Sunday, September 6, 2009

Assignat: The Nearly Perfect Money

Assignat: The Nearly Perfect Money
Thomas Allen

The assignat was nearly the perfect money. It was perfect in that it was created and issued by the government and not by the people or banks. It was perfect in that it was not backed by or redeemable on demand in precious metals. Its imperfection came in that it was backed by and convertible into (could be used to buy) lands of the government. To have been absolutely perfect money, the assignat would have had to be backed by nothing except the faith and credit of the French government and redeemable or convertible into nothing. To be absolutely perfect, money has to be completely an abstract intangible representing nothing—or so many monetary reformers and fiat money adherents claim.

When the revolutionary government came to power, France was suffering a lack of confidence and economic stagnation. It concluded that a lack of circulating medium caused the economic problems of France. Instead of using wise management that involved patience and self-denial, "the rarest products of political wisdom,"[1] which would have brought gradual sustainable long-term economic growth, the government choice the easy road of fiat money. Paper money would solve the country’s problems immediately.

The revolutionary government found that the country was poor in gold and silver. However, it found itself rich in land. It had stolen the land owned by the Catholic Church. Also, it had taken the lands of the Crown and the Royalist refugees. It used these lands as the basis for its new paper money, the assignat. Assignats could be redeemed for these lands.

Arguments of the proponents of the assignat included:

1. It would quickly and easily pay for the government’s expenses.

2. Land backed it, and it could be used to buy government land.

3. It would quickly transfer church lands to the people and thus create a cadre of small farmers to support the Revolution.

4. It could not be over issued because any excess would be used to buy land.

5. It was a "virtual mortgage on a landed domain vastly greater in value than the entire issue."[2]

6. It would bring economic prosperity.

7. The French nation was now more enlightened than it was in John Law’s time. (John Law was the author of the great inflation that France had suffered 70 years earlier.)

8. A popular constitutional government now governed France instead of an absolute monarch.

9. Enlighten self-interest and patriotism would maintain the money’s value.

10. Whatever the government decrees to be money is money and derives its monetary value solely from the government’s decree.

The government began issuing assignats in 1789. As the assignats promised to pay in coins and were not legal tender, they were originally credit instruments. They also paid interest. To prevent their usage as ordinary currency, they were issued in large denominations that were convenient sizes for the purchase of land. Government-owned land secured them. "They constituted, so to speak, a general mortgage upon the property of the republic, and were convertible into land at the option of the holder."[3]

In 1790, the government declared the assignat to be legal tender and ceased paying interest on future issues. Also, it began to issue small denomination assignats as metallic coins hardly circulated (caused by the depreciation of the assignat). When the government made the assignat legal tender, it severed its connection to land. When it became legal tender, its value depended more on its quantity in circulation instead of the value of land into which it could be converted. France had committed to a policy of inflation.

With land securing the assignats, people thought that they were adequately secured. They could not understand why gold and silver exchanged at a premium. (This lack of understanding is common among fiat money adherents.)

With each issuance of assignats, the premium on gold and silver rose. Like most fiat money folks and the monetary ignorant, the people and government blamed the bullion dealers. Demagogues clamored for hanging bullion dealers. Premiums would continue to rise until a sufficient number of dealers were hanged. Then assignats would trade at par with coins.

Many believe that British agents were the cause of the assignat’s depreciation. These agents caused people to distrust paper money. (Later British agents were blame for destroying the value of the assignat with counterfeiting.) One "popular theory was that the Bourbon family were, in some mysterious way, drawing off all solid money to the chief centers of their intrigues in Germany."[4] Another explanation was that France imported too much and exported too little.

It never occurred to the adherents of the assignat that assignats were inferior money and that gold and silver were the superior money. The rise in prices could not be the fault of the fiat paper money—or so they believed. However, when people can use inferior money, which legal tender laws give them the right to do, they will use it and save the superior money.

