn’t been a full-on, end-of-the-world currency collapse in living (U.S.) memory, most people have no idea how destructive an uncontrolled printing press can be. But it takes just a few real-world examples to make the point. So here — the first in a series — is a brief look at what happened after the French Revolution in 1789, excerpted from the Mises Institute’s Inflation and the F rench Revolution: The Story of a Monetary Catastrophe.

The tale begins with the newly-formed National Assembly wresting power from the French monarchy. Inheriting a financial mess, and worried about invasion from ticked-off neighboring monarchies, it responds as governments tend to do, with a military buildup and massive public spending on bread and buildings. To pay its bills, the Assembly expropriates the lands and estates of the French church and tries to monetize them. But…

It was not long before the Assembly realized that the sale of church lands alone would not be the fiscal bonanza they had envisioned. For one thing, throwing all those properties on the market would diminish their selling price. Second, there was just not enough floating capital (i.e. specie) in France to make large scale purchases. What to do? It was time for “the last remedy” for fiscal insolvency—government fiat paper currency. In March 1790, the Assembly authorized the printing of 400 million livres of paper assignats of denomination of 200, 300, and 1,000 livres, bearing three percent interest, and receivable for taxes and the purchase of the national properties. Supporters argued that the assignats would furnish payments to the state creditors, provide a means for the people to purchase lands and properties, draw specie out of hiding, and stimulate commerce and industry.

Many delegates opposed the measure on economical principles. They argued that the new currency would depreciate, that it would be followed by additional emissions, further depreciation, and that the calamities of John Law’s Mississippi Bubble (1717–20) would be re-enacted across republican France. Their objections and warnings were brushed aside. The enthusiasts essentially argued that economic laws did not apply to France, that she had learned from John Law’s failed experiment never to overdo paper money, that a republican government could more safely inflate than a monarchical one (the precise opposite of the truth), and that the immense landed wealth of France provided solid security. Even though the issue was relatively moderate, the assignats promptly depreciated five, and later seven, percent, as measured against gold.

By late summer, the government was again short of funds, so they naturally turned to a second issue of assignats. However, this time they doubled the dose to 800 million, dropped the interest payment, and made them legal tender for all purchases and debts across France. When the economists again remonstrated, paper advocates replied that the backing of the state would guard against depreciation, that assignats paid into the treasury would be destroyed, and that this would be the last emission.

The consequences of the second issue were just as the unpopular economists had foretold: depreciation in their value, rising prices, feverish speculation, complaints about a shortage of money, calls for more assignats, the prostration of commerce and industry, inordinate consumption, and declining savings. Economic calculation became impossible, but speculation quite profitable (or ruinous).

In June 1791, the Assembly issued another 600 million assignats (the previous promise not to issue more was conveniently and predictably forgotten), and in December an additional 300 million. By the end of the year, its market value had fallen to 66 percent of its face value. In 1792, they issued 600 million more. In April of the same year, they confiscated the estates of the émigrés (those who fled France to avoid being arrested or murdered) and added them to the national properties. Then came 1793—Year One; the year of la Terreur. Having tried inflation and legal coercion, they would try terrorizing the population into accepting the plunging assignat at par, and producing and selling at a patriotic loss.

In March, the National Convention created the Orwellian-named Committee of Public Safety (another unfortunate American precedent), which was a kind of committee of terror, dedicated to expropriating and murdering those deemed to be “traitors” to France or enemies of la Revolution. In May, they passed le Maximum, imposing price ceilings on grain. It worsened the grain shortage. In June, they passed the Forced Loan, a progressive income tax, whose progressivity was progressively lowered to reach more and more citizens. They also passed increasingly draconian and deadly laws designed to force people to accept the assignats at par and forbidding them from exchanging them for anything less than their face value. In July, the Convention repudiated the first issue of interest-bearing assignats.

In August, trading (i.e. buying or selling) specie was prohibited. In September, the Convention passed the General Maximum, extending price ceilings to all foodstuffs, as well as firewood, coal, and other essentials. In that month, despite the deadly coercion, the assignat fell 30 percent against gold. During 1793, the Convention issued 1,200 million assignats; in 1794, 3,000 million. Next came the deluge. In 1795, 33,000 million were printed, and in October, when a new government—the Directory—assumed power, the assignats’ purchasing power had fallen to almost nothing. On the black market, 600 francs of assignats traded for one gold franc.

The Directory was done with the assignat, but it was not done with inflation. In February 1796, it issued a new paper currency, the mandat, and made it exchangeable for assignats at the rate of 30 to 1. By August, after 2,500 million had been issued, the mandat had fallen to three percent of its face value. In 1796, the Directory had had enough, finally, and it withdrew the legal tender character of both the assignat and the mandat. Thereupon, their remaining meager exchangeable value disappeared altogether.

It took Napoleon to restore hard money to France.