Voluntary Society - Conditioning - Federal Reserve

Voices from the French Revolution by John A. Pugsley

Hegel, the renowned philosopher, wrote in his book "The Philosophy of History" back in 1832 that "what experience and history teach is this — people and governments never have learned anything from history, or acted on principles deduced from it."

That unfortunate truth is why the story you are about to hear is so important, for it is the story of your future.

As we begin the 1990's, the nation appears to be on the brink of an economic abyss. Recession is enveloping the nation's economy. Inflation is rising. Stock, bond and real estate prices are falling. Business and consumer debt are at an all-time high, and defaults are rising ominously. Our financial system is weak and in imminent danger. Hundreds of banks, savings & loans, and insurance companies are failing each year, and hundreds more are on the verge of collapse.

Meanwhile, our politicians pontificate, point fingers, hurl accusations at one another, but ultimately stand together on the fundamental issues. They call for lower interest rates, monetary easing. They push forward an ever-growing list of government regulations and programs. While they pretend to be appalled by government spending, under their votes it rises steadily, year after year, decade after decade. As a consequence, we suffer higher and higher taxes and an expanding torrent of government debt.

Your goal is economic survival. To achieve this, you must either be extremely lucky, or you must correctly anticipate the future, and steer your business and investment plans accordingly. Your challenge is to make sense out of a deluge of conflicting information and opinion.

This is why you should pay particular attention to the events that occurred two centuries ago in revolutionary France.

My introduction to the economic events surrounding the French Revolution came through a small book by an American diplomat, professor and college president named Andrew Dickson White. A man of eclectic knowledge and interests, he was, among other things, a student of history, and particularly of the history of the period surrounding the French Revolution.

In the mid-1890s, White became increasingly concerned for the economic future of the United States. Political pressure was mounting in the country for the expansion of the money supply as a means of stimulating economic growth. To show the fallacy of such a course, White prepared a paper, which he read to a group of Senators and Representatives in Washington.

Subsequently published under the title "Paper-Money Inflation in France," White's trenchant paper has been reprinted numerous times, and is still available as a small book entitled "Fiat-Money Inflation in France."

The work described in detail the political, economic, and monetary events that occurred in France during the 1790s; events that culminated in one of history's most infamous economic upheavals: the Great hyperinflation of the French Revolution.Let me share with you a few of the more pertinent details.

When the Revolution began in 1789, the economy of France was in serious depression. The year before, in 1788, a severe drought hit the agricultural areas of the continent. Then, in the fall, a hailstorm, raging from Normandy to Champagne, destroyed or severely damaged crops along 180 miles of usually fertile terrain. As though this was not sufficient, the winter of 1788-89 was the most severe in the century, only to be followed in the spring of 1789 by disastrous floods. By summer famine threatened every province.

The French government found itself in an impossible situation.The monetary unit of the time was the French franc, which was convertible into specific weights of gold and silver. Both gold and silver coins, denominated in francs, circulated as the medium of exchange.

The government was broke, and deeply in debt.

On the one hand, it was faced with a rising public clamor for action to alleviate the economic distress of the nation. On the other hand it was without resources.

The famine conditions had inflamed public anger, and a general tax revolt ensued. Taxes became impossible to collect. Yet the only other source of revenue — borrowing, seemed impossible. Since the government had been unable to meet its prior debt obligations, its credit had been destroyed. Unable to create gold or silver out of thin air, the government found itself in a state of economic paralysis.

Some members of the French National Assembly argued that the problems facing business were the result of a lack of money. After all, it was evident that no one had enough. Sales were down, business was stagnant, and the economy was moribund. It seemed to follow that the financial woes of the country could be alleviated if only there was more money in the hands of the people. Money would encourage people to spend; spending would encourage both investment and production. Increased production would mean taxes could be collected again, and this, in turn, would solve the mounting debts of the government.

A plan was proposed in the Assembly whereby the government would stimulate the economy by the issuance of a new government monetary instrument to be called the "Assignat." The Assignat, which literally translated means "assignment," was essentially a government IOU, denominated in francs. Since the government had no gold or silver with which to back this new issue, it was to be backed by government land; specifically, the lands that had been confiscated from the church. Assignats were interest-bearing government securities. As they were backed with state lands, they could be used, if the bearer so chose, to make down payments in the purchase of property. But as the more astute knew at the time, the issuance of paper IOUs was, in reality, simply an issue of irredeemable paper money.

