Bryan Cutsinger and Louis Rouanet on the Politics and Dynamics of Hyperinflation in Revolutionary France

Bryan Cutsinger is an assistant professor of economics at Angelo State University and Louis Rouanet is an assistant professor of economics at the University of Texas, El Paso. Bryan and Louis join Macro Musings to talk about the French Revolution, France’s public finances, its bout with hyperinflation, and finally, the implications of this experience for macroeconomic theory today. Specifically, David, Bryan and Louis also discuss the creation and widespread dissemination of assignats, the emergence guillotine-backed currency in France, the state vs. market theories of money, and a lot more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Gentlemen, welcome to the show.

Louis Rouanet: Thank you for having us.

Bryan Cutsinger: Thank you for having us.

Beckworth: Well, it's great to have you guys on. Now, Bryan, you are a veteran of the show, you've been on before. We had a fun conversation on the, *Seigniorage in the Civil War South* paper that you wrote. Really interesting to learn that the South did not optimize its seigniorage flows because there were two different parties that had different views on maximizing seigniorage. We talked about the seigniorage Laffer Curve, a lot of fascinating stuff you may bring up again as we discuss your work. And I have you two on because you just published a paper in the European Economic Review. Congratulations, that's quite an accomplishment in itself.

Rouanet: Thank you.

Cutsinger: Thank you very much.

Beckworth: The paper itself is super fascinating and it's titled, *Assignats or Death: The Politics and Dynamics of Hyperinflation in Revolutionary France.* So, great paper, we'll provide a link to it, and I look forward to hearing more about it. But let me begin with a very simple question, what was the motivation behind this paper?

Cutsinger: So as you mentioned in your introduction, one of the ideas that fascinated me on the Civil War side was the role that politics plays in determining monetary policy, whether that is monetary policy in a modern context or historically where you don't have independent central banks, you have legislatures making decisions about monetary policy. And we know from monetary macro theory that the future path of monetary policy has effects today, and that path is ultimately up to public choice or collective choice. So if we want to get a broader understanding of these factors, we need to incorporate politics into our analysis of, say, hyperinflation and whatnot. So Louis and I were in graduate school at the same time when I published that earlier paper. Louis obviously was very interested in the French Revolution, and so we decided to collaborate forces here with our co-author Josh Ingber, and start applying some of the same lessons that I learned in writing that paper on the Civil War to the French experience with hyperinflation.

Beckworth: Louis, do you want add anything to that?

Rouanet: Yes, I had been writing a paper on the Bank of France and I knew quite a bit about the French Revolution. And so it was only natural talking to Bryan, we were in the same office in the Hayek program at Mercatus, and so naturally we started working together. It was quite a long process. At first we didn't necessarily know what we were looking at, and then it kind of clicked when we realized that, we'll talk more about it, but when the structural breaks in the demand for money were really related to specific political events during the French Revolution that were quite significant, and so that's when the paper took shape.

Beckworth: And listeners, if you can't tell from Louis's accent, you are a Frenchman, so you bring a great perspective to this paper that unfortunately Bryan cannot bring as an American, so a great comparative advantage both ways. So let's talk about the French Revolution, kind of lay the groundwork for this paper because there's a lot of people like myself in America probably don't have the best understanding or command of the history of the French Revolution. And if you asked me what would I say? I'd say 1789 to 1799. I know the Storming of the Bastille. I remember that from high school history, that phrase that we see in memes, "Storm the Bastille." We talked about The Reign of Terror, that's pretty well known, the beheading of Marie Antoinette. But how would you characterize it? What was the French Revolution? What caused it? What's the broader historical context surrounding it?

The Basics and Background of the French Revolution

Rouanet: Well, so since we are on Macro Musings, the French Revolution was, first of all, a financial crisis, a debt crisis. Around 1788, the French crown was completely bankrupt or close to completely bankrupt. 50% of government spending was going just to repaying the debt, and the king was unable to enact new taxes because you had strong oppositions from the parliaments, which were judicial institutions in Ancien Regime France. Curiously, those parliaments were aristocratic. And they were really the first ones to sort of rebel against the crown, and so the only recourse the king has was to call what was called the Estates-General, which represented the three estates of the realm; the first estate, which is the clergy, the second, which is the aristocracy, and the third, which is the third estate, the rest of the population, which is about 98% of the population. And this institution had not been called in more than 150 years. So it was really unprecedented. The goal was to try to solve that financial crisis.

Rouanet: So the finance ministers of the time, Jacques Necker, was a Swiss banker, just gave a speech and said like, "Look, if we don't do something, we are in trouble. We will go bankrupt." But you had so much conflict between the different interest groups of that Estates-General that nothing was getting done. If you will, you have a war of attrition between interest groups where each one's a fiscal cost of reform to be borne by the other group. And in the end, the interest group that loses is the clergy because it was the weakest interest group. You had a lot of dissension between the high clergy and the low clergy. And for that reason, they bore most of the cost of fiscal reform in the sense that the assets of the clergy were nationalized. And when we say this, we need to realize that the clergy was by far the largest owner of land in France. It was a bit less than 10% of French land that was owned by the church.

