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The French Revolution
Andrew Dickson White (1832 – 1918)

The main source for this article is a remarkable little book, Fiat Money: Inflation in France, by Andrew Dickson White. This was never properly published, beginning as an address to a meeting of Senators and members of the House of Representatives in 1876, and then published ‘for private circulation only’ in 1912. It is now easily available on the web through the Gutenberg project, and elsewhere.

On July 15th 1789 a mob stormed the Bastille in Paris, and the French Revolution was born. The early days were triumphant: the ideals of the Enlightenment were dominant, a Declaration of the Rights of Man was proclaimed on the American model, and the King remained nominally in power. But gradually the revolution began to go wrong. In 1792 the king was dethroned and in the following January he was actually beheaded, soon to be followed by his wife, Marie Antoinette. By 1793 the reign of terror was in full swing; guillotines were set up throughout France and thousands were beheaded. These were not just the aristocrats, but ordinary people – the Third Estate – were hunted down; indeed it is said that more bakers were beheaded than aristocrats. In 1794 Robespierre, the architect of the terror was himself beheaded which seemed to mark the beginning of the end of the worst excess. Gradually the terror abated, and in 1796 a young general called Napoleon began winning victories in the south, and 3 years later he came to power as First Consul. Any semblance of democracy was snuffed out and the ideals of the Revolution were forgotten, but a sort of normality returned. There followed a decade of triumph when Napoleon extended French domination over much of Europe.

But what had gone wrong? Why did revolution lead to terror in this way? This question reverberated through much of the 19th century, when the revolutions were seen as the inevitable harbinger of terror and revolutionaries in their turn thought they ought to bring terror in their wake. But the answer to the problem of the French Revolution is very simple and can be boiled down to a single word: inflation. Inflation is the hidden ingredient in the French revolution, yet it is one that is tossed aside or ignored by virtually all historians of the period. Yet the French revolution is one of the classic cases where a monetary analysis is the vital hidden ingredient and makes sense of the whole phenomenon.

The French revolution began from an economic crisis. Louis XVI mismanaged the economy, and his extravagances drove him to near bankruptcy. At the beginning of 1789, he was forced to call together the Estates General to vote him more money. The Estates General proved obstinate, an impasse developed, and the Parisian mob supported the Estates General. On July 14, they stormed the Bastille.

From the first, financial matters predominated: there was not enough money to go round, and what should be done about it? There was one obvious solution – create more money. There was however one serious objection - the memory of John Law, whose inflationary schemes had ruined many Frenchmen a generation before. John Law (1671-1729) was a Scottish gambler and financier, half genius, half crook who fled from Scotland having killed a man in a duel over a girl. Having arrived in France, he set up a scheme to finance the French colony in Louisiana. His financial schemes were ingenious and at first they succeeded brilliantly, establishing a Banque Royale which issued its own bank notes. The scheme ballooned into Companie Perpetuelle des Indes encompassing both the West and East Indies. More and more paper money was issued, till in 1720 it all collapsed. Law fled from France and many of the French middle classes, and indeed of the aristocracy, were ruined.

But by 1797, memory of Law was fading, and the need for finance was strong. The Minister of Finance, Jacques Necker, was a prudent banker of the old school and argued strongly against the issuing of paper money, but his arguments were swept aside. At first, an ingenious compromise was proposed. One of the early acts of the National Assembly had been to confiscate all church land which amounted to somewhere between a quarter and third of all French property. It was proposed therefore that a form of bonds would be issued, called assignats: they would be interest- bearing, and the total issue would be small compared to the total value of the church lands, and in addition they would only be issued in large denominations of 200, 300 and 1000 livres - a term which conveniently translates into pounds or dollars: the minimum bank note would be one of £200 which, it was hoped, would be too large to be used as ordinary currency. There were political considerations too, for it was hoped to sell the church lands to the middle classes of France, many of whom had hitherto been suspicious of the revolution, but it was hoped they would be bound in to the new system by being able to buy church property cheaply.

But the need for money was pressing, and soon all ideas of a small issue in large denominations were swept aside, and in 1790 the first issue of the paper money ‘assignats’ was launched, amounting to some 400 million livres. The assignats were at first a great success. As is always the case with inflation, when the funny money is first issued, business boomed, the states debts were paid off, and everyone felt better off. But then something funny happened: prices began to rise and yet more money was needed to fuel the growing business boom. In September of the same year, a second issue of assignats was made, twice as big as the first, for 800 million livres. Inflation then took off with a vengeance and more money was needed. In June 1791 there was a third issue, in December a fourth, and in April 1792 there was a fifth issue. Inflation now really roared ahead: the prudent middle classes were soon destroyed, their savings halved – soon to become worthless, and it was the opportunists who rose to power and influence. What is worse, a certain madness ensues: money is one of the great anchors of our life, a the measure by which so many valuations are founded, and if that measure suddenly goes awry, a psychological uncertainty enters our soul, and we begin to go a little mad.

