The French Revolution - An Economic Interpretation

June 5th, 2014
in Op Ed, syndication

Book Review

by Dirk Ehnts, Econoblog101

Florin Aftalion published an account of the financial and fiscal problems before, during and after the French Revolution in 1987 (1990). Apparently, in the 1780s the French people were fed up with the way that taxes were collected and also with the way that government spent. There was some knowledge about what was later termed the quantity theory of money, thus linking price level and quantity of money (p. 44):

Follow up:

His [Jean Bodin] view was that the purchasing power of coin ought to be in inverse proportion to the quantity of gold and silver in existence in a given country. This idea, which had originally been a controversial one, was universally accepted a century later. The writings of David Hume, who was well-known and much respected by French philosophes, established its credibility once and for all.

Aftalion then proceeds to mention the fiscal experiments of John Law. who created a paper currency scheme in France in the early 18th century which ended in disaster:

However, correlation is not causation. Aftalion seems to have been a neoclassical writer, and although I disagree with his views his book contains some passages which are very interesting from a modern perspective. There is a nice discussion on money and taxes on page 59:

In the meantime, the Assembly was discussing an article of the Constitution which stipulated that ‘no tax, in kind or in money, can be levied; no loan whether manifest or disguised can be raised without the express consent of the representatives of the nation.’ Everyone seemed in agreement regarding this point. Need one add, however, that this express consent ought also to apply to paper money? Mirabeau answered that it should indeed, considering the fact that the issue of paper money was at the same time a loan and a tax [...]

This is an interesting thought. Paper money – issued by the government – is at the same time a loan and a tax. Here we enter into the fiscal realm, in which government can create tax liabilities in the private sector and thus force people to hold paper money issued by the government that they need for the payment of taxes. Since the paper money does not carry an interest rate and government does not repay taxes, the description is actually not quite right. However, the realisation that paper money has something to do with taxes is quite ingenious. On page 73 the topic resurfaces when a Martineau makes his opinion public:

[..] He informed them that ‘paper money, in times of despotism, is dangerous; it fosters corruption. But, in a nation which has been responsible for constituting itself, and which itself supervises the issue of banknotes, which determines the proportions and uses, this danger no longer exists.’

Here we are back at the idea of a sovereign paper currency, which today is quite standard. The ideas of the thinkers in the 18th century evolved along these lines and on page 74 Aftalion quotes Cazalés:

Credit depends upon the foundations of government, upon the liquidation of debt and upon the collection of the taxes. So long as the people is armed from one end of the kingdom to the other, so long as you have not granted the executive all of the powers that it requires, you will never be able to guarantee the collection of taxes.

What happens to the taxes is provided through an account in which tax income in assignats (paper money) is destroyed by burning it, thus reducing the amount of money in circulation (p. 95). At some point, another type of money, billets de confiance, were accepted for tax payments but in February 1792 the tax-collectors refused to accept it, which triggered a crisis.

It seems that one lesson from the french Revolution should be to get your fiscal house in order. It was difficult at the time, because the mob was in the street demanding the abolishment of taxes. After achieving that, there was no way to set up a currency that ‘worked’. Fiscal spending requires a proper money, which means that some taxation must be executed to allow for government spending without driving prices sky-high. What came after the French Revolution was The Reign or Terror, and then, shortly after, Napoleon. Perhaps it is better to pay taxes, after all.

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