Merchants began charging two prices for their goods and services. They charged a higher price for paper money and a lower price for specie. These merchants were soon denounced as enemies of the Republic. In April 1793, the government outlawed charging different prices for paper money and specie or refusing to accept assignats in payment for goods and services. Merchants could only charge one price, and they had to accept what the buyer offered. In September 1793, the government imposed the death penalty and confiscated the merchant’s property for refusing to accept assignats or accepting them at a discount. Next the government suppressed all commerce in gold and silver in November 1793. Thus, gold and silver ceased circulating, and prices continued to rise. (In August 1795, the government allowed special contracts to be made in specie. Coins soon reappeared in circulation.)

With each issuance of assignats, their value declined and prices rose—slowly at first and then more rapidly. As prices rose, the people demanded more assignats to offset the apparent shortage of money. At first prosperity was blamed for the depreciation of assignats and the rise in prices. Then the lack confidence and knowledge of the country folk were blamed.

Later people began to claim that a depreciating currency was a blessing. Depreciation kept the money in the country by hindering trade with foreign countries and thus encouraging domestic manufacturing.

By mid 1793 prices had risen so much that the government resorted to price fixing. It also levied a special tax on the profits of wholesalers and retailers. Scarcities, especially for food, soon appeared as farmers objected to being cheated. Shortages lead to rationing.

Imports collapsed as foreign goods sold for more than the fixed price. Merchants began going out of business as they were forced to sell at a loss. Those who remained in business did so by selling above the fixed price; they risked guillotining. Farmers had their crops and livestock taken for refusing to sell at a loss; many were guillotined.

Thus, the assignat led to the Reign of Terror (1793-1794). The Reign of Terror hardly slowed the depreciation of the assignat and the scarcity of goods.

About the assignat’s contribution to the Reign of Terror, Del Mar remarks:
There can be little doubt that the excesses of the Reign of Terror were greatly promoted by the operation of the assignats and mandats. This money caused so rapid and tremendous a rise of prices that all vested interests were deprived of value, all fortunes were levelled, and the social order was completely broken down. The landed proprietor and the mendicant of the slums, the gentleman and the ruffian, the industrious citizen and the professional pauper, the honest man and the thief, the patriot and the traitor, the weak, the strong, the small, the great, the good and bad were all mingled together, all ranked alike, all rendered equally rich, equally poor, equally powerful, equally impotent, and equally influential in promoting useful or pernicious ends. The assignats and their counterfeit adjuncts constituted an illimitable measure of value, and it ended, where all illimitability ends, in chaos and in madness.[5]
Such is the destructive power of fiat money.

The government found that printing money could more easily meet its ordinary expenses than levying taxes. Tax revenue declined to the point that the government was relying almost entirely on printing money.

Initially, premiums on precious metal coins typically ranged between 10 and 20 percent. Commodity prices remained steady or rose only slightly. Before midsummer 1793, assignats were satisfying the demand for money caused by the shortage of gold and silver coins and by increases in trade. (If assignats had not been issued, prices would have fallen.) However, after midsummer of 1793, the assignat began to depreciate rapidly, and prices began to rise noticeably and quickly. After midsummer of 1793, the government issued a large quantity of assignats. To these genuine notes was added a large but unknown quantity of counterfeits. By midsummer 1795, assignats were nearly worthless.[6] The inflation rate rose to 13,000 percent.[7]

The government first issued 179 livres in 1789.[8] By 1793, it had issued two billion francs in assignat.[9] By 1796, 45.5 billion in francs had been issued.[10] The value of the assignat had depreciated to 30 to 1 of coin.[11] Prices rose accordingly. By June 1796, 800 assignat francs exchanged for one franc in specie.[12]

[Editor's note: A table in the original that summarizes the issuance and value of the assignat is omitted.]

