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.
On July 6th, Nobel economics laureate and Princeton Professor launched, in the New York Times, one of his occasional polemics, entitled Conservative Delusions About Inflation, against proponents of the gold standard.
Krugman Caricature under creative commons license from DonkeyHotey
As usual, Prof. Krugman is, conveniently for the position he takes, beyond lopsided in his presentation of the facts.
It is quite amusing to see what psychiatrists call "projection" ("in which humans defend themselves against unpleasant impulses by denying their existence in themselves, while attributing them to others") so vividly at work. Prof. Krugman virulently berates others for the selective use of data he obsessively practices:
On Sunday The Times published an article by the political scientist Brendan Nyhan about a troubling aspect of the current American scene — the stark partisan divide over issues that should be simply factual, like whether the planet is warming or evolution happened. It’s common to attribute such divisions to ignorance, but as Mr. Nyhan points out, the divide is actually worse among those who are seemingly better informed about the issues.
The problem, in other words, isn’t ignorance; it’s wishful thinking. Confronted with a conflict between evidence and what they want to believe for political and/or religious reasons, many people reject the evidence. And knowing more about the issues widens the divide, because the well informed have a clearer view of which evidence they need to reject to sustain their belief system.
In particular, Prof. Krugman berates "a virtual Who’s Who of conservative economists and pundits sent an open letter to Ben Bernanke warning that his policies risked 'currency debasement and inflation.'” He obstinately, and perhaps borderline dishonestly, fails to note that only one of these close to two dozen signers is a noteworthy gold standard proponent, and only perhaps two others appear to be sympathizers.
Nor does Krugman make the distinction between those gold proponents who were predicting inflation, based upon Fed policy, and those who were not, like Lewis E. Lehrman -- founder and chairman of the Lehrman Institute, sponsor of this website -- and other followers of Prof. Jacques Rueff.
Krugman's misstatement is unsurprising. As previously noted here, Prof. Krugman forthrightly admits to a certain kind of intellectual incuriosity, rising to the laziness of a polemicist and well below what is expected of a Princeton professor: "Some have asked if there aren’t conservative sites I read regularly. Well, no." He presents as feeling impunity about making claims unsupported by facts simply to suit whatever his polemical purpose.
Hence, his distorted -- and, in key respects, outright factually wrong -- description of the gold standard proponents:
let’s not forget that quite a few influential conservatives, including Mr. [Paul] Ryan, draw their inspiration from Ayn Rand novels in which the gold standard takes on essentially sacred status.
And if you look at the internal dynamics of the Republican Party, it’s obvious that the currency-debasement, return-to-gold faction has been gaining strength even as its predictions keep failing.
Of course, if Prof. Krugman were not engaging in the kind of "descent into dogma" which he claims to deplore he would have noted that the novelist Ayn Rand is not a significant factor in the monetary policy discourse on the right. Paul Ryan by no means is among the proponents of the gold standard.
The "return-to-gold faction" of the Republican party indeed has been gaining strength. It has done so on the basis of its observations that the real world performance of the managed fiduciary currency system that Prof. Krugman theologically reveres correlates closely with poor to mediocre economic growth, lousy job creation, and a dramatic upsurge in income inequality.
There are real world disorders correlating with the Federal Reserve Note Standard. These, not inflation, are the trends predicted by the most influential of the proponents of the classical gold standard. Events, sadly, have justified such predictions. Will his having "got it wrong" send Prof. Krguman "back to the drawing board...? Hahahahaha."
The Heritage Foundation's Backgrounders long have been considered "the gold standard" of policy analysis by the center right policy community in the nation's capital.
Now Heritage has issued a Backgrounder, The Centennial Monetary Commission Act of 2013: A Second Look at the Fed and the 2008 Financial Crisis by Heritage's Norbert J. Michel, Ph.D.
Congress should set up a formal monetary commission, such as the one proposed in the Centennial Monetary Commission Act of 2013. This type of commission would provide a public venue for both critics and supporters to discuss the Fed’s past operations and the appropriate role for the central bank going forward.
Centennial Monetary Commission Act
The Centennial Monetary Commission Act (CMCA) (H.R. 1176) would “establish a commission to examine the United States monetary policy, evaluate alternative monetary regimes, and recommend a course for monetary policy going forward.” This bill, originally introduced by Representative Kevin Brady (R–TX), and a companion bill introduced by Senator John Cornyn (R–TX), would provide a much needed public forum for experts to evaluate the Fed’s overall performance and mission. The commission’s recommendations would not bind Congress to make any particular changes, but it would provide Members of Congress with information they need to fulfil their constitutional responsibilities for monetary policy.
Among the operating protocols which the Act would charter this Commission to review is the gold standard. As Dr. Michel observes:
The gold standard, although it has many historical variations, is essentially another type of monetary rule. The gold standard requires paper currency in this regime to be convertible to a fixed amount of gold. From roughly 1870 to 1914 (commonly referred to as the classical gold standard period), all major nations adhered to this sort of gold standard. The U.S. dollar, for instance, was defined as 0.048 troy ounces of gold, which meant that an ounce of pure gold was equivalent to $20.67. People exchanged gold for currency and vice versa.
Under such a system, gold defines the monetary unit and serves as the ultimate medium of redemption. Both private banks and the central bank can issue paper currency (notes) under the gold standard, but their notes are redeemable in gold. Historically, banks held gold coins and/or bullion in reserve to meet customers’ redemption needs.
