paper money and revolutions

The American, French, Russian and Chinese revolutionaries were all strapped for cash. At one time or another they all set about manufacturing some. It would appear, in retrospect, that the prinring press is deadlier than the guillotine or firing squad…

As might be expected, the design by which the French brought paper to the support of revolution was, in all respects, more subtle, ingenious, and logical than that of the Americans. Indeed, the principle was so plausible that there is a sense of disappointment in the discovery that the result was imperfect. But if the experience with the assignats was flawed, the end was still served. After all, there is very little in economics, the “dismal science,” that invokes the supernatural.But by one phenomenon many have been tempted. Why is anything intrinsically so valueless so obviously desirable? This power to command goods, induce cupidity, invite crime and promote avarice surely must entail some metaphysical or magical explanation of the value of paper money is required. Our economic know-alls, the Stiglitz’s, Krugman’s, Roubini’s and other gurus have acquired priestly reputations since they are thought to know why valueless paper and digital currency has any value.

John Stuart Mill made the value of money dependent on its supply in relation to the supply of things available for purchase. The inherent limit on supply was the security that, as money, it would be limited in amount and so retain its value. The same assurance of limited supply held for paper money that was fully convertible into gold and silver. It was the fact of scarcity, not the fact of intrinsic worthlessness, that was important.

The ingenuity of the French assignats lay in the commodity into which they could be exchanged and which by its scarcity gave them value.It was not gold and silver as these were not available in sufficient quantity, for as might be expected, they were principally possessed by those at whom the revolution was directed. Thus they had been secreted or sent or taken abroad. The supporting and restricting asset was land, the very thing the Revolution was in large measure about. Land could not be hidden nor increased in total amount. It was something that those who remained in France were as pleased to possess as gold itself.

The initial resource was the land not of the aristocracy but of the Church. This is estimated to have been about 20 per cent of all the land in France in 1789. At the time no more could be borrowed and there was no central bank to take up loans and provide quantitative easing. Meanwhile, memories of John Law kept Frenchmen acutely suspicious of ordinary paper money. However, a note issue that could be redeemed in actual land was something different. The clerical lands were an endowment by heaven of the Revolution.

The first issue was of 400 million livres, assignats, that were to be redeemed within five years from the sale of an equivalent value of the lands of the Church and the Crown. The first assignats bore interest at 5 per dent; anyone with an appropriate amount could use them directly in exchange for land. This was followed by a new large issue where the interest was eliminated, and later still, smaller denominations were issued.

Of course there were misgivings, though the initial response of the land-based currency was generally favorable. Had it been possible to stop with the original or second issue in 1790, the assignats would be celebrated as a remarkable innovation. Here was a standard based solidly and logically on the good soil of France. Purchasing power stood up well since the assignats had put land into circulation. And business and employment had improved.

However, in France as in America earlier, the demands of revolution were insistent. Although the land was limited, the claims upon it could be increased. The large issue of 1790 was followed by others. Importantly, the supply of assignats was curtailed by the righteous device of repudiating those that had been issued under the king. In these years they retained

ace value of around 50 per cent of their face amount when exchanged for gold and silver.

Soon again, need asserted itself. More and more were printed. In an innovative step in economic warfare, William Pitt, after 1793, allowed the Royalist emigres to manufacture assignats for export to France. This, it was hoped, would hasten the decay.In the end, the French presses were printing one day to supply the needs of the next. France went off the land standard and by 1797, the Directory returned to gold and silver. But by then, the Revolution was an accomplished fact. It had been financed by the assignats. They have at least as good a claim on memory as the guillotine.