Not all members of the French Assembly were in favor of a scheme to solve France's economic problems through expansion of the money supply, as memories lingered of a period some seventy years earlier when the money creation schemes of John Law had brought France to hyperinflation and financial ruin.

As Andrew Dickson White put it, "In John Law's day, the French had learned how easy it is to issue paper currency; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meagre means a class of debauched speculators, the most injurious class that a nation can harbor… how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality."

One French legislator, the famous orator and revolutionist Mirabeau, spoke of paper money as "A nursery of tyranny, corruptions and delusion; a veritable debauch of authority in delirium." He called the issue of such notes "a loan to an armed robber," and said of it: "that infamous word, paper money, ought to be banished from our language."

Mirabeau was not alone. One anonymous pamphlet read before the Assembly clearly defined the specific dangers of paper money: "increasing the quantity of money or substitutes for money in a nation increases prices, disturbs values, alarms capital, diminishes legitimate enterprise, and so decreases the demand both for products and for labor; the only people to be helped by it are the rich who have large debts to pay." It was signed merely "A Friend of the People" but after it was read, none other than Du Pont de Nemours claimed authorship.

In spite of these warnings, the popular support for a painless answer to the business slump was overwhelming. In April, 1790, the Assembly decreed that the state would sell four hundred million livres — the livre being the equivalent value of one pound of silver — in paper notes, in the form of Assignats bearing interest at the rate of three percent per annum.

To explain the advantages of the new currency, the Assembly issued an address to the French people. In this address it spoke of the nation as "delivered by this grand means from all uncertainty and from all ruinous result of the credit system." It predicted that this issue "would bring back into the public treasury, into commerce, and into all branches of industry strength, abundance and prosperity."

To quell the cries of the opposition that this would open Pandora's box, and start an endless chain of paper currency issues, the Assembly agreed that the issue would be limited to 400 million livres, and that would be the end of it. No more could be issued. After all, all they needed to do was prime the pump. Once business and commerce revived, it would run on its own.

What happened? The first result of the issue was exactly what its proponents promised. The pressure was off the treasury; a portion of the public debt was paid; creditors were encouraged and were willing to extend new credit; ordinary expenses were met, and, since a large quantity of the new paper money found its way into the hands of the consumers and businesses, trade increased. All in all, the economic difficulties of the country seemed to vanish.

The euphoria was brief. Within five months after the issue the government had spent the money, and although there had been a brief business resurgence, the economy quickly turned into the doldrums, and then into recession. Both the business sector and the government were again in trouble. It was only natural that the same Assembly quickly turned again to the panacea: further issues of Assignats. And again they promised that this would be the last. They would raise the limit just this one more time.

The Assembly duly declared that the total issue could never exceed some amount slightly above the current issue. Limitation after limitation was set.

The issues of irredeemable government IOUs followed one after another, and while each issue seemed to temporarily alleviate the problems, the periods of relief became shorter and shorter. As paper money increased in quantity, prosperity steadily diminished, and as new issues of Assignats occurred, the depreciation in the purchasing power of the Assignats accelerated.

The first issue of 400 million Assignats occurred in April, 1790. By the end of 1794, less than five years later, seven billion were in circulation. By the end of May, 1795, five months later, circulation was increased to 10 billion; at the end of July, just one month later, it jumped to 14 billion.

Meanwhile, the value of the paper currency relative to gold and silver coins fell steadily. One gold franc would buy 25 paper francs, then thirty, then fifty. By February, 1796, one gold franc was worth 288 paper francs. A few months later, 600. Meanwhile, commodities prices in gold or silver francs remained stable, while prices in paper francs rose proportionately to the rise in gold and silver.