Rouanet: So then they nationalized all of this land, but they had a lot of payments that were due immediately, and they could not do them in time. Tax revenue had completely collapsed because you have pretty much chaos with the beginning of the French Revolution. So they have to find a way to pay the creditors. And one way they do this is to create the assignats. Now, in a way, the French Revolution, a lot of themes that we have today, we have in the French Revolution. For instance, there was this plan to create a sort of an independent central bank with what was called the Caisse d'Escompte, which was a bank of issue in Paris. But very quickly that didn't prevail because the members of the National Assembly thought the members of the Caisse d'Escompte were members of the assignat regime, that they would support the king and the aristocracy and so old regime. And for that reason, they did not go with an independent central bank.

Rouanet: Some offers at the time, and some politicians were like, "Look, maybe that's a bad idea for the parliament to be in charge of monetary policy directly. But that's what they went with. So the Parliament was directly in charge of printing money, basically. So I'm trying to not be too lengthy because of course the French Revolution is a long period. Some say it starts in '89 and goes to basically the end of the Napoleonic era, but you have a lot of experiments at the time. France had a pretty strong distaste, by this I mean like the French public, they had a pretty strong distaste of paper money, in part because there was a paper money experiment less than a century earlier in 1716 to 1720 with the John Law experiment. So you had the Mississippi Bubble and they had this paper money experiment that left a pretty bad taste in the public's mouth basically. And for that reason, they really tried to distance the assignats from paper money per se.

Rouanet: So the first assignats were really more of a debt instrument. They paid interest, they had coupon payments. You had to sign your name on the back to say, "Okay, you are the owner of these assignats." They were a very large denomination, about 10,000 pounds, which you know, you could not use in regular transactions. But very quickly, people actually use those assignats to make transactions. And the way they did it is you had a bunch of intermediaries that developed. So municipal governments started creating banks of issue, and you also had private banks. And so you have this sort of free banking, if you will. But the base money is not specie, it's this sort of debt obligation. You also had the coupon payments that would be used to make transactions. And so very quickly, as the French government saw in this seigniorage opportunity, and that's when real the assignats became paper money.

Beckworth: Okay, so the origins of the French Revolution were economic in terms of the big fiscal deficits, the debt they were accruing. Now in preparing for the show, I went back and read some other papers in addition to yours, I read the Thomas Sargent, Francois Velde paper, 1995, Journal of Political Economy. And they did an interesting comparison where they compared France to the UK or Great Britain, and how they had fought all these wars, France lost a bunch of them, went bankrupt multiple times. But the UK was successful of in terms of raising revenue during peace times to pay off the wartime, and the French couldn't do this, they continued to struggle. So you see this economic story building, I understand that. But Louis, I guess my question to you is, this revolution got pretty intense, right? I guess 1793 to '94 was really the Reign of Terror. I mean, it was a lot of change, lasted some time, as you mentioned. Was there more at work than just the economics? So you've had the Enlightenment, were people ready to get rid of feudalism? Because that was one thing that they got rid of, feudalism, they took the property of the church, nobility. Were there other forces at work beyond just pure economic ones?

Rouanet: I mean, sure. A lot of people talk about the development of Enlightenment ideology, and that surely played a role. Of course, the causality can be reversed sometimes, which is that once a revolution happens, they try to find justifications for making reforms.

Beckworth: Sure, yes. That makes sense.

Rouanet: So if you take somebody like Rousseau, his main book, The Social Contract was not especially popular, but then between 1789 to 1799, you have more than 30 editions of that book. So yes, ideology played a role, but often it was kind of fluid and it was not necessarily predetermined what was going to happen, or at least it wasn't clear to the actors in 1789. With respect to, also, the economic aspects, one thing that is peculiar about the hyperinflation during the French Revolution is that it happens during a war and most of the hyperinflation during the 20th century, let's say, happened after the First World War, right? It happened after the war. So that's something that is peculiar to the French experience. Why did the French crown happen to be in such distress, financially? Here you have multiple hypotheses. Some people talk about the American War of Independence, and of course you have a lot of parallels between the French Revolution and the American Revolution. All the offers point to the fact that in the 1780s, just before the French Revolution, you had a bunch of conservative ministers that basically let deficits run. You even had one finance minister, Calonne, who had sort proto-Keynesian reasoning, which is, well it's good for business to have some kind of spending by the court, et cetera, et cetera. Of course, that didn't end up doing very well.

Beckworth: Now, as a Frenchman, Louis, I'm going to ask you this question. What does the French Revolution mean to a modern person living in France? Is it like July 4th for the US citizens? We celebrate, we get excited about it. What's the perspective you take on that?

