The the Audacity of Desperation and the Obliteration of Thrift

May the people of Ashur buy 30 kor of grain for one shekel of silver!
May the people of Ashur buy 30 minas of wool for one shekel of silver!
May the people of Ashur buy 3 seah of oil for one shekel of silver!

I came across an interesting little book the other day that I think sheds some light on what happening in the world of finance.  It is a history of money during the French Revolution.  The book was written in 1896 by Andrew White, an American historian at Cornell University.  It is a simple little book that doesn’t require an economics degree to understand it.  The fact that it was written more than 100 years ago makes it all the more interesting in light of recent events.

One of the results of the French Revolution was that all income producing land that belonged to the church was seized by the Republicans in order to be distrubuted among the people.  The problem was that ‘the people’ didn’t have enough money to purchase the land.  The solution was to issue assignats – a paper currency that was backed by the land.  Each piece of paper represented a portion of land owned by the issuers of the currency.  As the land was purchased, the assignants would be removed from circulation.  The first issue was for 4 million livres and the notes paid a 3% interest.     This appeared to be a very sensible policy.

However, as France continued to suffer economicaly, it was decided to continue printing the asignats.  16 million livres were printed and this time the notes paid 0% interest!   In good, populist fashion, the justification for this governnment policy was that it ‘served the people’.   And indeed, the issuance of paper stimulated manufacturing as “every one endeavors to invest his doubtful paper in buildings, machines and goods, which, under all circumstances, retain some intrinsic value.”  The merchants and the poor alike clamored for the printing of more bills.  According to White, ”France was now fully committed to a policy of inflation; and, if there had been any question of this before, all doubts were removed now by various acts very significant as showing the exceeding difficulty of stopping a nation once in the full tide of a depreciating currency.”

Uncertaintly over the value of the currency resulted in what White calls the “obliteration of thrift.”  Why save money if you are not sure it will maintain its value?   It also resulted in a speculative frenzy in which “the purchase of every article of supply became a speculation – a speculation in which the professional speculator had an immense advantage over the ordinary buyer.”  According to one observer, “Commerce was dead; betting took its place.”

Moreover, the printing of money stimulated over production and left “every industry flaccid afterward.”   Because of the the devaluing currency, “businesses found it increasingly difficult to forecast input costs.  This climate of uncertaintly resulted in businesses laying off workers.  The rise of unemployment meant that as prices for goods rose, wages stagnated.”  Worst of all, the specter of inflation gave rise to a “class of debauched speculators, the most injurious class that a nation can harbor – more injurious indeed than professional criminals whom the law recognizes and can throttle.”   

The takeaway message from the book is that inflation is worse than deflation because it destroys the moral and social fabric of society.

Since time immemorial, one of the most important tasks of the king was to maintain the purchasing power of money.  In our enlightened era, we have delegated that task to a select group of central bankers who operate outside of national interests.   They get to deal and play our cards and since 2008 they have gone all in.   At stake is not the assignats of Revolutionary France but an entire global system of finance.

The book can be downloaded for free from here:

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