Lessons from the Great French Inflation
By Richard Ebeling - May 20, 2014

Governments have an insatiable appetite for the wealth of their subjects. When governments find it impossible to continue raising taxes or borrowing funds, they have invariably turned to printing paper money to finance their growing expenditures. The resulting inflations have often undermined the social fabric, ruined the economy and sometimes brought revolution and tyranny in their wake. The political economy of the French Revolution is a tragic example of this.

Before the revolution of 1789, royal France was a textbook example of mercantilism, the eighteenth-century system of government control and planning. Nothing was produced or sold, imported or exported, without government approval and regulation.

Everywhere the Controlling Hand of Government Regulation

How extensive and pervasive were these regulations of economic activity? The famous French social philosopher, Alexis de Tocqueville, described it in detail in his book, The French Revolution and the Old Regime (1856):

"The government had a hand in the management of all the cities in the kingdom, great and small. It was consulted on all subjects, and gave decided opinions on all; it even regulated festivals. It was the government that gave orders for public rejoicing, fireworks, and illuminations . . .

"You have neither Parliament, nor estates, nor governors; nothing but thirty masters of requests [i.e., the heads of the bureaucratic planning agencies in Paris], on whom, so far as the provinces are concerned, welfare, misery, plenty or want entirely depend . . .

"Under the old regime, as in our own day, neither city, nor borough, nor village, nor hamlet, however small, nor hospital, nor church, nor convent, nor college could exercise a free will in its private affairs, or administer its property, as it thought best. Then, as now, the administration was the guardian of the whole French people . . .

"A very extensive machinery was requisite before the government could know everything and manage everything in Paris. The amounts of documents filed were enormous, and the slowness with which public business was transacted was such that I have been unable to discover any case in which a village obtained permission to raise its church steeple or repair its presbytery in less than a year. Generally speaking, two or three years lapsed before such petitions were granted . . .

"Ministers are overloaded with business details. Everything is done by them or through them, and if their information be not coextensive with their power, they are forced to let their clerks act as they please, and become the real masters of the country [i.e., authority was delegated to a permanent bureaucracy] . . .

"A marked characteristic of the French government, even in those days, was the hatred it bore to everyone, whether noble or not, who presumed to meddle with public affairs without its knowledge. It took fright at the organization of the least public body that ventured to exist without permission. It was disturbed by the formation of free society. It could brook no association but such as it had arbitrarily formed, and over which it presided. In a word, it objected to people looking over their own concerns, and preferred general inertia to rivalry . . .

"Government having assumed the place of Providence, people naturally invoked its aid for their private wants. Heaps of petitions were received from persons who wanted their petty private ends served, always for the public good . . .

"Nobody expected to succeed in any enterprise unless the state helped them. Farmers, who, as a class, are generally stubborn and indocile, were led to believe that the backwardness of agriculture was due to the lack of advice and aid from government . . .

"Sad reading, this: Farmers begging to be reimbursed the value of lost cattle or horses; men in easy circumstances begging for a loan to enable them to work their land to more advantage; manufacturers begging for monopolies to crush out competition; businessmen confiding their pecuniary embarrassments to the intendant [the local bureaucrat], and begging for assistance or a loan. It would appear that the public funds were liable to be used in this way . . .

"France is nothing but Paris and a few distant provinces that Paris has not yet had time to swallow up."

The Costly Extravagance of the King

While the French king's government regulated economic affairs, the royal court consumed the national wealth. Louis XVI's personal military guard numbered 9,050 soldiers; his civilian household numbered around 4,000—30 servants were required to serve the king his dinner, four of whom had the task of filling his glass with water or wine. He also had at his service 128 musicians, 75 religious officials, 48 doctors and 198 persons to care for his body.

The nobility and the clergy were mostly exempt from paying taxes, so the tax burden fell on the "lower classes." When Louis XVI assumed the throne in 1774, government expenditures were 399.2 million livres, with tax receipts only about 372 million livres, leaving a deficit of 27.2 million livres, or about 7 percent of spending. Loans and monetary expansion that year and in future years made up the difference. The accumulated debt of the royal French government was 2.5 billion livres.

