The Modern Period
Paper Money and Revolution in the Modern World
Paper money allowed a qualitative increase in the amount
of money in circulation beyond what was possible in the age of precious-metal
money, to the general advantage of government and trade. However, the
economic risks involved were consequently greater. Yet the existence of this
immediately accessible and highly manipulable form of money was itself a
revolutionary change, and it was a factor of central importance in the other
revolutions that have characterized the modern world -both political and social.
The two most important of these were, without doubt, the French Revolution
and the Industrial Revolution in Britain, which simultaneously transformed
both politics and economics in the late eighteenth century and themselves
provoked a greater use of circulating paper money. Three examples make clear the
importance of paper money in modern political revolutions. Local paper money
had been issued by Britain's American colonies during the eighteenth century,
but the American Revolution against British rule was financed by vast issues of
'Continental' bills: some $240 million was issued in this way between 1775 and
1779. A few years later in France, a country well aware of the potential of paper
money from the fiasco of John Law's experiments earlier in the century, the
Revolutionary government began in 1789 to issue paper assignats. These were
initially intended only to function as treasury bonds with 5 per cent interest, a
means of financing the extraordinary military expenditure entailed by the
Revolutionary Wars and supposedly backed by the proceeds from the
confiscation of Church lands. But the assignats quickly began to function as currency
and were produced in ever increasing numbers to meet the continuing
financial crises of the new Republic. Well over four million 400-livres notes alone
were issued in the 1790s, clear evidence of a chronic lack of financial control
which led to a reduction of the value of the assignats to about one
three hundredth of their face value. Over a century later the Russian Revolution saw
a huge surge of issues of paper money by the Bolsheviks, White Russians and
other 'authorities', such as the Ukrainian army.
Revolutionary, self-constituted governments such as these are, by their very
nature, risky ventures, unattractive for investors and lacking access to foreign
loans to pay for their wars. Paper money provided a ready, short-term solution
to the problem, but there was always a price to pay. Both governments and
individuals, like John Law in France, were frequently tempted to over issue
notes. Whether this was motivated by political aims or
personal greed, the consequences were always similar, namely the collapse in the
value of the paper money. The notes were theoretically backed up with gold
(or sometimes land), but their over issue made their redemption impossible or at
any rate undesirable on the part of the issuing authorities, and their
convertibility into gold or silver might be suspended as a result. American 'Continentals'
suffered rapid depreciation, and, despite legal attempts to enforce their
acceptance, the government only managed to avoid repudiating them altogether in
1780 by redeeming them at a rate of 40 paper dollars to one silver dollar,
effectively a repudiation rate of 97.5 per cent. One observer, writing in 1778,
remarked, 'The Congress paper dollars are now used for papering rooms,
lighting pipes and other conveniences.' Similarly, French assignats became quite
worthless within a few years. Despite the National Assembly's attempt to
declare them legal tender, the Republic could not avoid official bankruptcy
in 1797. Just as revolutionary governments took advantage of the seemingly
infinite accessibility of paper money, so over issue could threaten revolution in
a previously stable state. After the convulsive effects of the First World War, the
defeated countries of Central Europe, particularly Germany and the lands of
the former Austro-Hungarian Empire, abandoned themselves to huge over issues
of paper money. Their currencies became all but worthless, private savings
were wiped out and rampant inflation was only brought under control by the
governments' decision in 1922-3 to stop printing money and reform their currencies.
Turning to the intense social and economic transformations that characterize
the history of the modern world, the role of paper money here has perhaps even
more long-term significance than in more strictly political revolutions. The
Industrial Revolution which began in Britain in the mid-eighteenth century
made new demands on financial organization. It required the redistribution of
capital from agricultural to industrializing areas, and from old to new industries,
and encouraged an expansion of credit to finance new businesses. Banks were
both a product of, and a stimulus to, this growing economic activity. They
facilitated the circulation of capital and made advances to promote industry, trade
and public utilities, such as transport. But the banks themselves often emerged
as useful corollaries to other businesses, especially in the textile, mining and iron
industries, and their success -or, frequently, failure -owed much to the
general commercial climate or even the fate of a single enterprise: one bankruptcy
could bring many others in its wake. It was, however, through the country
banks that circulating paper money and more complex manipulation of money came into the hands of ordinary people.
|