French Experiments with Paper Money – Part 3
“Those who can not remember the past are condemned to repeat it.”
By: Pierre Driessen
The Revolutionary government, having assumed the debts of the previous regime, found itself in dire financial straits. In addition to this fiscal burden, domestically it faced a deteriorating economy, shortages of food and other basics, falling tax revenues, factionalism, political unrest and in certain regions civil war.
France confronted invasion from outside and her colonies and their commerce were threatened. Bottom line, government credit had dried-up and specie had all but disappeared from circulation. A solution to the problems was desperately sought and hotly debated.
As we have seen in part 2, the introduction of the assignat by the French Revolutionary government was an uneasy compromise between the parties – those wishing to keep France faithful to monetary principles and those which saw paper money as the panacea for the Revolutionary government’s fiscal and France’s economic troubles.
Paper money proponents, such as the eminent de la Rochefoucault, while acknowledging John Law’s disaster, argued: “Paper money under despotism is dangerous; it favors corruption; but in a nation constitutionally governed, which itself takes care in the emission of its notes, which determines their number and use, that danger no longer exists.” Paper money opponents, such as Necker and du Pont de Nemours (of explosives fame), warned that the John Law fiasco would repeat itself. Their arguments against paper money: 1) how easy it is to issue, 2) how difﬁcult it is to check against over-issuance, 3) how it absorbs the means of working people and those of small means, 4) how ruinous it is for those on ﬁxed incomes, salaries and wages, 5) how it encourages speculation, 6) how it stimulates over production and then guts industries, 7) how it destroys thrift, 8) how this bad money will drive-out good money and 9) how it encourages political and social immorality, fell on deaf ears.
The government’s immediate financial and political needs proved too great. In April 1790 the first issue of 400 million livres in paper money was decreed. It was secured or assigned, hence the name assignat, upon the confiscated real property of the Gallic Church. This property represented valued at 2 billion livres. The government, in one move, tried to alleviate its fiscal problems and politically bind the thrifty middle-class to itself and the Revolution, by selling them title to these lands.
Unlike John Law’s plain and rather utilitarian paper money, to make them appealing, assignats were beautifully engraved. To stir public sentiment, patriotic designs, legends and imagery were used. To instill confidence, a profusion of serial numbers, stamps, watermarks and signatures were used.
a small 50 sols (cent) denomination assignat issued under the decree of 23 May 1793. Note the quality of printing and beauty of design. It dispensed with patriotic phrases and instead gives warning of death to counterfeiters and advertises that the nation will reward denouncers. To try and foil counterfeiters, watermarks and embossed seals were used.
There was general relief, trade increased, credit reappeared, a portion of the public debt was paid and government expenses were met. Opponents appeared to have been proven wrong. In reality nothing had fundamentally changed, by September 1790 the government, having spend all, found itself again in financial distress.6 There came a general outcry for another issue of assignats. The debate was fierce, but the eloquence of proponents such as Mirabeau and government expediency won out. The success of the first issue was used as justification. On 29 September 1790, in a vote of 508 to 423, the second issue, in the amount of 800 million livres, was approved. Assurances were given to limit further issues and assignats which were paid back into the treasury were to be destroyed. The new assignats did not pay interest.
One immediate result of all this new money was, as opponents had foretold in point 8, the disappearance of small silver and copper coins from circulation. To deal with this shortage, people simply made hand written notes, know as “confidence bills”. These began to flood France, 63 different kinds in Paris alone.
Local governments also took matters into their own hands and began to issue small denomination assignats. The local issues and the “confidence bills” caused confusion, were open to fraud and undermined central government authority. The response was to re-issue assignats returned to the treasury as small denomination notes, instead of destroying them as was required by law and previously promised.
Other measures were taken to alleviate the shortage of specie: patriotic drives for silverware and jewelry (Louis XVI donated his silver and gold plate); churches and religious houses were required to relinquish all vessels not essential for worship and church bells were melted down. To no avail, silver and copper continued to disappear. It became increasingly necessary to issue assignats in ever smaller denominations, the smallest ultimately being a one-quarter sou (1/4 cent) note. There were numerous subsequent and ever increasing issues, and by January 1793 almost 3 billion francs in assignats were in circulation. This had increased to 7 billion by the end of 1794, to 10 billion by May 1795 and to 14 billion by July of that year. When on 18 February 1796, the printing plates were publicly destroyed, a total of 40 billion francs in assignats were in circulation.
The result of these issues, which put ever more in circulation, was price inflation and assignat devaluation. Initially this inflation was seen as an increase in the nation’s prosperity. Domestically, the increased money supply stimulated demand and internationally the devaluing assignats made French goods very cheap. Manufacturers struggled to expand and meet demand. Demand for labour increased and wages rose. Merchants also thought to beneﬁt and simply raised their prices.
With each new assignat issue, inflation increased, prices of daily staples – such as bread, soap, sugar and firewood – and imports began to outpace the rise in wages. Demand for everything, but especially manufactured goods began to wane. This decrease in demand hit manufacturers doubly hard, as their increased production capacity had begun to saturate the market with goods, yet their costs of raw materials continued to climb.
this 25 livres assignat, kindly given to the author by fellow ENS member Marc Bink, was issued under the decree of 6 June 1793, this larger denomination note still bears patriotic imagery
Individuals started to withdraw capital from business, as the future real purchasing power of assignats became more and more uncertain. This caused commerce to grind to a virtual halt.
