Fiat Money Inflation in France: How It Came, What It Brought, and How It Ended (two editions: 1876; 1896), by Andrew Dickson White

Monetary theory is notoriously difficult. Milton Friedman, who received a Nobel for his work on the subject — and did probably more than anyone else to revive the notion that inflation is always and everywhere a monetary phenomenon — said it was the hardest part of economics. 

But some difficult ideas about money are easier to understand if one concentrates on the facts of history. For this reason, Andrew Dickson White’s monograph on France’s second bout of paper money inflation — the multiple mass issuances of the assignat — makes for essential reading. It can reliably serve as a preface to any extended account of inflation, deflation, and the business cycle. It can also help prevent the formation of a few popular false notions, mostly relating to treating inflation too simply.

It also provides modern readers with an ominous warning. Indeed, Fiat Money Inflation in France can almost be read as a horror story. It is that unsettling.

From the beginning of White’s short book he seeks to answer the obvious question: how did paper-money inflationism became acceptable despite every historical reason to oppose it? 

The historical context was this: a mere 70 years earlier, the nation had experienced the Mississippi Bubble, an inflationary paper note scheme conceived by John Law. That ended in disaster. Why dare another? 

Well, desperation and the audacity of hope, for starters.

First, the desperation. By 1789, the French government’s finances were in shambles. It was running budget deficits and accumulating ever-higher levels of debt.

Cue the foreboding music.

Next, the audacity. France’s financial system was placed in grave jeopardy in part because of the triumph of republicanism. Substantive reforms had been enacted quickly, and elicited much excitement and fervor . . . along with destabilizing haste and the specter of uncertainty. But the uncertainty was experienced mainly by those folks far from the center and mania of politics. To those who supported the new regime, all things seemed possible. The Republic had been established. The spirit of can-do confidence was infectious. This was to be a New Age. 

Hope triumphed over reason and experience. Efforts to oppose the move to inflationism, by cooler heads, proved ineffective. The intuition of the period quickly hardened to dogma and became accepted as universal truth: corruption had been transcended. Disaster and widespread folly belonged to the old days, to the age of despots. Good people ruled now.

This is not psychological insight by 20/20 hindsight. White makes clear that Necker, the Finance Minister at the time, fully embraced such hubristic nonsense:

Like every supporter of irredeemable paper money then or since, he seemed to think that the laws of Nature had changed since previous disastrous issues. He said: “Paper money under a 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.” He insisted that John Law’s notes at first restored prosperity, but that the wretchedness and ruin they caused resulted from their overissue, and that such an overissue is possible only under a despotism.

As if foreshadowing a popular sub-current of 20th century crank economics — and of the illustrious dot-com craze of the 1990s — inflationists of the 1790s took to enthusing about the end of the old political economy and the beginnings of the new. Yesterday’s vices were becoming today’s virtues, and vice versa vices virtues, as Buckminster Fuller poeticized in our time.* The New Economy, hurrah and huzzah!

It didn’t work in the 1790s, and it didn’t prove true in the 1990s. Economics is still about scarcity; scarcity will always be with us, even amidst abundance. There can be no “end to scarcity.” And inflationary monetary policy does not usher in the Millennium.

What it leads to, eventually, is higher prices. And worse. That is, the increase in the amount of money is naturally offset by the discounting of a myriad traders; prices rise to meet the increased paper. But it would be a mistake to say that “inflation is a rise in the price level,” as we so often put it today. For, as a more sophisticated monetary theory insists — and as the French inflation shows — prices do not rise equally. The process of adjustment and adaptation does not happen with lightning-swift speed, or without casualties. Concurrent with upward price spirals, businesses fail in greater numbers, leading to a fall in employment. Mass unemployment.

We called this “stagflation” back in the 1970s. 

But how could prices rise while unemployment also increased? 

The simplistic view of inflation that had evolved in response to the rise of Keynesianism held that inflation and unemployment were in inverse relationship. This notion was codified in the famous “Phillips Curve”: the more inflation, the more employment; cut back on inflation, the more unemployment. By the 1970s, Milton Friedman showed that this could only be a short-term effect. In the long term, there is no inverse relationship. You can have rising unemployment along with ballooning money supply and skyrocketing prices, all at once. And if the word of an economist isn’t good enough, the stagflation of the “Me Decade” demonstrated the point well enough.

But stagflation was a historical fact long before Phillips drew his curve. Economists of the 1950s and 1960s could have avoided grave error had they turned away from debating the minutia of Keynes’s General Theory and read, instead, Andrew Dickson White. For as the French Assembly, and its successor body, the Council, printed issue after issue of assignats, employment definitely did not rise. 

Chaos ensued. 

