This article was first published on Medium on the 15th of June 2018.
I think The Bitcoin Standard by Saifedean Ammous will be a milestone in the slow realization of what Bitcoin is, digital sound money, and why it is at least a subversion of the current monetary system, or more likely a revolution in the monetary realm.
In this book, Saifedean mentions the historical study of hyperinflation episodes by Hanke and Bushnell, and make his point that every one of them occurred during the era of government paper-money, with one exception being “the inflation in France in 1795, in the wake of the Mississippi Bubble, which was also produced through government money and engineered by the honorary father of modern government money, John Law.”
In fact, this sentence conflates two distinct experiences of paper money in France, the first being the “Mississippi Bubble” that was part of John Law’s System that went bankrupt in 1720, the second being the dramatic fall of the Assignats, a note created by the French Revolutionary Government in the wake of the 1789 uprising, badly inflated and then demonetized in 1795.
Whether the mistake is on Hanke and Bushnell or Saifedean doesn’t matter, what matters is that the two events are indeed connected, and both illustrates Saifedean’s point that hyperinflation is the disease of government paper money.
I wanted to know more about these two very important events in french history, and started reading about it. In two articles by the very much forgotten now Alphonse Vuitry, a french historian of the late XIXth century, I found a gold mine of information not only about John Law and his system, but also on the chain of events that made it possible in the first place. It was indeed Louis XIV, the Sun King, that paved the way to John Law’s then innovative fiat money by crushing France under a never seen before heap of debt.
It is frequently argued that paper money inflation is a better way to finance government expenditures and deficit because it is hardly noticeable by the public. I thought that this small piece of history made a good argument to prove this point, but also that precisely because of that it is vital that free men never ever let this convenient tool in the hands of any government, be it our modern and apparently good-meaning democracy, because it makes a lot of abuse possible and still keep the ruler from being held accountable for it.
Sunset of the “Sun King”
The kingdom of France inherited from the Middle Ages a solid tradition of local power and what we would call nowadays “subsidiarity”. The King of France had to compose with many local counter-powers to his own authority and administration, principally the nobility and regional courts of Justice called “Parliament”. At this time, many provinces and even towns still had their own privileges, in the sense of privatae leges, or private laws. Since the word privilege had been made a bad press later on, it will be probably more accurate to talk about autonomy to describe the state of affair at this point of history.
Louis XIV was confronted from a very young age to those threats on his own personal power. The most powerful lords of the kingdom raised up during his childhood in a serie of events known as the Fronde. That’s maybe why he spent most of his reign suppressing traditional counter-powers and consolidating his absolute personal power.
He may not have been a ruler as absolute as he pretended, but as a matter of fact he was certainly more absolute than any ruler of France before him (and thereafter, except maybe for Napoleon I).
Even if he did a great PR job that allowed him to be remembered as the “Sun King”, the last 25 years of his reign were almost uninterrupted wars and misery for France, and were deeply resented by the people. War has always been expensive, so how did he manage to find money to keep his armies fighting for almost 25 years uninterrupted against the rest of Europe ?
How to finance war in the late XVIIth century
It was impossible for the Sun King, as absolute as he was, to print money out of thin air. Beside currency devaluation, the King had two others means to finance war : taxation and borrowing.
As the King’s coffers got heavily drained on the first years of war, the more straightforward way to fill them again was of course to raise existing taxes and invent new ones.
But there was obvious shortcomings :
- the nobility and the clergymen, the wealthiest of his subjects, didn’t pay taxes. Privileges were the linchpin of the social order of the time.
- heavier taxation was highly unpopular, and starving peasants rebelled more than once.
As for the first point, Louis XIV created new taxes paid by everyone, including the privileged ones, which was a really bold move for the time (and failed somewhat as many privileged still managed to escape taxation) :
- The capitation, meaning a tax by head. It is very similar to a flat tax of 15% on every revenue ;
- The dixième, meaning one tenth. This one is also pretty straightforward, the King was taking 10% of everyone’s revenue (on top of every other taxes of course).
An interesting feature of the monarchy tax system is the fermage, a system in which most taxes weren’t collected directly by the King’s administrators, but by rich people, sometimes organised in some kind of commercial society, who gave the expected amount of tax money to the King, and then went to get the money from the people themselves. Of course, they wanted their money back with a little profit (in fact, it has been calculated that some of them could do around 20% margin !). They were naturally despised and hated by the people.
Interlude : the french monetary system of the XVIIth century
By the time, France was on a bimetallic standard, meaning that money was gold and silver coins, and couldn’t be printed out of thin air.
But there’s a twist : there was then a fictional unit of account, called livre tournois, which value was arbitrarily fixed in terms of weight and aloy of precious metals. The gold coins, louis d’or, and silver ones, écu, despite being of a fixed weight and aloy of precious metal, worthed more or less livres at the King’s will. This feature was obviously abused by the King to depreciate the currency in times of need.
The livre had divisionnary units :
- the sol, or sou, worth 1/20th of 1 livre,
- the denier, worth 1/12th of the sou, and 1/240th of the livre.
