The Idea that Killed the French Assignat & Prospects for the Dollar
As a contrarian investor, I seek to profit by opposing trades based on self-assured judgments about the future. So, in defiance of the calls for an imminent hyperinflation, I ask; what idea really killed the French Assignat? And does it threaten the dollar today?
I recently wrote about the idea that killed the mark. This article is intended to confirm the rudimentary premise of my previous work; namely, that a tragically vicious idea has to firmly grip the minds of the masses in order for a hyperinflation to ensue. My contention is that the misguided premises of today are (fortunately) less vicious.
As you probably guessed, by 1789 the national debt of France was horrendously large, and the eyes of the rulers (and implicitly the masses) were peeled for a quick-fix solution. Such were the conditions of the birth of France’s famous irredeemable currency; the Assignat.
I’ll get straight to the premises that enabled the hyperinflation of the Assignat: ‘circulating medium’ was deemed to be too scarce. Meaning, there was a chronic complaint of a ‘shortage of money’. Thus, the energetic warnings of wise men were ignored and France issued paper money to alleviate this scarcity of circulating medium. As with all currencies, they could only function with a viable profit-motive in owning them. Meaning, the market price of gold (in Assignats) had to adjust to imply that the total volume of assignats could not buy the assets backing them. [If - say - 1 assignat were backed by 1 gold ounce, who in their right mind would swap more than 1 gold ounce for it?] In other words, the assignat price of gold was forced higher.
So, as with all irredeemable currencies, they fell to a discount from par. The National Assembly had made the assignat legal tender, so physical gold, silver and copper disappeared into hoards. This was the process described by ‘Gresham’s Law‘. Put simply, if you could dispel your debts and taxes with physical gold or assignats at 1-1 (when the market priced gold higher than the assignat), which would you use? Would you use the more valuable medium, or the less valuable one? Of course everyone was desperate to use their Assignats in exchange and keep their gold safely hidden away (or sell it abroad). Are you starting to see the potential for currency destruction?
Every issue of fresh assignats brought about the hoarding (and exporting) of the traditional circulating medium (coin). So every issue exacerbated the situation that it was intended to solve: a scarcity of circulating medium. The more they printed, the less gold, silver and copper were used in circulation. The solution to this was deemed to be further issues of assignats. And so on.. A dramatic hyperinflation was bound to continue insofar as said false premises remained lodged in the minds of the masses.
If you still think that this kind of thing could happen quite soon, let me ease your mind by demonstrating the degree of irrationalism in late 18th Century France. If you can vaguely remember some of your childhood history classes, you’ll likely recall some of the debauched practices involved with the guillotine. People were slaughtered for the most trivial reasons. I quote a few examples (pertaining to money) from Andrew Dickson White’s ‘Fiat Money Inflation in France‘ (Link at the end of the article):
…a superstition gained ground among the people at large that, if only enough paper money were issued and were more cunningly handled the poor would be made rich…To reach the climax of ferocity, the Convention decreed, in May, 1794, that the death penalty should be inflicted on any person convicted of ‘having asked, before a bargain was concluded, in what money payment was to be made’.
This is my case against an imminent hyperinflation of the dollar: the false premises of today do not have the dynamic property that is necessary for a hyperinflation. Today, ‘money printing’ does not immediately entail more ‘money printing’. Rather, it is directed at outrightly redistributing capital to ‘socially systemic’ institutions. Crudely put, the ‘money printing’ premise of today is: ‘print money or we’re all going to die!’. The composition of the dollar is altered to ‘game’ the balance sheets of said institutions; the dollar is altered to improve the capacity of their assets to meet their liabilities. My analogy is that central bankers are like naughty children that move the goal-posts after a shot at goal has already been taken. They make said institutions ‘score’ even when they make lousy shots; this – it is said – is supposed to be good for all.
However misguided today’s policies are, I doubt that they have the key property required for a hyperinflation: that money printing should immediately cause more money printing (insofar as the false ideas are held). I should note that this does not mean that hyperinflation will not happen sometime in the future. Things change, and I try not to have a dogmatic view on future events. Rather, I say that -right now – the hysteria (if any) about hyperinflation only interests me insofar as it gives me the opportunity to oppose the trades of people who believe in it.
All true contrarians should be fearful of adopting consensual views in markets. So – if you’re still convinced about a severe inflation – I ask; where did your intellectual convictions come from? How many people corroborate your view? How many people are reading the same literature as you? From what I’ve read, taking the anti-printing view during the French Revolution was an emotionally (and physically) demanding endeavor. Contempt would be present in the eyes of all the people you met and your arguments would be scorned and mocked as if you were the most stupid person alive.
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012