The government did everything within its power to stop the depreciation of the new currency. It promised, it cajoled, it threatened. It passed ever more severe laws in a vain effort to force the public to accept and value the ever depreciating Assignats.It passed price control laws. It passed currency exchange laws. It passed laws making it illegal to take currency out of the country. It made the ownership of gold and silver illegal. Anyone twice convicted of buying or selling paper money at less than its face value could be sentenced to twenty years in prison. Investing in foreign securities brought the guillotine.

Eventually, it became a crime punishable by death to even ask at the beginning of a transaction what type of money you were to be paid with — new issues, old issues, coins, etc.

 In the midst of all this the steady action of a simple economic principle could be observed. No matter how severe the penalty, people would not accept the paper Assignats at the legal exchange rate. No matter what the government decreed, the Assignats continued to fall in value. Price inflation could not be controlled — not by promises, not by urgings, not by threats, and not by force.And even as the results of the ever-increasing issues of government IOUs wreaked havoc on the nation, the source of the problem was not recognized.

Andrew Dickson White also observed that "in spite of these evident results of too much currency, the old cry of a 'Scarcity of circulating medium' was not stilled; it appeared not long after each issue, no matter how large.

"But every thoughtful student of financial history knows that this cry always comes after such issues  — nay, that it must come, — because in obedience to a natural law, the former scarcity, or rather insufficiency of currency recurs just as soon as prices become adjusted to the new volume, and there comes some little revival of business with the usual increase of credit."

And so the expansion of government debt and the money supply rolled on.

The price inflation that followed the expansion of the money supply was only one visible symptom of the destructive nature of this insidious monetary fraud. There were many other ways in which the expansion of paper money ripped apart the French society.One of those was the obliteration of thrift from the minds of the French people. Until then, hard work and thrift had characterized the French people.

With such masses of money flowing through their hands, and with such uncertainty as to its future value, the ordinary motives for saving evaporated. Why save if inflation destroys the purchasing power of your savings? Why not buy the things you need and want now, before they go up in price?

As White phrased it, as the idea of thrift died, a "loose luxury" spread throughout the country.

An even worse side-effect was the explosion of speculation. To quote White, "With the flood of paper currency in 1791 appeared the first evidences of that cancerous disease which always follows large issues of irredeemable currency, — a disease more permanently injurious to a nation than war, pestilence or famine. At the great metropolitan centers grew a luxurious, speculative, stock-gambling body, which, like a malignant tumor, absorbed into itself the strength of the nation and sent out its cancerous fibres to the remotest hamlets. At these city centers abundant wealth seemed to be piled up: in the country at large there grew a dislike of steady labor and a contempt for moderate gains and simple living."

The effect was not surprising. What naturally happens to a person's incentive to work hard and save money when he sees his neighbor make a lifetime's wages in a week in the stock or commodities markets? Why be prudent and debt-free, when all around you were getting rich by borrowing, speculating, and paying back their loans in depreciating currency?

In fact, it was the very growth of credit that fed the demand for credit. As the paper-money inflation destroyed the value of savings and rewarded those who went in debt by allowing them to repay their debts with rapidly depreciating paper currency, it gave birth to a vast debtor class, which was directly interested in the further depreciation of the currency.

The nucleus of this class was formed by those who had purchased the church lands from the government with small down payments. The creation of easy credit for mortgages, coupled with an inflation that reduced the real costs of servicing those mortgages, created an artificial demand for property that drove property prices up. And rising property values gave birth to another far more influential class of debtors: the speculators, who found that leveraging into rising nominal values was a fast way to amass great wealth.Before long, the debtor class became a political special interest group, which extended through every level of society. From the stock-speculator who sat in the Assembly to the small land-speculator in the rural districts; from the sleek inventor of puts and calls on the Paris Exchange to the lying stockbroker in the small town; all lobbied vigorously for new issues of paper money.But couldn't even the most blind see that the issues of government IOUs were causing the hyperinflation? Strangely, they could or would not.

Although both historical evidence and economic laws proved that money creation must result in rising prices, the proponents of government borrowing brushed these aside, arguing that "the laws of political economy, however applicable in other times, are not applicable to this particular period." Argument after argument was brought forth to explain why this time it was all right to issue more currency or why this time it wasn't the new money that was causing prices to rise.

