Lecture III.: On Some Effects of Government Paper Money.

In the last Lecture I considered the effect on the value of metallic money which can be produced by paper money, issued by individuals. In the present Lecture I shall consider the effects of paper money issued by governments.

My first instance shall be taken from the celebrated Mississippi scheme of Law.

In the beginning of the year 1716, the specie circulating in France was supposed to amount to about £40,000,000 sterling, or 800 millions of livres—the mark of silver, which is worth about 40 English shillings, being coined into 40 livres. But for some previous years the quantity of silver denominated a livre had been constantly varying; in 1715, the mark had been coined into 28 livres; in 1709 it had been coined into 40; in 1689 it had been coined into 28; and between 1689 and 1709 had been subject to constant alteration. Under these circumstances Law established a bank at Paris, called the General Bank, issuing notes payable on demand in livres of the same weight and fineness as those which were current at its institution; promising, in fact, to pay, not a nominal, but an ascertained quantity of silver. The security afforded by this promise enabled the bank in the course of three years to issue notes to the amount of 59 millions of livres; and if we suppose that about 19 millions of livres were consequently withdrawn from circulation, the notes of the bank may be supposed to have raised the whole currency of the kingdom to £41,000,000 sterling, or 840 millions of livres.

On the first of January, 1719, the Government, that is, the Regent in the name of the King, took possession of the bank. The first alteration was in the form of the notes; the words, “of the same weight and fineness” were omitted, and the note no longer promised to pay any thing more definite than so many livres; being, in fact, a promise to pay whatever the debtor thought fit, as the debtor had the power, in fact was in the habit, of increasing and diminishing the quantity of silver denominated a livre according to his notions of expediency. The next change was in the amount of its issues.

The bank issued notes to the nominal amount

of livres of the nominal value of rather more than £50 millions sterling; of which at least 600 millions must have been in circulation at one time. What part of the previously existing specie remained in circulation, is doubtful. It is clear, however, that it could not have been all withdrawn, as no run was ever made upon the bank for coin. Its notes, though they lost the premium which they had borne while the establishment continued in Law’s hands, still exchanged for coin at par.—I must now turn a little backwards in the story, and state, that while the bank was in the hands of Law and his partners, they received from the government the exclusive privilege of trading to the West Indies and the French possessions on the continent of America, (whence the name of the Mississippi scheme has ever since adhered to the whole of the transactions originating with Law,) to all countries to the east of the Cape of Good Hope, and had been incorporated under the name of “The Company of the Indias.” The mint, which in France is a source of profit, was afterwards made over to them, and they obtained a lease from the crown, first of the duties on tobacco, and afterwards of all those duties which were usually leased under the old régime, and they were at last entrusted with the receipt of all the revenues of the state. In return for these privileges, besides the annual rents for the duties leased to them, they engaged to lend the government 1,600 millions (£80 millions sterling) at three per cent. To enable them to do this, the bank was restored to them, on the 22d of February, 1720: their proceedings, however, were to be under the control of government, and the King guaranteed the payment of their notes. Five days after followed the celebrated arrêt of the 27th February, 1720, which prohibited any person or corporation from possessing any bullion, or more than five hundred livres (twenty-five pounds) in specie. The most extensive powers of search were given to the police, and informers were rewarded with all the excess found.

At the same time the notes of the company were not only made a legal tender, but the only legal tender, and the payment of any sum beyond ninety-nine livres, (four pounds nineteen shillings) in specie was made punishable by a fine of three thousand livres. The object of these laws was, of course, first to force all holders of specie to carry it to the bank to be exchanged for notes; secondly, to prevent their demanding payment from the bank in specie, except for small sums; and thirdly, to give a forced value to the notes, as the only money that could be safely tendered, or safely kept. On the 5th of March, 1720,—a considerable sum of specie having probably been received by the bank in the mean time,—an arrêt was made, directing the mark of silver to be worth eighty livres. This, of course, enabled the bank to pay whatever specie might be demanded by the holders of their notes, at half the former expense. This arrêt continued in force only a week, for it was followed by that of the 11th March, 1720, which declared that on the 1st of April the mark of silver was to be worth only seventy livres, and on the 1st of May, sixty-five; and all use of gold and silver as a medium of exchange was prohibited. As the bank received coin in the meantime at eighty livres the mark, this occasioned a considerable influx of coin to their coffers, in anticipation of its impending reduction in value. In three weeks they are said to have received 44 millions of livres, worth nominally about one million one hundred thousand pounds sterling.

