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lectures/french_rev.md

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@@ -35,7 +35,7 @@ Some of those theories about monetary and fiscal policies still interest us toda
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* a **real bills** theory of the effects of government open market operations in which the government *backs* new issues of paper money with government holdings of valuable real property or financial assets that holders of money can purchase from the government in exchange for their money.
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* the Revolutionaries learned about this theory from Adam Smith's 1776 book The Wealth of Nations
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* The Revolutionaries learned about this theory from Adam Smith's 1776 book The Wealth of Nations
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{cite}`smith2010wealth` and other contemporary sources
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* It shaped how the Revolutionaries issued a paper money called **assignats** from 1789 to 1791
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* a **legal restrictions** or **financial repression** theory of the demand for real balances
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* the Twelve Members comprising the Committee of Public Safety who adminstered the Terror from June 1793 to July 1794 used this theory to shape their monetary policy
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* The Twelve Members comprising the Committee of Public Safety who adminstered the Terror from June 1793 to July 1794 used this theory to shape their monetary policy
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We use matplotlib to replicate several of the graphs with which {cite}`sargent_velde1995` portrayed outcomes of these experiments
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We'll start by using matplotlib to construct several graphs that will provide important historical context.
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We'll start by using `matplotlib` to construct several graphs that will provide important historical context.
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These graphs are versions of ones that appear in {cite}`sargent_velde1995`.
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Britain won the first three wars and lost the fourth.
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Each of those wars produced surges in both countries government expenditures that each country somehow had to finance.
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Each of those wars produced surges in both countries' government expenditures that each country somehow had to finance.
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Figure {numref}`fr_fig4` shows surges in military expenditures in France (in blue) and Great Britain.
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during those four wars.
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```
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Figures {numref}`fr_fig2` and {numref}`fr_fig3` summarize British and French government fiscal policies during the century before the start the French Revolution in 1789.
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Figures {numref}`fr_fig2` and {numref}`fr_fig3` summarize British and French government fiscal policies during the century before the start of the French Revolution in 1789.
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Before 1789, progressive forces in France admired how Britain had financed its government expenditures and wanted to redesign French fiscal arrangements to make them more like Britain's.
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Figure {numref}`fr_fig2` shows government expenditures and how it was distributed among expenditures for
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* civil (non military) activities
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* civil (non-military) activities
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* debt service, i.e., interest payments
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* military expenditures (the yellow line minus the red line)
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* thus, after a war, the government does *not* raise taxes by enough to pay off its debt
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* instead, it just rolls over whatever debt it inherits, raising taxes by just enough to service the interest payments on that debt
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Eighteenth century British fiscal policy portrayed Figure {numref}`fr_fig2` thus looks very much like a text-book example of a *tax-smoothing* model like Robert Barro's {cite}`Barro1979`.
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Eighteenth-century British fiscal policy portrayed Figure {numref}`fr_fig2` thus looks very much like a text-book example of a *tax-smoothing* model like Robert Barro's {cite}`Barro1979`.
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A striking feature of the graph is what we'll lagel a *law of gravity* between tax collections and government expenditures.
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total expenditures and its tax revenues by either
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* raising taxes, or
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* lowering government's non debt service (i.e., non-interest) expenditures, or
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* lowering government's non-debt service (i.e., non-interest) expenditures, or
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* lowering debt service (i.e., interest) costs by rescheduling, i.e., defaulting on some debts
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Precedents and prevailing French arrangements had empowered three constituencies to block adjustments to components of the government budget constraint that they cared especially about
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In 1789, the Revolutionaries quickly reorganized the Estates General into a National Assembly.
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A first piece of business was to address the fiscal crisis, the situation that had motivated the King to convence the Estates General.
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A first piece of business was to address the fiscal crisis, the situation that had motivated the King to convene the Estates General.
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The Revolutionaries were not socialists or communists.
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Adam Smith defined a **real bill** as a paper money note that is backed by a claims on a real asset like productive capital or inventories.
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The National Assembly put togethere an ingenious institutional arrangement to implement this plan.
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The National Assembly put together an ingenious institutional arrangement to implement this plan.
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In response to a motion by Catholic Bishop Talleyrand (an atheist),
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the National Assembly confiscated and nationalized Church lands.
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These paper notes would be ''as good as silver coins'' in the sense that both were acceptable means of payment in exchange for those (formerly) church lands.
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Finance Minister Necker and the Constituants of the National Assembly thus planned
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Finance Minister Necker and the Constituents of the National Assembly thus planned
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to solve the privatization problem *and* the debt problem simultaneously
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by creating a new currency.
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how members of the Assembly marshaled theory and evidence to assess the likely
