Get Your Popcorn Ready To Watch The Coming Keynesian Self-Destruction
March 8, 2013
(This item originally appeared at Forbes.com on March 8, 2013.)
I have been enjoying a wonderful short book called Fiat Money Inflation in France, by Andrew Dickson White. It refers to experiments with printing press finance that began in 1789. The book was published in 1896.
I will simply provide here some short excerpts. I think they speak for themselves.
“Still another troublesome fact began now to appear. Though paper money had increased in amount, prosperity had steadily diminished. In spite of all the paper issues, commercial activity grew more and more spasmodic. Enterprise was chilled and business became more and more stagnant. Mirabeau, in his speech which decided the second great issue of paper, had insisted that, though bankers might suffer, this issue would be of great service to manufacturers and restore prosperity to them and their workmen. The latter were for a time deluded, but were at last rudely awakened from this delusion.”
“A still worse outgrowth was the increase of speculation and gambling. With the plethora of paper currency in 1791 appeared the first evidences of that cancerous disease which always follows large issues of irredeemable currency,—a disease more permanently injurious to a nation than war, pestilence or famine. For at the great metropolitan centers grew a luxurious, speculative, stock-gambling body, which, like a malignant tumor, absorbed into itself the strength of the nation and sent out its cancerous fibres to the remotest hamlets. . . . . As these knots of plotting schemers at the city centers were becoming bloated with sudden wealth, the producing classes of the country . . . grew lean.”
“The evils which we have already seen arising from the earlier issues were now aggravated; but the most curious thing evolved out of all this chaos was a new system of political economy. [Author’s emphasis.] In speeches, newspapers and pamphlets about this time, we begin to find it declared that, after all, a depreciated currency is a blessing; that gold and silver form an unsatisfactory standard for measuring values: that it is a good thing to have a currency that will not go out of the kingdom and which separates France from other nations: that thus shall manufacturers be encouraged; that commerce with other nations may be a curse, and hindrance thereto may be a blessing; that the laws of political economy however applicable in other times, are not applicable to this particular period, and, however operative in other nations, are not now so in France; that the ordinary rules of political economy are perhaps suited to the minions of despotism but not to the free and enlightened inhabitants of France at the close of the eighteenth century; that the whole state of present things, so far from being an evil is a blessing. All these ideas, and others quite as striking, were brought to the surface in the debates …”
This time it’s different?
Eventually France returned to gold — mostly because paper money fell out of use entirely by 1797, and bullion coins again became the standard of commerce. Successive governments attempted several more paper issuances, with little result except their own increasing unpopularity.
Thus the stage was set for the rise of Napoleon. Napoleon formalized France’s return to a gold standard system by the establishment of the Bank of France in 1803. He also refused to engage in any deficit spending, and lowered tax rates dramatically. The Magic Formula was in action in France. Again, from White:
“But this history would be incomplete without a brief sequel, showing how that great genius [Napoleon] profited by all his experience. When Bonaparte took the consulship the condition of fiscal affairs was appalling. The government was bankrupt; an immense debt was unpaid. The further collection of taxes seemed impossible; the assessments were in hopeless confusion. War was going on in the East, on the Rhine, and in Italy, and civil war, in La Vendee. All the armies had long been unpaid, and the largest loan that could for the moment be effected was for a sum hardly meeting the expenses of the government for a single day. At the first cabinet council Bonaparte was asked what he intended to do. He replied, “I will pay cash or pay nothing.” From this time he conducted all his operations on this basis. He arranged the assessments, funded the debt, and made payments in cash; and from this time—during all the campaigns of Marengo, Austerlitz, Jena, Eylau, Friedland, down to the Peace of Tilsit in 1807—there was but one suspension of specie payment, and this only for a few days. When the first great European coalition was formed against the Empire, Napoleon was hard pressed financially, and it was proposed to resort to paper money; but he wrote to his minister, ‘While I live I will never resort to irredeemable paper.’ He never did …”
Napoleon was so popular that he declared himself emperor in 1804, and it stuck. Thus did a great nation rise again from the ashes; although Napoleon soon returned it to ashes in his own special way, with a side trip to Moscow.
The self-destruction of today’s Keynesians will lead to a new gold standard system, just as it always has in the past. But, first the Keynesians need to light themselves on fire, accompanied, as it was in 18th century France, by widespread cheers and encouragement.
That should be interesting. Get your popcorn ready!