The government and the bank seem now to have supposed that the ordinary standards of value, gold and silver, being got rid of, bank paper would be unsusceptible of depreciation or excess; and between the beginning of March and the 2nd of May, they issued notes of the nominal value of 1,626,672,910 livres: being more than double the whole average amount of the money of the country. In the beginning of May, there were in circulation, notes of the nominal value of 2,235,083,590 livres; being a nominal value nearly three times as great as the 800,000,000 of coin for which they were substituted. Gold and silver coin would, of course, have disappeared, even if they had not been legally banished. Still, for the purpose of small payments, there was a circulation of small silver coins, and of copper, and in these small coins the bank paid those notes of ten livres which were presented to it. It may appear singular, that this coinage of small silver remained in the country. As the nominal value of every commodity had been at least trebled in France, we might have expected that the silver would have been collected and exported, and that the failure of the bank would have been occasioned by their subsequent inability to pay silver for their small-notes—and such, I think, would have been the case, if the whole transaction had taken up a longer time. But in less than three weeks after the last issue of notes, the bank was murdered by the government. If the government had not interposed, it might have lived in apparent credit for three months longer.

The history of the Mississippi scheme is a proof how ignorant the whole of a cultivated nation may be of the necessary results of their actions.

It appears to us obvious, that when the currency of the country was suddenly tripled, all prices must have experienced at least an equal rise. The French government was so little prepared for this result, that when it took place, they resorted to the most violent means to correct it. On the 21st of May, an arrêt was issued, declaring that the bank notes in circulation should in future pass at only half their nominal value. Now this was not, in fact, a greater diminution of the value of the notes than the arrêt of the 5th of March preceding, which had directed the mark of silver to be worth 80 livres, instead of 40. On the 4th of March, the holder of 40 livres in notes could demand of the bank a mark of silver. On the 5th of March he could demand only ½ a mark. So on the 20th of May, the holder of 65 livres in notes was entitled to a mark of silver. On the 21st, he was entitled to only ½ a mark. The first operation diminished the value of the notes directly only as compared with silver. The second diminished their value directly, not only in silver, but in every thing else. The first was injurious to creditors; the second to debtors. In the first case, the holder of the notes, so far as he was a debtor, could throw his loss, or much more than his loss, upon his creditors; in the second case, so far as he was a creditor, he could reimburse himself, or much more than reimburse himself, from his debtors. But in both cases, as between him and the bank, he was equally defrauded; and as the arrêt of the 5th of March had not interfered with the circulation of the notes, the government probably expected that of the 21st of May to create as little alarm. But they were mistaken. Though the French public were too ignorant to perceive the consequences of raising the nominal value of silver, they understood those of sinking the nominal value of notes. Up to the 21st of May, holders of commodities possessing intrinsic value seem to have given them in exchange for the notes, in blind confidence that others would do the same. Others did not, in fact, do the same, for as prices kept rising, the man who in December had sold a given quantity of corn for one thousand francs in notes, would not have been able in February to purchase an equal quantity of corn, or of any other commodity, with the same notes. Strange, however, as it may appear, the deterioration of the notes in value does not appear to have affected their circulation. All that people looked to was nominal value, and while the notes were called livres, nobody inquired what a livre meant. But the instant the denomination was altered; the instant government declared that a note for ten livres should be worth only five, the baselessness of the paper fabric was detected. The terror was as universal and as blind as the confidence had been. To use Sir James Steuart’s words, on the 22d day of May, a man with one hundred millions of bank notes might have starved in the streets. The Regent and his ministers, as much alarmed as the people at the tremendous machinery they had set in motion, tried the most arbitrary and the most inconsistent expedients to control it. They revoked the arrêt of the 21st of May, and at the same time raised the denomination of the coin, by declaring that the mark of silver should be worth 82½ livres. To stop the run on the bank, they ordered its payments to be suspended. And when 9000 livres in paper would purchase only 82½ in silver, an arrêt was issued, prohibiting any person from refusing to take the notes at par, under a penalty of double the value of the notes refused. Under a similar forfeiture all persons were commanded to bring back whatever funds they had exported, and forbidden to make any investments in foreign securities. All persons were forbidden to meet together, and soldiers were employed to prevent and disperse all assemblies of merchants and brokers. And when it was found that confidence could not be restored by forbidding people to communicate their fears, and that the credit of the notes was irretrievable, the transaction was wound up by the arrêt of the 10th of October, 1720, which, after providing, not for the payment, but for the investment, at a very low interest, of the outstanding notes, declared that after the 1st of December following, they should have no value.

