Part 2

JOHN MACKAY. Toronto General Trusts Building, Toronto, 31st March, 1914.

FIAT MONEY INFLATION IN FRANCE

How It Came, What It Brought, and How It Ended

Early in the year 1789 the French nation found itself in deep financial embarrassment: there was a heavy debt and a serious deficit.

The vast reforms of that period, though a lasting blessing politically, were a temporary evil financially. There was a general want of confidence in business circles; capital had shown its proverbial timidity by retiring out of sight as far as possible; throughout the land was stagnation.

Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self-denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few.

There was a general search for some short road to prosperity: ere long the idea was set afloat that the great want of the country was more of the circulating medium; and this was speedily followed by calls for an issue of paper money. The Minister of Finance at this period was Necker. In financial ability he was acknowledged as among the great bankers of Europe, but his was something more than financial ability: he had a deep feeling of patriotism and a high sense of personal honor. The difficulties in his way were great, but he steadily endeavored to keep France faithful to those principles in monetary affairs which the general experience of modern times had found the only path to national safety. As difficulties arose the National Assembly drew away from him, and soon came among the members renewed suggestions of paper money: orators in public meetings, at the clubs and in the Assembly, proclaimed it a panacea--a way of "securing resources without paying interest." Journalists caught it up and displayed its beauties, among these men, Marat, who, in his newspaper, "The Friend of the People," also joined the cries against Necker, picturing him--a man of sterling honesty, who gave up health and fortune for the sake of France--as a wretch seeking only to enrich himself from the public purse.

Against this tendency toward the issue of irredeemable paper Necker contended as best he might. He knew well to what it always had led, even when surrounded by the most skillful guarantees. Among those who struggled to support ideas similar to his was Bergasse, a deputy from Lyons, whose pamphlets, then and later, against such issues exerted a wider influence, perhaps, than any others: parts of them seem fairly inspired. Any one to-day reading his prophecies of the evils sure to follow such a currency would certainly ascribe to him a miraculous foresight, were it not so clear that his prophetic power was due simply to a knowledge of natural laws revealed by history. But this current in favor of paper money became so strong that an effort was made to breast it by a compromise: and during the last months of 1789 and the first months of 1790 came discussions in the National Assembly looking to issues of notes based upon the landed property of the Church,--which was to be confiscated for that purpose. But care was to be taken; the issue was to be largely in the shape of notes of 1,000, 300 and 200 livres, too large to be used as ordinary currency, but of convenient size to be used in purchasing the Church lands; besides this, they were to bear interest and this would tempt holders to hoard them. The Assembly thus held back from issuing smaller obligations.

Remembrances of the ruin which had come from the great issues of smaller currency at an earlier day were still vivid. Yet the pressure toward a popular currency for universal use grew stronger and stronger. The finance committee of the Assembly reported that "the people demand a new circulating medium"; that "the circulation of paper money is the best of operations"; that "it is the most free because it reposes on the will of the people"; that "it will bind the interest of the citizens to the public good."

The report appealed to the patriotism of the French people with the following exhortation: "Let us show to Europe that we understand our own resources; let us immediately take the broad road to our liberation instead of dragging ourselves along the tortuous and obscure paths of fragmentary loans." It concluded by recommending an issue of paper money carefully guarded, to the full amount of four hundred million livres, and the argument was pursued until the objection to smaller notes faded from view. Typical in the debate on the whole subject, in its various phases, were the declarations of M. Matrineau. He was loud and long for paper money, his only fear being that the Committee had not authorized enough of it; he declared that business was stagnant, and that the sole cause was a want of more of the circulating medium; that paper money ought to be made a legal tender; that the Assembly should rise above prejudices which the failures of John Law's paper money had caused, several decades before. 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.

M. de la Rochefoucauld gave his opinion that "the assignats will draw specie out of the coffers where it is now hoarded.

On the other hand Cazalès and Maury showed that the result could only be disastrous. Never, perhaps, did a political prophecy meet with more exact fulfillment in every line than the terrible picture drawn in one of Cazalès' speeches in this debate. Still the current ran stronger and stronger; Petion made a brilliant oration in favor of the report, and Necker's influence and experience were gradually worn away.

Mingled with the financial argument was a strong political plea. The National Assembly had determined to confiscate the vast real property of the French Church,--the pious accumulations of fifteen hundred years. There were princely estates in the country, bishops' palaces and conventual buildings in the towns; these formed between one-fourth and one-third of the entire real property of France, and amounted in value to at least two thousand million livres. By a few sweeping strokes all this became the property of the nation. Never, apparently, did a government secure a more solid basis for a great financial future.

There were two special reasons why French statesmen desired speedily to sell these lands. First, a financial reason,--to obtain money to relieve the government. Secondly, a political reason,--to get this land distributed among the thrifty middle-classes, and so commit them to the Revolution and to the government which gave their title.

It was urged, then, that the issue of four hundred millions of paper, (not in the shape of interest-bearing bonds, as had at first been proposed, but in notes small as well as large), would give the treasury something to pay out immediately, and relieve the national necessities; that, having been put into circulation, this paper money would stimulate business; that it would give to all capitalists, large or small, the means for buying from the nation the ecclesiastical real estate, and that from the proceeds of this real estate the nation would pay its debts and also obtain new funds for new necessities: never was theory more seductive both to financiers and statesmen.