Rouanet: Well, I guess historically it is less consensual than July 4th in America because we went through so many different regimes. After the French Revolution, you have the restoration of the monarchy and so the French Revolution is seen in this kind of negative light. And it's really after 1870 and the Third Republic that you have this effort on the part of historians to rehabilitate the revolution. And even then you have a lot of different views with respect to what part of the revolution you are rehabilitating. Are you rehabilitating basically the constitutional monarchy phase? Are you rehabilitating the Terror? That just creates kind of a lot of political debates.

Beckworth: Yeah, so because it went on so long and there's very different phases, some of them pretty violent, you don't maybe want to rehabilitate all of them, but certain parts of it. Okay, very fascinating, and it was interesting to hear you talk about the influence of John Law still being in their minds, they want to avoid it. And something you guys mentioned, Bryan, that this was the first hyperinflation in Western Europe. So John Law's episode didn't create hyperinflation, it just created some inflation. What would you say is the difference between his episode and this one?

The French Hyperinflation and its Economic Legacy

Cutsinger: I'll just say real quick that here we're using Cagan's definition of having inflation cross the threshold of at least 50% per month or higher. That is, of course, sort of an arbitrary line to draw in the sand because if you're experiencing 30% per month inflation, that's pretty bad too. When we use this case, we're saying this is the first time in Western Europe outside of the 20th century that we get rates of price level increases that exceed 50% per month. There's some debate… I mean, this could actually be the first actual case of hyperinflation, using Cagan's definition, in human history. A few centuries earlier in China, you do have a pretty large inflation that occurs as well. But because of data limitations, we don't really know the actual extent to which there was. But certainly, this is the first hyperinflation in Western Europe using that Cagan criteria.

Beckworth: So, the John Law episode had high inflation, but not hyperinflation at 50%. How would the continental experience in the US... We had the US Revolution right before this one, and we have the US Continentals, the famous saying, "Not worth the Continental." That was also pretty high inflation too, but not quite the same as what we experienced in the French Revolution.

Rouanet: The price increase during the French Revolution is about 11000%. So it's quite high. It is quite high in the experience with the Continentals as well. But of course you have, really, links between the two experiences because a lot of officers, for instance, French officers that served during the American Revolution, came back with the same ideas. And if you look at the parliamentary debates during the French Revolution, often they justified certain economic policies on the ground that, well, the Americans did similar things. So for instance, when they established price controls, that was one of the things where they said, "Well look, even George Washington went in the countryside and purchased commodities at a heavy discount." The two experiences are related in that way.

Beckworth: So what you're saying, though, is the US Revolutionary War was in the minds of the French during the Revolution as well.

Rouanet: Absolutely, yes. You had strong influence between the two experiences.

Cutsinger: One thing to add onto to that, another thing that Louis and I found and one of the things that motivated this paper was that the Confederate policymakers were then influenced by the French experience with hyperinflation, when they sought to make their currency redeemable for gold after the war's end. So we do see this sort of reciprocity of ideas that are emerging out of these experiences sort of cross influencing policymakers in two countries across time.

Beckworth: And you guys note that this experience has a legacy both on economic thought, development of theories for inflation, as well as just a broader understanding of French histories. Walk us through some of the people who were influenced by this experience with hyperinflation.

Rouanet: So of course here, too, it's both ways because one can think that, well, the assignats were an asset backed money, whereas the asset in question was land. Is that surprising from the countries that developed physiocracy? The economic theory is that, well, agriculture is a main creator of value. I think there may have been some aspect of this one creating the assignat. During the experience of the assignat hyperinflation, a lot of people had in mind the quantity theory, but a very, very crude version of it. Like you double the quantity of money, you double prices. So critiques of the quantity theory were like, "Look, we doubled the quantity of assignats and you have prices that have more than doubled. It proves that it's, for instance, greed or monopolists that take profit of what's happening and not purely monetary factors.”

Rouanet: But after the French Revolution, you had a bunch of economies that started to say, "Well look, when people expect inflation, velocity is going to increase quite a bit." The first one would be Henry Thornton in England who pointed that out, and in France, like Jean-Baptiste Say who was young in the beginning of the French Revolution, but later on participated in the Napoleonic regime, and he wrote his Treatise on Political Economy. That's what he says is like, "Look, if people expect inflation, then prices are going to rise at a faster rate than just the rate of growth of the money supply because velocity is going to increase."

Beckworth: Let's go to the specifics. You already provided an outline of it, but Bryan, maybe why don't you provide us... What was the original idea behind the issuance of the assignats and then the land sales? How was it supposed to operate? How did it actually operate?

