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Wednesday, April 17, 2013

Reading List: Fiat Money Inflation in France

White, Andrew Dickson. Fiat Money Inflation in France. Bayonne, NJ: Blackbird Books, [1876, 1896, 1912, 1914] 2011. ISBN 978-1-61053-004-0.
One of the most sure ways to destroy the economy, wealth, and morals of a society is monetary inflation: an inexorable and accelerating increase in the supply of money, which inevitably (if not always immediately) leads to ever-rising prices, collapse in saving and productive investment, and pauperisation of the working classes in favour of speculators and those with connections to the regime issuing the money.

In ancient times, debasement of the currency was accomplished by clipping coins or reducing their content of precious metal. Ever since Marco Polo returned from China with news of the tremendous innovation of paper money, unbacked paper currency (or fiat money) has been the vehicle of choice for states to loot their productive and thrifty citizens.

Between 1789 and 1796, a period encompassing the French Revolution, the French National Assembly issued assignats, paper putatively backed by the value of public lands seized from the Roman Catholic Church in the revolution. Assignats could theoretically be used to purchase these lands, and initially paid interest—they were thus a hybrid between a currency and a bond. The initial issue revived the French economy and rescued the state from bankruptcy but, as always happens, was followed by a second, third, and then a multitude of subsequent issues totally decoupled from the value of the land which was supposed to back them. This sparked an inflationary and eventually hyperinflationary spiral with savers wiped out, manufacturing and commerce grinding to a halt (due to uncertainty, inability to invest, and supply shortages) which caused wages to stagnate even as prices were running away to the upside, an enormous transfer of wealth from the general citizenry to speculators and well-connected bankers, and rampant corruption within the political class. The sequelæ of monetary debasement all played out as they always have and always will: wage and price controls, shortages, rationing, a rush to convert paper money into tangible assets as quickly as possible, capital and foreign exchange controls, prohibition on the ownership of precious metals and their confiscation, and a one-off “wealth tax” until the second, and the third, and so on. Then there was the inevitable replacement of the discredited assignats with a new paper currency, the mandats, which rapidly blew up. Then came Napoleon, who restored precious metal currency; hyperinflation so often ends up with a dictator in power.

What is remarkable about this episode is that it happened in a country which had experienced the disastrous John Law paper money bubble in 1716–1718, within the living memory of some in the assignat era and certainly in the minds of the geniuses who decided to try paper money again because “this time is different”. When it comes to paper money, this time is never different.

This short book (or long pamphlet—the 1896 edition is just 92 pages) was originally written in 1876 by the author, a president of Cornell University, as a cautionary tale against advocates of paper money and free silver in the United States. It was subsequently revised and republished on each occasion the U.S. veered further toward unbacked or “elastic” paper money. It remains one of the most straightforward accounts of a hyperinflationary episode ever written, with extensive citations of original sources. For a more detailed account of the Weimar Republic inflation in 1920s Germany, see When Money Dies (May 2011); although the circumstances were very different, the similarities will be apparent, confirming that the laws of economics manifest here are natural laws just as much as gravitation and electromagnetism, and ignoring them never ends well.

If you are looking for a Kindle edition of this book, be sure to download a free sample of the book before purchasing. As the original editions of this work are in the public domain, anybody is free to produce an electronic edition, and there are some hideous ones available; look before you buy.

Posted at April 17, 2013 22:05