One such ingenious argument stated it thusly, and I quote: "Your committee are thoroughly persuaded that the amount of the circulating medium before the Revolution was greater than that of the Assignats today: but at that time the money circulated slowly and now it passes rapidly so that one thousand million Assignats do the work of two thousand millions of specie."

Thus, the advocates of larger government deficits in France in the 1790s claimed that price inflation was somehow a result of the number of times the money changed hands, rather than the result of the total quantity of money in circulation. Today we hear the same argument as economists claim that money "velocity" is an uncontrollable factor that supersedes money quantity.Ultimately, White noted, a new idea took hold of the populace, — the idea that the ordinary needs of government could be legitimately met wholly by the means of paper currency; taxes could be dispensed with. "As a result," he wrote, "it was found that the Assignat printing press was the one resource left to the government, and the increase in the volume of paper money became every day more appalling."

The End of the Fraud

Eventually, the game could go on no longer. New issues of currency were met with derision, and depreciated before they even entered the system.

White summarized the Great French Inflation in these words: "It came by seeking a remedy for a comparatively small evil in an evil infinitely more dangerous. To cure a disease temporary in its character, a corrosive poison was administered, which ate out the vitals of French prosperity.

"It progressed according to a law in social physics which we may call the "law of accelerating issue and depreciation." It was comparatively easy to refrain from the first issue; it was exceedingly difficult to refrain from the second; to refrain from the third and those following was practically impossible."It brought, as we have seen, commerce and manufactures, the mercantile interest, the agricultural interest, to ruin. It brought on these the same destruction which would come to a Hollander opening the dykes of the sea to irrigate his garden in a dry summer. It ended in the complete financial, moral and political prostration of France.... "

And, White concludes, "There is a lesson in all this which it behooves every thinking man to ponder."  Indeed, there is.

Although you probably don't need any help in grasping the incredible parallels between the situation in France in 1790 and the United States in 1990, let us walk through them together. In pre-revolutionary France, government spending exceeded tax revenues, as they do today in the U.S. The French politicians were powerless to raise taxes, as are our politicians, today. In both cases, demands for government services and subsidies force the politicians to spend, but the ballot box makes it politically impossible to raise taxes to meet these expenditures.

In France, the government was unable to back its IOUs with gold and silver, and therefore these were removed as backing for the currency. New government IOUs were issued in the form of Assignats, which were to be backed by newly confiscated land. These IOUs soon drove gold and silver coins out of circulation. At a point, gold and silver were outlawed for monetary use, and Assignats were made the only legal tender.

In the U.S. today, the government issues Treasury IOUs backed only by its own taxing power. These large IOUs are then monetized by the Federal Reserve, a process in which the Fed purchases them and issues Federal Reserve Notes in payment. In every practical sense, Treasury Bills, Notes, Bonds, Federal Reserve Notes are the equivalent of French Assignats.

The Federal Reserve

Andrew Dickson White's pamphlet was written at the end of the 19th Century, when there was strong pressure by business and banking interests for an expansion of the U.S. money supply. But popular support was hard to muster. Just as many older French citizens in 1790 had bitter memories of the hyperinflation in John Law's time, some 70 years earlier, many Americans still had memories of the Continental Dollar inflation of the American Revolution, as well as the Greenback inflation during the Civil War. And, just as the French government found it hard to borrow without the gold or silver to repay the loans, so the U.S. government was unable to borrow significant sums in the U.S. bond markets. If the government borrowed, it had to have the gold or silver to repay the loans. Thus, both federal spending and federal debt had remained nearly level for almost the entire 19th century.

Just as the politicians in the French Assembly struggled to find a way to sell paper money creation to the public, and succeeded through the ploy of selling "Assignats," so the U.S. politicians and their supporters found an even more devious way to make an end run around the monetary restraints of a gold-backed currency.