White gives the following changes in the value of the assignat.[13] Before the issue of December 17, 1791, the value of a 100-livre assignat note had fallen to 80 livres. Soon after that issue, it dropped to 68 livres. At the beginning of February 1792, the value had fallen to 60 livres. Later that month it fell to 53 livres. In November 1792, the value of a 100-franc assignat note rose from 57 francs to 69 francs. This rise was due to military victory and repulsion of invaders and the confiscation of more land to back the assignat. By September 1793, it had fallen to less than 30 francs. With more military victories, it rose to above 50 francs in December 1793. July 1795 saw the value of 100-franc assignat note declining to four francs, then to three, and to two and a half. "On August 1, 1795, this gold louis of 25 francs was worth in paper, 920 francs; on September 1st, 1,200 francs; on November 1st, 2,600 francs; on December 1st, 3,050 francs. In February, 1796, it was worth 7,200 francs or one franc in gold was worth 288 francs in paper. Prices of all commodities went up nearly in proportion."[14] At the end of the assignat’s life, 600 francs in assignat equaled one franc in gold. The assignat had begun its life seven years earlier at par with gold. [Editor's note: 81 livres equals 80 francs, so the two are almost equal.]

[Editor's note: A table in the original that summaries the depreciation (inflationary effects) of the assignat is omitted.]

As with all paper money, counterfeiting was a problem. [Editor's note: A footnote in the original explaining that counterfeiting is a real problem with paper fiat money but not with gold coins is omitted.] In February of 1796, an estimated 100 billion livres of assignats were in circulation. Of these 36 billion were genuine, and the remainder, counterfeit.[15]

Although the assignat did at first stimulate commerce, the stimulation was short-lived. As a result of the assignat, manufacturing and commerce collapsed.[16] About this breakdown, White writes:

All this breaking down of the manufactures and commerce of the nation made fearful inroads on the greater fortunes; but upon the lesser, and upon the little properties of the masses of the nation who relied upon their labor, it pressed with intense severity. The capitalist could put his surplus paper money into the government lands and await results; but the men who needed their money from day to day suffered the worst of the misery. Still another difficulty appeared. There had come a complete uncertainty as to the future. Long before the close of 1791 no one knew whether a piece of paper money representing a hundred livres would, a month later, have a purchasing power of ninety or eighty or sixty livres. The result was that capitalists feared to embark their means in business. Enterprise received a mortal blow. Demand for labor was still further diminished; and here came a new cause of calamity: for this uncertainty withered all far-reaching undertakings. The business of France dwindled into a mere living from hand to mouth. This state of things, too, while it bore heavily upon the moneyed classes, was still more ruinous to those in moderate and, most of all, to those in straitened circumstances. With the masses of the people, the purchase of every article of supply became a speculation—a speculation in which the professional speculator had an immense advantage over the ordinary buyer. Says the most brilliant of apologists for French revolutionary statesmanship, "Commerce was dead; betting took its place."

Nor was there any compensating advantage to the mercantile classes. The merchant was forced to add to his ordinary profit a sum sufficient to cover probable or possible fluctuations in value, and while prices of products thus went higher, the wages of labor, owing to the number of workmen who were thrown out of employment, went lower.[17]
Toward the end of the assignat’s life, business activity began to increase significantly as people unloaded their assignats before they lost more value by buying tangible items.

In 1796, the government replaced assignats with mandats. The government decreed that the mandat was "fully secured and as good as gold." The choicest government lands secured mandats. Thus, the holders of mandats, like the holders of assignats, could convert their paper money into land.

The government issued 800 million francs in mandats[18] to replace the outstanding assignats. Assignats were converted at a steep discount; one mandat equaled 30 assignats. It also issued another 600 million mandats to pay the government’s current operating expenses.[19] In little more than a year the government issued 2.5 billion francs in mandats.[20]

As the people had lost confidence in fiat paper money (confidence is the lifeblood of fiat money), mandats quickly lost value. "Even before the mandats could be issued from the press they fell to thirty-five per cent of their nominal value; from this they speedily fell to fifteen, and soon after to five per cent, and finally, in August, 1796, six months from their first issue, to three per cent."[21] Mandats depreciated to 300 francs in mandats to one franc in coin.[22]

In spite of the legal tender law, people refused to accept mandats at any value. Using the special contract law, people began buying and selling with specie. Gold and silver began flowing into France. Soon the people conducted all economic activity with gold and silver.

