The creation of a paper currency, called the assignat, by the revolutionary government of France during the French Revolution has often been cited as a lesson in monetary policy and its failure. Not mentioned is the lesson the assignat and the Reign of Terror hold for crypto-currencies and their investors today. The story of the assignat is generally presented as one of hyper-inflation and the failure of a debased currency. The other story, linking the Terror of the revolution and crypto-currencies of today, is rooted in the inability of the revolutionary authorities in Paris to maintain control of the currency. This led directly to an economic crisis throughout the country and the resulting quest to regain control of the economic situation gave birth to the Terror. This failure to control the currency and the economic destabilisation that resulted presents an illustration of the motives behind why current crypto-currencies will not be allowed to succeed by governments and the result will be losses for those seeking to profit by riding the wave.
Class, Ideology, and Crisis
While radicalism during the French Revolution, and particularly the Terror of 1793-4, has often been explained in political terms, economics provided a major catalyst for the revolutionary fervour. There are many nuanced and intricate accounts of what began and drove the Terror, but the broad strokes of most popular accounts follow two basic political critiques: that of the modern left, and that of the right. The popular modern leftist account focusses on the claim that the alliance between the revolutionaries in the Jacobin club and the sans-culottes was inherently unstable as it was a pact of convenience between the bourgeoisie and the proletariat against the landed aristocracy. The inherent instability of class concerns was supplemented by the divergence of objectives, with the bourgeois revolutionaries focussed primarily on political concerns and issues of power and the proletarian sans-culottes focussed on economic concerns of prices, food, and poverty alleviation. The story goes that the only way this alliance could be maintained without addressing the fundamental disagreements between the two partners was through the use of violence against their political opponents – by creating a war against their enemies that would create solidarity between the two groups.
The other side of the coin is the right-wing view of the reasons for the Terror which has been passed down, relatively unchanged, from conservative contemporaries of the revolution. This story states that violence and the seeds of the Terror were an inherent aspect of revolutionary ideology. The conception of the ‘general will’ interacted with Rousseauian ideas of power to foster an inherent inability to countenance opposition, creating a situation where opponents to policy ideas became enemies of the revolution and therefore enemies of the ‘general will’ and the state itself. This led to a need to wage war on ideological enemies and the necessity of their elimination.
It should be noted that neither of these accounts is fundamentally false, they both contain some kernels of truth that help to perpetuate their prevalence in popular stories of the Terror. That being said, neither of these accounts is, by itself, satisfactory. The first recasts the sans-culottes as a class-conscious group of industrial workers united in their shared economic interests when in reality they were mostly artisans and professionals from the countryside with no particular class solidarity. They were in fact more united in their dislike of the guilds – the traditional organisations of class-based unity – than they were in their collective class-consciousness. Similarly, the conservative account fails to fully comprehend the non-political nature of much of the Terror. Focussing on the execution of deputies and political leaders in Paris makes for good story-telling in historical accounts but misses the reality that most of the instances of violence during the Terror occurred in the departments outside of Paris.
The roots of the Terror can be traced to a fundamental inability of the central authorities in Paris to exert control over regions and groups within the country. Historian Jean-Clement Martin put it succinctly as “the authority of the state was so uncertain, every group could claim to incarnate it for its own ends”. The attempts of the Convention in Paris to reassert itself in the face of this resistance were met with such difficulty that it precipitated the extensive use of violence against its opponents. Effectively, there was a perfect storm of loss of control by the central government, insufficient strength of the government to regain control, and a national emergency – namely war – that made violence the easiest route to pursue, if not the only one.
There is much that contributed to this confluence of factors leading to the Terror, but one that is often overlooked and is in fact a significant one is monetary policy. While central banks, currency, and the workings of the two are not often assumed to be the great causes of the Terror and revolutionary violence, the way the revolutionary government in France instituted its paper currency and the approach it had to the economy potentially contributed more than any other single factor to the emergence of the Terror.