Breaking Down the Assignats and Land Sales

Cutsinger: So what I'll do is I'll talk a little bit about how Louis and I started thinking about this and then I'll let Louis turn over and go through the actual mechanism, a little bit, of how that works. One idea that we were influenced by when we were looking at this literature of the political economy of hyperinflation, James Buchanan and Geoffrey Brennan wrote this book called The Power to Tax in, I think it's in the late 1970s or early 1980s. And they have actually a chapter on the political economy of seigniorage. They're actually somewhat critical of the standard approach to studying hyperinflation because they say, "Look, you're sort of assuming that the decision over how much money to create is being made by the sort of monolith, the government, rather than it emerging through a process of politicians interacting with one another.” Unless you can argue or unless you can show that there was some rule guiding the future path of policy, it seems sort of weird to think that there's going to be a stable money demand function.

Cutsinger: And that got Louis and I thinking, well, hyperinflation usually occurs during periods of political instability. Well-performing governments don't hyperinflate. Those two things don't... So normally what you have is political instability and hyperinflation, and one way to think about political instability is that, essentially, the political property rights, the decision rights over who's going to make decisions about policy, in this case monetary policy, are not clearly defined, right? They're up for grabs by different people. And as a result, you get a lot of uncertainty about what the future path of monetary policy is going to look like. So if you're going to try to study these episodes, we need to account for the fact that as different interest groups gain or lose power over the policymaking process, that is going to have an effect over monetary policy.

Cutsinger: And now in the case of the assignat, I'll let Louis elaborate a bit more, but in the case of the assignat, it is essentially... It's not redeemable in the sense that many economists I think would understand that term. It's not redeemable in the sense of, say, like a free bank note that was redeemable for gold at par on demand, right? That's one way to think about redeemability. Another way of thinking about redeemability is that at some point, you could use this to exchange... That you could use the note to purchase something, but it's not redeemable at a fixed par value, right? A free bank note is supposed to be redeemable at a fixed par value, whereas the assignat was actually used to purchase land sales, clergy land sales at first, at auction.

Cutsinger: What that meant though was that there was no fixed par value between the assignat and the value of the land because the actual sale price at auction determined the value, and you could either purchase the land using assignats or using specie. So it's a little bit different than your normal redeemability argument of, say, renewability under a gold standard. Now the government's commitment to keep using land sales to redeem or to pull the assignats out of circulation is one way to think about how it controlled the future path of monetary policy. And when that commitment wavered to using the expropriated properties as a way of basically buying back the currency that it had issued, then you're essentially saying that, "Okay, monetary policy was going to grow like this, now it's going to grow like that." Well, I should say it's going to grow at this pace and now it's going to grow at a much higher pace. Well then clearly that's going to have an effect on the demand for money.

Beckworth: Louis, just on the specifics of this, so I think I vaguely understand, the land sales were tied to the assignat, so there's supposed to be a link. This is where the asset backing occurs. What's not clear to me is how were they initially issued? Were they timed to go out just as land is being sold, before land is being sold? And then how did they get pulled out of circulation?

Rouanet: Again, the issue was paying the creditors. So they gave people assignat, and they were not, as Bryan said, redeemable for land at a fixed rate. But instead what happened is when, in the future, the land was auctioned, they usually had a candle auction and people bid money. They could bid with assignat or they could bid with gold. If they bid with assignat, then the state would get those assignats and burn them, often in the public square so that it's obvious to everybody. They did that really until the end, they continued to burn the assignat. When gold was used, they converted gold for assignat and then they would burn the assignat. So now why would that pin down the value of the assignat? Well, if you think about a certain amount of assignat being issued, like maybe like 10,000 pounds, and the specie value of the properties is at least as equal to this, then because the assignat is as good as gold to use in auction, then that just means assignat is going to be traded at par. But if they issue more assignats than there is national assets, what was called national assets, that is those clergy goods, then that's when the assignat starts to depreciate. Even if there is no monetary use to the assignat, this mechanism would hold. In a way, it's very akin to what is now known as the fiscal theory of the price level. It's very-

Beckworth: It's an asset back security.

Rouanet: Yeah.

Beckworth: Let me ask this question, Louis. Why did the recipients of the assignats believe and take it seriously? The expectation was that there'd be land sales, they'd be tied to gold, at least the value, indirectly. But why take the government seriously at all? I mean, this is a revolution. If anything it might be a time you might question whether you get your money back, but apparently that wasn't the case, right? They held their value relatively well. What do you think explains that?

Why Was the Assignat Taken Seriously?

Rouanet: Sargent & Velde, for instance… sections of French Revolution for the assignats in three separate periods. The first period is the early revolution. They issue the assignat. They even have a specific schedule with respect to the retirement of currencies. Say for instance, those 500 million, you have to retire within two years, and that's when the assignat doesn't really lose value, trades pretty close to par. It even earns interest. So it's really a debt instrument. And then later on, like 1792 or so, starts to lose quite a bit of value. When it starts losing too much value, that's when the government has all of these legal restrictions to boost the demand for assignats. So they prevent trading in gold. They prevent double pricing, so you have to price only in assignat.  They introduced some price controls as well to prevent inflation. You had this view among some revolutionaries that, again, the depreciation of the assignats was due to either greed or those greedy farmers that would hoard food, those greedy bankers that would hoard gold. And for that reason, they introduced a bunch of legal restrictions that way. Then they got lifted mostly in 1794 when Robespierre was toppled. And after a while, those restrictions went away. And soon after, you start having hyperinflation.