In July 1796, the government striped assignats and mandats of their legal tender status, which immediately made them worthless. The government ceased issuing them and returned to specie, and redeemed mandats in specie at one-seventieth of their face value.[23] The people had triumphed over the government and forced it to return to sound money.

France did not blindly travel down the road of paper fiat money. In spite of the promises of the fiat money advocates of perpetual economic prosperity, the French knew the destructive power of fiat money. White remarks:

It would be a great mistake to suppose that the statesmen of France, or the French people, were ignorant of the dangers in issuing irredeemable paper money. No matter how skillfully the bright side of such a currency was exhibited, all thoughtful men in France remembered its dark side. They knew too well, from that ruinous experience, seventy years before, in John Law's time, the difficulties and dangers of a currency not well based and controlled. They had then learned how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes,salaries or wages; 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. All this France had been thoroughly taught by experience. Many then living had felt the result of such an experiment—the issues of paper money under John Law, a man who to this day is acknowledged one of the most ingenious financiers the world has ever known; and there were then sitting in the National Assembly of France many who owed the poverty of their families to those issues of paper. Hardly a man in the country who had not heard those who issued it cursed as the authors of the most frightful catastrophe France had then experienced.[24]
(Yet they still fooled themselves into believing that they could master the devil. (Fiat money reformers today have fooled themselves into believing that they can master the devil.)

Del Mar explains the failure of the assignat to maintain its value:

In weighing the merits of the assignats it must be borne in mind that at the period when they were refused by the people, two-thirds of the whole mass afloat were counterfeit; that the genuine portion alone were nearly twenty times as numerous as were the coined livres before the Revolution, and the whole mass sixty times as numerous; that no limit was fixed to the emissions, and—at least towards the last—no previous announcement was made of them, and no one felt certain that they would not be doubled within the coming twenty-four hours; that the assignats were not full legal tenders, because farm-rents and taxes were payable one-half in produce; that rents had been fixed at 10 for 1 and scale payments generally at 30 for 1; that a stay law left the payment of debts to the option of the debtors; that special contracts were proposed to be permitted, and were soon after permitted to be made in coins; and that coins were allowed to circulate side by side with the notes, and thus assist to drag down their value.[25]
With much of Del Mar’s explanation, fiat money advocates agree. The problem was counterfeiting, allowing specie to circulate, allowing contracts to be made in specie (being inferior, fiat money cannot survive competition), and not being full legal tender. Whatever causes fiat money to lose its value is not the fault of fiat money.

Johnson explains the collapse in the value of the assignat and mandat although they were backed by and convertible into land:

Since the assignat and the mandat were a lien upon real estate, why should they have depreciated? The security possessed ample value and the government freely permitted conversion of paper money into land. They depreciated, nevertheless, because the price at which land was convertible kept rising constantly, so that the land value of the assignat steadily declined. The assignat was not a mortgage upon any particular piece of real estate; it was a mortgage upon property in general. In pledging the property of the republic as security the government could do no more than agree to accept the assignat in payment for this land. Evidently steady value could not be given to it by such an agreement unless the prices at which the land would be sold were fixed in the beginning for all time. Its value was due entirely to its services as money, and necessarily declined as the quantity was increased. Such must be the fate of any kind of money based upon property unless the supply is strictly limited.[26]
"For any commodity to serve adequately as money, it needs to be portable (relatively high value per unit of weight), homogenous or uniform, durable, divisible, recognizable, highly marketable (highly liquid, universally acceptable), and stable in value."[27] Land lacks many of these qualities. Some land has high value of several tens of millions of dollars per acre. Other land has low value of a few dollars per acre. Thus, land is highly variable in value, lacks homogeneity, and is not portable. Although it is recognizable and divisible, it is not highly marketable. Land is not liquid and is not universally acceptable. Land makes low quality money. Therefore, any monetary system based on or backed by land will result in low quality money.

