Deflation Made Simple II
The Story of Real Money (Entry 190)
Once the Pandora-like box of money-ex-nihilo was opened, it seemed impossible to close. It were as if the true nature of the French monarchy that for so long had been kept hidden behind a veil of pomp and circumstance, royal majesty, and divine providence had been suddenly unleashed — namely, a gluttonous appetite for the wealth of others and national glory no matter the chaos, impoverishment, and misery that it brought about.
Paris — the seat of the French monarchy until 1682 — led the way, first with the direct issue of cambitas-ex-nihilo in payment for needed, and surely not so needed, goods and services, and then indirectly through the issue of promeritum-ex-nihilo and the collection of interest payments. Whether the initial promises of redemption were genuine and simply could not be met, or they were a calculated deception from the outset is difficult to say. Unlike London, England, where the historical record was well preserved, the Paris Commune of 1871 brought about significant damage to our understanding of the French monarchy during this period.
No matter, for it soon became apparent from the frequent need of renewed promises — new promises stacked atop old unkept promises — and the excuse provided with each renewal and promise that deception was part of the monarchy’s modus operandi.
By January 1708 the city of Paris had issued some 72 million livres worth of counterfeit bills (cambitas ex-nihilo) in payment of goods and services and an additional 34.5 million livres worth of same in payment of loans issued to the monarchy by various treasury-bankers throughout the kingdom. In addition, 60 million livres in counterfeit bills (promeritum ex-nihilo) were issued by La caisse des emprunts , and another 62 millions livres worth of counterfeit bills (cambitas ex-nihilo) by various special treasuries (trésoriers de l’extraordinaire) designated by the monarchy to fund special projects or operations largely military in nature. These 228.5 million livres worth of combined cambitas-ex-nihilo and promeritum-ex-nihilo were spent or loaned into circulation in fewer than seven years!
All of these financial machination were, of course, guaranteed by the blood, sweat, and tears of the French farmer and the fermiers généraux (tax farmers) who made sure that the farmers paid. With greater clarity, these farmer-generals were privately employed collection agents who served the monarchy by forcing French farmers to pay the unpaid debts of French royalty. Many of these generals were employed by Italian treasury-bankers located in Lyon who had lent promeritum (cambitas-ad-prodigo) to the king via the king’s intendants and surintendants, and sometime even directly — recall the case of Samule Bernard (Entry 159). When the monarchy could not make good on what it had borrowed, the tax farmers would be sent out to knock on the doors of unsuspecting farmers. Perhaps you can now better understand why these tax-farmers (Entries 157-159) were so detested.
The taxed farms could be located anywhere throughout the kingdom where the monarchy had direct control — namely, amongst the pays d’élection (Entry 165).
Initially, the monarchy was able to force its treasury-bankers to agree to accept the monarchy’s counterfeit. This forced acceptance brought temporary relief to the French farmer and quelled the ever growing rebellion. In the long run, however, it served only to make the farmer’s burden much greater. For once the pandora-like box was opened, it was opened time and time again, until the treasury-bankers simply refused to lend and began to collect.
Although hardly sufficient, toward the end of the aforementioned seven year period a load of specie and other metal ingots worth about 30 million livres arrived from somewhere in the South Atlantic. When the metal arrived much of it was reformed and issued with a metal content worth about only 80 percent of the coin that was already in circulation. Any doubt that remained about the monarchy’s inability to make good on its money-ex-nihilo was quickly dissipated. Coin debasement was a clear indicator that the monarchy’s outstanding promises could no longer be trusted.
In order for the monarchy to make continued use of its money-ex-nihilo on which it was now utterly dependent, it was compelled to pay half with specie and half with counterfeit bills. Else, no one would sell to the monarchy what the monarchy believed it needed. Keep in mind that the imposition of force is an important cost to any state, and when rebellious resistance is widespread and persistent, the state simply cannot keep up. This is the reason that state deception is so important. For, if you believe that the state is a necessary good — as so many Americans believe today —, rather than a necessary evil, then you are forever fooled, and the state will rob you blindly.
