Odd Lots - Why It's Really Hard to Create a New Currency in a Revolution

Episode Date: February 10, 2017

Creating a new form of money is always tough. Will it hold its value? Will people trust it? Will people use it? All these challenges are even tougher if you're in the middle of a political chaos. On this week's Odd Lots, we speak with Rebecca Spang, a history professor at Indiana University and the author of a book about the monetary history of the French Revolution. Her book examines the disastrous attempt to create a new land-backed currency, the Assignat, in the late 1700s. The discussion sheds light on some fundamental issues that are still relevant today.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the podcast, Oddlots on Amazon music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. How are you doing, Tracy? I think I'm like dying of consumption or something. Consumption is a thing, right? Yeah, I think it used to be a thing. And now there's probably another name for it. Anyway. Sorry to hear that. So we've had a lot of bleak episodes lately. We just finished a sequence of episodes on money and crime and terrorism and the black market and stuff like that.

And I think today's is also kind of going to be pretty bleak because we're going to be talking about the French Revolution. People died of consumption in the French Revolution, right? They probably did. Yeah, it's a good way to connect. connect our episode to your current, your current ailment. Okay, Joe, in all seriousness, that is very bleak. We seem to be on something of a very dark, thematic pathway for 2017. Yeah, maybe it says something about our times.

But, of course, we're taking an angle that is relevant to past episodes that we've done. And I think it's one of my favorite questions and one of your favorite questions, which is what is money exactly. And the French Revolution will tell us something about what money is? Right, because every time in history, you know, the subject of coming up with a monetary system is important. And, you know, economists and historians and people on financial markets tend to, I think, sort of abstract away the question of money and they just sort of come up with these models that take it for a given. And it often seems to be the case that people should go the other way, start by

looking at the form of money and seeing what it says about the time. Right. Well, also, people forget that money is intricately linked with power and therefore with politics. And sometimes money can be, I guess, either a reinforcing force of the existing social structure or an instrument of change, right? Right. And people, money makes people do things that seem irrational. I mean, in theory, people should just want to increase their wealth and material wealth, but sometimes people just want to run up the score, so to speak. Okay, so I'm intrigued. So who is going to be connecting the idea of money with the French Revolution for us? Well, this is the perfect guest. We're going to be talking to Rebecca Spang. She is a professor of history at Indiana University.

and she actually wrote a book called Stuff and Money in the Time of the French Revolution, which is essentially a monetary history of the French Revolution, looking specifically at how they dealt with what is money and how that really shed some interesting light on this period in history. Very cool. Okay, so I have a feeling in addition to asking about the French Revolution and money during that era of time, we're going to have a whole bunch of questions about money now as well. right? Like things like Bitcoin, the euro. What it could teach us now. Yeah, Trump's relationship with

gold, all sorts of current event stuff too. So much, so much we can take from the past to apply the present. So without further ado, Rebecca, thank you very much for joining us. Oh, thank you for inviting me. I'm delighted to be here. So let's start with the question of why this angle on studying the French Revolution. No doubt there have been numerous books. much academic study about this period of time, why explore it through the monetary system? There's a well-established way of thinking about the relation of money and the French Revolution, which is to say that the French revolutionaries were utopian philosophers who had little understanding of the practicality of government. And so one of the ill-advised things they are

caricatured as having done was to issue paper currency in great quantities. It was issued in such quantities that so-called hyperinflation resulted and the whole system collapsed. And that is something that historians, economists, and policymakers ever since the debate on the Green back in the aftermath of the American Civil War. That is a story that people know and are familiar with and cite as true. Everyone just takes it for granted. Everybody takes it for granted, exactly. And so the French Revolution can always be offered as an example of why fiat currency is a bad idea. I wanted to go back to that episode, reexamine it, and I think I've come up with something different to say. Can you maybe explain for those who aren't entirely familiar,

with the subject exactly what the money system was during the time of the French Revolution and how it went wrong and how it became this linchpin for people to focus their fiat currency criticisms around. What you need to know is that the French Revolution is precipitated by a very heated political debate about government debt. And it's a lot like recent debates we've seen. has more to do with politics than it does with the actual viability of the state's finances. Nonetheless, when the representatives who form the first French National Assembly, this is in 1789, declare themselves to be a National Assembly, they face a considerable debt, they want to repay it, they also have an operating deficit they can't fill.

