Liberty Street Economics on The Collapse of the French Assignat and Its Link to Virtual Currencies Today
The Federal Reserve System's James Narron and David Skeie, career officials with the Federal Reserve System, are two eminent historically erudite figures.
Writing in the New York Federal Reserve Bank's online publication, Liberty Street Economics, they recently provided a continuation of their valuable historical "revue," Crisis Chronicles: The Collapse of the French Assignat and Its Link to Virtual Currencies Today:
In the late 1700s, France ran a persistent deficit and by the late 1780s struggled with how to balance the budget and pay down the debt. After heated debate, the National Assembly elected to issue a paper currency bearing an attractive 3 percent interest rate, secured by the finest French real estate to be confiscated from the clergy. Assignats were first issued in December 1789 and initially were a boon to the economy. Yet while the first issues brought prosperity, subsequent issues led to stagnation and misery. In this edition of Crisis Chronicles, we review how fiat money inflation in France caused the collapse of the French assignat (subscription required) and describe some interesting parallels between the politics of French government finance (subscription required) in the late 1700s and more recent fiscal crises.
As our colleagues point out in a recent San Francisco Fed Economic Letter, recovery from a recession triggered by a financial crisis is greatly influenced by the government’s fiscal position. Because of France’s poor fiscal status, the country was plunged into financial ruin for years. The assignats have taken their place in history as another paper money made worthless by over-issuance, with disastrous results. But others have been able to break the cycle of over-issuance and hyperinflation. And in one incredible example, Brazil did it with a virtual currency.
Those engaged, in practice as well as in theory, in matters of monetary integrity might fairly draw at least two lessons from the history presented.
First, although issues of paper fiduciary currency demonstrate an inherent propensity to lose value -- quickly or slowly. Specie -- money made of precious metals, particularly gold, demonstrate inherent stability as does currency defined by and convertible into specie. Whatever the theoretical quality of fiduciary money, one may speculate that both technical challenges and a lurking moral hazard make paper money inherently inferior.
Second, to serve its purpose as an agent of equitable prosperity the nominal and real value of money must be kept rigorously aligned. This was a point made by no less than Copernicus, in his 1525 essay On The Minting of Money.
I think that the relevant measure here is the valuation [Latin aestimatio] of the money as such,
The fundamental things don't change as time goes by.