John MacKay in his introduction to White’s book identifies four great and fundamental facts from the assignat experience:
(1) Notwithstanding the fact that the paper currency issued was the direct obligation of the State, that much of it was interest bearing, and that all of it was secured upon the finest real estate in France, and that penalties in the way of fines, imprisonments and death were enacted from time to time to maintain its circulation at fixed values, there was a steady depreciation in value until it reached zero point and culminated in repudiation. The aggregate of the issues amounted to no less than the enormous and unthinkable sum of $9,500,000,000 ($9.5 trillion) [sic], and in the middle of 1797 when public repudiation took place, there was no less than $4,200,000,000 in face value of assignats and mandats outstanding; the loss, as always, falling mostly upon the poor and the ignorant.

(2) In the attempt to maintain fixed values for the paper currency the Government became involved in an equally futile attempt to maintain a tariff of legal prices for commodities. Here again penalties of fines, of imprisonments and of death were powerless to accomplish the end in view.

(3) An wholesale demoralisation of society took place under which thrift, integrity, humanity, and every principle of morality were thrown into the welter of seething chaos and cruelty.

(4) The real estate upon which the paper currency was secured represented confiscations by the State of the lands of the Church and of the Emigrant Noblemen. These lands were appraised, according to Mr. White's narrative and other authorities, at $1,000,000,000. Here was a straight addition to the State's resources of $1,000,000,000. It is ominously significant that within one hundred years under the "Peace of Frankfort" signed on the 10th May, 1871, the French nation agreed to pay a war indemnity to victorious Germany of exactly the same sum, namely, $1,000,000,000 in addition to the surrender of the province of Alsace and a considerable part of Lorraine. The great addition to the national wealth, therefore, effected by the immoral confiscation of the lands in question disappeared with compound territorial interest added under the visitation of relentless retribution.[28]
France’s adventure with fiat money destroyed the morality and wealth of its people. It corrupted politicians (not hard to do). Thrifty people it turned into gamblers and speculators as it transferred wealth from workers to speculators. It devastated farmers and laborers, and it impoverished the middle class. France’s fiat money rewarded the heavily indebted wealthy as
it allowed them to pay off their debts with nearly worthless money. The assignat was fatal to

Furthermore, the assignat, like all fiat money, created a large debtor class. These debtors had a vested interest in a depreciating currency. Depreciation allowed them to cheat their creditors by paying them with cheap money. The nucleus of this debtor class was the buyer of government lands. They had made only a small down payment. Heavily indebted speculators joined them in the clamor for the issuance of more assignats, which would depreciate the money even more. They couched their demand for additional issuance with the promise that it was the only way to bring prosperity. (Sounds like today’s fiat money adherents and reformers.)

As with all fiat money, the biggest losers are the common worker, the poor, retired, and savers. The assignat was no different. About the destructive effects that the assignat had on workers and the poor, White writes:
This was hailed by many as a measure in the interests of the poorer classes of people, but the result was that it injured them most of all. Henceforward, until the end of this history, capital was quietly taken from labor and locked up in all the ways that financial ingenuity could devise. All that saved thousands of laborers in France from starvation was that they were drafted off into the army and sent to be killed on foreign battlefields. . . .

Strange as it may at first appear, while the depreciation of the currency had raised all products enormously in price, the stoppage of so many manufactories and the withdrawal of capital caused wages in the summer of 1792, after all the inflation, to be as small as they had been four years before—viz., fifteen sous per day. No more striking example can be seen of the truth uttered by Daniel Webster, that "of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper-money."[29] /p>
White continues:
On whom did this vast depreciation mainly fall at last? When this currency had sunk to about one three-hundredth part of its nominal value and, after that, to nothing, in whose hands was the bulk of it? The answer is simple. I shall give it in the exact words of that thoughtful historian from whom I have already quoted: "Before the end of the year 1795 the paper money was almost exclusively in the hands of the working classes, employees and men of small means, whose property was not large enough to invest in stores of goods or national lands. Financiers and men of large means were shrewd enough to put as much of their property as possible into objects of permanent value. The working classes had no such foresight or skill or means. On them finally came the great crushing weight of the loss. After the first collapse came up the cries of the starving. Roads and bridges were neglected; many manufactures were given up in utter helplessness."[30]
The biggest losers in the assignat fiasco were the working class, salaried employees and small farmers. In whatever country and in whatever era that fiat money is used, the biggest losers have always and will always be the working class, salaried employees, small farmers, and the poor. As with all fiat monetary regimes, the working class and salaried employees end up holding worthless paper while the wealthy shield themselves with tangible assets.
Mirabeau’s comment in January 1789 that paper money was "a nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium"[31] proved true. (Mirabeau later supported issuing paper money. He believed the adage that has brought down many: "this time is different.")

