Assignats or Death: The Politics and Dynamics of Hyperinflation 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 prices 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 a political one. 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 political support for the assignats. 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 breakdown entirely. Our results give further credence to the view that politics influences the demand for money as it impacts a currency's fiscal backing.

Keywords: political economy, Inflationary Finance, French Revolution