Our politicians and the big banking interests came up with the idea of the Federal Reserve System. Created ostensibly to protect the public from "panics" and bank failures, in truth its purpose was to provide an open-ended source of credit to the U.S. government, just as the Assignats provided one to the French assembly. Congress gave the Fed monopoly power over the issuance of U.S. currency in the form of Federal Reserve Notes. Initially, like private banknotes, the new Federal Reserve Notes were convertible into gold or silver. However, the reserves of gold that the Fed had to hold were dramatically lower than those commonly held by private banks. Thus, the Fed could expand note issue initially, without fear of a run on its reserves. The dramatic expansion of credit that this new system allowed resulted in a dramatic increase in the money supply during the 1920s, an enormous business and speculative boom (the roaring twenties), and the ultimate contraction of that boom created a run on the gold reserves of the private banks. It was that run caused the massive bank failures of the 1930s, and which the U.S. government met by outlawing the ownership of gold.

Just as the Assignats provided the French government with spending power, the Federal Reserve Act gave U.S. politicians a source for borrowing, and thereby the opportunity to increase government spending. This solved the problem of financing the U.S. entry into World War I, and created an immediate economic boom. But in the same way that the first issue of Assignats at first stimulated a business recovery, which was immediately followed by a contraction, so the paper-money boom of the twenties quickly led to the contraction of the Great Depression.

When the new credit expansion began to collapse, the public tried to turn away from the new flat money being issued by the Federal Reserve, and back to the gold they were used to using as money. They went to their banks and began withdrawing gold. Since Federal Reserve activities had allowed banks to expand their issues of banknotes and loans far beyond the gold reserves of the banks, the initial run on the banks started a chain reaction of bank failures. The government met this problem by taking the same action that the French Assembly did in the 1790s: it outlawed the use of gold as money, and demanded that it all be turned over to the government.

The Problem: A Lack of Money

In revolutionary France, proponents of money creation argued that a stagnant economy could be revived by increasing the "circulating medium." The idea that a nation's financial problems have roots in a lack of money is an age-old fallacy, but it is nevertheless as popular today as it was in 1790 France.

Today, the concept is wrapped in slightly different words. Today the Administration, Congress, the business community, and consumers all cry out for the Fed to lower interest rates. The demand is for the Fed to "ease" credit in order to forestall a recession. But the only tool the Fed has for reducing interest rates, or "easing" is to expand the money supply. They must increase bank reserves by turning those previously issued Treasury IOUs into circulating currency.

The demand for lower interest rates or easier credit is purely and simply a call for an increase in the quantity of money in circulation, and by implication argues that economic recessions are the result of a lack of money.

Just as the members of the French National Assembly argued that more circulating medium would encourage people to invest, produce, and solve the mounting debts of government, so our political leaders, at the behest of business and banking interests, do the same.When Reagan proposed his radical new "supply-side" program, he was merely dusting off the old theory presented by the paper-money advocates in the French Assembly, who promised to pull the country out of the economic slump through a program of government borrowing and spending that was supposed to stimulate production and thus balance the federal budget.

In revolutionary France, the creation of money appeared to alleviate the economic recession, but soon the stimulus wore off and a bigger issue was needed.

In the U.S. the argument has always been that a prudent and conservative Federal Reserve Board would control growth of the money supply and not allow politicians to get their hands on the money creation mechanism. The growth of money and of the price level since 1913 clearly shows the fallacy of this argument. Federal Reserve chairmen constantly reiterate the Fed's commitment to stable prices, and assure us that the Fed considers containment of monetary growth to be its prime priority. Yet whenever recession threatens, they turn on the presses, and the money rolls into the banks.

Just as the French Assembly always opted in favor of greater issues whenever the economy slowed, so the Fed always has, and always will, choose to expand the money supply whenever recession threatens the financial system.

Likewise, just as the French Assembly, with each new issue of debt, promised that this issue was the last, U.S. politicians set limit after limit on the federal debt, then immediately override their own limits. They pass law after law to balance the federal budget (such as the Gramm-Rudman Hollingsworth bill) and immediately subvert the purpose of the laws by all manner of accounting trickery. And why do they do this?

They are responding to the immense political clout of the debtor class.

In revolutionary France, the continuing debauchery of the currency eventually resulted in the creation of a debtor class that had a vested interest in further depreciation of the currency. As White pointed out, a large segment of these debtors were land speculators with property mortgages.

