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Going the Way of France (1790)

Mises Daily: Thursday, December 11, 2008 by

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French assignat, 1795

First printed in 1896 and as unfortunately pertinent today as it was then, Dr. Andrew Dickson White's Fiat Money Inflation in France chronicles the national suicide of an imposing empire that choked to death on one of mankind's more foolish delusions — the stubborn belief that money does grow on trees. Dr. White's style makes the book an easy read, even during the frightening parts that sound as if lifted directly from today's newspapers.

Weighing in at a light sixty-eight pages, the book nonetheless packs a wallop. It is well-researched and — most surprising for a history book — full of laugh-out-loud moments. One-hundred-plus years have done nothing to diminish the effect of Dr. White's prose.[1] Only in the author's method of referring to the numbers involved — numbers that then seemed so fantastic yet are commonplace today — does the book show any signs of dating. This leads you to read, for example, "twenty eight hundred millions" instead of $2.8 billion — billions likely being beyond the thought process of the people of his time.

Not beyond ours, though; we're up to a trillion.

File Under "Idea, Not a Good One"

The issue of paper will show that gold is not necessary.

–Mirabeau, French politician (1790)

Wisdom comes and goes; lessons are learned hard then hardly remembered. Mankind's endless stupidity on the subject of paper money surely ranks up there in the realm of the sublime. We are forever like Charlie Brown, trying and trying to kick Lucy's football. Generation follows generation, each refusing to learn one of life's more important lessons — nobody must be allowed license to counterfeit. Fiat Money Inflation in France uses as its lesson plan the tragedy of France in the 1790s and Dr. White moves the tale along at a steady clip.

His prose is pointed but polite, and makes no bones about giving credit where credit is due. On the plus side of the ledger, he notes that France was not plunged into a decade-long economic pit by wild-eyed fools, but rather by calm, well-educated ones. The smartest guys in the room whose ideas brought about the tragedy "were universally recognized as among the most skillful and honest financiers in Europe" (p. 47).

Because France in 1789 was in an economic downturn, the idea that the difficulties were due to a lack of money — and that more of it would be nice — caught the imagination of many people. France boasted its own Bernankes, Paulsons, and Greenspans, and when not misthinking, they were off making the rounds of Parisian salons, talking peoples' ears off about how fiat money, despite its disastrous history, could work if only done better — and better is what they intended.

"France was not plunged into a decade-long economic pit by wild-eyed fools, but rather by calm, well-educated ones."

Fiat money, declared the experts, was a means of "securing resources without paying interest" (p. 2). The idea promised that from nothing there would be something — or, as Keynes would later put it, from stone there shall be bread. Nobody was thinking this one through.

Soon the doctrine wormed into the ears of the French politicians who, upon having it explained to them that the plan called for them to print money whenever they wanted, were quickly convinced the whole thing was a splendid idea.

France in 1790 was on a gold standard, with the livre being the unit of measure, but the government would now issue paper money, too. It was to be backed not by gold but by church land stolen specifically for the purpose, and under the authority of The Will of the People. While France had just experienced a harsh lesson in paper money not too long before the coming madness — with John Law's 1720 paper-money schemes — members of the French central government insisted that John Law's paper notes did in fact bring prosperity, "and the ruin they caused resulted from their over-issue, and that such an over-issue is possible only under a despotism" (p. 4).

"We don't live under a despotism!" everyone agreed, and promptly voted to issue $400 million livres' worth of paper money, backed by the stolen church land and paying interest to the holder at three percent annually. Not five months later, $800 million more were printed, the notes not bearing any interest at all. With the currency now nice and elastic (before it all collapsed in 1796), the French politicians were madly printing money in secret, running the printing-press workers at a very un-French-like fourteen hours per day.[2] In less than six years, the French politicians printed over $45 billion in irredeemable paper — and that was when $45 billion was a lot of money.

Those few goldbugs who always doubted the soundness of fiat money — paper currency without a metal anchor — have in large measure been vindicated. But why were the rest of us so blinded by money illusion?
Niall Ferguson (2008)

It is where Dr. White outlines the effects of all this inflation on France that the book reads like today's paper. Prices rose as the value of the currency endlessly fell; savings dwindled while debt loads rose; a spirit of gambling took hold, and bribery flourished. I just Googled those terms plus "America," and we're four for four.

Dr. White created the book from a series of lectures given during his time at Cornell University and the University of Michigan. Judging by how the book reads, he must have been quite the speaker. Describing Mirabeau's impassioned 1790 speech in support of paper, he writes of its oratorical beauty, of how it was frequently interrupted by applause, yet how listening to the opinion of a man who never studied the subject he's yammering about (Mirabeau knew nothing of economics) "was like summoning a prize fighter to mend a watch" (p. 18).

