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Hyperinflation History: La Terreur

A while back a reviewer dismissed the idea of a dollar collapse by asking “Collapse against what?” His argument was that the other major currencies are a mess too, so in relative terms the dollar will be fine. This of course misses the point, but in a useful way because it illustrates how words that seem clear to a field’s insiders (in this case gold bugs and other gloom-and-doomers) can be confusing to normal people.

After all, “collapses” do happen all the time. The stock market craters once a decade at least, and oil and houses have seen epic bear markets in just the past couple of years. It’s bad if you own this stuff, but life goes on, so what’s the big deal? And since, as the reviewer said, the dollar is valued in relation to other currencies that also seem shaky, why would it have to collapse at all?

Reasonable questions. Taking the second one first, it’s true that the dollar is quoted in terms of its exchange rate versus the euro, yen, and pound. But its value lies in the amount of stuff it can buy. It is thus possible to for the dollar buy a lot less oil, wheat, and land (that is, to collapse) while maintaining a stable exchange rate, if the euro and yen are falling just as fast.

But the first question is the big one: Is a currency collapse different from oil going from $150 to $40 or the NASDAQ falling by 80%, and if so, how? The answer is that it’s very different, because money is more than just another commodity. It’s the glue that holds a society together. Savers work in order to store value for later in life. In the U.S. their savings take the form of dollars, and the effort they expend today depends in part on how much they expect their dollars to be worth tomorrow. Borrowers, meanwhile, calculate their obligations in currency, and moderate their borrowing based on their sense of how much the currency they’ve promised to pay back in the future will be worth. In other words, all that’s holding them back is fear of having to repay their loans. So when you devalue a currency and you hurt the ants and enbolden the grasshoppers.

Historically — and there’s a lot of history on which to draw — when a country’s currency is trashed, so is its national character. The relationships between work, savings, debt and more generally honesty and fair play, are all perverted when money ceases to function as a store of value.

Governments, meanwhile, can only do their thing if they can pay for it, and as the value of their monetary reserves and tax revenue falls, they go absolutely crazy. Frequently, hyperinflation equals dictatorship.

Because there hasn’t been a full-on, end-of-the-world currency collapse in living (U.S.) memory, most people have no idea how destructive an uncontrolled printing press can be. But it takes just a few real-world examples to make the point. So here — the first in a series — is a brief look at what happened after the French Revolution in 1789, excerpted from the Mises Institute’s Inflation and the French Revolution: The Story of a Monetary Catastrophe.

The tale begins with the newly-formed National Assembly wresting power from the French monarchy. Inheriting a financial mess, and worried about invasion from ticked-off neighboring monarchies, it responds as governments tend to do, with a military buildup and massive public spending on bread and buildings. To pay its bills, the Assembly expropriates the lands and estates of the French church and tries to monetize them. But…

It was not long before the Assembly realized that the sale of church lands alone would not be the fiscal bonanza they had envisioned. For one thing, throwing all those properties on the market would diminish their selling price. Second, there was just not enough floating capital (i.e. specie) in France to make large scale purchases. What to do? It was time for “the last remedy” for fiscal insolvency—government fiat paper currency. In March 1790, the Assembly authorized the printing of 400 million livres of paper assignats of denomination of 200, 300, and 1,000 livres, bearing three percent interest, and receivable for taxes and the purchase of the national properties. Supporters argued that the assignats would furnish payments to the state creditors, provide a means for the people to purchase lands and properties, draw specie out of hiding, and stimulate commerce and industry.

Many delegates opposed the measure on economical principles. They argued that the new currency would depreciate, that it would be followed by additional emissions, further depreciation, and that the calamities of John Law’s Mississippi Bubble (1717–20) would be re-enacted across republican France. Their objections and warnings were brushed aside. The enthusiasts essentially argued that economic laws did not apply to France, that she had learned from John Law’s failed experiment never to overdo paper money, that a republican government could more safely inflate than a monarchical one (the precise opposite of the truth), and that the immense landed wealth of France provided solid security. Even though the issue was relatively moderate, the assignats promptly depreciated five, and later seven, percent, as measured against gold.

