Thomas Tooke

Does the knowledge of history and forewarning preclude monetary debacles from happening?

In Uncategorized on January 1, 2013 at 10:11 pm

It is sometimes touted, at least I have seen twice the case between Ray Dalio and Hugh Hendry that the central bankers know very well history and as a result they have the capacity to preclude a monetary debacle.

However I found recently an old archive document from Nicolas Bergasse from France who was a lawyer and a politician.

The document is called “Protestation contre les assignats-monnoie” which can be translated into “protestation against the assignats-currency”.

This publication is troubling because it forecasts all the ills of an irredeemable currency system.

His first line of objections is based on the well established real bills doctrine which makes Assignats unsuitable since those assets are not self-liquidating. Evidently this raises a lot of questions about the use of Treasury Bonds as a more of monetary asset, but that is another question. The world seems to repeat always the same mistakes.

Then he explains the problem of the creditors of the Church. The assignats were issued against the confiscation of the assets of the Church. The problem was that some of those assets had debt against them. In his paper, Bergasse explains that by both confiscating the assets of the church and at the same time repudiating the claims from the creditors, this would create havoc of confidence in credit. If you want a recent parallel, you could think of the two tiered payment system on the Greek debt with privilege to the ECB granted back in March 2012. In his word this action would introduce a precarious environment for property rights.

He continues to explain that the assets of the Church were indeed heavily mortgaged with different lines of debts some of general credit and other with a particular claim. One of his grievances was that a lot of clergy men and women would find themselves destitute as some of the assets of the Church were supposed to produce income to bring a subsistence to those people. Finally the last creditors were actually the poor as the Church was maintaining a fund for the poor and as a result of this confiscation the burden to fund the poor would fall back on the “Nation”, the concept which replaced the kingdom.

What is interesting is that according to Bergasse the Assemblée knew about the desperate state of Finances but was desperate itself in its actions and relying on expediency a guide for its decision process.

The other caveat of the Assignats mentioned by Bergasse was that if there is a time-frame for the sale and if the Nation has to re-imburse at a fixed date, the speculators will try to buy the assets at “prix vil” or ditressed price. You can now check what happens with the auction of state assets of Greece and wonder if those “institutions” like Blackstone are just doing what Bergasse describes. Bergasse also says that if there is no time frame for the sale of assets, there is no liquidation of those assets, and those assignats would have no difference with (John) Law´s system.

Bergasse very accurately predicted a deteriorating term of trade situation, interestingly the paper money is touted as a source revival of the trade situation at the time by Bergasse´s opponents. This runs evidently contrary to decades of strength of the German mark prior to 1990s with large trade surplus and inversely of chronic inflation and trade deficit accompanied with weakening currency for many nations in history. Fullarton and Tooke describe the phenomenon even more accurately (I leave that for another post). Finally Bergasse describes a problem created by the inability of commercial agents to price properly goods and services due to instable prices and resulting friction in commerce. He predicts as a result a crumbling of manufacturing and destruction of industry.

The flight of specie overseas is described by Bergasse in two ways, first because imports will have to be settled with specie as the paper even if it would trade at par does not travel across the borders.  To that extent today´s fiat USD have managed to travel everywhere. It sounded like a fantastic advantage in the 90s, but if it stops traveling it becomes a great problem. The second way the specie would flee overseas would be through arbitrage between billets the caisse d´escompte, shipping of PMs to London and the purchase of lettres de change.

The other problem facing France at the time aside from massive amounts of debts, was a large external debt position as mentioned by Bergasse. As a result he expects fully the Gresham law principle to take hold. He also predicts that the tanking exchange in foreign capitals is only the beginning.

Another phenomenon was the rampant emigration of skilled workers which was not witnessed since the Huguenot emigration during the period of catholic-protestant strife of the “Edit de Nantes”. Another phenomenon noted is that at the time is was not possible to pay the troops in paper but only in “numéraire” (precious metals). Decidedly the military seem to have had an old affection for specie.

Bergasse deplores that the system will favor extremely the “agiotage” of bankers and will absolutely destroy commerce.  What is assignat to him: ” Un malheur inévitable pour les créanciers, une resource infâme pour les débiteurs”, which can be translated as “a inevitable curse for creditors and an infamous resource for the debtors. It think one should look at the benefits derived by negative present value LBO debt and the permanent carry trade of Warren Buffet between insurance float financing the acquisition of corporations. As Buffet said himself one of the chief criteria for an acquisition of a company is if the company can reprice inflation for the products it sells.

He describes how the debtor will buy the Assignat at dirty price to repay his debt at par. He laments that the political process is done through intrigue, based on the violation of all forms of properties, on the destruction of all morality.

Bergasse finally decries, the “Assembly of legislators, which fouls the principles of honesty, and repudiate as mere scruples the most sacred values of justice and morality, which break the most solemn contracts, the most respected obligations, who change at their whim the nature of all commitments, and who introduce bad faith in all the classes of society, without any fear of making universal corruption a mean to pass the constitution they prepare”.  Evidently the French constitution was far from perfect and had to be retooled many times…

Finally he explains that the Assignat will not be short of supporters amongst those who will benefit from it. They will not miss an occasion to publish the triumph of Assignat; that it is wrong to doubt of the solidity of the assignat, which not only has the Church´s assets as collateral but also the guarantee of the Municipalities.

The interesting point is that despite the absence of complex modeling of economics Bergasse has almost a 20/20 foresight of the different impacts of the forced assignat paper money. The destruction of commerce, the benefit to speculators and bankers, the plunge of the currency, the worsening trade balance and terms of trade, combined with large external debt and total debt, and the corruption of the legislators, who know the situation is precarious but act with expediency.

Evidently he was proven right, yet the experience of paper money debacle was known from John Law, “whose name alone was enough to instigate fear in France” as Bergasse says. So policy makers of the time were warned, they had to know the problems of paper money in Massachusetts in 1737 yet failed to act decisively and courageously. It hard to imagine that people in Weimar Germany were unaware of the previous monetary experiences of serious monetary crisis and reforms of irredeemable currencies. So why the failure?

The conjecture is that psychology makes people in power think that this was the past and this is now. In other words overconfidence and the idea that they are better, smarter more informed, more sophisticated than their elders. This was precisely the line of argument from Mirabeau which was used to dismiss the idea that France was headed toward a repeat of the John Law episode. “This time is different!”

  1. superb piece of historico-economy!

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