Assignats or Death: Inflationary Finance in Revolutionary France

Abstract

Following a revolution precipitated by unsustainable government deficits, an explosion of paper money called the assignat caused a rapid increase in the price level not seen in Europe again until the widespread adoption of discretionary fiat standards in the 20th century. The value of the assignat depended on the property the revolutionary government had expropriated to back it. The decision to retire the assignats from circulation using the revenue collected from the sale of the expropriated property was ultimately political. We examine how shifts in the political equilibrium affected the demand for the assignat and find evidence of two money demand shocks that correspond to the collapse of the assignat's political support. Our estimates of the demand for the assignat indicate that the first shock reduced the demand for real balances by up to 70%. The second shock caused the negative relationship between real balances and inflation to break down entirely. Our results point to politics' critical role in determining a currency's fiscal backing and, thus, the demand for money.

Keywords: Political Economy, Inflationary Finance, French Revolution

JEL Classification: D72, E31, N13