By late summer, the government was again short of funds, so they naturally turned to a second issue of assignats. However, this time they doubled the dose to 800 million, dropped the interest payment, and made them legal tender for all purchases and debts across France. When the economists again remonstrated, paper advocates replied that the backing of the state would guard against depreciation, that assignats paid into the treasury would be destroyed, and that this would be the last emission.

The consequences of the second issue were just as the unpopular economists had foretold: depreciation in their value, rising prices, feverish speculation, complaints about a shortage of money, calls for more assignats, the prostration of commerce and industry, inordinate consumption, and declining savings. Economic calculation became impossible, but speculation quite profitable (or ruinous).

In June 1791, the Assembly issued another 600 million assignats (the previous promise not to issue more was conveniently and predictably forgotten), and in December an additional 300 million. By the end of the year, its market value had fallen to 66 percent of its face value. In 1792, they issued 600 million more. In April of the same year, they confiscated the estates of the émigrés (those who fled France to avoid being arrested or murdered) and added them to the national properties. Then came 1793—Year One; the year of la Terreur. Having tried inflation and legal coercion, they would try terrorizing the population into accepting the plunging assignat at par, and producing and selling at a patriotic loss.

In March, the National Convention created the Orwellian-named Committee of Public Safety (another unfortunate American precedent), which was a kind of committee of terror, dedicated to expropriating and murdering those deemed to be “traitors” to France or enemies of la Revolution. In May, they passed le Maximum, imposing price ceilings on grain. It worsened the grain shortage. In June, they passed the Forced Loan, a progressive income tax, whose progressivity was progressively lowered to reach more and more citizens. They also passed increasingly draconian and deadly laws designed to force people to accept the assignats at par and forbidding them from exchanging them for anything less than their face value. In July, the Convention repudiated the first issue of interest-bearing assignats.

In August, trading (i.e. buying or selling) specie was prohibited. In September, the Convention passed the General Maximum, extending price ceilings to all foodstuffs, as well as firewood, coal, and other essentials. In that month, despite the deadly coercion, the assignat fell 30 percent against gold. During 1793, the Convention issued 1,200 million assignats; in 1794, 3,000 million. Next came the deluge. In 1795, 33,000 million were printed, and in October, when a new government—the Directory—assumed power, the assignats’ purchasing power had fallen to almost nothing. On the black market, 600 francs of assignats traded for one gold franc.

The Directory was done with the assignat, but it was not done with inflation. In February 1796, it issued a new paper currency, the mandat, and made it exchangeable for assignats at the rate of 30 to 1. By August, after 2,500 million had been issued, the mandat had fallen to three percent of its face value. In 1796, the Directory had had enough, finally, and it withdrew the legal tender character of both the assignat and the mandat. Thereupon, their remaining meager exchangeable value disappeared altogether.

It took Napoleon to restore hard money to France.

20 thoughts on "Hyperinflation History: La Terreur"

  1. Riplakish,

    Great explanation. And I almost guarantee you that most readers of this website, including me, understand your position and agree with it.

    My argument is that you and a host of other individuals here, are looking at inflation and deflation from the wrong perspective. As you yourself explain, increase and decrease of money in circulation and increase and decrease of good and services causes prices (who knows which good or service) to fluctuate. I agree with you 100% on this.

    In my opinion, that is why for anyone to explain inflation and deflation in terms of price increases and price decreases is almost impossible and it is incorrect.

    Why? Well, take the Weiner Republic for instance. While food prices and essentials were rising, the cost to rent plummeted. So what kind of environment was that than? Was it inflationary or deflationary? I think you would agree that it was inflationary, as a huge increase of money (to pay for war) was chasing ever fewer goods. That expansion of money is inflation.

    In my opinion looking at prices is incorrect because there are too many variables involves, as you mentioned, productivity, weather, social issues, etc, etc. Bad weather causing oranges to up in prices is NOT inflation.