Beckworth: So early on, it was credible. It was a credible policy at least initially. That's the key thing that you believe that there would be some real value behind these assets that the government was issuing.

Rouanet: But I have to add that they did continue to burn those assignats until the end. They did not renege on that, let's say, obligation. But it's the same question of why didn't they default? So really, it's a fiscal crisis, the French Revolution, and bankruptcy was out of question maybe because the [inaudible], the bond holders were simply too powerful of an interest group. You have to wait [until] basically 1797 for the French government to bankrupt on two-thirds of its debt. But they really resisted this tendency to default. There was this view that it was really bad, you shouldn't do bankruptcy. It was against most of, let's say, orthodox economists that served, for instance, in the National Assembly. If you take, for instance, Dupont de Nemours, who is linked to America as well because the DuPont Corporation is named after his son. Well, there was this view, "Bankruptcy is the last thing you want to do. If we do this, we're not going to be able to establish credibility to then do the things we want." It is just that after a few years after the revolution in 1797, they just couldn't do otherwise. And that's when they have to default. And that's the last time, by the way, that France defaulted on its debt, 1797.

Cutsinger: I was just going to add, one of the things that we discuss in the paper is that at least, as Louis mentioned, later on, they do end up defaulting on the debt. But when we look at some of these political events that essentially portended the end of the assignat, or the government's commitment to use its assets to remove the assignats from circulation, we actually see bond prices go up. We see the bond prices appreciate. In other words, it does seem that the bond holders were a relevant interest group that the government wanted to keep happy. And so if it had to default on something, it wasn't going to default on its debt. It was going to default on its currency that it has issued. Which is actually another similarity to the American Revolution, which is that the Americans, we did default on the Continentals but did so to make sure that we could pay our bond holders, many of whom were located outside of the United States. And you can understand why you would want to prioritize paying back your external creditors, especially if you're a new young nation, you need to make sure that you can borrow again if the need arises at some point in the future. So like the Americans, the French did prioritize the bond holders over the holders of the assignats.

Rouanet: Even though, of course, prioritize doesn't mean they didn't suffer heavily from both-

Cutsinger: Sure. Sure.

Rouanet: Inflation and then default. Right?

Beckworth: Relatively speaking. So just to be clear, the years that the assignats were used were 1790 to 1796 or something?

Rouanet: Yes, that's correct.

Beckworth: Okay. So you have that nice run there. And from 1790 up until 1792, as you mentioned, relatively stable real money demand. And then in 1792, the government decided to divorce the note issue from land sales. But you also mentioned they still do the burning of the notes that they're getting. Apparently they're not burning enough notes. But then in 1793, I guess this is the other fascinating thing, reading from this, a new group comes to power, maybe you can tell us about them. And they institute, I'm using quotes here, "a guillotine-backed currency". So explain that clever use of the words. Why was there a guillotine-backed currency or a guillotine backed assignat?

The Jacobins, Guillotine-Backed Currency, and Ensuing Hyperinflation

Rouanet: So that sentence comes from somebody who immigrated to Switzerland who was an economist, [inaudible]. And that's something he says, it's you had this guillotine-backed currency. Why guillotine-backed? It's because one of the things they did is, for instance, expropriate the nobles later on. And this became part of the backing for the assignats as well and increased it. In fact, when you have the goods, those assets of the emigres, that is, those who emigrated from France, usually nobles, they are confiscated. And so the backing of the assignat increases and you see the assignat reevaluate, increase in value for a while before it starts declining again. So that's a clear case where the fiscal backing of the currency increased, you have reevaluation of the currency before it devaluates again once they issue more money and et cetera, et cetera.

Beckworth: So, in 1793, Louis, the Jacobins come to power, and I guess that's where I was going with this. What I read about them is they were very strict, very hardcore. The guillotine-backed currency was under them. Were they threatening people with punishment if they didn't accept the assignats?

Rouanet: Absolutely. Now, whether or not that punishment was effective… from what I can tell from, for instance, police reports in Paris, it was pretty effective because they had pretty good political control over a city. In the countryside, that's a lot less clear. The peasants usually did not like the assignats, did not like to accept them. They saw them as a Parisian currency that was imposed upon them, that they could not necessarily use easy, that would depreciate fast. They probably had lags between transactions that was quite long, so they didn't like the assignat very much. So by the end of the hyperinflation episode, really, the use of the assignat becomes more centered around Paris because that's where the revolutionaries have the most control over.

