French Revolution Hyperinflation

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The famous English economist John Maynard Keynes, commenting upon an observation of Lenin, wrote:

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction. And does it in a manner which no one man in a million is able to diagnose.

(Keynes, 1920)

No doubt Lenin and Keynes were familiar with the role of inflation during the French Revolution.

In October 1789 the French National Assembly found itself in a desperate situation. Tax revenue fell far short of expenses, and the government survived day by day with advances from the Bank of Discount, a bank that largely loaned funds to the government. The bank declared itself out of funds, and the assembly needed resources to complete the Revolution. The assembly met the financial crises with two important and interrelated measures. It confiscated church lands and it created an “extraordinary treasury” charged with raising 400 million livres by selling assignats, which were certificates of indebtedness bearing 5 percent interest. The government announced its intention to sell the church property and take assignats in payment. The church property in effect served as collateral for the assignats.

The assignats met with less than a hearty reception because it was not clear which lands would be sold to creditors. In August 1790 the assembly turned assignats into bank notes and added an extra 800 million livres to the issue. The decree specified that the total number of assignats in circulation should never exceed 1,200 million livres. The new assignats bore no interest and could be acquired by anyone, whereas the first issue was available only to creditors of the government. Instead of just liquidating the national debt, the government took to issuing assignats to pay for deficit spending.

By mid-1792 the inflation horse was definitely out of the barn; prices rose 33 to 50 percent while wages lagged far behind. In January 1793 a mob stormed stores in Paris and in February a scarcity of soap sparked further riots. Mobs also obstructed grain shipments. In 1794 the government implemented a system of price controls known as the Law of the Maximum. People who refused to accept assignats in payment or accepted them (or paid them) at a loss, could be fined 3,000 livres and imprisoned six months for the first offense. The fine and imprisonment could be doubled for the second offense. Speculation in specie and assignats could bring six years’ imprisonment, and forestalling was punishable by death. A forestaller was a person who withheld necessary commodities from circulation. Nevertheless, farmers and manufactures hoarded goods, and the specter of famine rose up for the spring. In December 1794 the government abandoned price controls, prices soared, and assignats fell to less than 3 percent of their face value.

The Convention, the governing body at that stage of the Revolution, acknowledged the fall of the assignats in June 1795. The nominal value of each successive issue was reduced according to a scale of proportions. In July of the same year the Convention ordered in-kind payments for half of the land tax and rents. Peasants stopped bringing produce to market to avoid accepting assignats. Speculation became rampant while inflation ruined creditors and savers. As prices outpaced wages and workers suffered, speculative profits created a new class of ostentatious rich who stood in stark contrast to the destitution of the lower classes. Prices outpaced wages and workers suffered. Inflation reached its peak as the Directory took power. Each day saw prices rise hourly, and each night paper money came off the press for issuance the following day. Paper money issues doubled in four months, for a total of 39 billion livres in assignats.

In February 1796 the Directory discontinued the assignats. It tried an issue of land warrants, which were good for the purchase of national property at an estimated price without competitive bidding. The sale would be to the first taker. The public had lost faith in paper money, however, and in July 1796 the government decided to return to specie. Inflation continued to ravage the economy until the advent of Napoleon in 1799. Apparently, his wars brought in more than they cost and his government improved the efficiency of taxation, ending the government’s need to promiscuously print paper money.

Since the experience of the French Revolution, hyperinflation has been associated with revolutionary change. It played a role in the rise of Hitler to power in Germany, the Communist Revolution in China, and the Bolshevik Revolution in Russia. The American Revolution also had a hyperinflationary episode.