The next great financial bubble of France was the issue of Assignâts. A few years before 1789, the specie current in France had been estimated at 2200 millions of livres, or about 88 millions sterling. The revolutionary government possessed great wealth in confiscated property, but wanted money. To supply this want, and to create a market for the confiscations, they issued notes in the following form:

“National property Assignât of 100 francs.”

These notes were a legal tender, and in that respect resembled every other paper currency having a forced circulation; but they differed from all others in not even professing to represent any specified thing. The words “National property” signified that their value might be obtained by purchasing with them the confiscated property at the auctions of such property, which were constantly occurring. But there was no reason why that value should have been called 100 francs. It depended on the comparative quantity of the property so purchasable, and the number of assignâts issued. They were first issued in May, 1790, and the amount was fixed by law at 400 millions French, or sixteen millions sterling. In September, 1790, 1200 millions French had been issued; in 1793, 3626 millions; in 1794, 8817 millions and a half; in 1795, 19,699 millions and a half; and on the 7th of September, 1796, the issue had amounted to 45,579 millions, or about £1,823,160 sterling.

We have seen the consequences of the issue by Law of paper of the nominal value of 2200 millions of livres,—we may conceive the consequences of issuing 45,000 millions.

The value of assignâts fell from day to day. The prices of commodities rose in proportion, not merely to the existing depreciation, but to the well-founded apprehension of a still further depreciation.

When the supply of a durable commodity is suddenly increased, the value falls, but not necessarily in proportion to the additional supply. Unless the causes of the additional supply are ascertained to be permanent, most of the dealers prefer holding their existing stock, in the hope that the market may alter, to parting with it at a certain loss. But when a commodity is perishable, no loss can be so complete, or so certain, as to retain it. A small increase of supply may create such a competition among the sellers, as to reduce the price to nothing. A fish market might be so over supplied as to reduce the sellers to give away a portion of their stock, or even to pay people to remove it from their stalls. Assignâts were a most perishable commodity. Every body taxed his ingenuity to find employment for a currency, of which the value evaporated from hour to hour. It was passed on as it was received, as if it burned every one’s hands who touched it. Those who had never engaged in business, became speculators. Others purchased estates, built houses, or bought pictures and furniture. What was yesterday an extravagance became a bargain to-day. No one scrupled any expense, even for mere transitory pleasure, if it afforded a means of investing or spending, or in any way getting rid of what he possessed in assignâts.

