Inflation and the French Revolution: The Story of a Monetary Catastrophe
As in so much else, the French revolutionary regime (1789-94) was the precursor of the centralized, totalitarian, managerial, pseudo-democratic despotisms that now reign over the West. It is also reminder that mass democracy and inflation go together, as surely as thunder and lightning. Let us revisit the Revolution, from a free-market, hard-money perspective.
After two centuries, there remains no better analysis of the first two years of the French Revolution than Edmund Burke's Reflections on the Revolution in France (1790). Astute, penetrating, prescient—Burke, an Anglo-Irish MP and a liberal Whig, was of a rare type: both practical statesman and political philosopher. Had the English ministry and his fellow Parliamentarians followed his advice in the 1770s, they would never have driven the Americans to revolt and hence lost their most valuable colonies in the world. Had the French, they would have been spared the Terror, total war, and Napoleon. Burke continues to be accused by clueless academics and ignorant pundits either of inconsistency or deviationism for his very different reactions to the American and French Revolutions.
Burke was both a liberal and a man of the Right. He believed in religious toleration but supported an established church, the Anglican Communion. A friend and admirer of Adam Smith, he defended commercial liberty, but he also believed that civilization depended on the perpetuation of a landed aristocracy with its own separate political representation. While he denied that a king could tax his subjects without their consent, he was a fierce opponent of democracy and universal suffrage. Burke denied that liberty could be achieved by revolution or intellectual endeavor. For him, it was the product of tradition and history, and its victories had to be embodied in institutions.
Did the assignat "save" the Revolution? On the contrary, it helped bring on the Terror and set French progress back a generation.
Burke thought the French Revolution, rather than being a necessary if needlessly bloody hill on the path of progress and freedom, was a catastrophe for
The power of the French king was checked by public opinion, by an independent clergy, and by the parlements of the judicial nobility. The nobility itself was filled with admiration for the mixed constitution of
As Burke noted, the noble cahiers and instructions for their delegates to the Estates General "breathe with the spirit of liberty as warmly, and they recommend reformation as strongly as any other order." Maybe more. The spirit of laissez faire, mixed constitutionalism, and civil libertarianism was stronger in the nobility than among the bourgeoisie, and certainly stronger than among the urban artisans and peasantry.
The political argument in the Estates General in May–June 1789 that led to the outbreak of the Revolution was over voting. The question at issue was whether the three estates should vote by order (the traditional practice) or by head. The monarchy rightly sided with the first two estates on the question, but the Third Estate eventually grew tired of the controversy and declared itself to be the National Assembly, the other two orders be damned. They were only following the logic of their position to its logical conclusion, but they were also fulfilling the visionary and naive expectation of the French masses that the ancient social orders be erased so they could live lives of greater abundance and freedom. Many "conservative" and "liberal" historians have applauded the Third Estate's seizure of power and argued that the Revolution went wrong later with the ascendancy of Robespierre and the Mountain. Burke knew better.
By its arrogant usurpation, the Third Estate expressed its rash "preference for a despotic democracy to a government of reciprocal control." Big mistake, thought Burke. "I cannot help concurring" with the opinion of Aristotle and other ancient critics of democracy, "that an absolute democracy, no more than an absolute monarchy, is [not] to be reckoned among the legitimate forms of government. They think it rather the corruption and degeneracy than the sound constitution of a republic."
Aristotle pointed out that "a democracy has many striking points of resemblance with a tyranny." Burke translates: "Their ethical character is the same; both exercise despotism over the better class of citizens; … the demagogue, too, and the court favorite are not unfrequently the same identical men, and always bear a close analogy; and these have the principal power, each in their respective forms of government, favorites with the absolute monarch, and demagogues with a people such as I have described."