To be clear about the vulnerability of the French monarchy at the end of King Louis’s illustrious career, the cost of borrowing at La Caisse des emprunts de Paris had dropped from between 8 and 10 percent to three percent overnight. Though not understood by all Parisians, it was now clear to the best informed that the paper in circulation was junk that may or may not fetch real worth in the market place where it was destined for use.
So, the yet unformed or already reformed 30 million-worth of specie was used in payment or in redemption of 600,000 livres worth of cambitas-ex-nihilo each month. Accordingly, the debt-can — albeit ever a tiny bit smaller — was kicked just a little further down the road, and the rooster that would one day come home to roost remained afield for just a little longer. By 1713 when the Peace of Utrecht was finally agreed, this monthly allotment had been reduced to 500,000 livres or 6 million per year. The French treasury was rapidly dissipating.
How did one determine whose counterfeit would be redeemed?
By lottery. Perhaps you recall the tontine loans of the English Exchequer (Entry 141)?
What made this work for a time, was the monarchy’s need to appear fair, if not obviously dishonest, the French public’s desire to remain loyal to their king (social order is important in any society), still another promise — this time the promise of coming negotiated peace —, and the simple reality that a free-market economy — no matter how constrained by government intervention — requires a medium-of-exchange — no matter how corrupt — in order to function.
Simply change the words monarchy and king in the above paragraph to US Government and nation, respectively, and you can quickly understand what is occurring in the United States of America today.
As more money-ex-nihilo poured into the economy — albeit more discretely than before —, what specie remained was smuggled out of the country by some of the more risk-prone money-changers. Had they become the true heroes of the free-market?
Whereas Colbert had set up a system to attract cambitas, satiate the king’s preference for war, and still leave something left for the king’s subjects to conduct their daily business confident that the value of their cambitas was constant or even increasing across time and space, Colbert’s successors created a system to drive out what little cambitas remained thus making it increasingly difficult for the king to wage war abroad, and purchase important supplies overseas.
China was poor in comparison and very distant in both time and space. What is more, there was no petro-dollar — internationally recognized promeritum-ex-nihilo backed by the army of the world’s largest and most powerful hegemony and a foolish, but by no means powerless, American public. In effect, there was no one from whom the French monarchy could endlessly borrow. For better, or for worse, the wealthiest creditor nation on the continent, the United Dutch Provinces, viewed France as its most dangerous enemy. Inevitably, the monarchy would be forced to turn on its own people.
Was old age and economic ruin the only way to curb the king’s appetite for armed conflict and glory?
By the time Louis XIV died he had only to step out of his palace at Versailles to see the economic ruin and the misery that he had created for his subjects. And this, the good, but elderly king surely did many times before his death. Already in 1700, as his grandson Philippe de France (1683-1746), Duke of Anjou (duc d’Anjou), acceded as Philip V of Spain (reign 1700-1746) to the throne of the recently departed Carlos II (Entries 134, 138, and 148), King Louis told his grandson:
“Faites le bonheur de vos sujets; et, dans cette vue n’ayez de guerre que lorsque vous y serez forcé et que vous en aurez bien considéré et bien pesé les raisons dans votre Conseil.
Essayez de remettre vos finances; veillez aux Indes et à vos flottes; pensez au commerce; vivez dans une grande union avec la France, ….”
In translation from French to English
“Make your subjects happy, and to this end do not engage in war unless you are compelled and only after you have considered well and weighed carefully the opinions of your council.
Do your best to keep your financial house in order; watch carefully over your overseas interests and fleets. Think commerce and live in union with France, ….”
Louis XIV had achieved his goal, Spain and France were now one in defiance of the Holy Roman Empire, but at what price? And, could the goal not have been achieved differently? Alas, it is not really a question that we need to answer. For, the answer is already clear. It lay in the financial wisdom and political fortitude of Jean-Baptiste Colbert.
Alas, of what use is 20-20 hindsight, if we look into our own future while wearing blindfolds?
In liberty, or not at all,
Roddy A. Stegemann, First Hill, Seattle 98104