A Lesson From History for America

Americans who want to see where our economy is headed in the near future should read an interesting little book called Fiat Money Inflation in France by Andrew Dickson White which chronicles the French 's use of paper money to finance national recovery during the French Revolution of the 1790s.

When nations enter into times of economic distress, as the United States is today, sensible and educated people often turn to unsound crackpot schemes that offer free money or easy to credit all backed by some magic formula. This was the case in France between 1789 and 1796, the nation's ruling body tried to create prosperity by issuing vast amounts of paper or fiat money. The money was supposedly backed by the value of land confiscated from the Church and opponents of the revolution.

At first the system worked quite well, the money supply grew and the economy boomed. Seeing that issuing paper money brought prosperity the politicians began issuing more and more paper money.

The more paper the government issued the less value the paper had hence the term "Fiat Money Inflation."

Eventually France's money was worthless and the nation was impoverished. Average people couldn’t buy food and other essential products. Businesses shut down because they couldn’t pay their workers and unrest spread through the land. The response of France's National Assembly was to keep issuing paper money because politicians and speculators were profiting from it and getting rich. The average people got poorer while the speculators and their friends the politicians got rich.

As the economic situation got worse all sorts of crackpot solutions were tried including price controls. Business owners were forced to accept the worthless money at pain of death, merchants who refused payment in worthless paper were sent to the guillotine or imprisoned. People caught using or hoarding gold coins were imprisoned or killed. The Draconian measures failed and the money=s value kept falling and falling. Eventually the situation got so bad that the printing press used to create the worthless money was smashed and publicly burned. France was in chaos and primed for the dictatorship of Napoleon.

The modern American equivalent of paper money is easy credit created through artificially low interest rates generated by the Federal Reserve. The Federal Reserve is the American printing press every time the gang in Washington needs more money they use it to crank down the interest rate. The lower the interest rate the more easy credit available to the mob. This fuels the consumer society and like the French paper money creates the illusion of prosperity. Easy credit works just like paper money by increasing the buying power of the average person without creating real value.

A classic easy credit scheme was sub prime mortgages by getting rid of all sensible requirements for mortgages the government made mortgages available to people who couldn’t afford them. This gave the working poor the illusion that they were "middle class" could “buy” a house. It made politicians feel good because they could say they were “lifting people out of poverty.” This fantasy was compounded by easy access to credit cards and car loans made possible by low interest rates which enabled the working poor to purchase the trappings of middle class life without a middle class income. This house of cards has now collapsed and the working poor have been reminded that they are poor. Government efforts to restore easy credit such as the Federal Reserve's .25% interest rate will fail and make things worse.

Like the paper money speculators in France, the beneficiaries of the American easy credit fantasy are turning to government for "help." In other words the predators having consumed all the private capital are turning to the public purse and the taxpayer. We’ve already seen the "Wall Street Bailout" and “Cash for Clunkers." I imagine demands for bailouts for the movie industry, broadcast television, newspapers and other industries will follow. If the bailout cycle is allowed to go on, we’ll see a new bubble based on public financing that’ll burst sooner or later and bankrupt the government and the entire nation.

The sensible course of action would be for government to let the market work by allowing these businesses to suffer the inevitable effects of their own greed and incompetence. The competent and strong businesses would survive to build the economy up, the incompetent and weak would perish. This would form the basis of true economic recovery and real prosperity. Getting rid of easy credit would force people to live within their means and save which would help the economy. Unfortunately it doesn’t look like that will occur because our leaders haven=t learned from history or read Andrew Dickson White.

*White, Andrew Dickson (1959) Fiat Money Inflation in France Irvington on Hudson, New York, the Center for Economic Education.