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GoldMoney Series E1 P1
Max Keiser: Hi I’m Max Keiser, here with James Turk director of GoldMoney Foundation. Today we are going to take a look at the history of fiat money inflation and economic collapse here in France.
James Turk: We’re going to look at two specific episodes where the currency collapsed.
Max Keiser: Twice, hard to believe.
John Law and the Mississipi Bubble
Max Keiser:Frances first experiment with fiat money lasted only 5 years but it left deep scars. In 1715, Scottish financier John Law found a willing sucker in French regent Philippe d’Orleans. Louis XIV, the Sun King’s wars and extravagance had left France heavily in debt. His successor tried in vain to square the budget, but expenses doubled incomes. Drastic cuts would have to be made unless another solution was found. John Law, heading the Banque Générale, started issuing banknotes. He said this would guarantee liquidity and increase commerce. The bank invested in some hot properties, including the Mississippi company, whose shares traded right here, in the Rue Quincampoix. The shares jumped as did the value of the banknotes… and then in 1718 the Banque Générale became the Banque Royale and they issued even more shares. The economy boomed as paper wealth became widespread and in 1720 John Law was made Minister of Finance.. but that same year the bubble popped and the shares started to fall. Law’s solution was to issue more banknotes, to attempt to prop up the share price, in rapidly increasing amounts. The notes started to trade at a discount to metal money. The government started to panic, he issued more shares and forced the State Pension account to buy more shares. That didn’t work. People started to hoard more gold and silver. The State went door to door and confiscated it. In just a few short months the shares and the bank notes, now held by everyone in France and held in all the pension accounts, became worthless. The entire country went down the drain. Oh, and by the way, if you really wanted to insult someone? You called them a banker.
James Turk: I’m James Turk, director of the GoldMoney Foundation; it’s my pleasure to be speaking with Pierre Jovanovic, bestselling author and noted historian. It’s a flaw in human nature that we’re always thinking that there’s a free lunch in this world. A free lunch comes one way from printing money, but in reality there is no free lunch and fiat money ultimately leads to a financial or monetary crisis and that’s what happened with the Mississippi bubble. The shares of the Mississippi company rose, the eventually collapsed. What where the consequences of that collapse?
Pierre Jovanovic: These where tremendous, first of all people never believed too much in paper, they thought it was nonsense.. paper instead of physical gold or silver and then there was a kind of mini revolution.. the Mississippi company was in Rue Quincampoix in Paris and there where like thousands of people coming and striking just in front, they wanted their money back.. there were like…
James Turk: It was a bank run?
Pierre Jovanovic: Yeah, it was a bank run. The bank run started with the people who were very well informed, the people around the king and then progressively, it took 3 or 4 days, information went down to the people..
James Turk:So what they were doing is, they were trying to take this paper based on nothing but promises to redeem them for actual physical gold and physical silver, because the tangible asset ultimately has value, whereas paper is only based on someone’s promise and people were fearful that those promises were worth nothing.. and in fact they were worth nothing.
Pierre Jovanovic:Don’t forget that in the beginning they said that the Mississippi was like the promised land, filled like some biblical city, filled with gold mines and silver mines and golden apples growing on trees… people really fantasised about it, so everyone wanted the shares of the company and it was such a success that John Law issued more actions.. more shares than available. That’s a very common thing through history..
James Turk: After the collapse of the Mississippi bubble.. what was the impact on the French people? Was it throughout the entire country or just in Paris?
Pierre Jovanovic: No, it was definitely throughout the whole country because; don’t forget the law which forbade the French people from using gold and silver coins were extremely active. People all over France were thrown in jail and at the time jail was very specific.. it was really a nightmare.. so people were really scared. Everybody went nuts. There was just this anger against the politicians.. we cannot use the term politician because at the time it was the aristocracy…
James Turk: The monarchy.
Pierre Jovanovic: ..but the anger of the people was already there. This anger was going to be multiplied until the French Revolution and The Terror… when they would take everyone and just send them to the guillotine. It’s like a maelstrom of anger of people who have been stolen… their wealth for which they had worked all their life.
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GoldMoney Series E1 P2
The Assignat
Max Keiser: 1789. France is in turmoil as the Ancien regime is overturned and the Assemblée Nationale abolishes feudalism and the privileges of nobility and clergy, declares the Rights of Man, the Bastille is stormed and the King is forced to accept a constitutional monarchy. A feeling of freedom and enlightenment sweeps the nation. The country’s best minds come here to the Assemblée to make impassioned speeches. But the crushing debt is a problem. Some suggest the issuance of notes to bring liquidity and prosperity.
Max Keiser: Resistance is fierce. Jacques Necker, finance minister, argues passionately that printing money would lead down a dangerous path and reminds the Assemblée of the Mississipi Bubble and John Law, still in living memory for many. Necker was savagely attacked by the proponents of the assignats. You see, they had a cunning plan: They would confiscate property from the church and they would do a one time issuance of 400 million livres. This was the Collateralised Mortgage Obligation of its day. Limited, one time, backed by property… What could possibly go wrong?
Max Keiser: The debt crisis escalated. Silver disappeared from the markets. There was an outcry for paper money, but the defenders of sound money were eloquent. They remembered John Law and the Mississippi company.. names like Necker, DuPont, Maury… For a whole year the debate raged between Paper money and Hard Money. The paper money crowd said.. “it’s gonna be one time deal, fully collateralised” ..And in the end, by just a handful of votes, 400 million livres of Assignats was approved.
James Turk: Pierre, help me understand something... in 1720, the Mississippi Bubble collapsed bringing devastation to France and to its people. Seventy years later France again turned to paper currency. How could this happen?