Of course, faced with a new crisis, “something had to be done.” Like usual in politics, that something was not good. Not in revolutionary France, anyway.

First, politicians tried a redoubling of inflation. Then there were multiple attempts to regulate behavior, by wage and price controls. They even backed their regulations, prohibitions and mandates with the death penalty.

Still, not even the threat of beheading could fix the broken economy.

Instead, decay spread far and wide. Morals were quickly corrupted. And the incentives to save evaporated. The French, White writes, were a historically thrifty people. After the onset of the inflation, not any longer. 

And, worst of all, came the fearsome Reign of Terror, turning the French Revolution into a totalitarian nightmare.

It is with the Terror that we get to the real horror show. Popular histories and especially dramatic Hollywood re-enactments do not stress enough the clamor for (and policy of) inflation as the prime causal factor. Too often, the cause of the Terror is set down to human bloodlust. Or some nationalist fervor. Or the deep class resentments that had been festering for eons. But White makes this clear without belaboring the point (that’s my job) that the context of the Terror was financial failure and the responses to it: inflation, rising prices, price controls, confiscations, progressive taxation, and more. What began as a panacea — a “cure,” of all things — found its ultimate symbol in the invention of a doctor: the “National Razor,” the Guillotine.

And yet, it is almost certain that nearly everyone in France who first urged the paper money scheme meant well. 

Finance Minister Necker, for example, was a man of probity. Necker initially opposed the inflationists’ craze. But, hounded by the press — including the now-infamous Marat, who called Necker a “money-grubber” (and, I suspect, much worse) — he relented. He obviously thought that backing the paper with claims to real property raised paper money above empty promises. (They didn’t call these issues “mortgage-backed securities,” then, but could have.)

A mere five months after the first issue of Necker’s assignats, and the government was again broke. And clamoring for another issuance. Importantly, the next issue, and all that followed, abandoned a key part of Necker’s initial securities: interest payments. As issue added to issue, at some point the notes became completely unanchored from any conception of real wealth. They became what White calls “fiat money.” 

But, while most folks meant well at the beginning, it is just as certain that very few people meant well as the boom and bust cycle matured. 

“Greed” became a common term of opprobrium, and, just like today, it applied only to “the other guy.” Never oneself. 

Paranoia swept the nation, and calls for violence, looting, and liquidation of the rich began small but soon ballooned, then burst from threat to policy. (Marat, again, was a particularly vile instigator.) The rich were indeed targeted, and many, many were sent to Joseph-Ignace Guillotin’s infamous beheading device.

We do not live (yet?) in such violent times. But the parallels with our contemporary reality are hard to ignore. Now, as then, inflationary monetary policy has led to a financial boom that has painfully backfired. Now, as then, distrust of the most well-off takes on a paranoid dimension (think of all the yammering — much of it incoherent — about the “One Percent”). We haven’t descended to a murderous level, though it is worth noting that during the assignat inflation, the mob mentality first advocated taxation and confiscation, and only later moved on to mass murder.

We have many advantages now, of course. 

For one, we have a 200 year history of central banking, which has honed our leaders’ abilities to milk the system for far longer periods. They haven’t been able to ensure unending prosperity and progress, but they have, so far, prevented a descent into chaos. Can they do so forever?

And our intermediary institutions — such as Social Security, food stamps, and the like — provide enough stability to allow our monetary wizards many a lurch left and right, all the while funding the continued deficits of today’s warfare/welfare-state governments. Today’s slow unraveling of inflationary policy is nowhere near as quick as it was in times past. For this we should be at once thankful and nervous.

White makes clear that it was the poor and working classes, for whom the paper money scheme was often said to help the most, that were hurt the most. Though some wealthy businessmen and landowners came out OK, it was a few insiders who really made out like bandits.

This same divorce between stated goals and inevitable consequences lingers today. It is amazing how many contradictory notions can float in one person’s head, at least if that person is a politician. Or voter. How it is that people can push dangerous nostrums like inflationism all the while pretending they are doing it “for the poor” or “for the middle class” or “for the downtrodden,” and then witness those same policies cultivate poverty, corrupt the middle class, and crush the downtrodden, would be funny if it weren’t so devastating.

Andrew Dickson White wrote Fiat Money Inflation in France in order to encourage readers to support the meeting of financial crises “in an honest and straightforward way,” without wishful thinking and short cuts. It is a history with a message and a warning — against falling for the schemes of “dreamers, theorists, phrase-mongers, declaimers, schemers, speculators.” 

Trying to get something for nothing often winds up with getting worse than nothing. And worse than nothing can be very bad indeed.


Jacques Necker

* R. Buckminster Fuller, And It Came to Pass — and Not to Stay (1976)