The creation of the assignat, the paper currency of Revolutionary France, was not as directed or deliberate as the creation of most currency is – or should be. It was a muddled affair that consisted largely of the various revolutionary administrations lurching from policy position to policy position with little control or sense of direction.
Initially, the assignat was a work-around born out of the confiscation of church property. Facing a massive debt crisis, the revolutionary government decided that a way out of its bind was the value locked into the swaths of land held by the Catholic Church which amounted to roughly 15% of the land in the country. The time constraints of this policy presented a problem: the government needed the value of that land immediately but it would take months, if not years, to complete all the individual auctions. Thus the assignat was born, an interest bearing stock issued by the government that was redeemable for its face value in Church property. Shortly after, it was decided that the new assignats could also help alleviate the lack of currency in the system and it was declared that the notes would no longer bear interest and would circulate as money alongside the hard specie already in circulation.
While this solved the problem in accounting terms, in practical terms the situation was much different. The assignats, when originally printed were in incredibly large denominations for the time (hundreds of livres) to match them to plots of land, this meant that they were unsuitable for day to day transactions which required denominations of less than one twentieth of a livre. To solve this subsequent problem, the government eventually ran new print runs of assignats in much smaller denominations but faced the perennial problem of insufficient small change in circulation.
The history of the assignat usually goes from here to talk about the hyper-inflation brought about by the government continuously printing new assignats to fund itself. This is a misconception. The inflation seen in early Revolutionary France was a product of two sources: a lack of confidence in the currency and speculation. The lack of confidence in the currency predates the first print run of assignats and contributed to price increases throughout the first years of the revolution. In fact, increased production of assignats was encouraged as a solution to this inflation by providing more currency for people to make purchases with, not the driver of it. The spectre of speculation was a result of the liberalisation of economic matters by the new revolutionary authorities and the lack of confidence in the assignat. Money changers began to treat money as a commodity that could be bought and sold and exchanged for itself with the inherent premia attached. This was further aggravated by the simultaneous circulation of hard specie, and speculative transactions would continue to suppress the value of the assignat.
A Surplus of Freedom
The extreme economic liberalism which allowed for speculative trading of the currency domestically was a fundamental problem in the run up to the Terror. Many revolutionaries in France believed in an inherent link between political freedom and economic freedom, to the extent that they pushed for near-complete deregulation of the economy. Much of this was well-founded; many of the taxes and regulations imposed by the Ancien Régime were at the heart of regional inequality and the hardships faced by the common people. Where this idea overstepped was in the laissez-faire approach to currency exchange.
The decision to treat money as just another form of merchandise, rather than a special case directly led to all subsequent currency-based problems the regime faced. This ‘free-market’ for money was what gave the confidence mechanism such potency in Revolutionary France and contributed significantly to the inflation and hardship experienced. By allowing money to be freely traded, the authorities tacitly permitted fluctuating price differentials between the paper currency and the hard specie already in circulation. This was aggravated by the fact that financial institutions emerged that issued their own assignats backed by the larger denomination official assignats, the open-season on currency speculation allowed these notes to also carry their own prices relative to all the other notes. As a result, prices soared and certain notes began to be refused for certain transactions or in certain regions, making inter-regional commerce within France increasingly difficult.
Simultaneously, there was an increasing disconnect between the revolutionary rhetoric on economic freedom and the reality on the ground. The massive disparity between the promise and political belief in the new policies and their disastrous effects led, almost by necessity, to conspiratorial thinking. People began to suspect that forces, both foreign and domestic, were attempting to subvert the revolution by undermining the currency. Thus, instead of reassessing the policy of ‘money as a commodity’ officials began to search for scapegoats and enemies. The spiraling outrage and fear was fueled by increasingly aggressive political rhetoric against both domestic counterfeiters and émigré nobles suspected of funneling fake notes back into France.