Those who depended on fixed money payments were reduced to beggary, and beggary, at periods of general distress, is starvation. Every morning there were found in the waters, and on the shores of the Seine, the bodies of wretches who had preferred death by suicide to death by hunger. The state of the labouring classes was scarcely more tolerable. An increase in the rate of wages is never contemporary, even under the most favourable circumstances, with a forced depreciation of money. The labourers, generally speaking, have but weak means of combining to demand higher wages, or of persisting in their combination, if the advance be refused; while capitalists are almost always combined to resist the advance, and have funds to stand out in their resistance. And in the general disorganization of both the internal and the external commerce of France, which marked the periods which I am describing, the funds for the maintenance of labour, and the average rate of wages must have fallen off, even if the currency had remained metallic, and at its former standard. The sovereign people felt and acted with the usual folly and violence of a despot. The depreciation of the assignâts was attributed to the conspiracies of the Aristocrats, and to the intrigues of Mr. Pitt. The rise of prices was explained by the favourite theory of a monopoly; and it was thought that all this could be remedied by terror, by substituting fine, imprisonment, confiscation, and death, for the ordinary motives to commercial transactions. “If provisions and commodities are wanting,” said the Procureur-General Chaunette, “on whom will the people, the legislator people, lay the blame? On the authorities?—no. On the convention?—no. It shall lie on the merchants and the dealers. Rousseau was one of the mass of the people, and he well said, ‘when the mass of the people have nothing else to eat, they must feed on the rich.’ ” To prevent the constantly increasing difference between the value of paper and metallic money, the purchasing assignâts with money at less than their nominal value, or the sale of money for more than its nominal value in assignâts, or the making any difference in price according as that price was to be paid in money, or in assignâts, was made a crime punishable by six years’ imprisonment in irons.

To prevent the hoarding of the precious metals, all concealed gold and silver, in whatever form, became forfeited, half to the state, and the other half to the informer. These measures had the success that might have been expected. The law against taking assignâts at less than par, was passed in April 1793. In the following June, 100 francs in silver were worth 300 in paper. In August they were worth 600. The failure of the law seems to have been attributed to its mildness. The punishment was raised to twenty years’ imprisonment in irons: and in 1796, an assignât of 100 francs, professing to be worth 4l. sterling, was currently exchanged for 5 sous 6 deniers, or rather less than three pence in money.

These efforts to prevent the depreciation of assignâts in money, were accompanied by efforts, as violent as senseless, and still more mischievous to prevent their depreciation in commodities.

The first of these attempts was the celebrated maximum. By that law, which was passed in May 1793, when the issue of assignâts was not one-tenth of the amount to which it afterwards rose, corn was directed to be sold exclusively, in open market, at a price to be fixed by each commune; or, as we should say, by the vestry of each parish, according to the average price of the four months of January, February, March, and April, preceding the enactment.

As that price was even then grossly inadequate, and became more so every day, the markets were of course unsupplied. This was attributed to what the French call accaparement, and we, when with equal wisdom we made it a crime, called engrossing. The decree which made accaparement a crime, defined an accapareur to be “one who withdraws from circulation commodities of the first necessity, and does not publicly sell them;” and it defined commodities of the first necessity to be, bread, wine, butcher’s meat, corn, flour, leguminous vegetables, fruit, charcoal, wood, butter, tallow, hemp, flax, salt, leather, liquors, salted provisions, cloth, wool, and all clothing except silk. Every dealer was bound to make periodical declarations of his stock, which the communes were to verify by search; and each commune was to appoint persons who were to fix such prices to each article, as would leave a moderate profit to the dealer, but not exceed the means of the people. “If, however,” added the decree, “the cost of production be such as to leave no profit to the dealer, the commodity must still be sold at such a price as the purchaser can afford.” And any violation of the decree, any refusal to sell, any concealment of stock, or even the being accessory to any such violation, was punished by death.

Of course the majority of the shops were shut, and in those which continued open only the worst articles were exposed to public sale, and all that was tolerable was reserved to be sold in secret bargains to those who still retained the means, and were willing to incur the risk of becoming purchasers at the metallic value.

