The Money Mystery Ch: 4

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Questions and Answers

What was the French government's initial method of financing its spending in 1790?

Creating assignats (correct)

Implementing austerity measures

Issuing tax rebates

Selling government bonds

In the first stage of inflation described, what behavior did people exhibit regarding their spending?

They began to barter instead of using money

They delayed spending, hoping prices would fall (correct)

They increased their saving to invest in stocks

They spent freely, expecting prices to rise

What effect did the increase of assignats have on prices during the inflation period?

Prices rose to compensate for the fall in the assignat’s value (correct)

Prices stabilized temporarily

Prices decreased sharply

Prices remained unchanged throughout

What was a common response from merchants when they realized the value of assignats was falling?

They sought ways to protect themselves against risks Signup and view all the answers

Which stage of inflation involved people beginning to spend assignats quickly?

Second stage Signup and view all the answers

What phenomenon occurs when people anticipate price hikes and start to withdraw their money from circulation?

Hyperinflation Signup and view all the answers

What did the public initially think about the assignats when they were first issued?

They were widely accepted and popular Signup and view all the answers

What did the government fear that led them to issue assignats?

A tax rebellion Signup and view all the answers

What was one consequence of the government printing more paper money?

The value of the assignat fell sharply. Signup and view all the answers

What was the fate of people caught trading in gold or foreign currencies?

They faced a six-year prison sentence. Signup and view all the answers

What event occurred on February 28, 1793, in Paris?

A major riot broke out over food prices. Signup and view all the answers

How did the public respond to the introduction of the mandat?

Demand for it quickly diminished. Signup and view all the answers

What was one significant outcome of Napoleon's rule regarding paper money?

He established a new currency system based on gold. Signup and view all the answers

What effect did price controls have on inflation initially?

They temporarily reduced inflation levels. Signup and view all the answers

What was a notable behavior of merchants in response to inflation?

They included a cushion in prices to account for future fluctuations. Signup and view all the answers

Study Notes

The French Runaway Inflation

In 1790, the French government, short on cash, issued assignats as a new form of currency to fund its spending.
Assignats were initially popular and widely accepted but rapidly lost value.
This led to runaway inflation, showcasing the dangers of unchecked paper money creation.
In 1793, a bushel of wheat cost 25 assignats but rose to 1,000 assignats by the end of the year.
Merchants began adding markups to their prices to protect themselves against the declining value of the assignats.
The French government responded by printing more assignats, exacerbating the inflation.
As the assignat's value declined, a black market emerged for goods traded with gold or silver.
The government tried to control the black market by increasing fines and imposing jail terms for those caught trading with gold, silver, or foreign currencies.
The government also attempted to suppress the declining demand for assignats by imposing price controls and introducing a new currency called mandats.
Mandats initially traded at 35% of their face value, falling to 3% within six months.
The French economy, deprived of a stable currency, fell into chaos, leading to unemployment, fear, and hunger.

Napoleon and Paper Money

In 1799, a coup d’état replaced the French government with Napoleon who, recognizing the dangers of inflated paper money, instituted measures to ensure the French government would never again issue paper money.
Napoleon's actions highlight the need for sound monetary policy.

Thomas Jefferson’s Warning

Thomas Jefferson, in 1817, warned of the potential for paper money to “break up the measure of value, makes a lottery of all private property”
He questioned whether it would ever be possible to place a constitutional veto on paper money issuance.
The French example of runaway inflation serves as a cautionary tale about the risks of uncontrolled paper money.

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Description

This quiz explores the dramatic inflation in France during the 1790s when the government introduced assignats as currency. As the assignat rapidly lost value, it led to widespread economic issues including a black market for goods. Test your knowledge on the causes and consequences of this historical financial crisis.