Burke was not so naïve as to believe that
An exasperated Burke wondered why the French seemed to lunge from one extreme of government to another, as if there were no third option. "Have they never heard of a monarchy directed by laws, controlled and balanced by the great hereditary wealth and hereditary dignity of a nation, and both again controlled by a judicious check from the reason and feeling of the people at large acting by a suitable and permanent organ?" Nay, instead of retaining the Estates General as "a permanent assembly in which the commons had their share of power," they thrust total power upon the politically inexperienced and rash masses. Overnight, the whole fabric of the ancient constitutional order of
Was this wise? What check remained on the power of the Assembly, the power of
The Assignat Inflation
The National Assembly that took de facto control of political power in
Meanwhile, the interest and principal was falling due on the national debt. What to do? The logical and just thing was to repudiate the enormous debt incurred by the monarchy. After all, the people of France, voiceless and unrepresented for centuries, had never approved nor sanctioned it; and if the monarchy had been as oppressive and iniquitous as the revolutionaries claimed, then surely the liberated masses should not be burdened with the responsibility of paying its extravagant debts?
Jean Baptiste Say recalled with disgust that "the moment there was any question in the National Assembly of commerce or finances, violent invectives could be heard against the economists."
Well, justice is one thing when one is out of power, and another when one possesses it. The Assembly rejected repudiation because they feared antagonizing the moneylenders of
The Assembly knew that it was politically inconceivable to lay new taxes and expect them to be paid without sending an army into the countryside to shake down the peasants, but who would pay the army? And further borrowing was out of the question until new taxes could be laid. That left one resource—plundering the privileged orders. In November 1789, the Assembly expropriated the vast lands and estates of the French church and declared them to be "national properties." From thenceforth, they would be "at the disposal of the Nation" (meaning the state). Burke observed sardonically that the government, still in its infancy, had grasped at "one of the poorest resources of doting despotism."
Burke angrily rejected the notion that the rights of property applied only to individuals. They also applied to corporate bodies, such as the
Burke denied that the church was a parasitic body attached to the French nation. It was not exempt from all taxes, and it provided essential social services, such as free primary schools, classical academies, hospitals, and orphanages. Although we might prefer a purely private provision, can we doubt that
Burke ranked the confiscation of the church lands, along with a "compulsory paper currency" with which it was linked, as the first layer of the "cement" by which the revolutionary government would rule over a unified and servile
He believed the confiscation served the new government in three ways. First, it all but destroyed a rival social authority that could check its moral and political power. Second, it placated the powerful "monied interest" of
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
The consequences: depreciation, 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.
Many delegates, including Cazales, Bergasse, Maury, Necker, and Nemours, 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
It should be noted that the Assembly was not a total bust when it came to economic freedom. They did abolish the tithe, the corvee, the guilds, and all internal custom barriers. However, they would go no farther, and would soon regress into a kind of hyper mercantilism. Burke writes of their open and contemptuous "defiance of economic principles." Jean Baptiste Say recalled with disgust that "the moment there was any question in the National Assembly of commerce or finances, violent invectives could be heard against the economists." Such is ever the reception accorded men who bear unwelcome or inconvenient truths.
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
(Whenever a government promises not to use a power they wish to exercise, or have just acquired, by way of assuaging the fears of those who anticipate abuse, they are sure to break that promise whenever it becomes convenient or they believe they can get away with it. Only fools or ignoramuses ever trust the word of government officials or politicians.)
Burke finished his Reflections soon after this second emission. As many of the French paper advocates had cited the notes of the Bank of England as a source of English prosperity and proof that paper money was safe, Burke drew an invidious contrast between his country's redeemable bank currency and the French assignats. In contrast to the latter, English bank notes have their "origin in cash actually deposited," are "convertible at pleasure, in an instant and without the slightest loss, into cash again," and not one shilling "is received but of choice." The French inflationists mistakenly assume that "our flourishing state in
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). Burke should get credit for a remarkably accurate and precise prediction. He believed that the rise of prices, consequent to assignat inflation, would render it unprofitable for farmers to take their crops to market. They would stay home and produce only for themselves or for barter with their neighbors. The government would then send troops into the countryside to confiscate grain and other foodstuffs. It happened exactly as he foretold.
The revolutionary government first decided to cure the evils generated by inflation with more inflation. Instead of destroying assignats received for the national properties, they reissued them in the form of smaller notes. In June 1791, they 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
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 to 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