But it might work for us

In the fictitious world of television series “Battlestar Galactica,” a popular religious refrain holds that “all of this has happened before, and all of this will happen again.” The series, which is otherwise short on phrases that can be charitably interpreted as relevant to economic history, holds a special significance given the state of the economy today.

In the period after the French Revolution, the National Assembly of France found itself with substantial debt and a concerning budget deficit. “There was a general search,” wrote historian Andrew Dickson White, co-founder of Cornell University, “for some short road to prosperity: ere long the idea was set afloat that the great want of the country was more of the circulating medium; and this was speedily followed by calls for an issue of paper money.”

Although support for paper money began to grow, the French also had reason to be suspicious of a system of currency based entirely upon government fiat. In 1720, for instance, they had seen the supply of John Law’s unbacked paper bills roughly quadruple, prices subsequently double and their economy face ruin and hardship at the hands of unchecked inflationary expansion. In order to assuage the fears of those who warned of a return to Law’s recessionary French economy, certain members of the National Assembly proposed that land be confiscated from the Catholic Church and used as a backing for these new paper bills, a plan that involved the added benefit of transferring almost a third of all property in France from the newly vilified church to the French government.

The confiscation of church land also lent the National Assembly another benefit, this time in the form of an apparent check on inflation. “As soon as paper money should become too abundant,” explained White, “it would be absorbed in rapid purchases of national lands.” The nation, then, essentially planned to combat inflation, should it have arisen, by selling off part of the land taken from the church. The paper money received in exchange could be removed from circulation, and the value of those bills that remained in the economy after the sale would be driven up. Mirabeau, an 18th-century French statesman, said that the process would flow as naturally as the water cycle. As the paper money rained down into the economy, it would be funneled into large gluts that could be vaporized back into the monetary atmosphere until the next liquidity drought arose. “The issue of paper,” Mirabeau would later claim with certainty, “will show that gold is not necessary.”

In April of 1790, to the chagrin of fiat money detractors who remembered the ruin of their fathers and forefathers faced at the hands of John Law, that issue of paper finally came. The French National Assembly authorized the issue of paper bills, known as “assignats,” backed by national property worth 400 million French livres and bearing interest at a rate of 3 percent. Almost immediately, however, the advocates of the assignat began to complain that the sum was too small, and a mere five months later the effects of the paper money stimulus had begun to wear off. “If it is necessary to create five thousand millions, and more, of the paper,” read a pamphlet addressed to the National Assembly and disseminated to citizens in September of 1790, “decree such a creation gladly.” The pamphlet urged that a policy of controlled inflation was “the only means to insure happiness, glory and liberty to the French nation,” and Mirabeau argued that the losses that would result to bankers, creditors and capitalists were worth the prosperity that would return to French manufacturers.

On September 29, 1790, the assignatistas won their second victory in the National Assembly, a second issue of 800 million assignats came to pass, and it was decreed that the sum total number of assignats in circulation at any time could not surpass those already issued. As another precaution against runaway inflation, the National Assembly decided to do away with its view of the “water cycle” paper money system and to replace it with fire, declaring its intention to immediately burn all assignats received in exchange for the sale of national properties.

Actions, however, speak louder than words, and despite its verbal commitment to a controlled and responsible issuance of fiat paper money, “France was now fully committed,” as White puts it, “to a policy of inflation.” In November of 1790, the National Assembly attempted to fix the exchange ratio of silver to gold, and then in June of 1791, 600 million new assignats were issued. These 600 million, like the 800 million before them, did not bear the 3 percent interest rate that characterized the initially issued 400 million. The assignats, which came to be issued more and more frequently, had developed into a basic fiat money system that would soon give rise to hyperinflation.

As that hyperinflation came to pass, the apparent rise that the assignat had given to the French was revealed to be nothing more than a passing high, the ephemeral joyride that inevitably stems from the issue of easy credit unbacked by hard and real resources. Each new round of inflation, White noted in his account of the time period, markedly depreciated the currency. Gold and silver were driven out of circulation, with accusations of “hoarding” and threats of death hurled at those who were caught with gold under their mattresses and in their basements. “The plenty of currency had at first stimulated production and created a great activity in manufactures,” White described, “but soon the markets were glutted and the demand was diminished.” Foreign demand dropped off, and unemployment ran rampant. Credit and capital flows dried up. Business and investment stagnated. “Curious it is to note,” White observed, “the general reluctance to assign the right reason.”