French patriotism had withstood the monarchs of Europe and their armies. However, it could not withstand fiat money. The assignat brought the Republic down.

The revolutionary government resorted to fiat money in the form of the assignat to save the Revolution and the Republic. The king, aristocracy, and church had drained the country of specie through extravagant and reckless spending. As the Treasury was empty and the government was rich in land, it believed that it needed to convert its land to money. In the end, the fiat money to which the revolutionary government turned to save the Revolution and the Republic ended both the Revolution and the Republic. As much as anything, the assignat brought Napoleon to power with his dictatorial rule.

France needed many years to recover fully from its fiat money adventure. White remarks:
The acute suffering from the wreck and rain brought by assignats, mandats and other paper currency in process of repudiation lasted nearly ten years, but the period of recovery lasted longer than the generation which followed. It required fully forty years to bring capital, industry, commerce and credit up to their condition when the revolution began, and demanded a "man on horseback," who established monarchy on the ruins of the Republic and thew [sic] away millions of lives for the Empire, to be added to the millions which had been sacrificed by the Revolution.[32]
For those who want to learn more about the assignat and its devastating effects on France, I highly recommend Fiat Money Inflation in France by Andrew Dickson White, which can be found at html. It shows a strong similarity between France of the 1790s and the United States of the last 35 years or so.

[Editor's note: The origninal contains an appendix that contains White's summary of the cause and effects of the assignat. This appendix is omitted.]

[Editor's note: The orignial contains an appendix that contains Johnson's comment about the advocates of "ideal" money. That appendix is omitted.]

1. Andrew Dickson White, Fiat Money Inflation in France, (rev. ed., 1914), gildedopinion/assignats.html, July 8, 2009.

2. Ibid.

3. Joseph French Johnson, Money and Currency in Relation to Industry, Prices, and the Rate of Interest (rev. ed., Boston: Ginn and Co., 1905), p. 311.

4. White.

5. Alexander Del Mar, Money and Civilization (1886, Rpt., Hawthorne: Omni Publications, 1975), p. 261.

6. Ibid., pp. 255-256.

7. Richard J. Greene, "Fiat Money System," Mar. 21, 2004, 04/greene032104pv.html, Apr. 23, 2008. Nick Jones, "Fiat Currency: Using the Past to See into the Future,", Jan. 1, 2009.

8. Del Mar, p. 251.

9. Johnson, p. 312.

10. "Assignat," Funk and Wagnalls New Encyclopedia (1983), II, 448.

11. Ibid.

12. Del Mar, p. 255.

13. White.

14. Ibid.

15. Del Mar, p. 252.

16. White.

17. Ibid.

18. Funk and Wagnalls New Encyclopedia, II, 448; Del Mar, p. 258.

19. Del Mar, p. 258.

20. White.

21. Ibid.

22. Funk and Wagnalls New Encyclopedia, II, 448.

23. Ibid.

24. White.

25. Del Mar, p. 257.

26. Johnson, p. 312.

27. Thomas Coley Allen, Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money (Franklinton: TC Allen and Co., 2009), p. 93.

28. John MacKay, introduction to Fiat Money Inflation in France by Andrew Dickson White, (rev. ed., 1914), gildedopinion/assignats.html, July 8, 2009.

29. White.

30. Ibid.

31. Ibid.

32. Ibid.

Copyright © 2009 by Thomas Coley Allen.

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