And so they decide that what they're going to do is they're going to nationalize land formerly held by the Catholic Church. This amounts to probably about 10% of the property in France. They do this because after all, they say, you know, Jesus doesn't say to the disciples, go forth and be property developers. So why does the Catholic Church have all this wealth? The nation, the state is going to take over the property in exchange. It will also pay the priests. It will do all the charity work. and it will then pay off its debts with this land.

But, you know, people don't necessarily want to be paid in land. It's not always the case that, you know, an armament supplier wants a used monastery in Brittany, say. So what they say is we'll have this piece of paper that's worth 10,000 livres. That was the unit of account at the time. And it's backed by a used monastery in Brittany. say, and we'll issue the paper. And then when somebody wants to buy the used monastery, it will come back into the central government. So we won't have created paper. We're just creating land in a form that can circulate. And that was supposed to be. And these physical bills,

they were paper money, they were called asinia. And so explain to us a little bit more the mechanism by which they were ostensibly backed by the land. Did they pay any sort of dividend or yield or anything like that? Or how did the actual backing work? Okay. So actually, that's interesting. For the first six months, they were supposed to be interest-bearing. And that's really complicated.

Because imagine that you've got a bill for a thousand leave and it's going to carry 4% annual interest. So that means that after six months, it's actually worth a little bit more than a thousand. So how do you make change for that? So after this first six months, when these are supposed to be interest-bearing, the government decides, no, they're not going to be interest-bearing. And they introduce some other changes as well. In fact, there were some who argued that the best way to make them widely accepted would be for each bill to be backed by a very specific piece of land so that they would in effect be real estate trading cards. The problem with that is that it would have greatly complicated making any exchange because while somebody might be happy to take a bill back to. by 500 leave worth of land, they might be much more skeptical about a piece of bell that's only

this little corner of a wheat field. Because then everybody has to become an expert on all the different pieces of land. Exactly. And then there's going to be people who say, oh, well, I don't want that 500. I want that 500. So it creates non-equivalency. At the very least, though, you would have expected that these papers or certificates backed by land would have been relatively stable in value, right? Like, land is usually pretty stable. So creating money backed by land should have made some sense. But I'm guessing it all went wrong, right?

So that was exactly the logic of the French revolutionaries. They say the price of land is stable. They say the land is ours. Nobody can take it away from us. What they didn't think through very well was that by having taken the land that once belonged to the Catholic Church, they had created politically controversial money. So something like 50% of the population of France right from the get go says these bills are illegitimate. because the state never had the right to the land. The land belongs to the church. It would be a sin to take one of these bills. So how did, you know, initially these start, these were very high denomination bills, right? Yes.

These were not designed to be money that you could go to the store and buy some apples or buy a loaf of bread with. So how did they become, go from these sort of essentially paper money very big? bills at very high denominations to money that started to circulate and be used? That's a really good question. In the beginning, they're large denominations because they represent pieces of land. And really, you can't get very much land for a dollar and a half, say. But as you say, it's just not practical if they are also supposed to be a medium of exchange to only have 500 and 1,000 as the smallest denominations in circulation. So at the beginning, what happens is that all across France, literally thousands of bodies,

municipalities, counties, for-profit banks, they say, well, we'll make small change. We'll take this bill that's good for 1,000, and we're going to lock it up in our safe, And we will issue a thousand of our own bills, each of which is equal to one. And then those can circulate. And when they all come back into us eventually, then we can take the thousand out of the safe. So what ends up happening in the course of 1890 and 1791 is that you get this proliferation of different issuers of small change, which the central government enthusiastically. welcomes as people doing their patriotic duty and evidence of what ingenious people will do in a country that has freedom and liberty.

That also sounds like a recipe for lots of confusion and potentially counterfeiters as well. It's a recipe for both of those. Because imagine that you live in a small town in the north of France and there are these locally issued very small denomination bills that have been signed by the mayor and some other patriotic officials and maybe even, you know, your cousin. And you know what it is. But then somebody who's traveling across the country, a merchant or by 1792, a soldier, comes with a small bill issued in a different part of the country signed by different people. Well, you don't know who those people are. You don't know if that bill's legitimate. It could just have been made up on the spot.