In an attempt to put the government's finances in order, in July 1774 the king appointed a brilliant economist, Anne-Robert-Jacques Turgot, to serve as finance minister. Turgot did all in his power to curb government spending and regulation. But every proposed reform increased the opposition from the privileged and the favored – politically connected business groups, power-lusting bureaucrats, the tax-exempt Church organization – and the king finally dismissed him in May 1776.

It was the chaos of the king's finances that finally resulted in the calling into session of the Estates-General in early 1789, followed by the beginning of the French Revolution with the fall of the Bastille in Paris in July 1789. But the new revolutionary authorities were as extravagant in their spending as the king. Vast amounts were spent on public works to create jobs, and 17 million livres were given to the people of Paris in food subsidies.

French Revolutionary Paper Money Brings Disaster

On March 17, 1790, the revolutionary National Assembly voted to issue a new paper currency called the "assignat," and in April, 400 million were put into circulation. Short of funds, the government issued another 800 million at the end of the summer. By late 1791, 1.5 billion assignats were circulating and its purchasing power had decreased 14 percent. In August 1793 the number of assignats had increased to almost 4.1 billion, with its value having depreciated 60 percent. In November 1795 the assignats numbered 19.7 billion, and by then its purchasing power had decreased 99 percent since first issued. In five years the money of revolutionary France had become worth less than the paper it was printed on.

The effects of this monetary collapse were fantastic. A huge debtor class was created with a vested interest in the inflation because depreciating assignats meant debtors repaid in increasingly worthless money. Others had speculated in land, often former Church properties the government had seized and sold off, and their fortunes were now tied to inflationary rises in land values. With money more worthless each day, pleasures of the moment took precedence over long-term planning and investment.

Heinrich von Sybel explained the social and psychological atmosphere of the time in his History of the French Revolution (1882):

"None felt any confidence in the future in any respect; few dared to make business investment for any length of time, and it was accounted a folly to curtail the pleasures of the moment, to acquire or save for an uncertain future . . .

"Whoever possessed a handful of Assignats or silver coins, hastened to spend them in keen enjoyment, and the eager desire to catch at every passing pleasure filled each heart with pulsations, and were frequented with untiring zeal . . .

"The cabarets and cafes were no less filled that the theaters. Evening after evening every quarter of the city [Paris] resounded with music and dancing . . .

"The enjoyments, too, received a peculiar coloring – glaring lights and gloomy shadows – from the recollections and feelings of the Revolution . . .

"In other circles no one was received who had not lost a relative by the guillotine; the fashionable ball-dress imitated the cropped hair and the turned-back collar of those who were led to execution; gentlemen challenged their partners to the dance with a peculiar nod, intended to remind them of the fall of the severed head."

Goods were hoarded—and thus became scarcer—because sellers expected higher prices tomorrow. Soap became so scarce that Parisian washerwomen demanded that any sellers who refused to sell their product for assignats should be put to death. In February 1793 mobs in Paris attacked more than 200 stores, looting everything from bread and coffee to sugar and clothing.

The first illusions of prosperity of rising prices from paper money creation soon turned to economic stagnation. As Andrew Dickson White explained in Fiat Money Inflation in France (1876):

"Under the universal doubt and discouragement, commerce and manufacturing were checked or destroyed. As a consequence, the demand for labor was stopped; laboring men were thrown out of employment, and under the operation of the simplest law of supply and demand, the price of labor – the daily wages of the laboring class – went down."

Costs of Inflation Fall on the Weakest in Society

On whom did the burden of the inflation mostly fall? The poorest. Financiers, merchants, and commodity speculators who normally participated in international trade often could protect themselves. They accumulated gold and silver and sent it abroad for safekeeping; they also invested in art and precious jewelry. Their speculative expertise enabled many of them to stay ahead of the inflation and to profit from currency fluctuations. The working class and the poor in general had neither the expertise nor the means to protect the little they had. They were the ones who ended up holding the billions of worthless assignats.

