Economic Ideas: Inflation, Price Controls and Collectivism During the French Revolution

Governments have an insatiable appetite for the wealth of their subjects. When governments find it impossible to continue raising taxes or borrowing funds, they have invariably turned to printing paper money to finance their growing expenditures. The resulting inflations have often undermined the social fabric, ruined the economy, and sometimes brought revolution and tyranny in their wake.

The political economy of the French Revolution is a tragic example of this. Before the revolution of 1789, royal France was a textbook example of mercantilism. Nothing was produced or sold, imported or exported, without government approval and regulation.

Government Extravagance and Fiscal Ruin

While the French king’s government regulated economic affairs, the royal court consumed the national wealth. Louis XVI’s personal military guard numbered 9,050 soldiers; his civilian household numbered around 4,000—30 servants were required to serve the king his dinner, four of whom had the task of filling his glass with water or wine. He also had at his service 128 musicians, 75 religious officials, 48 doctors, and 198 persons to care for his body.

To pay for this extravagance and the numerous other expenses of the Court, as well as the foreign adventures financed by the King (such as the financial help extended to the American colonists during their war of independence from the British), the King had to rely on a peculiar tax system in which large segments of the entire population – primarily the nobility and the clergy – were exempt from all taxation, with the “lower classes” bearing the brunt of the burden.

One of the most hated of the taxes was the levy on salt. Every head of a household was required to purchase annually seven pounds of salt for each member of his family at a price fixed by the government; if he failed to consume all the salt purchased during the previous year and, therefore, attempted to buy less than the quota in the new year he was charged a special fine by the State. The punishments for smuggling and selling salt on the black market were stiff an inhumane.

As we saw, in a previous article, when Louis XVI assumed the throne in 1774, government expenditures were 399.2 million livres, with tax receipts only about 372 million livres, leaving a deficit of 27.2 million livres, or about 7 percent of spending. Loans and monetary expansion that year and in future years made up the difference.

In an attempt to put the government’s finances in order, in July 1774 the king appointed a brilliant economist, Anne-Robert-Jacques Turgot, to serve as finance minister. Turgot did all in his power to curb government spending and regulation. But every proposed reform increased the opposition from privileged groups, and the king finally dismissed him in May 1776.

Those who followed Turgot as controller-general of the French government’s finances lacked his vision or his integrity. The fiscal crisis merely grew worse and worse. As Thomas Carlyle (1795-1881) summarized it in his study of The French Revolution (1837):

Be it ‘want of fiscal genius,’ or some far other want, there is the palpablest discrepancy between Revenue and Expenditure; a Deficit of the Revenue . . . This is the stern problem: hopeless seemingly as squaring the circle. Controller Joly de Fleury, who succeeded [Jacque] Necker, could do nothing with it; nothing but propose loans, which were tardily filled up; impose new taxes, unproductive of money; productive of clamor and discontent.

As little could Controller d’Ormesson do, or even less; for if Joly maintained himself beyond a year and a day, d’Ormesson reckons only by the months . . . “Fatal paralysis invades the social movement; clouds of blindness or of blackness envelop us; we are breaking down then, into the black horrors of NATIONAL BANKRUPTCY?

It was the chaos of the king’s finances that finally resulted in the Estates-General’s being called into session in early 1789, followed by the beginning of the French Revolution with the fall of the Bastille in Paris in July 1789. But the new revolutionary authorities were as extravagant in their spending as the king. Vast amounts were spent on public works to create jobs, and 17 million livres ($3.4 million) were given to the people of Paris in food subsidies.

Assignats: Paper Money and Wild Price Inflation

In November 1789, Honore Mirabeau proposed an answer to all of the government’s financial difficulties. In the previous month, the National Assembly had nationalized all of the estates and properties of the Church. Mirabeau now suggested that paper notes be issued by the National Assembly, with the Church lands as collateral. The notes would first pass into circulation as spending for public works and other expenses of the government. They would be redeemable at face value in the form of purchase price for Church property.

At the same time, it was argued that the added circulation would give a “stimulus” to industry, create jobs, and put money in the pockets of the working class. (Later it would be the confiscated lands of the nobility who had fled France that would be used as the fictitious collateral behind a flood of paper money.)

On March 17, 1790, the revolutionary National Assembly voted to issue a new paper currency called the Assignat, and in April, 400 million of them ($80 million) were put into circulation. Short of funds, the government issued another 800 million ($160 million) at the end of the summer. Seymour Harris, in his study of The Assignats (1930), traces the path of the paper currency’s depreciation. By late 1791, 1.8 billion Assignats were circulating and its purchasing power had decreased 14 percent. In August 1793 the number of Assignats had increased to almost 4.9 billion, its value having depreciated 60 percent. In November 1795 the Assignats numbered 19.7 billion, and by then its purchasing power had decreased 99 percent since first issued. In five years the money of revolutionary France had become worth less than the paper it was printed on.