Beckworth: Yes. That's what's fascinating, I guess, is the Jacobins were so brutal, so rigid in their enforcement, it actually helps the value. And I'm going to come back to this, but I'll just mention it now, it raises questions about the state-backed theory of money. But I want to put a pin in that for now. So again, just to summarize, 1790, the assignats are introduced. It worked relatively well until 1792 when the government divorces note issue from land sales. But in 1793, the Jacobins come in and they actually help restore some of the value to the assignats. And then they lose in 1794-

Cutsinger: Yeah, so I’ll jump in there. So we pick up in 1794 right after Robespierre is executed. So Sargent and Velde divide the assignat experience into three different theories of the demand for money. And so it's that final period, the 1794 to 1796, that in their view is most consistent with the Cagan view of hyperinflation. And it's also during that period when you actually do get price level increases that meet that threshold of 50% per month. So we focus exclusively on that period. We do so for several reasons, one of which is that it's not obvious that the Cagan specification applies to situations of relatively mild inflation. For those of you who are not familiar with that particular specification, Cagan's intuition here was that when prices are increasing by at least 50% per month, we can sort of ignore real interest rates and real income or whatever scale variable you want to use for the demand for money because the rate of depreciation is just so large that any change in the real interest rate or any change in real income, it's just going to have an inconsequential effect on the demand for money. And so we focus exclusively on that period, and then we look at, basically, during that 1794 to 1796 period, there's a great deal of political instability around the strength of the Jacobins and their commitment, as you mentioned, David, to enforcing the use of the assignat.

Cutsinger: And what we show is that as the strength of the Jacobins is weakened, the demand for the assignat falls. Because as you mentioned, the Jacobins were committed to continuing using this currency, but as they lost political power, that essentially is a policy path shock. And so what's going to happen with the assignats is going to be different now than what it would've been had the Jacobins remained in power. And so the first thing we look for in the paper is, well, can we identify structural breaks in the demand for money over this time period, this 1794 to 1796 time period? And we do. We identify two, one in the summer of 1795 and then another in November, 1795. The first one corresponds to a weakening of the Jacobin left, and then the one in November of 1795 corresponds with the establishment of the directorial regime, which basically portended the end of the assignat.

Cutsinger: So what we do find, however, is that while there is a structural break in the demand for money in the summer of 1795, we do have a stable money demand relationship between 1794 and 1795 despite that break. In other words, there is an inverse relationship between real assignat balances and inflation. However, after November, 1795, that relationship breaks down entirely. In other words, I think the only demand that was left for the assignat was sort of a speculative demand that, "Well, maybe the government will honor these, maybe they won't." But we have a figure in the paper for those of you that want to go look at it, where we actually show what the three different money demand functions look like. And what you see is essentially no relationship whatsoever between real assignat balances and the inflation rate after November, 1795.

Rouanet: So what the first structural break is, really, is… so Robespierre is toppled, it doesn't necessarily mean at first that the Jacobins are losing power because it's kind of an internal strife within the Jacobin faction. But then it's clearer and clearer that more moderates are getting their position back, that there is going to be some constitutional change. And you have a bunch of insurrections in Paris that happen. And each one of them, they really just weaken the Jacobins because they lose. So the one that is closer to our first structural break, for instance, you have this three or four-day insurrection in Paris with tens of thousands of people that barricade. They even take a cannon, they storm the National Assembly, kill one of their members, put their head on a spike, present it to the president of the Assembly. It's a pretty violent affair.

Rouanet: And one of their slogans was, "Assignats at par." The Jacobins were like, "We need to do anything possible to bring up the value of the assignat." Often, again, with quite crude quality fear reasoning, so it's like, "We need to retire the currency by, for instance, issuing debt." Which, once they tried to do this, it didn't really work, which you should expect from the point of view of let's say an asset-backed currency kind of mechanism. But then again, once they lose, more and more, you have more questioning on the part of... Politicians are like, "Well maybe we should get rid of the assignats. Maybe we should not honor them anymore." And that's really when the hyperinflation occurs, when the demand for assignats just completely collapses and you start having quite a few problems financing even government expenditures through inflation.

Beckworth: So the breakdown occurs as the one group that really supports the assignats loses power, kind of follows that increasingly, and then your mention events in particular in the summer and fall. So what we have here is the development with the one group that really supports the assignats begins to lose power, and there's some big changes in the summertime and then later in November. And so you see that this idea that this asset you're holding, the assignat, the future backing of it is in question increasingly, so is its value, inflation takes off, you’ve got hyperinflation. So it's a very fascinating story and we'll let the listeners go look at your paper for more details. But let's move from the specifics of the story to the implications for how we understand theories of the price level. So one of the ones we've touched on is fiscal theory of the price level and that says the current price level is equal to the expected discounted value of future primary surpluses, so some kind of backing in the future, real resource backing for the government liabilities you're holding today. Another theory we keep touching on is a sophisticated version of the quantity theory, a very forward looking… the quantity of government liabilities or notes outstanding. So where do you guys land on this? Does this experience confirm one or the other, or are some of both? What do you think? Bryan, I'll start with you.