The pressure on politicians to increase government spending and on the Federal Reserve to expand the money supply rises each time a recession threatens. This pressure comes directly from debtors who will be thrust into default if their income streams are interrupted. As was the case in France, the largest group of debtors are real estate investors and speculators, who benefit if they can pay off their mortgages with cheaper dollars, and who, on the other hand, will lose everything if real estate prices drop significantly. Since real estate is most vulnerable to rising interest rates, the political pressure for lower rates is intense. Lower rates come from only one source: money creation.

In revolutionary France, the idea that the needs of government could be met wholly by means of borrowing or currency creation took possession of the nation. Taxes were unpopular, difficult to collect, and could be dispensed with.

The Laffer Curve, which purports to show that reducing taxes stimulates business activity, became a rallying symbol for the supply-side economists who offered tax-rate cuts as the brilliant new idea for the 1980s.

The cry for lower taxes to stimulate economic activity is not a new and profound economic theory: it is the same dusty and discredited idea that was argued before the French Assembly 200 years ago. Tax cuts would certainly be beneficial to the economy, but only if government spending drops by the same amount. When tax revenue is merely replaced by more government borrowing, it leads to economic disaster, as was proven in France.

Even as you listen to this, lobbyists are furiously pressuring federal politicians for further tax cuts, and those politicians are struggling to find ways to comply. Yet federal spending is on the rise. I wonder how long it will be before some politician will stand up and demand an abolition of all taxes. It can't be long in coming.Two hundred years ago, there was a long and detailed history proving that money creation always resulted in inflation, and eventually the destruction of the economy it was supposed to help. In revolutionary France, proponents of money creation ignored the evidence of history and the theoretical arguments. They claimed that the laws of political economy that might have applied to earlier times were not applicable to their period.

Today in the U.S., politicians and economists brush off warnings that continued growth of federal debt and the money supply must eventually touch off a price explosion. None other than Fed Chairman Alan Greenspan, as knowledgeable an economist as has ever graced the Chair, stated (in reference to the fact that money growth in the first half of the 1980s had not resulted in price inflation) that "the old economic relationships no longer seem to apply."

The Age of Speculation

Perhaps the most significant social effect of money creation that was felt in revolutionary France was the effect it had on the public's sense of thrift, prudence, and investment. The continual injections of printing-press money and the concomitant price spiral punished those who saved, and rewarded those who gambled.

The vivid descriptions in Andrew Dickson White's book of the speculative markets in 18th-Century France could be descriptions of our own investment markets. Speculation has replaced long-term investment. Investment profits have superseded earned income as the return of choice. The person who practices thrift, saves his money, and pays cash for the necessities and luxuries of life is considered ignorant and old-fashioned. The big money is made not through thrift, but through speculation — leveraged corporate buyouts, takeovers, borrowing in real estate, margining stocks, and leveraging positions in stocks, bonds, and commodities through options and futures contracts. An ever-growing flood of new and more speculative financial instruments spring into the broker's portfolios. The financial pages grow, and the fever rises.

What is not understood is that these "new" investment vehicles and devices are not the result of a normal, healthy evolution of investment markets based on the latest knowledge and modern technology. They are the deformed offspring of fiat-money inflation in the twentieth century.


The economic problems of today are not new, and they are not unique. They are the effects of society's inability to learn from history, or to act on principles deduced from it. Our problems are manifestations of the truth of the economic law that has been known since the days of Rome: paper money does not cure a country's economic problems, it causes them. The expanding, irredeemable issues of federal debt are the foundation for all of the ills of our economy, just as the Assignat issues were for revolutionary France.You are living through a period that will be written about by scholars and economic historians for centuries to come. As your descendants browse through "Fiat-Money Inflation in America" two hundred years from now, will they be able to say, my family saw it coming, and prospered in spite of it? If you listen to and take heed of the Voices from the French Revolution, perhaps they may.

A paperback copy of Andrew Dickson White's book, Fiat-Money Inflation in France, is available for $4.50 plus $1.95 postage and handling from Laissez Faire Books, 942 Howard Street, San Francisco, CA 94103. Call, 800-326-0996.

The Truth Seeker magazine is published in hard-copy four times per year for US$20. P.O.Box 2872, San Diego, CA 92112. We value good writers. Please ask for our writers guidelines; call: 1-800-321-9054. Thank you.

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