April 7. Problems with QE were known long ago…

“There is a lesson in all this which it behooves every thinking man to ponder.”


So ends a book that I hadn’t visited in a while, Fiat Money Inflation in France by Andrew Dickson White.



This book outlines everything that is wrong with Japan’s (and the US’) current path of QE monetization, draws striking parallels with current affairs in the US and in France today (and the EU as a whole) and even provides historical examples which can be related to Cyprus.  It’s not filled with charts and pictures, or with econometric models, but is an easy read in 68 pages.  It’s copyrighted in 1896.


Here’s how it starts: “Early in the year 1789 the French nation found itself in deep financial embarrassment: there was a heavy debt and a serious deficit.” …”Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self denial, and, thus far in human history, these are the rarest products of political wisdom.”


This was France during 1790 to 1796…the state confiscated the lands of the church and issued assignats against this land, essentially interest bearing paper notes/currency (QE), that could be used to extinguish debts of the state, and to stimulate the economy.  Some men realized the dangers of irredeemable paper money: “They had learned how easy it is to issue it; how difficult it is to check its overuse; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meager means a class of debauched speculators, the most injurious class that a nation can harbor;… how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality.”


With the first issuance of 400 million assignats, benefits did accrue, but the immediate gains soon dissipated and calls were made for further issuance, so the total was increased to 800 million, and finally a proposal of 2400 million was rolled out to completely eliminate the debt of the state. Exactly like succeeding rounds of QE.


There were arguments against this money issuance, a pamphlet (that someone doubtless needs to translate into Japanese)  “…the truth which it presented with great clearness being simply that doubling the quantity of money or substitutes for money in a nation simply increases prices, disturbs values, alarms capital, diminishes legitimate enterprises and so decreases the demand for both products and for labor; that the only persons to be helped by it are the rich who have large debts to pay.”


However, “the great majority of Frenchmen now became desperate optimists, declaring that inflation is prosperity. [Abe, Kuroda, and let’s throw in Evans]. Throughout France there came temporary good feeling.  The nation was becoming inebriated with paper money. [Rising stocks?] The good feeling was that of a drunkard just after his draught…. As draughts of paper money came faster the successive periods of good feeling grew shorter.”  With each new issue came a marked depreciation of assignats.


“All this breaking down of the manufacturers and commerce of the nation made fearful inroads on the greater fortunes, but upon the lesser and upon the little properties of the masses of the nation who relied upon their labor, it pressed with intense severity.  The capitalist could put his surplus paper money into the gov’t lands [stocks, farmland] and await results; but the men who needed their money from day to day suffered the worst of the misery.  Still another difficulty appeared.  There had come a complete uncertainty as to the future.”


“It was simply a feverish activity caused by the intense desire of a large number of the shrewder class to convert their paper money into anything and everything which they could hold and hoard until the collapse which they foresaw took place.”


How similar is this to current affairs?  Capital is going into assets to “wait it out” rather than hire employees for new enterprise.  The chasm of income and wealth inequality grows.  The quest for inflation is confused with prosperity.  Confidence is lowered and wealth seeks safety, while the middle class working man is gutted (wages have barely made any real gains).  Eventually wealth is taxed or confiscated, though initial tax levies don’t bring in amounts forecast.  A difference arises in the value between new and old money, in the current case it appears as if the “Cyprus” euro isn’t worth the same as a German one.


“Against DuPont, who showed conclusively that the wild increase in paper money was leading straight to ruin, Cambon carried the majority in the great assemblies and clubs by sheer audacity-the audacity of desperation.  Zeal in supporting the assignats became his religion.”   It just reminds me of Nigel Farage railing against the zeal of the troika in support of the euro, all to no avail.  There is even (of course) an example of the current M Cahuzac who resigned as budget minister after admitting a secret Swiss bank account, although of course in those days, it meant the guillotine.  “Marat followed out this theory by asserting that death was the proper penalty for persons who thus hid their money.”

Posted on April 7, 2013 at 3:47 pm by alexmanzara · Permalink
In: Eurodollar Options

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