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effects of their innovation.
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* Members of the Natioanl Assembly quoted David Hume and Adam Smith
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* Members of the National Assembly quoted David Hume and Adam Smith
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* They cited John Law's System of 1720 and the American experiences with paper money fifteen years
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earlier as examples of how paper money schemes can go awry
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* Knowing pitfalls, they set out to avoid them
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But they set out to remake the French tax code and the administrative machinery for collecting taxes.
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* they abolished many taxes
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* they abolished the Ancient Regimes scheme for ``tax farming``
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* tax farming meant that the government had privatized tax collection by hiring private citizes -- so called tax farmers to collect taxes, while retaining a fraction of them as payment for their services
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* they abolished the Ancient Regimes scheme for *tax farming*
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* tax farming meant that the government had privatized tax collection by hiring private citizens -- so-called tax farmers to collect taxes, while retaining a fraction of them as payment for their services
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* the great chemist Lavoisier was also a tax farmer, one of the reasons that the Committee for Public Safety sent him to the guillotine in 1794
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As a consequence of these tax reforms, government tax revenues declined
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plt.show()
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```
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To cover the disrepancies between government expenditures and tax revenues revealed in {numref}`fr_fig11`, the French revolutionaries printed paper money and spent it.
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To cover the discrepancies between government expenditures and tax revenues revealed in {numref}`fr_fig11`, the French revolutionaries printed paper money and spent it.
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The next figure shows that by printing money, they were able to finance substantial purchases
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of goods and services, including military goods and soldiers' pay.
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Notice the 1793-1794 surge in revenues raised by printing money.
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* this reflects extraordinary measures that the Committee for Public Safety adopted to force citizens to accept paper money, or else.
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* This reflects extraordinary measures that the Committee for Public Safety adopted to force citizens to accept paper money, or else.
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Also note the abrupt fall off in revenues raised by 1797 and the absence of further observations after 1797.
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* this reflects the end using the printing press to raise revenues.
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* This reflects the end of using the printing press to raise revenues.
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What French paper money entitled its holders to changed over time in interesting ways.
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```
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We have partioned {numref}`fr_fig9` that shows the log of the price level and {numref}`fr_fig8`
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below that plots real balances $\frac{M_t}{p_t}$ into three periods that correspond to different monetary experiments or ``regimes``.
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below that plots real balances $\frac{M_t}{p_t}$ into three periods that correspond to different monetary experiments or *regimes*.
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The first period ends in the late summer of 1793, and is characterized
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by growing real balances and moderate inflation.
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The second period begins and ends
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with the Terror. It is marked by high real balances, around 2,500 millions, and
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with the Terror. It is marked by high real balances, around 2,500 million, and
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roughly stable prices. The fall of Robespierre in late July 1794 begins the third
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of our episodes, in which real balances decline and prices rise rapidly.
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hyperinflations.
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To bring this out, we'll use linear regressions to draw straight lines that compress the
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inflation-real balance relationship for our three sub periods.
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inflation-real balance relationship for our three sub-periods.
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Before we do that, we'll drop some of the early observations during the terror period
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to obtain the following graph.
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This lecture sets the stage for studying theories of inflation and the government monetary and fiscal policies that bring it about.
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A ``monetarist theory of the price level`` is described in this quantecon lecture {doc}`cagan_ree`.
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A *monetarist theory of the price level* is described in this quantecon lecture {doc}`cagan_ree`.
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That lecture sets the stage for these quantecon lectures {doc}`money_inflation` and {doc}`unpleasant`.

lectures/inflation_history.md

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Immediately after World War I, Hungary, Austria, Poland, and Germany were not on the gold standard.
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Their currencies were fiat or "unbacked", meaning that they were not backed by credible government promises to convert them into gold or silver coins on demand.
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Their currencies were "fiat" or "unbacked", meaning that they were not backed by credible government promises to convert them into gold or silver coins on demand.
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The governments printed new paper notes to pay for goods and services.
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Each government stopped printing money to pay for goods and services once again and made its currency convertible to the US dollar or the UK pound.
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The story told in {cite}`sargent2002big` is grounded in a ``monetarist theory of the price level`` described in {doc}`cagan_ree` and {doc}`cagan_adaptive`.
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The story told in {cite}`sargent2002big` is grounded in a *monetarist theory of the price level* described in {doc}`cagan_ree` and {doc}`cagan_adaptive`.
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Those lectures discuss theories about what owners of those rapidly depreciating currencies were thinking and how their beliefs shaped responses of inflation to government monetary and fiscal policies.

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