29.a.i.

French Playing Card Money

In 1685, the French government was late in sending the payroll to its military outpost in present-day Canada. The soldiers were supposed to be paid in silver coins known as livres (pronounced “leaves”). The soldiers, of course, were inconvenienced by the delay; but they were not the only ones who suffered. Local shopkeepers who sold goods to the soldiers would have also suffered a drop in business. With buyers unable to buy, and sellers unable to sell, the local economy experienced what we would nowadays call a recession. It might seem that the solution would have been for shopkeepers to sell to the soldiers on credit. After all, the soldiers’ wages would come eventually. But credit has a major difficulty: Suppose a soldier is to be paid 30 livres as soon as the payroll ship arrives from France. In principal, a shopkeeper might then be willing to extend 30 livres of credit to the soldier. But the problem is that the soldier might have also run up 30 livres of credit with each of 10 other shopkeepers—a debt that will probably never be paid. Also, when a shopkeeper sells for credit instead of coins, how can he pay his own suppliers? These problems with credit sales mean that the delay of the payroll would have seriously hampered the soldiers’ ability to buy goods. This in turn would have hurt the shopkeepers and the economy as a whole.

The intendant of the camp, Jacques Demuelles, devised a brilliantly simple solution to the problem: He paid the soldiers with paper IOU’s. One problem was that suitable paper was hard to find on the Canadian frontier, so he procured sets of playing cards and cut them in quarters. On each quarter he might write “IOU 1 livre”. He then announced that these IOU’s would be redeemable in silver livres as soon as the payroll ship arrived. As long as people trusted that the IOU’s would actually be redeemed when (and if) the payroll ship arrived, the IOU’s would circulate at par—that is, one paper livre would be worth one silver livre. If people had their doubts, then paper livres would be at a discount--one paper livre would be worth something less than one silver livre. Fortunately, this paper money experiment was so successful that the paper livres circulated in spite of official attempts to suppress them. Soldiers used paper livres to buy goods from the shopkeepers, who in turn used them to buy goods from their suppliers. From there the paper livres spread through the whole economy. They were finally redeemed in silver at par when the payroll ship arrived, 8 months late.

The details of this episode are lost to history, but it appears that the paper livres greatly stimulated business.  It is easy to see why. Paper money is far more convenient than coins, barter, or credit. When it was introduced into an economy that relied mostly on barter, the improvement in the efficiency of trade, and of borrowing and lending, would have been enormous.

   The following hypothetical balance sheet will help explain the nature of the card money. It is assumed that 1000 soldiers were each owed 30 livres, and 30,000 livres were in transit from France.

 

Figure 29.1: Balance sheet of the French military:

 

    ASSETS                              LIABILITIES

1) 30,000 livres (coins)         30,000 livres wages payable                                                                                              

in transit                                                                                                               

 

 

                                                                                                                               

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2)                                             +10,000 livres paper cards
                                            -10,000 livres wages payable 

 

 

 

 

 

 

 

 

 

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3)                                             +20,000 livres paper cards                 
                                            -20,000 livres wages payable                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   In line 1 of figure 29.1, we see that 30,000 livres of "wages payable" are backed by 30,000 livres of coins in transit. It is as if the soldiers each have 30 livres "on deposit" with the payroll office.

   In line 2 we suppose that the payroll office issues 10 paper livres to each soldier, leaving 20 livres on deposit for each. The issue of paper livres simply replaced one liability (wages payable) with another (paper livres). After the issue of paper in line 2, the claims against the military still total 30,000 livres (10,000 livres paper plus 20,000 livres of wages payable). The issue of the 10,000 paper livres would have stimulated the local economy, since the paper livres were easier to spend than livres on deposit.
   The 10,000 livres of paper might have been enough for soldiers to buy all they wanted of local merchants, and in that case they would have asked for only 10,000 paper livres. But suppose the soldiers needed another 20,000 livres to buy the things they wanted. They would then apply to the payroll office to convert another 20,000 livres on deposit into 20,000 livres of paper (line 3). The payroll office might issue the new paper livres and it might not. If the payroll office issued the paper livres, then soldiers would be able to buy and merchants would be able to sell. The economy would be stimulated. If it followed a “tight money" policy, it would refuse to issue the paper livres in the belief that the issue would be inflationary--more money would be chasing the same amount of goods.
   In this case the tight money view is incorrect. The issue of paper livres cannot be inflationary, since the issue of paper in line 3 is accompanied by an equal reduction of wages payable. In the end, there are always 30,000 livres (in paper or on deposit) laying claim to 30,000 livres in coin, so each livre (paper or deposit) must be worth one livre in coin. The only way that inflation could occur is if (1) the total number of livres on the liability side exceeded the 30,000 livres in coin on the asset side, (perhaps because of an overissue of paper livres) or (2) the payroll office had less than 30,000 livres in coin. For example, if the coin shipment from France ultimately totaled only 15,000 livres in coin, then each paper or deposit livre would be worth only half of a silver livre.
   The soldiers would not have asked for the issue of 20,000 paper livres in line 3 if they had not wanted to spend that much, and if the payroll office had refused them, the economy would have returned to the recessionary situation of soldiers being unable to buy and merchants unable to sell. Given that the issue of paper livres would not be inflationary, the payroll office should issue as much paper money as the soldiers are entitled to receive in wages.