Thursday, January 15, 2009

Fiat Money Inflation in France - Part 2 of 3

This Part 2 continues my summary of Prof. Andrew Dickson White's essay Fiat Money Inflation in France. (It is interesting to note the monetary parallels between France of the 1790s and the United States of today, which is the reason I'm posting this information).

The Historical Background in France--

Among the causes of the French Revolution (1789–1799) were that King Louis XV had fought several wars, and Louis XVI had supported America during its Revolutionary War, bringing France to the edge of bankruptcy. The nation’s debt was outpacing income.

The Estates–General was organized into three estates– the clergy, the nobility, and the rest of France. It was last assembled in 1614. The Estates–General was called to meet by Louis XVI in May 1789. In June, the third estate defiantly adopted the title of National Assembly, or an assembly of “the people.” The King attempted to prevent the meeting by closing the convention hall. The National Assembly moved to a nearby tennis court and agreed to not leave until they had given France a constitution.

Louis XVI proceeded to shut down the assembly. Paris was soon consumed with riots, chaos, and widespread looting. On July 14, 1789, insurgents successfully stormed the Bastille, a prison containing weapons and ammunition. The King and his military supporters backed down.

In August 1789, the National Constituent Assembly abolished the feudal system, sweeping away special privileges previously held by nobles, clergy, towns, provinces, companies and cities. Originally summoned to deal with a financial crisis, by late 1789 the Assembly had focused on other matters and only worsened the deficit. The assemblage debated between forming a republic or a constitutional monarchy.

In 1791, the various groups reached a compromise which left Louis XVI as little more than a figurehead-- he had to swear an oath to the constitution, and a decree declared that retracting the oath, heading an army for the purpose of making war upon the nation, or permitting anyone to do so in his name would amount to de facto abdication. The Legislative Assembly degenerated into chaos in less than a year, leaving an empty treasury behind it.

During the continuing chaos, France engaged in war with neighboring Austria in 1792, mobs stormed the royal palace and slaughtered the Swiss guards, and the King and Queen were imprisoned. Louise XVI was taken to the guillotine and beheaded in 1793, followed by his wife Marie Antoinette a few months later.

When the economy continued to go badly, prices rose and people rioted. New governmental policies became more radical. For example, “The Law of the Maximum” set food prices and led to executions of offenders. The “Committee of Public Safety” became the executive agency of the new revolutionary government, and it was responsible for executing by guillotine an estimated 20,000 people for allegedly supporting the monarchy against the revolution. This “Reign of Terror” prevailed between 1793 and 1794.

Eventually, while the government continued to evolve and falter, the French army under Napoleon Bonaparte suppressed riots in France and secured military victories against France’s neighbors. With that success, Napoleon eventually gained power, and in 1799 he staged a coup and installed the Consulate, which effectively led to his dictatorship, and then eventually to his proclamation as Emperor in 1804. This brought a close to the specifically republican phase of the French Revolution.

It was against this general economic and political background that France suffered hyperinflation through the printing of fiat money

-- The immediate cause of the French Revolution was the bankrupt state of the public treasury, which forced Louis XVI to call the Estates-General to meet in May 1789;

-- On July 14, 1789, came the storming of the Bastille;

-- The inflation in revolutionary France was begun to pay off debt and finance the budgetary deficit;

-- In April 1790 was the first issue of 400,000,000 livres in paper money, followed by successive new issues;

-- In February 1796, when the machinery, plates and paper for printing fiat money were destroyed, there were 40,000,000,000 livres in circulation, to be displaced by new paper notes at a ratio of 30:1 (i.e., approximately 1,200,000,000,000 livres, i.e., 1.2 trillion livres).

Following Parts of the summary of Fiat Money Inflation in France will particularly discuss how inflation is always falsely hoped to be the “short road to prosperity.”

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