It would be a great mistake to suppose that the statesmen of France, or the French people, were ignorant of the dangers in issuing irredeemable paper money. No matter how skillfully the bright side of such a currency was exhibited, all thoughtful men in France remembered its dark side. They knew too well, from that ruinous experience, seventy years before, in John Law's time, the difficulties and dangers of a currency not well based and controlled. They had then learned how easy it is to issue it; 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,--more injurious, indeed, than professional criminals whom the law recognizes and can throttle; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality. All this France had been thoroughly taught by experience. Many then living had felt the result of such an experiment--the issues of paper money under John Law, a man who to this day is acknowledged one of the most ingenious financiers the world has ever known; and there were then sitting in the National Assembly of France many who owed the poverty of their families to those issues of paper. Hardly a man in the country who had not heard those who issued it cursed as the authors of the most frightful catastrophe France had then experienced.

It was no mere attempt at theatrical display, but a natural impulse, which led a thoughtful statesman, during the debate, to hold up a piece of that old paper money and to declare that it was stained with the blood and tears of their fathers.

And it would also be a mistake to suppose that the National Assembly, which discussed this matter, was composed of mere wild revolutionists; no inference could be more wide of the fact. Whatever may have been the character of the men who legislated for France afterward, no thoughtful student of history can deny, despite all the arguments and sneers of reactionary statesmen and historians, that few more keen-sighted legislative bodies have ever met than this first French Constitutional Assembly. In it were such men as Sieyès, Bailly, Necker, Mirabeau, Talleyrand, DuPont de Nemours and a multitude of others who, in various sciences and in the political world, had already shown and were destined afterward to show themselves among the strongest and shrewdest men that Europe has yet seen.

But the current toward paper money had become irresistible. It was constantly urged, and with a great show of force, that if any nation could safely issue it, France was now that nation; that she was fully warned by her severe experience under John Law; that she was now a constitutional government, controlled by an enlightened, patriotic people,--not, as in the days of the former issues of paper money, an absolute monarchy controlled by politicians and adventurers; that she was able to secure every livre of her paper money by a virtual mortgage on a landed domain vastly greater in value than the entire issue; that, with men like Bailly, Mirabeau and Necker at her head, she could not commit the financial mistakes and crimes from which France had suffered under John Law, the Regent Duke of Orleans and Cardinal Dubois.

Oratory prevailed over science and experience. In April, 1790, came the final decree to issue four hundred millions of livres in paper money, based upon confiscated property of the Church for its security. The deliberations on this first decree and on the bill carrying it into effect were most interesting; prominent in the debate being Necker, Du Pont de Nemours, Maury, Cazalès, Petion, Bailly and many others hardly inferior. The discussions were certainly very able; no person can read them at length in the "Moniteur," nor even in the summaries of the parliamentary history, without feeling that various modern historians have done wretched injustice to those men who were then endeavoring to stand between France and ruin.

This sum--four hundred millions, so vast in those days, was issued in assignats, which were notes secured by a pledge of productive real estate and bearing interest to the holder at three per cent. No irredeemable currency has ever claimed a more scientific and practical guarantee for its goodness and for its proper action on public finances. On the one hand, it had what the world recognized as a most practical security,--a mortgage an productive real estate of vastly greater value than the issue. On the other hand, as the notes bore interest, there seemed cogent reason for their being withdrawn from circulation whenever they became redundant.

As speedily as possible the notes were put into circulation. Unlike those issued in John Law's time, they were engraved in the best style of the art. To stimulate loyalty, the portrait of the king was placed in the center; to arouse public spirit, patriotic legends and emblems surrounded it; to stimulate public cupidity, the amount of interest which the note would yield each day to the holder was printed in the margin; and the whole was duly garnished with stamps and signatures to show that it was carefully registered and controlled.

To crown its work the National Assembly, to explain the advantages of this new currency, 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 results of the credit system." It foretold that this issue "would bring back into the public treasury, into commerce and into all branches of industry strength, abundance and prosperity."

Some of the arguments in this address are worth recalling, and, among them, the following:--"Paper money is without inherent value unless it represents some special property. Without representing some special property it is inadmissible in trade to compete with a metallic currency, which has a value real and independent of the public action; therefore it is that the paper money which has only the public authority as its basis has always caused ruin where it has been established; that is the reason why the bank notes of 1720, issued by John Law, after having caused terrible evils, have left only frightful memories. Therefore it is that the National Assembly has not wished to expose you to this danger, but has given this new paper money not only a value derived from the national authority but a value real and immutable, a value which permits it to sustain advantageously a competition with the precious metals themselves."

But the final declaration was, perhaps, the most interesting. It was as follows:--

"These assignats, bearing interest as they do, will soon be considered better than the coin now hoarded, and will bring it out again into circulation." The king was also induced to issue a proclamation recommending that his people receive this new money without objection.

All this caused great joy. Among the various utterances of this feeling was the letter of M. Sarot, directed to the editor of the Journal of the National Assembly, and scattered through France. M. Sarot is hardly able to contain himself as he anticipates the prosperity and glory that this issue of paper is to bring to his country. One thing only vexes him, and that is the pamphlet of M. Bergasse against the assignats; therefore it is after a long series of arguments and protestations, in order to give a final proof of his confidence in the paper money and his entire skepticism as to the evils predicted by Bergasse and others, M. Sarot solemnly lays his house, garden and furniture upon the altar of his country and offers to sell them for paper money alone.

There were, indeed, some gainsayers. These especially appeared among the clergy, who, naturally, abhorred the confiscation of Church property. Various ecclesiastics made speeches, some of them full of pithy and weighty arguments, against the proposed issue of paper, and there is preserved a sermon from one priest threatening all persons handling the new money with eternal damnation. But the great majority of the French people, who had suffered ecclesiastical oppression so long, regarded these utterances as the wriggling of a fish on the hook, and enjoyed the sport all the better.