The effects of this monetary collapse were fantastic. A huge debtor class was created with a vested interest in the inflation because depreciating Assignats meant debtors repaid in increasingly worthless money. Others had speculated in land, often former Church properties the government had seized and sold off, and their fortunes were now tied to inflationary rises in land values. With money more worthless each day, pleasures of the moment took precedence over long-term planning and investment.

Goods were hoarded—and thus became scarcer—because sellers expected higher prices tomorrow. Soap became so scarce that Parisian washerwomen demanded that any sellers who refused to sell their product for Assignats should be put to death. In February 1793 mobs in Paris attacked more than 200 stores, looting everything from bread and coffee to sugar and clothing.

In his four-volume History of the French Revolution (1867), Henrich von Sybel (1817-1895) explain the social and psychological environment of the time:

None felt any confidence in the future in any respect; few dared to make any business investment for any length of time, and it was accounted a folly to curtail the pleasures of the moment, to acquire or save for an uncertain future . . .

Whoever possessed a handful of Assignats or silver coins, hastened to spend them in keen enjoyment, and the eager desire to catch at every passing pleasure filled each heart with pulsations. In the autumn all the theaters had been reopened and were frequented with untiring zeal . . . The cabarets and cafes were no less filled than the theaters. Evening after evening every quarter of the city resounded with music and dancing . . .

These enjoyments, too, received a peculiar coloring – glaring lights and gloomy shadows – from the recollections and feelings of the Revolution . . . In other circles no one was received who had not lost a relative by the guillotine; the fashionable ball-dress imitated the cropped hair and the turned-back collar of those who were led to execution; and the gentlemen challenged their partners to the dance with a peculiar nod, intended to remind them of the fall of the severed head.

On who did the burden of the inflation mostly fall? The poorest. Financiers, merchants, and commodity speculators who normally participated in international trade often could protect themselves. They accumulated gold and silver and sent it abroad for safekeeping; they also invested in art and precious jewelry. Their speculative expertise enabled many of them to stay ahead of the inflation and to profit from currency fluctuations. The working class and the poor in general had neither the expertise nor the means to protect the little they had. They were the ones who ended up holding the billions of worthless Assignats.

Finally, on December 22, 1795, the government decreed that the printing of the Assignatsshould stop. Gold and silver transactions were permitted again after having been banned and were recognized as legally binding. On February 18, 1796, at 9 o’clock in the morning, the printing presses, plates, and paper used to make Assignats were taken to the Place Vendôme and before a huge crowd of Parisians were broken and burned.

Disastrous Price Controls To Combat Inflation

However, before the episode with the Assignats ended, as the inflation grew worse, an outcry was heard from “the people” that prices must be prevented from rising. On May 4, 1793, the National Assembly imposed price controls on grain and specified that it could only be sold in public markets under the watchful eye of state inspectors, who were also given the authority to break into merchants’ private homes and confiscate hoarded grain and flour. Destruction of commodities under government regulation was made a capital offense.

In September 1793 the price controls were extended to all goods declared to be of “primary necessity.” Prices were prohibited from rising more than one-third in 1790. And wages were placed under similar control in the spring of 1794. Nonetheless, commodities soon disappeared from the markets. Paris cafes found it impossible to obtain sugar; food supplies decreased as farmers refused to send their produce to the cities.

American economist, Edwin Kemmerer (1875-1845), in his study of the economics of the French Revolution in his book, Money (1935), explained some of the ways the price controls were evaded:

Among the methods employed for evading this price-fixing system the following may be cited: the withdraw of goods from the market and the failure to produce new supplies when the existing stocks were exhausted; the production and sale of inferior quality, the feeding of grain to farm animals at times with the prices of grain subject to the Maximum and the prices of live animals were not; the milling of wheat into flour by the farmers when the price of wheat was controlled and the price of flour was not.

Farmers sold their produce at home clandestinely, instead of bringing it to market. When the prices of raw materials were controlled, the prices of manufactured articles frequently rose abnormally, and when the prices of necessities were held down, the price of luxuries soared.

Evasions of the law yielded large profits, when the penalties for evasion, if caught, were extreme. This led to much official corruption. The supply of goods available in the markets at the controlled prices were often inadequate and the queue, as in Russian cities of today, became a familiar institution.

The Ideology of the Total State over the Individual

During the Jacobin Republic of 1792–1794, a swarm of regulators spread across France imposing price ceilings and intruding into every corner of people’s lives; they imposed death sentences, confiscated wealth and property, and sent men, women, and children to prison and slave labor. In the name of the war effort, after revolutionary France came into conflict with many of its neighbors, all industries in any way related to national defense or foreign trade were placed under the direct control of the state; prices, production, and distribution of all goods by private enterprises were under government command. A huge bureaucracy emerged to manage all this, and that bureaucracy swallowed up increasing portions of the nation’s wealth.