By midsummer there were riots in Paris. The king was dethroned, the royal family imprisoned, and a revolutionary commune took power. The monarchy was abolished and government was carried out by ad hoc committees led by whoever could gain the support of the mob. In January 1793, Louis XVI was beheaded and yet more assignats were issued – the numbers by this time were becoming meaningless. Politics began to take on the sort of contradictory meanings that George Orwell satirised so well: a Committee of Public Safety was formed which became a sort of nom de plume for the Reign of Terror. In May, the classic ‘King Canute’ response to inflation was brought forward: price controls were introduced. In June, a forced loan was decreed, and in August, barter was prohibited: the merchants by this time were trying to get round the worthless currency by resorting to barter, so this too had to be outlawed. In September, price controls were further extended when the Law of the Maximum was introduced and price controls extended to all food. In the autumn, yet more assignats were issued, and no doubt coincidentally, Marie Antoinette was beheaded.

The madness known as the Terror reached its heights in 1794, when thousands were executed by decree of the revolutionary tribunal, many of them for breaking the Law of the Maximum. But the excitement and the terror could not last, and in July Robespierre himself was executed: there was a Reaction against the extremists, and the worst was over: in December the Law of the Maximum was repealed.

But still the economic chaos continued. In 1795 the printing presses were working flat out and the number of assignats doubled from 7,000 to 14,000 only to double towards the end of the year to 45,000 – all these figures in millions of course. But it could not last, and at the end of 1795 a new constitution was adopted and a new government formed – the Directory. And early in 1796 the new government did what all new governments do in such circumstances, it issued new currency. The machinery, plates and paper for printing assignats were destroyed and a new paper notes were issued called the Mandat, to replace assignats at 30 to 1.

But the trouble with inflation is that though it may be slow to get going in the first stages, it is hard to stamp out in the latter stages – as Margaret Thatcher was to discover. The mandats were issued in Feb 1796 and by August they were worth only 3% of their face value. And by February the following year, both assignats and mandats were declared to be no longer legal tender. The next two years were years of chaos. There was arbitrary government by the Directory, business was disrupted and the people were discontented. With paper money finally abandoned, the economy reverted to its former coinage; but recovery from inflation is, as always, very, very painful.

The solution came the following year when Napoleon returned from Egypt (where he had been duffed up by Nelson) and rapidly carried out a coup d’etat "to save the republic" which as usual means making himself dictator. His timing was, as so often, impeccable. Two years of savage deflation had done their work. The stuffing had been knocked out of the revolutionaries, but business was ready to revive: all that was needed was stability, and the smack of firm government. Napoleon was just what was needed: a good, old-fashioned, sound money man.

He issued a new coinage, based on solid gold which could not effectively be counterfeited: the largest 20-franc coin, that he created in 1803 which he modestly called ‘The Napoleon’ became the model from much of continental Europe, and would last in value right down to the end of the century. His financial reforms generally were long-lasting. Indeed his financial abilities were, if less flashy, probably rather more successful than his military abilities. Napoleon has probably had a bad press: strategically he was a brilliant, if ultimately unsuccessful general; politically he was a tyrant; but economically he was a sound money man burdened by the reputation of representing a revolutionary and terrorist country. Had he inherited a less revolutionary background, he might well have been rather more successful.

* Andrew Dickson White (1832 – 1918) was a historian, educator and diplomat, who co-founded Cornell University and became its first President, after which he became American Minister to both Germany and Russia. Although it is one of the classic works of monetarist economics, it appears to be unknown to historians of the French Revolution, who only ever refer to inflation, or assignats, in passing, and none of whom realise the importance of inflation in understanding the period. And yet without understanding inflation, the French Revolution does not make sense: why, in so short a time, were all the ideals of the Enlightenment about freedom and democracy, subverted by the Terror, and destroyed in the Directorate? And the misunderstanding because of the centrality of the Revolution, both in French and indeed European history throughout the 19th century, 19th century history is widely misunderstood. There can be few better demonstrations of the importance of monetarism in understanding many crucial aspects of history, and of the world today.

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