    So what is the correct way, in my view, to see inflation and deflation. I think you have to take a holistic approach and see it from the money supply+credit perspective, NOT from a price perspective. The money has expanded in the last 3 years, but that has been dwarfed by the credit collapse. So in essence, the money supply+credit has contracted. In my opinion, this view is much more simple than trying to measure every single price of all assets and services out there. It cannot be done! The expansion or contraction of money supply+credit does have an effect on prices at certain point.

    Danny

  2. For those who only see deflation due to the credit hole, it is because your definition is broken. It is not about the amount of money in circulation.

    It is about the amount of money in circulation against the goods and services being purchased.

    In a microcosm, consider a seller with a meal, and two buyers with $1. The meal has intrinsic value (one must eat to live). One could argue that the meal will probably end up costing around a dollar, as the buyers HAVE to eat, and its all they have to offer. Now, add another buyer to the mix, but let him have $2. You now have an increase in currency against a fixed amount of assets. I’ll bet that meal will be somewhere between $1 and $2 (the buyer will be willing to offer more than those limited to $1, but may not be willing to give up everything they have).

    The problem is, currency is not the only variable which can fluctuate. The amount of goods and services available can also fluctuate. The ratio of the two will generally describe whether you have inflation or deflation.

    So, if the amount of money available drops 2%, but the productivity – the amount of goods and services – drops by 4%, the ratio of money to goods and services to purchase still _increases_ by 2% – inflation.

    This is the mechanism though which our current recessionary inflation is happening. You would either need a substantial improvement in productivity without a comparable amount of new money (the beginning of a recovery), or the volume of money to plunge without a corresponding plunge in goods and services being offered, in order to have a deflation. While either could happen, neither are particularly likely in the present environment.

  3. A true hyperinflation comes AFTER A WAR. Like with Weimar republic, after they lost WWI. Like with France, after the french revolution (which was essentially a civil war.) We even had a big bout of inflation in 1945, after WWII, and again in 1973, when Vietnam was just coming to an end.

    People who are predicting a big hyperinflation in the USA are actually predicting the USA will soon get into A BIG WAR. That seems remote, with Obama in office (but maybe 80% probability with Dick Cheney in office …)

  4. Hi Danny,

    perhaps you are right and we will not get hyperinflation. I was addressing the notion that it is logical to invest in property, for those who do expect hyperinflation. In fact, gold & silver are much better bets, for those having such expectations.

    Finally, it is possible to have inflation on life’s essentials, while asset prices deflate. If a currency weakens, import prices go up, notably fuel, and a cycle can take hold. Once cash gets into a cycle of ever weakening, then people try to convert it as soon as they can into hard goods (or hard currency, which today is gold & silver), nobody wants to sit on a fast depreciating asset. This can be the touch-fuse for hyperinflation.

  5. Response to Max,

    The fed has been blowing bubbles for the last 100 years (and I know you agree), and now that we have reached a plateau, you guys think we will see hyperinflation? Oh boy…

    Let me get this straight! I thought inflation came about as a result of an expansion of money and credit (they blow bubbles, right?). But right now, credit is essentially drying up. For an update on credit, go out and ask your friends and see who is getting the mortgage offers they were getting years ago. Now look at how much household wealth (credit) has evaporated. Do you get the picture now? Yes, the fed is printing.. But the credit side of money is contracting at a phenomenal rate and faster than the paper money they are printing. The fed will not be able to catch up with the credit collapse. I don’t believe in looking at prices to determine inflation, but all that removed credit is not chasing goods any longer..

    I am not a genius, but it seems that that credit balloon has popped and has a huge hole. And I don’t see how a deflating balloon can be inflated before it deflates entirely. Do you?

    Danny

  6. newfy777,

    If you are holding on to silver, gold, etc because you think the USD will collapse, you are totally out of touch with reality dude, wake up. You also mention how they “manipulate” the USDX to prop up the dollar but you fail to mention what is going to make “them” stop? This is a ridiculous assumption, you need to start thinking logically here.

