EC Plus Ça Change: A French Lesson In Monetary Debauchery

Fiscal policy shifted into turbo-charged, warp speed, overdrive early into the COVID related recession. To facilitate the borrowing binge, the Federal Reserve took unprecedented monetary actions. In 2020, the fiscal deficit (November 2019- October 2020) rose $3.1 trillion and was matched one for one with a $3.2 trillion increase in the Fed’s balance sheet.

The Fed is indirectly funding the government, but are they printing money? Technically they are not. However, they are inching closer through various funding programs in coordination with the Treasury Department.

Will the Fed ever print money? In our opinion, it is becoming increasingly likely as the requirements to service the interest and principal on existing debt, plus new debt, far exceeds what the economy is producing.

Given the increasingly dire mismatch between debt and economic activity, we think it is helpful to retell a tale we wrote about in 2015.  This article is more than a history lesson. It effectively illustrates the road on which the U.S. and many other nations currently travel.

This story is not a forecast but a simple reminder of what has repeatedly happened in the past.  

As you read, notice the lines French politicians use to persuade the opposition to justify money printing.  Note the similarities to the rationales used by central bankers, MMT’ers, and neo-Keynesian economists today. Then, as now, monetary policy is promoted as a cure for economic ills. As we are now constantly reminded, massive monetary actions have manageable consequences, and failure is blamed on not acting boldly enough.

Our gratitude to the late Andrew D. White, on whose work we relied heavily. The exquisite account of France circa the 1780-the 1790s was well documented in his paper entitled “Fiat Money Inflation in France” published in-1896. Any unattributed quotes were taken from his paper.

Before The Presses Rolled

During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt-tightening was not popular, and the King certainly didn’t want a revolution on his hands. For example, in 1776, newly anointed Finance Minister Jacques Necker believed France was much better off by taking large loans from other countries instead of increasing taxes, as his recently fired predecessor argued. Necker was ultimately replaced seven years later when it was discovered France had heavy debt loads, unsustainable deficits, and no means to pay it back.

By the late 1780s, the gravity of France’s fiscal deficit was becoming severe. Widespread concerns helped the General Assembly introduce spending cuts and tax increases. They were somewhat effective, but the deficit was very slow to decrease. However, the problem was the citizens were tired of the economic stagnation that resulted from belt-tightening. The medicine of austerity was working but the leaders didn’t have the patience to rule over a stagnant economy for much longer. The following quote from White sums up the situation well:

“Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but this involved patience and self-denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues, and France was not then one of these few.”

By 1789, commoners, politicians, and royalty alike continuously voiced their impatience with the weak economy. This led to the notion that printing money could revive the economy. The idea gained popularity and was widely discussed in public meetings, informal clubs, and even the National Assembly. In early 1790, detailed discussions within the Assembly on money printing became more frequent. Within a few short months, chatter and rumor of printing money snowballed into a plan. The quickly evolving proposal was to confiscate church land, which represented more than a quarter of France’s acreage to “back” newly printed Assignats (the word assignat is derived from the Latin word assignatum – something appointed or assigned). This was a stark departure from the silver and gold-backed Livre, the currency of France at the time.

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