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Commentary & Review:

A Thought or Two after Reading Andrew Dickson White's "Fiat Money Inflation in France" over the Weekend

"If the inflationists, who now have the leadership of the Fed, and control of the central banks around the world, have their way a very dangerous economic policy course will be followed. This will result eventually in sharply rising inflation rates and a much lower U.S. exchange rate, and will bring about a disastrous global recession, which could threaten the capitalistic system as we know it today." Marc Faber writing for the Daily Reckoning

usagold (6/30/03)........Surprisingly, despite over 30 years studying the gold market and that which affects it, I never read Andrew Dickson White's "Fiat Money Inflation in France" though I'd seen it referenced many times. One of the remarkable points made by White is that the French power structure was willing to embark upon a money printing scheme despite fully understanding the devastating inflationary experience at the hands of John Law several decades earlier. The French revolutionary government convinced itself that this time it would be different since France had become a Republic and shed the tyranny of the monarchy. Of course, events proved this rationalization wrong. The French 'assignat inflation' devastated the French economy just as mercilessly as John Law's.

Assimilating the statements made by key members of the US Federal Reserve in recent months with respect to resorting to the printing press, one is forced to consider whether or not the United States, and the rest of the industrialized world, will find itself heading down the same road at some point in the future. I was stopped for a moment by this quote from "Fiat Money Inflation in France" not just because of its lucid enumeration of the problems inflation presents, but because it seems to eerily reflect similar circumstances and though patterns today:

"They knew too well, from that ruinous experience, seventy years before, in John Law's time, the difficulties and dangers of a currency not well based and controlled. They had then learned how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the working men and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meager means a class of debauched speculators, the most injurious class that a nation can harbor,--more injurious, indeed, than professional criminals whom the law recognizes and can throttle; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality. All this France had been thoroughly taught by experience."

Yet, presented with a collapsing French economy, the French Assembly was driven to desperation and moved in the direction of inflation with little hesitation. The comments made by Alan Greenspan and Ben Bernanke in recent months assuring Wall Street and the public that the printing press remains a welcome tool in the central bank's arsenal, echo that French political sentiment in the 1790s. They also echo back eerily to the 1970s -- a decade when the United States moved to the edge of the inflationary precipice and nearly toppled in, its own version of the John Law / Assignat sequence mentioned by White. And just like the French Assembly in 1790, the motivation for resorting to the printing press comes from a deep-seated fear of deflation began within the Federal Reserve.

Some say we've come full circle. They point to the U.S. economy floating on 'a sea of liquidity' created by the Fed. The question becomes: Where will all this lead us in the months and years to come? The warning posted at the top from Marc Faber sums up the concerns of many.

I could write a couple chapters on what I learned from this Andrew Dickson White essay written nearly 100 years ago, including its applicability to the international economic situation today, but I think most of you can draw your own conclusions without much difficulty. The French example is only one of many in Western history and as we have said often here: If history doesn't repeat, it at least rhymes -- justification enough to download the article and give it a read.

Professor White does offer some advice in the scholarly manner you would expect. I'll bring this little historical foray to a conclusion with this short, but useful reference from the essay:

"The 'louis d'or' (Ed. note: a gold coin from a previous era hoarded by the French people) stood in the market as a monitor, noting each day, with unerring fidelity, the decline in value of the 'assignat' a monitor not to be bribed, not to be scared. As well might the National Convention try to bribe or scare away the polarity of the mariner's compass. On August 1, 1795, this gold 'louis' of 25 francs was worth in paper, 920 francs; on September 1st, 1,200 francs; on November 1st, 2,600 francs; on December 1st, 3,050 francs. In February, 1796, it was worth 7,200 francs or one franc in gold was worth 288 francs in paper."

And further on:

"Shortly afterward a report by Camus was made to the Assembly that the
entire amount of paper money issued in less than six years by the Revolutionary Government of France had been over forty-five thousand millions of francs-- that over six thousand millions had been annulled and burned and that at the final catastrophe there were in circulation close upon forty thousand millions. It will be readily seen that it was fully time to put an end to the system, for the gold 'louis' of twenty-five francs in specie had, in February, 1796, as we have seen, become worth 7,200 francs, and, at the latest quotation of all, no less than 15,000 francs in paper money -- that is, one franc in gold was nominally worth 600 francs in paper."

Whether or not the United States, and indeed the rest of the industrial economies, are headed down this same path is a matter of conjecture, and there will be much discussion and debate on the matter in the weeks and months ahead. I would say simply enough, that a little gold tucked away seems to be a rational approach under the circumstances -- just in case this particular inflationary scenario flares out of control. All in all, I think you'll find Andrew Dickson White's essay an important addition to your arsenal of knowledge.

Wednesday February 8
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