Monetary inflation has always been with us. Dan Steinhart from The Casey Report shares a couple of the stories.
Watching from afar as inflation in Argentina grows worse – officially 11%, realistically around 25% – it's tempting to think of the scourge of fiat money as a modern phenomenon; tempting to think that if only US President Franklin Roosevelt hadn't confiscated US citizens' gold to usher in the beginning of the current era of paper money—or if only Richard Nixon hadn’t abandoned the last link with gold—we could be living in a precious metals paradise, as all our ancestors before us did.
That narrative, of course, is utterly false. Humans have been screwing up money for centuries, beginning with China's printing of jiaozi in the 10th century. History is littered with episodes of hyperinflation, but my favourite is that of revolutionary France as told by Andrew Dickson White in the short and chatty Fiat Money Inflation in France. It contains the most vivid description I've seen of how easily overspending becomes inflation and transforms into hyperinflation, and how far governments will go to maintain their power in the face of a dying currency.
France's hyperinflation began as all hyperinflations do: the state printed too many assignats (pictured below), and they rapidly lost their purchasing power. As the value of their paper money plummeted, French citizens hurriedly sought alternative stores of value like real assets, and alternative mediums of exchange like gold—as any intelligent person would.
Correctly perceiving this as a threat to its financial hegemony, the French government reacted violently. I'll let three short passages from the book explain. Note in particular the rapid progression (all emphasis mine):
"Couthon had proposed and carried a law punishing any person who should sell assignats at less than their [face]value with imprisonment for twenty years in chains, and later carrieda law making investments in foreign countries by Frenchmen punishable with death."
"The Convention decreed that any person selling gold or silver coin, or making any difference in any transaction between paper and specie, should be imprisoned in irons for six years: – that anyone who refused to accept a payment in assignats, or accepted assignats at a discount, should pay a fine of three thousand francs … Later, the penalty for such offences was made death, with the confiscation of the criminal's property, and a reward was offered to any person informing the authorities regarding any such criminal transaction."
"The Convention decreed that the death penalty should be inflicted on any person convicted of having asked, before a bargain was concluded, in what money payment was to be made."
Yikes. Fiat currency isn't just a contemporary problem, that's for sure. Are Argentines headed for the guillotines, too?
Probably not. The Argentinian government has made a virtual decennial ritual of inflating its currency out of existence. As a result, Argentines have earned their black belts in navigating through hyperinflations. That, combined with the Argentine government's lack of resources to enforce its edicts, ensures that most Argentines won't suffer the gruesome fate that many poor 18th-century Frenchmen did.
Importantly too, although hyperinflations – or even just double-digit inflations – decimate much of the wealth of a populace, they also create massive distortions. Or, as we like to call them at Casey Research, opportunities…
Managing Editor of The Casey Report