And that went for the rest of the French Assembly, too, bursting with plans to "fix" the economy but full of "men who had never shown any ability to make or increase fortunes for themselves (yet) abounded in brilliant plans for creating and increasing wealth for the country at large" (p. 17). They soon would fall back to the politician's more natural road to wealth, as their newly found power to dispense endlessly available money made them obvious candidates to bribe for legislative favors. Dr. White tries to see the bright side by writing "it is some comfort to know that nearly all concerned were guillotined for it" (p. 30).

What is best about the book is that it is, at its base, a plea for the poor — an appeal to grant them the protection afforded by gold. Dr. White shows a progressive mind in his concern for the less fortunate, always the ultimate victim of inflation, which "creates on the ruins of the prosperity of all men of meager means a class of debauched speculators, the most injurious class that a nation can harbor" (p. 5).

Don't we know it.

No, Virginia, Money Does Not Grow On Trees

On whom did this vast depreciation mainly fall at last? Men of small means.

–Andrew Dickson White (1896)

Using the French monetary collapse of 1796 as a lesson to teach a greater point — to warn against fiat currency — the book is unabashedly supportive of a gold standard. At the time of its publication in 1896 this position was not only respected; it was mainstream — proponents of paper money were the kooks. Now the shoe is firmly on the other foot: polite people do not talk about a gold standard. Maybe they should start.

The purpose of a gold standard — what makes it so indispensable to a system of economic justice — is that it takes the power to create money and credit at will out of the politicians' hands — in fact, out of anyone's hands. No man, no matter how virtuous and saintly, can long resist the call of the money machine; and the political world, where virtue and saints are always in meager supply, is a particularly dangerous place for it to reside.

The removal of the gold standard from our lives, Robert Samuelson recently noted, has "created an entirely new situation…inflation would no longer control itself." With Nixon's repudiation of the US dollar's remaining link to gold in 1971, we've all taken a time machine back to 1790s France, and so far it's been a less-than-excellent adventure.[3]

"Polite people do not talk about a gold standard. Maybe they should start."

We have substituted for the steady, disinterested hand of gold the arbitrary, rapacious vagaries of the politician; yet we wonder why prices do nothing but float upward, year after year, until grandma is eating cat food. Whenever and wherever paper money has been introduced, from France in the 1790s to America in 2008, a steadily debased currency and a steadily debased economy have followed, as "there is a natural law of rapidly increasing emissions and depreciation" (p. 21).

Inflation as a deliberate policy is fit for nobody but street junkies; it is a method of short-term, artificial pleasure at the certain cost of long-term pain. But "long term" is a misleading, soothing term meant to calm nerves. The "long term" always inevitably morphs into "right now," and towards the foolish he's a vicious bastard. A glance at America's money-supply growth since 1971 — and since the Federal Reserve's creation in 1913, for that matter — gives notice that many have been fools.

The French of the late 1790s, like so many people in so many times, believed in "the doctrine that all currency…derives its efficiency from the stamp it bears" (p. 22), and therefore we can print as much of that currency as we please. Dr. White identifies that flawed doctrine as the root cause of the disaster.

In France during 1790 to 1796 the economic dislocations gained steam as the currency dove towards zero, leading politicians to pass a desperate intervention, followed in time by another even more desperate; and soon Marat, one of the most powerful men in French politics, was openly calling for the people to murder the shopkeepers and plunder their inventory. (That was his economic stimulus package.) The price inflation rent the fabric of French civilization; just the attempt alone to enforce price controls had the guillotines chopping steadily.

As much as the French of the 1790s, we too wished to be "delivered by this grand means from all uncertainty and from all ruinous results of the credit system" (p. 8), and now, also like the 1790s French, we have discovered that where "commerce was dead; betting took its place" (p. 27). We too sat at dinner parties and prattled on about how our hedge fund — the one we told you all to invest in — is up 46% year to date; and now we find ourselves staring at an empty 401(k) with the same dumbfounded "what happened?" look on our face.

What is amazing about America circa 2008 is not the citizens' money illusion — history has seen that aplenty — but the utter lack of resistance to it. From near to far, from MTV to CNBC to cocktail parties, the doctrine of fiat money is so pervasive that the thought of life without it is beyond our comprehension. Maybe it shouldn't be.

Niall Ferguson recently asked why the West was so "blinded by money illusion." He asks the question as if we're over the illusion, as if we now see paper money for what it is. We don't. We, like the French of 1795, still blame "every cause except the right one" for our troubles.

On a Paris morning in February 1796, with great melancholy all the apparatus for printing paper money was "solemnly broken and burned" in that city's Place Vendome (p. 53). It took the French six years to figure it out; it's taken us 37 and counting.

Dr. White's excellent book can move us a step closer to "solemnly" breaking and burning the root of our problem. Even if it doesn't, Fiat Money Inflation in France is still a great read.

Notes

[1] Case in point: "All that saved thousands of laborers in France from starvation was that they were drafted off into the army and sent to be killed on foreign battlefields."

[2] Being French, they of course went on strike.

[3] My mother-in-law now lives with me. Her savings have been depleted by the dollar’s steady debasement. Thank you, Mr. Greenspan. You’re the best.