With the emergence of increased partisan rhetoric around the idea of the ‘nation’ – something that sprung from the revolution and was to impact European countries for centuries to come – preserving the value of the assignat became conflated with defending France and preserving the nation. The currency crisis and inflation had begun almost immediately after the collapse of the Ancien Régime but it was now used as a reason for France to declare a pre-emptively defensive war against its enemies in Europe. The revolutionary authorities were determined to use military means to punish émigré nobles hiding in foreign courts and force foreign nations to accept assignats as international payments. After war was declared, the rhetoric only increased, directly linking the success of the currency with the success of France’s armies.
The fear of counterfeiters and agents provocateur seeking to debase the assignat continued to escalate and became all encompassing. People in both the countryside and the cities began to internalise the idea that the failure of the currency and the economy more generally was the work of saboteurs and began to root them out. Suspected price-fixers, food hoarders, counterfeiters, all manner of economic criminals were summarily punished by mobs of citizens with little evidence and no trial – sometimes merely an accusation was enough. Judicial authority, particularly in the departments, was impotent in the face of popular revolutionary justice.
What made the situation worse was that the fears and paranoia were not entirely without merit. There were many documented cases of counterfeiters throughout the country, some were merely attempting to profit from arbitraging the currency while others were genuine counter-revolutionaries seeking to bring down the regime. Similarly, many émigrés actually were making significant efforts to undermine the economy of Revolutionary France by introducing large amounts of fake assignats from across the border. Each actual instance of economic sabotage only fed the furor within France and stoked the paranoia of the citizenry.
As economic stability continued to fall, the authority of the revolutionary regime became more and more fractured making it almost impossible for the central government in Paris to exert control over the monetary situation in the departments. People began to mete out their own revolutionary justice: popular assemblies declared local price controls, foreigners were targeted by mobs, and merchants were threatened until they agreed to sell at a ‘fair’ price. Regional authorities were increasingly pressured to act by their constituents. Local officials were often caught in the middle, condemned by the people if they refused to act and condemned by one political faction or another for each action taken. This led to drastically different currency and price controls between regions, and even between towns, and precipitated a general discussion about which levels of government had what authority and which authority was more legitimate.
The Convention in Paris was caught completely by surprise when it finally decided to act. Its members had been in the dark about what was happening in the departments and so the resistance when it finally issued its directives on currency and prices was entirely unexpected. When the Convention decided that only its version of the assignats were deemed legal tender it was doing so in a defensive manner, not from a position of political strength and it would be nigh impossible for it to see this directive carried out at the local level without being heavy-handed.
The forced implementation of this directive without the increased issuance of smaller denomination assignat notes meant that many of the locally distributed unofficial notes were instantly demonetised without replacement, crippling the effective money supply. This compounded with the continuation of the free-market for money only increased the downward pressure on the value of the assignat as confidence in the currency collapsed.
The Terror began just as the central government in Paris started to reassert its authority over the various decentralised power structures that had emerged in the vacuum that had existed. In an attempt to contain inflation, wage and price controls were instituted with the General Maximum along with the Law of Suspects as an effort to supress agents seeking to undermine the regime and allay the paranoia of the population by giving it an outlet. Hoarders, counterfeiters, émigrés, ‘federalists’ – those who sought to exert regional authority, and other enemies of the revolution were all targeted.
The vast majority of those executed during the Terror, nearly 85%, were arrested, tried, and killed outside of Paris, in the countryside. Contrary to popular imagination, the political trials and denunciations in the capital were secondary to the principal wave of the Terror out in the minor cities and towns. One of the larger proportions of those swept up in it, besides those involved in the civil war in the Vendée, was individuals denounced for economic crimes. Accused counterfeiters, hoarders, and price-fixers made up the majority of suspects hauled before revolutionary tribunals and executed as enemies of the revolution. These economic crimes were a direct result of the failure of the currency and punishing alleged perpetrators was a similarly direct attempt to reign in the economic chaos. The second significant group targeted were so-called ‘federalists’. There was a legitimate faction within revolutionary politics that sought to establish a federal structure for post-revolution France but the persecution of these individuals was combined with a general effort to stamp out the regionalism and decentralisation that proliferated during the years of central government collapse. Officials and other individuals who had advocated for regional solutions to the various crises and instituted or enforced regional and local directives were swept up with the legitimate Federalists in an effort to re-centralise economic control with the Parisian government.