Pierre Jovanovic: To keep the revolution going, Talleyrand had this genius idea. He said “we are going to steal, to take everything which belongs to the Vatican” As you know the Vatican at the time was extremely powerful.. just the Pope owned almost half of Europe. So they invented this extraordinary thing which they called “la caisse de l’extraordinare”… The “extraordinary cash register”. You can’t make this up. This extraordinary cash register was made to sell everything which they take from the Vatican.
James Turk: They confiscated the land…
Pierre Jovanovic: Everything! Buildings, people, cattle...
James Turk: ..And they issued these assignats in order to sell all this property and raise money to pay for the deficit.
Pierre Jovanovic: It was not a paper currency in the beginning, because they paid interest on it. The French government paid interest… before realising that it was such a good idea that they just transformed it into paper money… and we started all over again.
Max Keiser: The second time was easier. The issue was a wonder. The government paid off their expenses. People got their shiny new assignats, commerce was stimulated and liquidity increased.
Max Keiser: However after just five months the government had spent the money and since it continued to run a deficit, soon cries were raised for another assignat issue. The second assignat issue only took three months to approve and it was passed by a large majority. 503 to 423 votes. 800 million livres were to be issued. Necker resigned. The Royal family fled the Tuilleries Palace in servant’s clothes and was arrested at Varennes.
Max Keiser: The assignats had already started to lose value. Gold, silver, copper were all driven out of circulation. But the people wanted more. The government issued another 100 million livres in assignats.. Prices kept going higher, but people wanted more. It was a vicious cycle… prices higher, more assignats. Foreigners, exiled nobles, shopkeepers, the Church… all were blamed for rising prices…
Max Keiser: …but not the assignats. Speculation was rampant as people tried to protect themselves against a depreciating currency. A new speculator class emerged who wanted more of this funny money and they pressured government to keep the printing presses rolling. In December 1791 a new issue was authorised: Another 800 million livres. Meanwhile the value of the first issue continued to drop, from 100 livres nominal to 53 livres. In March Clavière became Minister of Finance, promising to speed up printing. In April came the fifth largest issue: 500 million livres. Many smaller issues and reissues were simultaneously being carried out. Issue after issue followed through 1792, every couple of months, up to a total of three-and-a-half billion livres. Food prices continued to rise. In August of 1792 food riots lead to an end of the constitutional monarchy, the Paris Commune insurgency, the assault on the Tuilleries Palace, the arrest of the royal family and the Jacobin takeover of the Assemblée. The guillotine started to work overtime.
James Turk: So they broke their promise and instead of limiting the amount in circulation, they increased the amount in circulation. So maybe after the first year they did another one and after six months…
Pierre Jovanovic: Exactly. Like the John Law stuff. Exactly the same thing. It’s always very easy for the government to use the printing press and print money.
Max Keiser: King Louis XVI was guillotined on January 1793. War intensified and the Reign of Terror really got going. War and money printing really got prices skyrocketing. The Jacobins introduced the “Law of the Maximum” to put a ceiling on prices. This only led to shopkeepers and shops disappearing because the penalty for violating the law was death. Dragoons went into the countryside looking for food and the shops in Paris were attacked by mobs. Meanwhile assignats kept rolling off the printing press and all efforts to prop up their value failed. In 1794 total assignats issued reached 7,000 million livres, in May of 1795 they totalled 10,000 million livres, in July of 1795 14,000 million… Creditors were wiped out. Debtors rejoiced.
James Turk: So the Maximum was essentially a form of price controls, shopkeepers could only charge so much…
Pierre Jovanovic: Yes, but it never worked, just as it never worked in Rome.
James Turk: They’d be forced to accept currency which was worth less than the goods, so the shopkeeper closed up shop rather than accept the worthless currency…
Pierre Jovanovic: Exactly as it was during Nero and the roman emperors (see Diocletian’s “Edict on Maximum Prices”) who started mixing silver and copper.
James Turk: …and that destroyed the economy even worse than the currency collapse itself.
Pierre Jovanovic: Exactly, history keeps on repeating.
Max Keiser: In October of 1795, the Convention fell and was replaced by the Directory, by then the guillotine had become a standard part of governmental succession. The Directory tried to replace the, by now almost worthless, assignat with a new issue by a different name, “Mandat” which was short lived. assignats continued to circulate, but were increasingly worthless.
James Turk: So ultimately when the assignat collapsed we went to what was called the “Mandat”...
Pierre Jovanovic: “Mandat National” if I remember correctly.
James Turk: it lasted one year.
Pierre Jovanovic: one year
James Turk: And it was also a paper currency.
Pierre Jovanovic: Definitely, just plain paper. You didn’t even have the church properties to back the money. It’s amazing… just the trust o the revolutionary government, which nobody trusted anymore.
Max Keiser: The Directory marks the end of the French Revolution. Bone crunching poverty gripped the nation. They feared the rise of the army. And they were right. In 1799 Napoleon’s coup brought in The Consulate and later the Empire.
Napoleon: “While I live I will never resort to irredeemable paper”
Max Keiser: He never did. The gold franc held until World War 1.
James Turk: The bottom line is that sometimes people and particularly politicians don’t learn from monetary history.
Pierre Jovanovic: Certainly, history is repeating itself, especially right now. We can see exactly the same thing. What we are seeing today is what the French people have seen 200 years ago with John Law.
James Turk: I think that people should get their history books out and see what’s happened before.
Pierre Jovanovic: People are too lazy to open their schoolbooks.
James Turk: Hopefully they’ll be watching this video.
Max Keiser: Seem like when anyone, anywhere fools with fiat money, catastrophe follows. James.. is anyone going to learn from this history?
James Turk: Lets hope this time we learn from history so we don’t have to relive it.
Max Keiser:Let’s go to the Café… and buy some gold!
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