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Jul 11, 2014

Thomas Paine Versus Edmund Burke, Part 10

Smith explains Paine’s views on paper money, price controls, self-interest, and exploitative governments.

In May 1793, Thomas Paine, while still serving as a member of the French National Convention—he would be expelled and imprisoned by Robespierre later the same year—wrote a pessimistic letter to Danton expressing his despair about the future of the French Revolution. Paine warned of a looming disaster that would result “not from the combined foreign powers” that had allied themselves against France, nor from the “intrigues” of counter-revolutionary aristocrats and priests, “but from the tumultuous misconduct with which the internal affairs of the present Revolution are conducted.”

In addition to condemning “internal contentions” and fanatical denunciations within the National Convention, as different factions struggled for political supremacy, Paine identified three major factors that had thrown the Revolution off course. One was the concentration of power in Paris at the expense of district and municipal authorities. More relevant to our purpose are Paine’s critique of the paper currency (“assignats”) issued by the French government and his warning about the deleterious effects of price controls.

As originally authorized by the Constituent Assembly in 1789, assignats were treasury notes (bonds, in effect, bearing five percent interest) that were intended as a short-term expedient to reduce the national debt, or at least delay payment on it, and to thereby rescue the revolutionary government from the bankruptcy it had inherited from the Old Regime. Printed only in large denominations, the original assignats were redeemable in the nationalized lands that had been confiscated (primarily) from the Catholic Church. It was predicted that the original assignats would be retired quickly, given the vast amounts of land available at reasonable prices.

Within a year, however, the prospect of easy money proved too alluring for French politicians. They issued a second run of assignats, except these carried no interest and were declared legal tender throughout France. Assignats were thus transformed from redeemable bonds into compulsory paper money backed by nothing more than the force of French law. And as the printing of more assignats followed in larger and larger waves, predictable results also followed. Hard money was driven from the market, politically connected speculators made huge profits, and severe inflation rendered food and other essential commodities unaffordable to the poor.

Almost as predictably, high prices were commonly blamed not on the unbacked paper currency but on greedy farmers, manufacturers, and merchants. Although many French politicians had a good understanding of economics and therefore advocated free markets in theory, some eventually succumbed to the popular demand for price controls. This was especially true in Paris where mobs, which were often controlled by the extreme wing of Jacobins as useful instruments in their quest for power, exerted considerable influence on the National Convention (September 1792 to October 1795).

Thomas Paine was a vigorous defender of hard money. Indeed, so fierce was his opposition to unsecured paper money that, despite his opposition to capital punishment, he once declared that any legislator who called for fiat paper currency should be subject to the death penalty. Having witnessed the devastating inflationary spiral caused by the printing of “Continental” currency during the American Revolution, Paine lamented that France was following the same path to financial chaos. As Paine wrote to Danton:

The assignats were not of the same value they were a year ago, and as the quantity increases the value of them will diminish. This gives the appearance of things being dear when they are not so in fact, for in the same proportion that any kind of money falls in value articles rise in price. If it were not for this the quantity of assignats would be too great to be circulated. Paper money in America fell so much in value from this excessive quantity of it, that in the year 1781 I gave three hundred paper dollars for one pair of worsted stockings. What I write you upon the subject is experience, and not merely opinion. I have no personal interest in any of these matters, nor in any party disputes. I attend only to general principles.

Paine’s opinion of price controls changed over the years. As brilliantly explained in Eric Foner’s Tom Paine and Revolutionary America (Chapter Five, “Price Controls and Laissez-Faire: Paine and the Moral Economy of the American Crowd”), Paine had advocated wartime price controls in Pennsylvania during the late 1770s, but he subsequently converted to laissez-faire after seeing their harmful consequences. Paine’s conversion via experience is reflected in his remarks to Danton about the unintended consequences of governmental price fixing during the American Revolution.

I see another embarrassing circumstance arising in Paris of which we have had full experience in America. [F]ixing the price of provisions [cannot] be carried into practice. The people of Paris may say they will not give more than a certain price for provisions, but as they cannot compel the country people to bring provisions to market the consequence will be directly contrary to their expectations, and they will find dearness and famine instead of plenty and cheapness. They may force the price down upon the stock in hand, but after that the market will be empty.

I will give you an example. In Philadelphia we undertook, among other regulations of this kind, to regulate the price of salt; the consequence was that no salt was brought to market, and the price rose to thirty-six shillings per bushel. The price before the war was only one shilling and sixpence per bushel; and we regulated the price of flour (farina) till there was none in the market, and the people were glad to procure it at any price.

We now arrive at the second topic of this essay: How do people come to understand their rights?

According to Paine in Rights of Man, self-interest and rights are closely related. Man “acquires a knowledge of his rights by attending justly to his interest, and discovers in the event that the strength and powers of despotism consist wholly in the fear of resisting it….” At the time Paine was writing in 1792, he estimated that “more than one-fourth of the labor of mankind is annually consumed” by the governments of Europe, so a major purpose of every just revolution should be to drastically lessen the burden of taxes imposed by any such “barbarous” system of despotism.

As I explained in Part 5 of this series, Paine believed that “Government is no farther necessary than to supply the few cases to which society and civilization are not conveniently competent.” Consequently, he also believed that the legitimate domestic concerns of governments, because they are so few, are difficult to use as “pretenses” for high taxes. This is why governments typically invoke the specter of foreign aggression and the need for war as a rationale for high taxes: ”the object of [war] is an increase of revenue; and as revenue cannot be increased without taxes, a pretense must be made for expenditures. In reviewing the history of the English government, its wars and its taxes, a bystander, not blinded by prejudice, nor warped by interest, would declare, that taxes were not raised to carry on wars, but that wars were raised to carry on taxes.” (See Part 9.)

The system of perpetual wars and high taxes, Paine argued, does not serve the interests of the common person. Neither the farmer nor the merchant nor any person who makes his living by the social means of voluntary exchange has anything to gain from war. If war is the harvest of governments, this is because war enables those in the political realm, such as politicians, bureaucrats, and political favorites, to line their pockets with the pelf acquired through high taxes. Once people come to understand how they are being exploited for the benefit of the political class, their self-interest will eventually cause them to understand and defend their rights. Herein lay the significance of the American Revolution.

The independence of America, considered merely as a separation from England, would have been a matter but of little importance, had it not been accompanied by a revolution in the principles and practise of governments. She made a stand, not for herself only, but for the world, and looked beyond the advantages herself could receive. Even the Hessian, though hired to fight against her, may live to bless his defeat; and England, condemning the viciousness of its government, rejoice in its miscarriage.

This was far more than jingoistic chest-thumping by an American patriot. As Paine saw the matter, America, with its extensive freedoms, low taxes, and prosperity, proved to the rest of the world that a powerful government and high taxes were not necessary for prosperity. Quite the reverse was true. People throughout the world, by contemplating the American experience, were beginning to understand that “hordes of miserable poor, with which old countries abound” were “the consequence of what in such countries is called government.” It was not as if most poor people were constitutionally unable to care for themselves or make decent livings. Rather, their abject poverty was largely the result of high taxes and other restrictions on individual freedom. Thus, as this vital knowledge spread throughout the world, as people everywhere came to understand how freedom is essential to the self-interested pursuit of happiness and how most governments are nothing more than complex systems of exploitation, they would demand radical reforms in their own systems of government—by peaceful means, if possible. Or by violent means, if necessary.

Given my past record, it should come as no surprise to my readers that I have more to say about Thomas Paine. I still have not explained his supposed advocacy of a mini-welfare state, for example, so I will try to tie things up in the next installment of this series.

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