“Andrew Dickson White was a professor of history in the second half of the 19th century. He also convinced Ezra Cornell to create the great university which bears his name. White became the first president of Cornell. The goal was to create “an asylum for science where truth shall be taught for truth’s sake”.
White’s relevance to today’s investors is his compilation of a lecture that looked at the French experience with fiat money during the French Revolution in the waning years of the 18th century. His work was published in book form under the title of “Fiat Money Inflation In France”.
There certainly have been countless other experiments with paper-based currencies, but this episode stands out from the many other such episodes in monetary history. One of the reasons is that the French had suffered through another hyperinflation just 70 years before.
“John Law was the architect of that prior debacle, issuing paper backed by holdings of land in Louisiana. Reflecting on the experience, White said:
“…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.”
One statesman held up a piece of the old paper money and declared that it was stained with the blood and tears of their fathers. Despite the history and admonitions, France charged ahead with their new paper money scheme. In their minds and exhortations, “It was different this time.” Tragically, that was not the case.
In late 1789, France was heavily in debt and running a substantial annual deficit. The minister of finance at the time was a man named Necker. Necker was described as a man of “sterling honesty, who gave up health and fortune for the sake of France”. Before he left France forever, Necker was called “a wretch seeking only to enrich himself from the public purse”. So much for gratitude. He stood in the way of the “necessity” of borrowing money.
A new and improved version of fiat money creation called for the issuance of what were termed “assignats”. These were notes secured by the real estate recently confiscated from the Catholic Church. In addition, the notes carried an interest rate of 3%. To make them even more believable, they were beautifully engraved with a portrait of King Louis XVI. It was said that the issuance of the assignats would do amazing things such as stimulate business, give everyone buying power and that the debts of the nation could be repaid.
It was also specified that no more than 400 million would be printed. If they had lived up to the promise not to exceed 400 million, some of the positive outcomes might have come true. They did not. In the end, 26 billion were printed, as well as a new version called “mandats”. The “mandats” were said to be “good as gold”. In the end, both the assignats and the “mandats” were worthless.
This new fiat money scheme did not end well. The best job in France was probably working at the print shop cranking out billions of new paper money. While there was an initial boost to business and exports in general, it soon ran out of gas and France’s manufacturers shuttered their plants and massive unemployment ensued.
The country was flooded with paper currency. The value of the currency dropped precipitously. In an amazing display of ignorance and propaganda, the government attributed the declining value of the currency to a failure to print more paper money. Desperate people will say and do desperate things. Many forms of outright tyranny ensued. One of the manifestations of this tyranny was a policy of “Forced Loans” to the government inflicted upon those who still had any remaining wealth.
What makes this episode in monetary history so critically important to us today was not that the French in fact did this. The first important lesson for us was the speed with which it went from issuance to complete economic and social devastation. This was not a long drawn out affair.
The second lesson comes from not only listening to the assurances of those who set this tragedy in motion, but the assurances and explanations along the way. History says that once set in motion, fiat money schemes cannot be reversed. Tragedy and collapse are the terminal destinations for this “train”. So just 70 years later, the French went down the same path that was so disastrous for their ancestors.
The world is now repeating the same process, despite the knowledge of so many failed and tragic dalliances with currency depreciation in the past. One almost gets the sense that this oft-repeated story is simply part of the cycle of human existence.
At the time that White was giving his lectures, he expressed a “feeling of regret that he was spending so much effort on a topic so devoid of practical value”. He could not imagine the events in France ever finding supporters in the United States. It shows how history can deviate so much from rational thinking and life’s “truths”.
What all of this makes crystal clear for us, is where we are today and where we are heading. As investors, the only realistic high ground is in real assets.”