Debasement of coins is another well-known trick in the medieval rulers’ book. It was especially easy for Louis XIV, since as we just saw the livre was defined by decree, and it was not even necessary to recast coins to fraud their holders !
The operation, called réformation, went like this : the King summoned every one of his subjects to bring their species to the nearest royal mint, where the officer of the mint will mark them and give it back to them at the new, devalued rate, so that the King could make a benefit. Sometimes, the king even appreciated the value of the livre before debasing it, artificially raising the benefit of debasement.
Between 1689 and 1709, the livre lost about one third of his value. By the King’s death in 1715, it’s value had been modified 43 times, almost twice every year !
These manipulations were of course highly unpopular. Worst, they were also ineffective : about one fifth of the monetary stock never showed up for reformation, and was either hoarded or brought to a foreign country to be sold there, or melted and bring back in France as bullion. Once corrected for inflation, it appears that fiscal revenue of the State was significantly less in 1709 than it was 20 years earlier.
Last, but not least : it is during the course of these reformation that the State began to draw short term bills for its debtors when it was short on species. Because those bills were at first scrupulously redeemed in gold or silver coins, they began to circulate and be used as if they were money, effectively becoming the first paper-money that the French have ever known.
But the most astonishing mean used by Louis XIV to keep its wars going was borrowing. Why ? Because the French King credit was so bad, he had to find tons of creative ways to use the much better credit of his wealthiest subject to borrow at affordable rates. And he did use something very special about the French Monarchy : traditionally, almost every post of public servant, or office, was for sale, and the King had the right to create them at will !
The end of the reign of Louis XIV saw the first and maybe the only hyperinflation of public servants in history, as the King created myriads of increasingly useless and ridiculous offices, like the most derided at the time controler of barbers and wigmakers.
As officers received a kind of salary from the King, he was effectively borrowing money from them at a much better rate than the one he would have got on a free market.
Selling offices became a real business, with wholesalers buying a lot of them at a discount, and then selling them on retail. But soon it was not enough again, and the King forced current offices’ owners to pay again if they wanted to keep their investment. Of course some of them weren’t very cooperative, so the King had to exile or jail them for some times as an example. But it had the very unpleasant consequence that people didn’t trust the King anymore, and stopped buying offices.
This inflation of administrative offices had another indirect and dire consequence : the King totally disrupted his own administration, which became bloated, redundant and highly ineffective. It was obviously bad for economic activity too, and because of the increasing pressure from taxation many people became miserable.
When nothing worked anymore, the King forced people to lend him money at a very low interest rates, especially people that could be easily blackmailed like the naturalized foreigners. In the later years, the King stopped paying interests, or forced severe haircuts on his debtors, reducing capital due and/or rates of interests by as much as 50%.
The debt by the end of Louis XIV’s reign, or How bad it really was
On the last 26 years of his reign, the cumulated revenue of the State is estimated to be more than 1.3 billion livres on taxation and other means. Cumulated expenses, on the other hand, were about £5 billions in the same time frame.
Those figures are huge : it is estimated that by 1689 the monetary stock of France was only about £500 millions !
By the time the King died in 1715, the total debt of the State was about £2.4 billions, from £84 millions in 1689. Net fiscal income was £69 millions in 1715, meaning that the whole debt was about 35 years of net income. But, hey, France won the war, Louis XIV’s grandson would stay on the throne of Spain, so it was worth it, right ?
It is said that people were relieved when they first heard about the King’s death, and it seems that he was widely hated by then. I thought that maybe the chain of fatal events that would lead to the fall of the French Monarchy less than a century later has its roots here.
Many of those that believe that it’s okay for a government to finance itself through inflation will disregard the story of Louis XIV as irrelevant to our time. And it is irrelevant, in a way.
But consider this : as absolute a monarch Louis XIV was, he simply didn’t have enough power to wage costly wars and simultaneously escape the consequences for himself and the State. Everyone perfectly knew that he was the only responsible for their suffering, and the King couldn’t steal his subjects’ money without them knowing. His heirs were also incapable to balance a budget, and because of that the French, fed up by an unjust and overwhelming tax system, rised up and took rid of their King.
Louis XIV had as much power as it was possible for his time, but lacked the only one that really matters if you want to be a real, unaccountable tyrant : the power to create money. Louis XIV had huge power, and obviously abused it, he did a lot of harm to its own people, but in the end he was clearly held personally accountable and had to compromise, either by declaring a tax free year when people literally went starving, or by writing an open letter to its people, in which he humiliates himself and apologies, asking them to sacrifice a little more, not for him, but for France.
On the other hand, just think about how our modern democracies have been waging pointless and absurdly expensive wars for many years now, wars with no goals and no ends, causing deaths and pain to people on the other face of the earth that has nothing to do with the average taxpayer that supposedly voted for all this. The leaders that ordered this masquerade are still cocking around. They won’t apologies, for they know they will never pay for any of this.
That’s the power of government controlled fiat money, the only one that really matters because it allows its possessor to escape the consequences of its own decisions, either by hiding them or delaying its effect in time until it doesn’t matter anymore, because, in the long run, you know, we are all dead.
That’s the power Bitcoin is taking back today.