    If gold goes up, it will not be because the dollar collapses, but again, the only thing you gold bugs know how to do is beat down on the dollar, as the dollar has been inversely moving against gold. Let me say this from a neutral standpoint, as I do not have any gold or dollar positions. Have you not seen the dollar collapse in the last 10 years. I mean, the dollar has lost about half it’s value against the EURO. HALF!!!!!!!!!!!! And you all know that the dollar floats against other currencies, right???

    So, what makes you think that other countries are not printing and “monetizing” their debts?? Have they not passed their own stimulus packages.. Have they not had a housing/credit/stock bubbles, mostly worst than ours. You don’t have to be a freaking genius to know that the dollar has already collapsed ahead of all other major currencies. If the dollar is making a move, it will be higher, not lower. And if you are basing your strategy on a sinking dollar, than I suggest you revisit that strategy.

    I am not betting against gold at all (I like gold), even though I expect a major pullback, but you guys are buying gold for all the wrong reasons. The stupid thing is that in the long run, gold should do well and you guys will look like geniuses. Just be ready some a nice pullback on gold and the USD rise, which should make you see reality for what it is!

    Danny

  7. T-dog writes “There has never been a hyperinflation where housing prices and stocks have fallen. What are you afraid of??? Go out and buy them tough guys!!!!”

    There is a chronology to a currency collapse, that invalidates your logic regarding houses. Suppose in your expectation of currency collapse, you bought 5 properties at a fixed 6% mortgage rate, thus immuning yourself from seismic interest rate changes. In the event of the expected currency collapse, what will likely happen, is that the currency is unlikely to be destroyed overnight, but implodes in a slow motion whirlpool fashion.

    Effectively, this means that your income, which is likely fixed (especially if you are an employee), is suddenly insufficient to meet your daily food, fuel and living expenses. As hyperinflation kicks in, both your salary and savings become increasingly meaningless and you become financially distressed. You would not want to convert your gold to cover todays expenses at $10k per ounce, because next week it will be $11k per ounce and so on. It would be squandering of stored wealth.

    Regarding the properties, though your employee income, rental income, mortgages and savings are fixed, your property taxes, insurance and maintenance costs go sky high. You can add a zero, maybe two, to last years total dollar costs, but not to your available funds, which have now disappeared on buying food and such like. How can one pay bills that have increased ten, or a hundred fold, and which must be paid, when income has not moved?

    In summary, hyperinflation (even when short) is hell on earth. Even if it is over relatively quickly (2 years?), you have to survive it with your investments intact, and that involves a hell of alot more than buying early, and it is in no way easy money, even if looming hyperinflation is a sure bet.

  8. Thanks for describing in minute detail the first ever hyperinflation in the aftermath of the French Revolution, and its close link to resulting state terror.
    But don’t be fooled into thinking that man ever will learn from his mistakes.
    Remember the Weimar hyperinflation 150 years later, which was even
    worse, with paper money bills printed in billions of Reichsmark ?
    It helped Hitler and the Nazi’s ascending to power, unleashing the WW2 disaster.

  9. I don’t disagree with the possibility of a dollar collapse in the future. But if you and John Rubino are so sure of it coming soon then you should all go out and buy houses(with a big mortgage and low or no down payment, stocks(on margin), canned foood, gold, silver and try to get in massive debt.

    Don’t think housing prices or stocks have fallen enough??? There has never been a hyperinflation where housing prices and stocks have fallen. What are you afraid of??? Go out and buy them tough guys!!!!

  10. What the dollar will collapse against is credibility. When merchants accept dollars only at a discount or not at all, trade will suffer. Then comes more dollars plus wage/price controls leading to hording/shortages. Next comes lstiff penalties for dollar discrimination, such as selling the same item for a $20 bill or $5 in quarters. The heavily manipulated USD-EUR cross (Fed prints dollars to buy euros) won’t matter, because owning and trading in other currencies will be outlawed too. 1. Fiat currency -> 2. Boom -> 3. Bust -> Repeat 2 & 3 several times -> 4. Collapse -> 5. Tyranny -> 6. Revolution -> 7. Sustainable Growth -> Back to 1.