The Theoretical Implications of the Assignat Story

Cutsinger: So my thought is that it's a bit of both and I think that what you see in the figure in the paper where we break down what we identify are three money demand relationships, is that given some policy path, you get an inverse relationship between inflation and real balances that I see as sort of the basic quantity theory intuition. However, when that policy path changes, for whatever reason, then you start to see the money demand function move around quite a bit. So I think the paper illustrates both, if you want to call it asset backing or fiscal backing. I see a nuanced distinction between the two theories. But either way, on the one hand you have this asset or fiscal backing theory, on the other hand you have this quantity theory. I think the paper sheds light on both that the asset part of this sort of pins down the policy path, but then within that policy path we have an inverse relationship between real balances and inflation. And so I see the papers as sort of contributing to both saying that both elements play a role.

Beckworth: So just to be clear, the quantity theory is like a local maximum and then the asset back is more of a global maximum… the overall trajectory of the price level is being set by the asset back, but within that there's certain changes driven by the quantity approach. Is that right?

Cutsinger: That's how I interpret it. Now I think, again, you could take sort of a sophisticated version of the quantity theory from someone like Bennett McCallum and there you would actually get... None of this is inconsistent with the quantity theory, because it would all be about, okay, so what's the expectation of the future monetary policy path? As the expectation of that policy path varies, then you get different money demand functions that's totally consistent with that version of the quantity theory. I mean, I think sometimes some of these… the sociology of science is such that we get these different schools and terms and whatever, and we don't necessarily... Sometimes we talk at cross purposes. So if you want to call that sort of, as you described it, the global situation is pinned down by the asset backing, but then within that we get the quantity theory variation, or you can take a big broad picture of the quantity theory, which is probably closer to my own view, that the future path of policy determines the demand for money. And so as that future policy path changes, so too does the demand for money.

Rouanet: And of course we should be aware that part of the reason you may have that shift is that people find substitutes. Either they go to barter or they find substitutes as a way to make exchanges. And so that's probably why we find those shifts. And that's part of the debate also for the Continentals and the asset backed monies in the US is like, well, maybe it's not inconsistent with the quantity theory once we allow for outflow and inflows of gold into the country. And you did have very little specie until fairly late during the French Revolution. But of course toward 1796 or so, you start having more specie, at least in the countryside being used because the assignats are just a total disaster at that point.

Beckworth: So those are the theories for the price level. So one category we can put the asset backed or fiscal theory of the price level, and as Bryan said, there's maybe some slight differences between those two, but generally speaking there's some real resource backing the money. And then there's the quantity theory in the other bucket. And so we've used those to think about the price level. But I want to step aside now and talk about the theories for money itself. Why do people accept money? And I think the assignats is an interesting case study. So you have on one hand, you have the state theory of people, the chartalists, the people who say that money only becomes accepted because the government is backing it or there's a threat of force or they take taxes in it. Then you get more the Carl Menger, kind of, money emerges organically through market process, through discovery. And it strikes me at least that the assignats tends support the state theory more. Maybe I'm wrong. Definitely with the Jacobins, it seems to be very state theory, the threat of force. But how would you view this, where would you come down on those two theories?

The State vs. Market Theories of Money

Rouanet: Well, of course by 1792 and the Jacobins and these kind of very heavy-handed interventions, the assignats were already used as money fairly widely. I'm not exactly sure they intended to create the money. Again, the first assignats were more debt securities, you had to write your name on the back. It was just not really considered as a money at all. And there is an element of spontaneity in the sense that you have all of those intermediaries that just issue notes that are redeemable for assignats and that are smaller denomination. One thing that people need to realize is that during the beginning of the French Revolution, a lot of the gold either goes abroad or goes underground. People are fairly scared. You have this thing that is called the Great Fear in the countryside. This idea is that you have roving bandits that come and are going to steal everything from you. And so you have a lack of currency to make transactions. And so they try to find a substitute and that's really when the assignat also kind of takes the place of gold. So I'm not exactly sure it supports the state theory of money. Again, because at least at the very beginning, I'm not sure they were intended as being as widely circulating as they were, those assignats.

Beckworth: Okay. Bryan, any thoughts?

Cutsinger: Yeah, I'll add on a little bit to that. So the way I interpret the chartilist view versus the Mengerian view is we're trying to explain the social origin of the institution of money. Now clearly by the time of the French Revolution, humans have figured out money. And so in that sense, I don't know anyone who is inherent to the Mengerian view, of which I would consider myself, would deny the fact that if a government wants to compel people to use a certain thing as money, that it certainly can. There's plenty of evidence of that being the case, but I don't necessarily think that that is… or the French experience says, "Oh, well this tells us that the Mengerian view is wrong." I mean, one way to argue this would be to say, well, they only had the idea of money because money spontaneously emerged in the first place and they realized, “Oh wow, a circulating medium can be valuable because it reduces transaction costs. Why don't we monopolize the creation of that circulating medium and reap the profits that come from doing so?”