Finally, on December 22, 1795, the government decreed that the printing of the assignats should stop. Gold and silver transactions were permitted again after having been banned and were recognized as legally binding. On February 18, 1796, at 9 o'clock in the morning, the printing presses, plates and paper used to make assignats were taken to the Place Vendôme and before a huge crowd of Parisians were broken and burned.

Price Controls Bring Even More Disaster to France

As the inflation grew worse, an outcry was heard from "the people" that prices must be prevented from rising. On May 4, 1793, the National Assembly imposed price controls on grain and specified that it could only be sold in public markets under the watchful eye of state inspectors, who were also given the authority to break into merchants' private homes and confiscate hoarded grain and flour. Destruction of commodities under government regulation was made a capital offense.

In September 1793 the price controls were extended to all goods declared to be of "primary necessity." Prices were prohibited from rising more than one-third from their level in 1790. And wages were placed under similar control in the spring of 1794. Nonetheless, commodities soon disappeared from the markets. Paris cafes found it impossible to obtain sugar; food supplies decreased as farmers refused to send their produce to the cities.

During the Jacobin Republic of 1792–1794 in revolutionary France, a swarm of regulators spread across France imposing price ceilings and intruding into every corner of people's lives; they imposed death sentences, confiscated wealth and property and sent men, women and children to prison and slave labor. In the name of the war effort, after revolutionary France came into conflict with many of its neighbors, all industries in any way related to national defense or foreign trade were placed under the direct control of the state; prices, production and distribution of all goods by private enterprises were under government command.

A huge bureaucracy emerged to manage all this, and that bureaucracy swallowed up increasing portions of the nation's wealth.

The Collective Is Everything, the Individual Nothing

This all followed naturally from the premises of the Jacobin mind, which under the shadow of Jean-Jacques Rousseau's notion of the "general will" argued that the state had the duty to impose a common purpose on everyone. The individual was nothing; the state was everything. The individual became the abstraction, and the state the reality.

Not even the family had autonomous existence in the new French collectivist society. As one of the leading French revolutionaries declared: "The principles that ought to guide parents are that children belong to the general family, to the Republic, before they belong to particular families. The spirit of private families must disappear when the great family calls. You are born for the Republic and not for the pride or the despotism of families."

Those who did not see the "general will" would be taught, those who resisted the teaching would be commanded and those who resisted the commands would perish, because only "enemies of the people" would oppose the collectivist Truth.

The End to the Controls and the Freeing of Prices

In late 1794 the anti-Jacobin Thermidorians gained the upper hand in the government and brought the infamous French reign of terror to an end. At the same time advocates of a freer market were able to make their case.

One of them, M. Eschasseriaux, declared, "A system of economy is good . . . when the farmer, the manufacturer, and the trader enjoy the full liberty of their property, their production, and their industry."

And his colleague, M. Thibaudeau, insisted: "I regard the Maximum [the price controls] as disastrous, as the source of all the misfortunes we have experienced. It has opened a career for thieves, covered France with a hoard of smugglers, and ruined honest men who respect the law . . . I know that when you violate commercial liberty you are subjected to great inconveniences. I know that when the government attempts to regulate everything, all is lost."

Finally, on December 27, 1794 the price and wage controls were lifted, and market-based terms of trade were once again allowed. And following the end of the assignats a year later, goods once more flowed to the market and a degree of prosperity was restored – until Napoleon's experiments in government planning when he shortly came to power in France.

In our own time, democratic majorities have replaced the absolute monarchs of that earlier period. But the thirst for power and plunder through political means remains the same. When taxes or borrowing are insufficient to cover all that government wants to spend, the handle of the monetary printing press is still turned, even if today it involves the simple click of the "mouse" that magically creates tens of billions of dollars or euros on the computer screen of a central bank.

And it still carries with it the potential destabilization and destruction of the economic and social fabrics of society when let loose without limit and not stopped in time.