So there's enormous increase in the information costs of any transaction because people have to verify these many different bills they see in front of them. Now, there were some people who thought there was a benefit to the skepticism around this money in the sense that, you know, if silver and gold, you can export those, you can take those out of the country. But if there is some sort of paperback money and it's only local credibility, you can at least be sure that that will stay in France and only circulate in France. That's right. That is the argument for a national money. And remember that throughout the medieval and early modern period, a lot of the currency in circulation, it's gold, it's silver, and it circulates by weight. So it's not national money.

We're talking about the era in which money really begins to be identified with the nation. And so one argument for that, and this goes back to sort of Rousseau's ideas about self-sufficiency, is if we issue a paper that nobody else wants because they don't believe in our politics, well, that's great because it stays in the country. It's a sort of bi-American venture. That sounds familiar. Yes, it does. So is the ultimate argument that the assigneat, that they failed because they were politically controversial forms of money, or is it that they failed because they were poorly designed forms of money? Good question. I think it's a little bit of both.

They were politically controversial. And for nearly all of the 1790s, with an exception of a few months, French revolutionaries really really. endorsed the idea of free trade to the point of allowing the free trade in money. So while this paper is being issued, except for a few months, they never say that you have to take the paper and coins at a one-to-one exchange value. So what you end up getting are situations in which a merchant might say, sure, you can have that for two in coins or 200 in paper. So over and over again, there are these controversies about how the money backed by land relates to the money that was already in circulation. Could they have just taken a stronger stance on it and would that have

been effective? We say, this is absolutely money. It is illegal to trade them. at a different price than any other money with the same denomination and you have to accept this? Would that have worked? That's an interesting question. If they had done that from 1790, there would have been immediate objections, as I said, on the part of the Catholics who see this as, I mean, not all Catholics, but those Catholics that did see it as sacrilegious. On the other hand, I think it would have made for a much more coherent policy. A lot of what radicalizes the French Revolution, and we see this in other historical episodes as well, is policymakers thinking, oh, well, that didn't work.

Why don't we try this? And then they try something for a couple of months, and that doesn't work. And they say, okay, let's try this. And that's a really bad way to build trust in a monetary or a political system. So this gets to something that, you know, you hear echoes of this in current politics, which is the idea of monetary innovation or the idea that the price of money could fluctuate, even though our money system is pretty stable in the U.S. and has been for a while, it's still, there are a lot of people who get very concerned. They get really inflation. The idea of inflation sets people off. The idea of quantitative easing makes people nervous. What is it due to society when the money itself is perceived to be traded on a market and volatile so that beyond just the price of goods going up and down, they don't feel that the money is a stable store of value? Very good question. I was fascinated to discover that through the 1930s, it was possible. for political figures in the United States to be pro-inflation. You could be pro-inflation

because you were thinking of yourself and the people around you as producers. You wanted prices to go up. It's when we all start thinking of ourselves as consumers and only consumers, which goes back, of course, to Tracy's terrible affliction with consumption. That's the point at which inflation becomes this awful, terrible bug bear. Now, in societies that experience dramatic inflation, so of course we think about Weimar, Germany, or Hungary after the Second World War, many other historic examples, what happens is that people tend to think that they need to get their wealth out of money and into something that will last. So they might buy land, they try to buy any sort of physical object that they think will hold its value.

It's a point at which money is no longer believed to be a store of value. It doesn't serve that function. Rebecca, I want to go back to the politically controversial aspect of this discussion and ask you to connect what happened in the French Revolution with the Asinat to potentially what might happen today with the Eurozone and the Euro, which is, of course, a currency, which seems to, even though it's stable in terms of the actual market, at least for now, it seems to be becoming ever more controversial in its basic ideals, I guess. What do you think will happen there?