  11. am prepared..gold.. silver.. stored food..great article
    nobody else I know[ except my brother who has gold and silver like me] believes the dollar will ever fail..[WRONG]..the only reason it hasn’t already is smoke and mirrors,USDX manipulation and other hanky panky in the markets..
    you WILL see a world economic collapse[ordos de chaos..order out of chaos] as there has never been a world reserve currency failure before…not yet..its going to be a brutal WORLD economic collapse..not just the U.S, as the illuminist banksters running the world want 5 billion of us to perish,and starvation is the cheapest simplest way to do that….a world economic collapse IS indeed exactly what the banksters want..just look at the Georgia guidestones..”the world population must be reduced to 500,000,000 million for humanity to be in perpetual harmony with the earth”[something like that]..don’t fool yourself..these people are dead serious and the bible prophesies it too in Revelations..get storable food and water filtration FIRST,then physical gold and silver bullion..just my 2 cents..

  12. The only thing I can foresee to stop government from over growing it’s income stream of sustainable taxes (those that don’t destroy the economy) is that people live more independently. That is ….. use less government. Otherwise, any and all requests for an increase in services from gov will eventually demand that same government to devalue the currency as noted in the example.

    Now … I would call out all the scumocrats at this point and scream. STOP WRECKING AMERICA, but the re-pubic-ans seem to do a pretty good job of wrecking things as well.

    So …… after the crash… or the proverbial ‘Thinning of the Herd’ … we can start over, till we forget and go down the easy road to destruction once again.

  13. You still don’t answer how the other currencies are any better than the USD. I mean, the USD has collapsed in the last 5 years against major currencies. Instead of worrying about the other major currencies, you gold bugs are focused on the dollar.

    Keep watching the boiling pot boys, keep watching it. The US is not the only printing money and you all know it. But if it makes you happy to see the dollar collapse, very well. To you this is a good thing, as gold will rise to the moon. To me, gold and the USD can both rise in harmony. But hey, it is cool to say that the dollar will collapse in 2 months. Lol.

    D

  14. It amazes me how few people get this or know about this. Intellegent folks who some how think the US dollar is a forever thing , an eternal institution, forever valuable. Almost no one has gold or silver as a hedge against currency collapse, a friend of mine a well educated MBA told me he has gold! (but he means GLD). I suppose that this may be what holds the dollar up, so many are hypnotized as to its value and perminence as the “almighty Dollar” and store nothing else but dollars and stocks as their savings.

    sometimes I think the world has become so unacustomed to trading in gold coin, or thinking of value in terms of gold…and further there is so little gold held in the general population, that if an upheaval occurs and a barter economy evolves, it will use 9mm bullets and shotgun shells or some other replacement “money”rather that gold or silver, simply because it is so rare as to be illiquid and undervalued.

    Personally, as long as there is a fort Knox, I to will hold a substantial measure of my savings in gold and silver coin in a vault beyond government control. I may trade around that core holding with GLL or GLD to trade the up dwn cycle of themarket valuation, but when I take a profit, and “bank” value…it is transfered into gold socked in a vault.

  15. A currency collapse means the end of normal commerce, so it’s hard to imagine any other “collapse” (stocks, commodities) that’s even in the same universe. In a hyperinflation everyone is affected in material ways on a daily basis. People get frantic to convert their failing paper into real goods, but meanwhile the costs of production rise above the price control levels and production shuts down. It doesn’t take long for the shelves to empty in a country with just-in-time delivery and only 3 days’ inventory at the average grocery store.

    Junk silver is nice when there’s a functioning black market. But once production slows, critical items may not be available at any price. If the dollar fails utterly, John Williams estimates it would take 6 months to develop a working barter economy. In a less severe inflation, import prices become prohibitive and we have very little domestic production, so we’d still see shortages. Nothing beats some food and staple goods in the basement.

  16. And there is a postscript to this story. Napoleon financed his military forays with gold (and probably plunder too). He could not dare risk using paper money to finance his wars as this would have certainly caused a revolt among the populace, the recent inflations being fresh in their minds. This was the last war ever paid for in gold. All subsequent wars have been paid for in paper.

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