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September 22, 2020
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How money was thought. Part 6. Bullionists and anti-bullionists |

In the previous part of this series (we encourage you to read it; it is available here), we described how economists thought about the first paper money, which started to appear more often in Europe in the 18th century. Unfortunately, politicians and bankers liked the very idea of ​​reprinting banknotes. It caused great inflation. Especially in France …

Inflation is destroying the economy of France

Jon Law

In the previous section, we wrote, inter alia, about the Scottish John Law, who headed the first central bank in the history of France. His monetary policy and economic experiments (all strangely reminiscent of Modern Monetary Theory today) ultimately led to the country’s enormous debt, the Mississippi Company bubble, and high inflation, which in the long run sparked the outbreak of the French Revolution.

What were the real reasons for the revolution of 1789? Of course, in history books you will find a rather naive story about the evil king of France who oppressed his people. But the truth was a little different. Of course, there was then a clear division between society and social classes, but the revolution broke out for a different reason. The country … went bankrupt. Nor was it – which is worth adding – the cost of servicing the manor, as we are often told. These were still – in the context of the entire budget – quite low. The reason for the fall of France was simply the country’s debt as such and the service of that debt.

The French economy was also in a deplorable state then. Still, only 10 percent. the national income went to the maintenance of the famous royal court of Versailles. At the end of the 18th century, more than half of the state budget was spent only on interest on debt. When the king finally stopped paying them back (he had no funds for it), he made enemies, among others in the middle class and the banking community. It was also not the peasants, but the townspeople who started the volt, which went down in history as the French Revolution. In the National Assembly in 1789, nearly half of the people came from this state.

In order to save the economy, however, the stupidest decision was made: new paper money was issued, which theoretically had security in part of the property that had previously been confiscated by the nobility. With what effect? Not very good. One by one, however …

Unfortunately, the revolutionaries may and eventually took over all power (the king, as we know, had a life on the guillotine), but – as it turned out – they did not know the economy. The budget was still full of holes: more was flowing out of it than flowing into it. The new elite was afraid of introducing new taxes, because they already knew what the angry crowd meant. Prices were starting to rise sharply, there was no money to pay the troops that should defend the country from its neighbors, who in turn decided to take advantage of France’s weakness, but also to stop the volts so that it would not spill over to the rest of Europe.

So how do you get out of such a problem? Started up… yes, printing presses again. Only that the new banknotes, however, had no cover in anything. The French produced a pure fiat currency based on belief in an uncertain government.

Effect? Even higher inflation! In 1793, as much as 20 sou was paid for a pound of meat (four years earlier, only 6). The French thought that it was enough to enter maximum prices in response. When they did, the merchandise began to disappear from the stores, and the black market flourished. A Frenchman from Lyons wrote in his diary in late 1793 that “There is no food here even for two days.” A few days later, the situation had already become “Desperate.”

In fact, the coins on the market had completely different values ​​than the nominal ones minted on them. Penny sums had to be printed as banknotes. People also did not want to adopt the revolutionary currency to such an extent that such an offense – reluctance to adopt the French currency – was already punishable by death. But it didn’t help. In 1795, banknotes were already worth only 10 percent. its nominal value (as if today PLN 10 in your wallet is worth PLN 1). The printing presses eventually produced banknotes in the amount of over 45 billion francs.

In the following year, the banknotes were already worth 1 percent. nominal value. The end couldn’t be different. On February 19, the printing presses used to issue money were publicly destroyed. The crisis was brought to an end only by the wars led by Napoleon. As you know, war like nothing else can start the economy …

Everything that happened in France then sparked a worldwide debate about the reasons for the price increases. In the history of economics, this dispute is referred to as the conflict between bullionists and anti-bullionists.

Bullionists vs anti-bullionists

gold priceHow did the two groups differ? Of course, with your view of money, and more specifically with how money and the attitude of officials and authorities to it affect the markets, especially in terms of a jump or fall in prices.

Anti-bullionists argued that prices were rising not because of faulty monetary policies, but because of wars or crop failures. Robert Torres (who lived in the years 1780-1864) in his work Essay on Money and Paper Currency from 1812 outlined the main assumptions of this idea.

A decade earlier, Henry Thorton, who in turn was a famous bullionist, presented his arguments. However, he did not stop at showing the relationship between the amount of money in circulation and the price level. He also analyzed the mechanisms of such dependence. He believed that the amount of money in the market could affect prices through interest rates. In other words, he believed that money as such was a neutral tool. Bankers and politicians should be blamed for the spikes in prices.

The debate of both groups was summed up in the 19th century by economist David Ricardo, who, however, took the side of the bullionists. He designed the equation:

MV = PT,

where M is the amount of money, V is the speed of circulation, P is the price level, and T is the number of transactions.

Ricardo also believed that the amount of banknotes issued by the government must depend on the resources of ores owned by a given country. He saw the importance of convertibility into gold in particular in international trade. In the case of domestic trade, it was of little importance in his opinion. Thus, he postulated that the currency issue should be based on the gold standard (Gold Bullion Standard). The cover, however, was not to be gold coins, but always only gold bars. Why is that so? The idea was to exclude ordinary citizens for whom the value of one bar was astronomical from the convertibility of banknotes into gold. If coins were used as a foundation, the average citizen could freely exchange their banknotes for gold, which in turn would lead to the outflow of the latter from the treasury of the central bank. It is difficult to imagine politicians and central bankers who would like this idea …


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