What's fascinating about the euro is that I don't think it's the political ideals that it was meant to embody. the movement of people, Europe as not divided by the sort of nationalism and xenophobia that destroyed it in the two world wars. Those political ideals, while they're under attack from the extreme right, I don't think those are things that people generally disagree with. What's happened is that those political ideals got yoked to certain fiscal monetary criteria about debt, about taxation. That meant that those political ideals really could not be achieved with the euro. So it's hard to say what's going to happen. So the big takeaway that I got from your book, and it touches on a theme that we've discussed a lot of times on this podcast, which is that, like, you know, money is essentially a social network. And it, it establishes its value once we essentially all accept that it establishes its value. Once we all accept that dollars are worth something, dollars are worth something. But that it's really hard to just sort of manufacture that social acceptance. It takes Nealow. It takes momentum. It takes good governance. It takes laws. It takes certain trust. And that in a time of extreme sort of social disorder, when the government is weak, when a lot of people don't trust each other, the monetary system is just going to sort of be a mirror to that.

That's absolutely very insightful as a reading of my book. What I would say is that at a time when political legitimacy is, in doubt when people wonder if the government really has their interests at heart, that is the worst time to attempt any kind of monetary innovation. Because it then calls the monetary system. I mean, on that note, we have to ask you about Bitcoin, right? Because of course, Bitcoin kind of rose from the ashes of the financial crisis during a period of great upheaval in markets and within the world and the idea was that it could offer something different to national currencies. Do you see any prospect of success on that front? I'm actually a bit worried about that.

I think that what we're seeing in the continued interest in Bitcoin is one fantasy of a money that is completely divorced from regulatory. policy, government, the state. And while that doesn't necessarily mean that it's only going to be used for black market or illegal transactions, it does mean that those people who are left, perhaps for reasons of poverty, dependent on the money issued by the state, are going to be in a worse and worse position. So what I worry about is that that we see perhaps a growing possibility for monetary systems that are really very strongly different for the rich and the poor. I mean, they're like that today.

The example I always use is, you know, just imagine you're a homeless person. You've amassed quite a few quarters and you go to try to buy a plane ticket with your change. it's almost legally impossible to buy a plane ticket with cash these days. Tracy, we should try to do that episode, buy a plane ticket with quarters. Yes, you should. I mean, I used to cover fintech, and I know a lot of fintech companies that were created specifically to try to address this problem, but that's probably a topic for a whole other episode. Rebecca Spang, the book is Stuff and Money in the French Revolution.

And the paperback copy is just about to come out, right? Yes, it is next week. Well, it's a fascinating book. I highly recommend people read it. And we really appreciate you coming on the episode. Thank you. So, Tracy, when we were first talking about doing this episode of monetary policy during the French Revolution, I was thinking of it as sort of this, you know, historical curiosity.

but it definitely seems like there's a lot of relevance to things going on these days. Oh, yeah, for sure. I mean, I think purely on the political front, you could probably draw a lot of connections between what's happening now, certainly in Europe and the French Revolution, right? Like a bunch of people, a bunch of rich people, like the Catholic Church, didn't really want to contribute more into the taxation system. And so they hijacked this argument that they were going to fight for the good of the people

in order to fight against paying their fair share. And I think there's some who would say maybe that that reflects a little bit what Brexit supporters have been doing. Yeah. And also the euro is an interesting example because normally when we talk about currency movements or currencies, they tend to be driven, at least in the short and medium term, by sort of plain vanilla economic data points. So whether inflation comes in strong or whether GDP comes in strong, or whether the Fed hikes or cuts rates.

But we don't really talk much about sort of the existential case for this currency or that. But as more stress is placed on politics in one way or another, you could imagine that we'll start to see more stresses placed on different currencies. Yeah. I mean, I also liked Rebecca's idea of currencies for. the rich and currencies for the poor. That was really fascinating. It's something that we kind of already see playing out thanks to technology that basically either gives you access to certain things or prevents you from accessing certain things, right? Right. I mean, there was the article in the

New Yorker recently about all the rich tech and finance executives all getting into becoming preppers with their real estate in New Zealand and their home, home solar and telecom networks. And it's sort of this sort of early indication of people wanting to have insurance that's sort of outside the existing financial system in case things really fall apart. Right. Right. So maybe they'll come up with like their own special currency in which to do that, right? Or would or would everyone just go back to using gold?

I don't know. Place your bets now. Okay. All right. Well, this has been another episode of the Odd Lots podcast. I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. And I'm Tracy Allaway.

I'm on Twitter at Tracy Allaway. And you can find Rebecca Spang on Twitter at Rebecca Spang. Thanks for listening.