Pop quiz: What was the world’s first recorded hyperinflation?
We have described that politicians, including the Roman Emperor Diocletian, use inflation as intentional policy.
Sometimes politicians get so carried away that they cause hyperinflation. The term hyperinflation is often thrown about carelessly. To economists, Hyperinflation is defined as inflation of over 50% per month.
You probably wouldn’t associate hyperinflation with cries for ”Liberty, Equality, and Fraternity”, but you should. The first recorded hyperinflation occurred in the wake of the French Revolution.
In 1789, revolutionaries violently seized control of the French government. They cancelled all taxes, but didn’t reduce government spending. Nor did they default on government debt.
The new government, called the National Assembly, seized the Church’s land, then worth perhaps 2 billion French livres (pounds).
But most of this land was not liquid. The government couldn’t spend it.
The Assembly issued paper claims called assignats, supposedly, though not legally, backed by the Church lands. Assignats, like bonds, were supposed to pay interest to the holder. Despite the talk about land backing, these assignats were unsecured debt, that is, debt not backed by any collateral.
The government used assignats to purchase real goods.
In 1790, the National Assembly issued 400 livres’ worth of assignats. A few months later, they increased that number to 800 livres. And then they eliminated the interest rate.
The assembly found that it didn’t have to tax or borrow if it could instead create, and spend, assignats.
Assignats were now basically fiat money; the Assembly could print them in whatever quantities they liked, whenever they liked. And they did.
The Assembly printed so many assignats that their purchasing power fell by half over the following two years. From 1790 to 1793, inflation averaged about 1.3% per month, or about 17% per year (taking compounding into account). In 1794, inflation averaged about 7.5% per month. Prices more than doubled. What could once be bought for 1 livre now cost about 2.38 livres. By 1796, the assignat was basically worthless, and the French productive class – farmers and peasants – had been ruined. They were ripe for recruitment by a would-be savior. One soon appointed himself, and Napoleon waged war on all the areas of the world he could reach.
The assignat inflation ruined the French economy, and ultimately caused tens of thousands of deaths. As more and more assignats were printed, they were worth less and less. . In the 1790s, most of the French economy was farmers. But as inflation rose, farmers realized that they’d be better off holding onto their grain, which holds its value, instead of trading it for paper that was rapidly losing its value.
Farmers acting rationally withheld grain from the market. In the modern politico-speak, this would be called a “supply chain crisis.”
The average Frenchman in 1790 got about 75% of his calories from grain. So rising prices was an existential crisis. Assignat printing caused the price of grain to skyrocket, and the supply to sharply shrink.
In 1793, the government acted as demagogues often do: they enacted price control laws purportedly to decrease the price of grain. They declared a maximum price on grain, and made it illegal not to accept assignats at face value. But farmers rebelled. Many of them were arrested or killed. As always happens, the price controls made the problem much worse.
All that interference in the markets had a cost. Imprisoning and killing farmers for selling wheat at market prices decreased the supply of wheat, and France suffered a famine in 1974. Thousands of innocent people died.
The French hyperinflation was the predictable (French economist Turgot had been in government and his understanding of the importance of real money was well known) result of deliberate government policy. And its counter-productive destructive results were also predictable.
This post was written by Katherine Silk and Roger Silk. Roger D. Silk holds a Ph.D. in applied economics from Stanford, and is the author of the recently published book explaining inflation, Politicians Spend, We Pay, available here. Katherine Silk holds a MA in history from Stanford.
Click here for to enter a drawing for a free copy of the book.