The convention appear to have thought that the inefficiency of the law arose from the maximum having been imposed on the finished commodities in the dealer’s hands, leaving the charges of production and transport unregulated. Commissioners were directed to be appointed in every parish to state the prime cost of all the enumerated commodities at the place of production, according to the prices of 1790, that is, according to metallic prices, which were not one-tenth of those which existed at the time of the decree. To this one-third was to be added (that is, not one thirtieth part of what ought to have been added) to compensate for the subsequent rise. A sum was then to be fixed for the expense of carriage to the market; five per cent. on these sums was to be added for the profit of the wholesale merchant, and ten per cent. for that of the retailers; and the aggregate of these sums was to be the price of the commodity. To diminish in some measure the competition of purchasers, the consumer was forbidden to purchase from any one but the retailer, and the retailer from any one but the wholesale dealer: even the quantity which each might purchase was defined. The grocer was forbidden to take more than twenty-five pounds of sugar at once from the sugar merchant, and the seller of lemonade more than ten: and the authorities gave to each intended purchaser a certificate specifying the amount that he might purchase.

As the French subsist chiefly on bread, the bakers’ shops were the principal subjects of legislation. They were not to be entered without a certificate, which at the same time was a test of the good political principles of the bearer, and specified the quantity that he might purchase. A long rope was extended from the counter into the street which the file of candidates for purchase were to lay hold of, in order to ensure their entering the shop in fair succession. But it was found that persons spent whole nights in the street, in vain attempts to make their entrance. Sometimes the rope was cut through wantonness or malice, and the feeble were suffocated or trampled to death in the consequent struggles; and the disorder became the more frightful when, as a remedy, it was decreed that the last comers should be served first. To prevent the closing the shops, every person who, having been a year in trade, discontinued or diminished his business, was declared a suspected person; and this when suspicion was imprisonment, and imprisonment the guillotine. At length, even the revolutionary government seem to have felt the impossibility of using fear instead of hope as the motive of production and exchange. The assignâts, having sunk below one three-hundredth part of their nominal value, were called in, the government offering to take them at one per cent. in payment of a forced loan which, in violation of all resemblance to honesty, was imposed in money, and to give mandâts, a new species of paper money, in exchange for them at the rate of three per cent. The ultimate result was, that of the whole 45,579,000,000, 12,744,000,000 were, in some way or other discharged: the remaining 32,835,000,000 of the nominal value of about £1,313,000,000 sterling, about twice the amount of our national debt, remained waste paper in the holder’s hands.

The mandâts were of the nominal value of 2,400,000,000 French, or about £96,000,000 sterling: they were directions to the authorities to put the bearers into possession, without auction, of a definite portion of the confiscated estates. Such, however, were the comparative values in money of the property and the mandâts, that they came out at a discount, and gradually sunk to less than a seventieth of their nominal value. They were issued on the 9th of June, 1796, and were extinguished, partly in the purchase of confiscated property, and partly in the payment of taxes, before the end of the following September.

The length of the details into which I have been led as to the paper currency of France, forces me to pass quickly over the history of the other paper currencies of the continent. Catherine II. gave Russia a paper currency, and, by the moderation of her issues, for some time kept it at par; but in 1814, the period at which Storch closes his narrative, four roubles in paper were worth only one in silver.

The Bank of Copenhagen was founded in 1736. Nine years afterwards the government freed it from the obligation of paying its notes in full. In 1773, the king, thinking probably the privilege of issuing an inconvertible paper money too valuable for a private corporation, took the bank into his own hands. In October 1813, a dollar in silver was worth 1600 dollars in paper.

The Austrian paper money owes its origin to Maria Theresa. In 1810 a florin in silver was worth thirteen florins in paper. In 1811 the government called in the existing paper money, and directed it to be exchanged, at one-fifth of its nominal value, for a new paper money; and in 1812, eight florins in paper were worth only one in silver.

These examples are enough to show that the depreciation of our paper money, great and disastrous as it was, was far less than has usually attended an inconvertible paper currency; and if on any future war a new bank restriction is proposed, I hope it will be recollected that the evils which that unhappy measure actually produced, great as they were and continue to be, bear no proportion to those which the example of other nations shews us to have been exposed to.