Factories and businesses closed, unemployment soared and wages began to fall. In the summer of 1792, labourer’s wages had fallen back to 1789 levels, at 15 sous per day, despite the rampant price inflation and assignat devaluation. For example, the price of a measure of ﬂour rose from 2 francs in 1790 to 225 francs in 1795. What saved a great many laborers from starvation was enlistment in the Republican armies, to then be sent to fight and die on foreign battlefields.
Speculation, especially in stocks and other get rich-quick-schemes, began to replace legitimate commerce, industry and work. Many people, especially from the countryside, were ruined by unscrupulous investment scheme promoters. As a result of the easy money to be made from government contracts, political and administrative corruption became epidemic.
Saving and thrift disappeared as a result of the uncertain value of assignats; it was more prudent to spend than to hold. A large number of French citizens became indebted as a direct consequence of the government’s program to sell confiscated Church lands on credit. These debtors had a direct interest in assignat depreciation, as payment for these lands could only be made in assignats.
In short, there was a general breakdown of public morality, spirit, industry and goodwill. The climate thus created was one of uncertainty about the present, let alone the future. Self-interest came to dominate most peoples actions. This atmosphere, which was the opposite of what the Revolutionary government had envisioned, and various groups such as debtors and speculators, inadvertently created by the government’s actions, threatened to undermine the very Revolution that assignats were supposed to save. Reality and human nature had triumphed over the idealism of 1789.
The Revolutionary government tried many innovative and draconian measures to stabilise its paper money. Propaganda and appeals to patriotism were two methods. Scapegoats were invented, with note: Bourbon conspirators, English agents and money grubbing unpatriotic merchants.
The heavy hand of the law was also employed. Preferring specie over assignats was punished with imprisoned in irons for 6 years; refusing assignats in payment or accepting them at a discount – 1st offense 3,000 franc fine, 2nd 6,000 franc fine and 20 years in irons. By the law of 18 September 1793 the penalties for these offenses became death. This was carried to the extreme when in May 1794 it was decreed that any person convicted of “having asked, before a bargain was concluded, in what money payment was to be made” would face the death penalty. Other measures included making foreign investment by Frenchmen punishable by death, levying very high import duties and legislating gold, silver and assignat convertibility ratios. In August 1793, all property of Frenchmen who had left France after 14 July 1789 and not returned was confiscated.
Then came the Forced Loan of 22 June 1793. Levied on all married men with incomes of 10,000 francs and unmarried men with incomes of 6,000 francs. The income threshold was quickly lowered to 1,000, as less than 20% of the expected revenue was raised. Next on 31 July 1793 came the repudiation of the early assignat issues, 558 million francs worth, bearing Louis XVI’s image. Finally in desperation on 29 September 1793, the Law of the Maximum was passed. Its aim was to control the prices of necessities by setting them at 133% of 1790 levels, with fixed charges for transport distances and a 5% proﬁt for wholesalers and 10% for merchants. It proved popular with the populace. For shopkeepers and manufacturers it was ruinous, they simply could not sell below their costs and many went out of business. Farmers refused to bring their goods to market or simply planted less. Many of those found selling for prices higher than allowed by law were condemned to the guillotine. Evasion, smuggling, shortages, rising prices and rationing were the result.
All government actions were to no avail. The depreciation of assignats and price inflation was actually exacerbated through these measures. By early 1796 assignat values had collapsed to less than 1% of their face value. At the end, 1 franc in gold was nominally worth 600 francs in paper. The government abandoned the assignat and replaced it with the mandat at a ratio of 1 for 30.
Many of the same measures were tried to force the mandat’s acceptance, but even before they came off the presses, their value fell to 35% of face and by January 1797 to 3%. Finally on 14 February 1797 assignats and mandats were declared no longer legal tender. As a result of this, specie began to gradually come back into circulation and as exports revived, specie from abroad flowed in. The government however was bankrupt, its credit non-existent and taxation impossible. The middle class was wiped-out. For example, a hardware manufacturer who retired with 321,000 livres in savings in 1790 had only 14,000 francs left in 1796. The only beneficiaries were a small group of speculators, who build fabulous fortunes.
To save France, a strong man was needed. The one who emerged was Napoleon Bonaparte. During his first cabinet meeting as consul, when asked how he intended to pay for government expenditures, Napoleon replied: “I will pay cash or pay nothing.” The plunder from military victories and indemnities levied upon conquered states replenished French specie reserves. In 1800 Napoleon established the Banque de France, which functioned as a central bank, giving direction and stability to France’s state finances.
However, it took more then 40 years for French industry, commerce, capital and credit to recover to pre-1789 levels. In light of the present global financial and economic situation let us all hope that bureaucrats and politicians remember their history and draw the proper lessons from it. That they do not succumb to the temptation of the printing press and try to inﬂate their way out of this distress by printing ever larger amounts of money and making credit too cheap. This author does not hold out much hope, as central bankers such as Alan Greenspan have shown, the temptation is great for mere mortals. Lets pray we are not condemned to a repeat of the French experience.
Previously published in the ENS “The Planchet” Magazine Vol-56 Issue-06