Recall how France was deeply in debt and the national treasury was empty in the late 1780s, and how in 1789 King Louis XVI tried to stop the people's "National Assembly," which led to the storming of the Bastille (1789) and overthrow of the king and queen and execution by guillotine (1793).
How Fiat Money Came About-- In 1789 France was "financially embarrassed." It was heavily in debt and had a serious deficit. Capital (savings) had retired out of sight as citizens and investors were not confident enough in the economy to take business and investing risks.
There was a general search for some short road to prosperity. Most of the politicians figured the solution would be to get more spending money circulating. They called for an issuance of irredeemable paper money.
By "irredeemable" it was meant that there would be no gold or similar assets in the national treasury to give "value" to the assignats (paper money). In other words, a citizen accepting the paper money would not be able to redeem it (i.e. trade it in) for gold. History has shown that people are justly skeptical about accepting mere paper money as having any real value.
The government came upon the idea of confiscating the real estate owned by the French Church, which comprised between 25-33% of all realty in France. The new paper money would be "backed" by the confiscated lands. In other words, the assignats were intended to be a form of mortgage-- a note secured by land. The government hoped that the assignats would also be used to purchase the church lands from the government, providing the treasury with money.
To stimulate loyalty and arouse public spirit the portrait of the King was placed in the center of the notes and patriotic legends and emblems surrounded his picture.
The assignats were put into circulation as speedily as possible.
In political speeches it was predicted that "the issue of money would bring strength, abundance and prosperity back into the public treasury, commerce and all branches of industry."
The king issued a proclamation recommending that the French people accept the new money without objection.
"It began to be especially noted that men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large. People did not stop to consider that it was the dashing speech of an orator and not the matured judgment of a financial expert."
What the politicians had hoped-- The rationale for issuing the assignats was--
(a) it would give the treasury something to pay out immediately;
(b) once in circulation, the money would stimulate business;
(c) it would give large and small investors a way to invest in real estate; and
(d) a stimulated economy and the proceeds from the sale of real estate would provide the government a way to pay its debts and fund new projects and programs.
The next posts on this subject will discuss what happened after the first issues of fiat money and the consequences and effects. Later parts will also discuss the parallels between the fiat money inflation in France during those ten years (1790s) and current events in the United States with the $160,000,000,000 "stimulus checks" of 2008, and then the authorized $700,000,000,000 TARP "bailout" of 2008, and the impending 2009 "stimulus package" calling for the immediate issuance and circulation of $800,000,000,000 in "new money."