Cutsinger: So I don't necessarily think that the French experience with the assignat runs counter to the Mengerian logic. What I do think it illustrates though is fiat money has this sort of final period problem of if at some point you think that the money... Even if it's 1,000 years from now, 1,000 years from now, someone's not going to be willing to accept the US dollar. If you take rational expectations seriously, then the dollar should lose value today because of backwards induction, and so in order to get a new currency off the ground, you have to do something to convince people that there's going to be, we have this phrase in the paper, a buyer of last resort. Somebody has to be willing to step in, whether that's the government or maybe a central bank on behalf of the government, that is willing to step in and buy back the currency that it issued in order to solve this sort of final period problem.

Cutsinger: And I think the assignat is kind of a creative way to solve this problem because, historically, one way to solve that problem is that you make your notes redeemable for a specie, gold or silver. But rather than doing that, the assignats solve the final period problem by essentially saying, “Well, we're going to seal this group's property and then we're going to have auctions where you can purchase that property using the notes that we just issued, and that also can solve this final period problem of fiat money.” So I think that the assignat has a lot to teach those of us that are interested in monetary economics and monetary history because it illustrates a lot of these very high level ideas that people who are engaged in high theory, of which I'm definitely not one, that think about, why is fiat money accepted? Why does it have value? Things like that; the assignat experience can help us think through how real world governments or real world people have tried to solve this problem.

Beckworth: In the time we have left, I want to bring up Napoleon. There's a movie coming out in the fall, so listeners will have heard this show by the time the movie comes out. It looks really great, big budget movie. And I'm just wondering, Louis, where does Napoleon fit in this story? What were his views of the assignat and did his wars have a bearing wars bearing on the assignats?

Napoleon and the Assignats

Rouanet: That's a great question. Well, I've seen only the trailer. I'm skeptical, but I will wait for the movie to comment on it. But-

Cutsinger: If I could just jump in real quick. I saw the trailer and I texted Louis and said, "This looks fantastic." And Louis responded with a litany of historical inaccuracies, just in the trailer. So we'll see.

Rouanet: But to be fair, I don't know, maybe it's just an artifact of being a trailer and everything is not in order and everything. But of course Napoleon at the end of the assignat was a general in Italy, he was doing his first campaign of Italy. He had trouble actually because of the assignats, because you had to feed the troops and pay them. And paying them when you have hyperinflation is pretty tough, especially because in occupied territories, peasants and people were not thrilled in accepting asking assignats that were devaluing very, very fast. So he was very critical of the assignats. You even have a historical recollection by one of his bankers who become the founder of the Bank of France, Le Couteulx who recollects how he had a dinner in Paris with Napoleon and Napoleon was like, “We should get rid of assignats right now, do away with this and go back to gold.” And Le Couteulx, and also the bankers, were pretty wary of this.

Rouanet: They were like, “Well, we shouldn't do this immediately because going back to specie is going to take some time. Specie is not there, species is abroad, and if we get rid of the assignat right now, we have nothing to make transactions, and it's a problem.” So he was critical of paper money. After the end of the assignats, you have this period where France is kind of in limbo and they allow this sort of free banking experiment in the sense that you have multiple banks of issue, mostly in Paris of course, that redeem their notes for gold. A lot of those banks of issue, you had to be a shareholder to have access to the discount windows so you add some interesting sort of industrial organization of banking.

Rouanet: And Napoleon, when he comes into power, one of the first things he does is to create the Bank of France. So you have two bankers, Perregaux and Le Couteulx [inaudible] and they lobby Napoleon for that bank of France, if you will. And after a while, Napoleon was a major shareholder of the Bank of France and he never used it too heavily when it comes to financing in his own wars even though he tried sometimes. He tried to have more and more control of his Bank of France as the war went on to finance his expenditures and his very, very expensive wars abroad. But there was never really any kind of very heavy inflation. It was actually much lower than the inflation in England during the Napoleonic War, right? In England during the Napoleonic Wars you have inflation that goes quite high, so the price level more than doubles. That is not the case in France, so yes.

Beckworth: Well, thank you, Louis, for that history of Napoleon. And I did not know that he was reason we had a central bank in France, at least before the euro, the Bank of France, he was the creator of that. You won't get that in the movie, I bet, so you heard here on the podcast.

Rouanet: That's why I'm skeptical of the movie.

Beckworth: Well nobody cares who starts the central bank of France other than listens of this show. But hats off Napoleon for his legacy beyond just fighting battles, he actually started the central bank, very fascinating.

Rouanet: Yeah, his entire family also… well, not his entire [family], but even his mother was a shareholder of the Bank of France. So he had quite a few political connections at the time.

Beckworth: Very interesting. Well, with that our time is up. Today, our guests have been Bryan Cutsinger and Louis Rouanet. Thank you both for coming on the show. We will have your paper posted in the show notes. Listeners, check out.

Rouanet: Thank you.

Cutsinger: Thanks so much for having us, David.

Photo by James D. Morgan via Getty Images