Shorting The Federal Reserve: Part Deux by 720Global

The sequence of events leading up the French Revolution are likely unfamiliar to most. Yet money printing and a debauched French currency played no small part in those events. As a sequel to “Shorting the Federal Reserve”, 720 Global aims to provide an historical example of excessive money printing which lead to financial crisis, and ultimately the revolution of a major sovereign nation. More than a history lesson, this article effectively illustrates the road on which the U.S. and many other nations currently travel. The story relayed in this article is not a forecast for what may happen but a simple reminder of what has repeatedly happened in the past.

As you read, notice the story lines the French politicians used to persuade the opposition and justify money printing. Note the similarities to the rationales used by central bankers and neo?Keynesians today. Then, as now, it is promoted as a cure for economic ills with manageable consequences and where failure to generate a sustainable recovery are thought to be a failure of not having acted boldly enough.

Our gratitude to the late Andrew D. White, on whose work we relied heavily. The exquisite account of France circa the 1780?1790’s was well documented in his paper entitled “Fiat Money Inflation in France” published in?1896. Any unattributed quotes were taken from his paper.

Before The Presses Rolled

During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt tightening was not popular and the King certainly didn’t want a revolution on his hands. For example, in 1776 newly anointed Finance Minister Jacques Necker believed France was much better off by taking large loans from other countries instead of increasing taxes as his recently fired predecessor argued. Necker was ultimately replaced 7 years later when it was discovered France had heavy debt loads, unsustainable deficits, and no means to pay it back.

By the late 1780’s, the gravity of France’s fiscal deficit was becoming severe. Widespread concerns helped the General Assembly introduce spending cuts and tax increases. They were somewhat effective but the deficit was very slow to decrease. The problem, however, was the citizens were tired of the economic stagnation that resulted from belt tightening. The medicine of austerity was working but the leaders didn’t have the patience to rule over a stagnant economy for much longer. The following quote from White sums up the situation well:
“Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self?denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few”.

By 1789, commoners, politicians and royalty alike continuously voiced their impatience with the weak economy. This led to the notion that printing money could revive the economy. The idea gained popularity and was widely discussed in public meetings, informal clubs and even the National Assembly. In early 1790, detailed discussions within the Assembly on money printing became more frequent. Within a few short months, chatter and rumor of printing money snowballed into a plan. The quickly evolving proposal was to confiscate church land, which represented more than a quarter of France’s acreage to “back” newly printed Assignats (the word assignat is derived from the Latin word assignatum – something appointed or assigned). This was a stark departure from the silver and gold backed Livre, the currency of France at the time.

Assembly debate was lively, with strong opinions on both sides of the issue. Those against it understood that printing fiat money failed miserably many times in the past. In fact, the John Law/Mississippi bubble crisis of 1720 was caused by an over issue of paper money. That crisis caused, in White’s words, “the most frightful catastrophe France had then experienced”. History was on the side of those opposed to the new plan.

Those in favor looked beyond history and believed this time would be different. They believed the amount of money printed could be controlled and ultimately pulled back if necessary. It was also argued new money would encourage people to spend and economic activity would surely pick up. Another popular argument was France would benefit by selling the confiscated lands to its people and these funds would help pay off its debts. In addition, land ownership by the masses strengthened French patriotism.

Shorting The Federal Reserve: Part Deux

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