The original failure of the central authorities to maintain control over the currency and money supply led to a general breakdown in economic conditions, with increased inflation and economic hardship. The resulting attempts of regional authorities to solve the various problems associated with the failure of the currency led to further erosion of government authority. Finally, the crisis was aggravated when the flimsy attempts of the Convention in Paris to regain control of the currency caused monetary chaos and pushed the value of the assignat to new lows. The resulting Terror was a response to this loss of control and was a violent attempt by the central government, and those loyal to it, to regain what had been lost. Indeed, the worst instances of the Terror, outside of the Vendée, come from cases where officials loyal to Paris attempted to crush resistance to centralisation and the edicts of the Convention. The Terror was first and foremost a political response to an economic problem.
Necessity of Crypto-Currency Control
The lesson for the modern world from the Terror and the assignat is not one of similarity of outcome, but rather one of similarity of motivation. The threat posed by crypto-currencies to the efficient function of state-controlled currencies finds a revealing echo in the assignat and the Terror, and the trials and tribulations of that era should present a warning to those investing in crypto-currencies today. This is not to say that a modern Terror will be sparked by crypto-currency proliferation, it is instead that the necessity of central control over the currency builds in an inherent limit to the usefulness of crypto-currencies.
Those investing in crypto-currencies generally fall into one of two camps: those who are along for the ride and seeking to make an easy profit, and the ‘true-believers’. The former has much to fear from the success of the latter. The belief in the ability of crypto-currencies to operate as money alongside existing currencies, or that they will eventually supplant national currencies entirely, is what will spell their end as a meaningful form of exchange.
Governments derive significant economic power from control of the money supply and are generally loathe to surrendering it – much of the debate over the Euro is about whether it was wise to transfer that control to a supranational body. This power helps to stabilise and moderate economic fluctuations in the national economy and loss of this control can cause economic repercussions that can be difficult to manage. The example of Revolutionary France is one of loss of currency control to a decentralised process, rather than to a higher monetary authority, and has parallels with the grander ambitions of crypto-currency advocates: a decentralised currency that is free from state control.
The spectre of this decentralised currency makes the whole crypto-currency experiment inherently dangerous to states and their economies, for if it is left unchecked it could result in a loss of authority over the monetary system. The result is that as crypto-currencies become more common and more frequently used for transactions – that is, as they infringe more and more on the domain of state-controlled currency – more and more countries will seek to maintain control over their proliferation. We have already seen the beginning of this as China and South Korea have both implemented bans on the trading of crypto-currencies, with India and the Netherlands looking to follow with similar policies. Germany and France are also looking to present resolutions at the upcoming G20 meeting to ban or regulate crypto-currencies in member countries.
This is the threat posed to the speculators in crypto-currencies: as crypto-currencies become more successful, the objective of the ‘true-believers’ becomes more tangible and governments will seek to prevent a loss of control. Speculators risk losing their gains and the value of their portfolios as governments continue to move to reign in the power of crypto-currencies. These financial vehicles will become victims of their own success as governments perceive them to be threats to their existing currency control. The commodification of money, which is effectively what crypto-currencies do, leads to significantly adverse economic outcomes and instability if it becomes pervasive in the economic system. As the case of Revolutionary France showed, losing control of the money supply and allowing money to become a commodity like any other presents major problems for governments.
The lessons of French monetary folly during the revolution presents a warning to those banking on the success of crypto-currencies: these financial vehicles will not be allowed by governments to supplant centrally controlled currencies and their very success is what will attract government action. It is already beginning around the world, in economies ranging from China to the Netherlands, and likely soon the rest of the economies of the G20, governments are reasserting control over the monetary situation before it gets beyond their ability to do so. The result will be widespread demonetisation of crypto-currencies and significant losses for those seeking to profit from their success.