Deflation Made Simple II

The Story of Real Money (Entry 183)

Surprisingly, perhaps, the amount of real wealth raised by the French monarchy through monetary debasement was small in comparison with the other methods used to offset the kingdom’s chronic deficit spending between 1689 and 1715. In fact, during this entire period the monarchy was only able to raise 140 million livre’s worth of real wealth for itself via currency debasement — about 5 million livres per year. It was simply not enough to cover an average annual deficit for the same period of 16.4 million livres (Entry 181).

As our focus in these many pages is on the historical tug-of-war between real-money and its corrupt government competitor — counterfeit currency in all of its forms; let us dwell first on this smaller fraction (about one third of the total short-fall).

The French unit-of-account had not changed since King Louis of France (1214-1270) was canonized as Saint Louis de France by Pope Boniface VIII in 1297. From then until the time of Louis XIV the French unit-of-account resembled very closely that of the English monarchy in the 17th century (Entry 150). The base unit was the livre (French pound). It was the equivalent of 12 sous or 240 deniers (20 deniers per 1 sou). In addition, there were the two louis — a louis d’or that was made from gold (or), and a louis d’argent, also known as the écu, that was made from silver (argent). So, without further specification the louis referred to the louis d’or and the ecu referred to the louis d’argent. Each of these were worth several livres.

As nearly all of Louis XIV’s wars were fought on foreign soil, a large amount of French species left the kingdom and created a domestic shortage of specie at home (Entries 166 and 177). The term specie (espèce) is the name that we once gave to precious metals that were used as real money — you know, the kind that retains its value over time and insures fairness in trade and investment. It was typically the name used for gold and silver coin and bullion in the aggregate. War was not the only cause for a shortage in specie, however.

Like the English pound, the precious metal content of the French livre was arbitrarily set by the French royal mint — specifically the king’s Contrôleur général des finances. As we have already observed in our discussion of money in 17th century London (Entry 150) fixing the relative value of substitute goods that are subject to different market factors is bound to make the one more valuable relative to the other, and cause the more valuable of the two to disappear in favor of the other.

One of the market factors taken into account by Le contrôleur général des finances included his own desire to juggle the value of the accounts of the royal treasury. Accounts denominated in louis or écu could be more easily settled by changing the relative value of each relative to the French livre. When the louis dominated the treasury’s accounts Le contrôleur would set the relative value of silver to gold higher, so that with a little silver much gold could be purchased, and the gold-denominated accounts could be more easily paid down. When the écu dominated the monachy’s accounts the relative value of gold would be set higher, so that with a little gold much silver could be purchased, and the accounts based on the écu could be more easily paid down.

Whereas there was only one minor change in the French monetary system while Jean-Baptiste Colbert was the monarch’s Contrôleur général, there were multiple important changes between 1689 and 1715 while De Pontchartrain and Chamillart occupied the same post. Colbert had once introduced a new coin equal to 4 sous without changing its value relative to the other accounting units. Colbert never messed with the relative value of the two forms of specie. In contrast, for example, De Pontchartrain changed not only the relative values of the louis and the écu, but the precious metal content of either or both multiple times!

In effect, he who controls the money supply can steal. It is for this reason that no one, but the market place itself, should have control of the money supply.

Now, Le contrôleur général may have had the final say in the monetary regime of France, but there were many voices that went into each of his decisions. Some wanted to prohibit the import of foreign exports and require that all French exports be traded only for species. Others, sought to change the relative value of the louis and écu. And, still others advocated a Bank of England à la française! The money-changers simply observed and transacted according to their observations. These latter were the “FED-watchers” of the 17th and 18th centuries.

In the end De Pontchartrain was a dabbler whose preoccupation was messing with the relative value of French species.

In liberty, or not at all,
Roddy A. Stegemann, First Hill, Seattle 98104