This all followed naturally from the premises of the Jacobin mind, which under the shadow of Rousseau’s notion of the “general will” argued that the state had the duty to impose a common purpose on everyone. The individual was nothing; the state was everything. The individual became the abstraction, and the state the reality. Those who did not see the “general will” would be taught; those who resisted the teaching would be commanded; and those who resisted the commands would perish, because only “enemies of the people” would oppose the collectivist Truth.

The French Revolutionist Bertrand Barere (1755-1841) declared in 1793:

The Republic must penetrate the souls of citizens through all the senses . . . Some owe [France] her industry, others their fortunes, some their advice, others their arms; all owe her their blood. Thus, then, all French people of both sexes and of all ages are called upon by patriotism to defend liberty . . .

Let everyone take his post in the national and military movement that is in preparation. The youth will fight; the married men will forge arms, transport baggage and artillery, and provide subsistence; women will work at the soldier’s clothing, make tents, and become nurses in the hospitals for the wounded; the children will make lint out of linen; and the old men, again performing the mission they had among the ancients, will be carried to the public squares, there to enflame the courage of the young warriors and propagate the hatred of kings and the unity of the Republic.

All laws, customs, habits, modes of commerce, thought and language were to be uniform and the same for all. Not even the family had autonomous existence; and children? They belonged to the State. Said Barere:

The principles that ought to guide parents are that children belong to the general family of the Republic, before they belong to particular families. The spirit of private lives must disappear when the great family calls. You are born for the Republic, and not for the pride and the despotism of families.

Here was the birth of modern national collectivism and allegiance and obedience to the “people’s” State.   When in January 1793 a messenger was sent to inform the revolutionary French forces in the east of the country, who were facing the invading armies of anti-revolutionary foreign monarchs, that the French king had been executed, one of the French officers asked, “For whom shall we fight from now on,” if not the king? The reply was, “For the nation, for the Republic.”

The Return to Freer Market Principles

In late 1794 the anti-Jacobin Thermidorians gained the upper hand in the government, and the advocates of a freer market were able to make their case. One of them, M. Eschasseriaux, declared, “A system of economy is good . . . when the farmer, the manufacturer, and the trader enjoy the full liberty of their property, their production, and their industry.”

And his colleague, M. Thibaudeau, insisted, “I regard the [price] Maximum as disastrous, as the source of all the misfortunes we have experienced. It has open a career for thieves, covered France with a hoard of smugglers, and ruined honest men who respect the law . . . I know that when the government attempts to regulate everything, all is lost.”

Finally, on December 27, 1794, the price and wage controls were lifted, and market-based terms of trade were once again allowed. And following the end of the Assignats a year later, goods once more flowed to the market and a degree of prosperity was restored. As Adolph Thiers (1797-1877) described in his History of the French Revolution (1842):

Nobody any longer traded in anything but silver. This money, which had apparently been hidden away or exported aboard, took over the circulation. Whatever was hidden came into the open, whatever had left France returned there . . .

Gold and silver, like all commodities, move to where demand attracts them, their price become higher and stays at that level until the supply is adequate and the demand is satisfied. Only gold and silver were to be seen on the markets and people’s wages were paid in the same manner. One might have said that no paper money existed in France.

Warrants [Assignats] were to be found only in the hands of speculators, who received them from the government and resold them to buyers of national assets. Thus the financial crisis continued to exist for the state, but almost ceased to exist for individuals.

The types of collectivist ideas and economic policies that were experienced during the French Revolution have been experienced many times since, and have had their advocates in our more modern times, including, some have suggested, for instance, in the writings of such famous economists as John Maynard Keynes.

In late 1936, the Austrian-born economist, Joseph A. Schumpeter, wrote a review of Keynes’s recently published, The General Theory of Employment, Interest, and Money, which in a handful of years became the “bible” of the Keynesian “new economics.” Schumpeter concluded the review with the following observation:

Let him who accepts the message there expounded [in John Maynard Keynes’s The General Theory of Employment, Interest, and Money] rewrite the history of the French ancien regime [old regime] in such terms as these:

Louis XVI was a most enlightened monarch. Feeling the necessity of stimulating expenditure he secured the services of such expert spenders as Madame de Pompadour and Madame de Barry. They went to work with unsurpassable efficiency. Full employment, a maximum of resulting output, and general well-being ought to have been the consequence. It is true that instead we find misery, shame and, at the end of it all a stream of blood. But that was a chance coincidence.

Source: http://www.fff.org/explore-freedom/article/economic-ideas-inflation-price-controls-collectivism-french-revolution/

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