The rise of the gold standard to such respectful and prominent notice by such a prominent thought leader as Heritage Foundation represents a significant development in the policy discourse in Washington, DC. The long eclipse of the gold standard as an appealing policy option clearly is beginning to pass away.
Paper currency, undefined by and inconvertible to precious metal, preferably gold, has a long history of abuse and pernicious consequences. The abuses of paper money, then known as "bills of credit," reached such proportions in the American colonies that the British Parliament prohibited future issues.
Parliament even provided draconian penalties to any colonial governor or commander in chief who connived at such practices: to "forfeit and pay the sum of one thousand pounds, and shall be immediately dismissed from his government, and for ever after rendered incapable of any public office or place of trust."
1764 Pennsylvania 3-pence paper money, printed by B. Franklin
And although the Currency Act of 1764 was protested by the colonists, during the Revolutionary War and the post-colonial period the vast majority of American statesmen, both at state and federal levels, expressed comparable disdain for paper money. (Ben Franklin, however, remained enthusiastic for it.)
The Currency Act; April 19, 1764:
WHEREAS great quantities of paper bills of credit have been created and issued in his Majesty's colonies or plantations in America, by virtue of acts, orders, resolutions, or votes of assembly, making and declaring such bills of credit to be legal tender in payment of money: and whereas such bills of credit have greatly depreciated in their value, by means whereof debts have been discharged with a much less value than was contracted for, to the great discouragement and prejudice of the trade and commerce of his Majesty's subjects, by occasioning confusion in dealings, and lessening credit in the said colonies or plantations: for remedy whereof, may it please your most excellent Majesty, that it may be enacted; and be it enacted by the King's most excellent majesty, by and with the advice and consent of the lords spiritual and temporal, and commons, in this present parliament assembled, and by the authority of the same, That from and after the first day of September, one thousand seven hundred and sixty four, no act, order, resolution, or vote of assembly, in any of his Majesty's colonies or plantations in America, shall be made, for creating or issuing any paper bills, or bills of credit of any kind or denomination whatsoever, declaring such paper bills, or bills of credit, to be legal tender in payment of any bargains, contracts, debts, dues, or demands whatsoever; and every clause or provision which shall hereafter be inserted in any act, order, resolution, or vote of assembly, contrary to this act, shall be null and void.
II. And whereas the great quantities of paper bills, or bills of credit, which are now actually in circulation and currency in several colonies or plantations in America, emitted in pursuance of acts of assembly declaring such bills a legal tender, make it highly expedient that the conditions and terms, upon which such bills have been emitted, should not be varied or prolonged, so as to continue the legal tender thereof beyond the terms respectively fixed by such acts for calling in and discharging such bills; be it therefore enacted by the authority aforesaid, That every act, order, resolution, or vote of assembly, in any of the said colonies or plantations, which shall be made to prolong the legal tender of any paper bills, or bills of credit, which are now subsisting and current in any of the said colonies or plantations in America, beyond the times fixed for the calling in, sinking, and discharging of such paper bills, or bills of credit, shall be null and void.
III. And be it further enacted by the authority aforesaid, That if any governor or commander in chief for the time being, in all or any of the said colonies or plantations, shall, from and after the said first day of September, one thousand seven hundred and sixty four, give his assent to any act or order of assembly contrary to the true intent and meaning of this act, every such governor or commander in chief shall, for every such offence, forfeit and pay the sum of one thousand pounds, and shall be immediately dismissed from his government, and for ever after rendered incapable of any public office or place of trust.
IV. Provided always, That nothing in this act shall extend to alter or repeal an act passed in the twenty fourth year of the reign of his late majesty King George the Second, intituled, An act to regulate and restrain paper bills of credit in his Majesty's colonies or plantations of Rhode Island and Providence plantations, Connecticut, the Massachuset's Bay, and New Hampshire, in America, and to prevent the same being legal tenders in payments of money.
V. Provided also, That nothing herein contained shall extend, or be construed to extend, to make any of the bills now subsisting in any of the said colonies a legal tender.
Some of the standard fundamental denominations of gold by weight are grains and pennyweights. "Pennyweight" has an interesting, and significant, back story.
1807 British Half Penny, Reverse
According to Wikipedia:
The pennyweight is the common weight used in the valuation and measurement of precious metals.
Lord Keynes, in attacking the gold standard in his 1930 essay Auri Sacra Fames, commences with the observation that "The choice of gold as a standard of value is chiefly based on tradition. In the days before the evolution of Representative Money, it was natural ... to choose one or more of the metals as the most suitable commodity for holding a store of value or a command of purchasing power."
In deconstructing and ridiculing gold, presenting it as an atavism, Keynes, however, blundered. His claim for the superiority of "Representative Money" -- rather than "Real Money" has been falsified. The fiduciary dollar, a form of Representative Money not convertible to gold at a defined weight, has lost over 80% of its purchasing power in the past 40 some years. The reality of Real Money is reflected in the name and weight of a coin, a Penny weighing a pennyweight, or a Pound Sterling weighing a pound of sterling.
Sometimes tradition contains more wisdom than may be found in well-intended innovation. Keynes, a humanitarian and man of expedients, well might recognize and adapt to this fact were he alive today. As Walter Heller, economist for JFK and LBJ once famously observed, sometimes one must "Rise above principle and do what's right."
History, more than tradition, shows the classical gold standard to be the right thing.