Revolutions Part I
Bob talks English, French, and American Revolutions in regards to Crypto Economics & Governance.
Welcome to my newest crypto extravaganza as I attempt to glean DeFi & governance wisdom from the absolute economic chaos that was the American, English and French Revolutions. Got some Continental Dollars from the US Revolution that just went reverse-split 40-1? Are you French revolutionaries, with massive debts to creditors, yet no revenue since everyone stopped paying taxes? Are you going to launch a new paper money called Assignats in France, and back it with the property you’re seizing from the Catholic church you just nationalized? Maybe you’re just the English Revolution, and after dabbling with a new constitution you invite back the monarchy because you missed the good ole days of ‘King and Country’ and couldn’t stand the Commonwealth, Cromwell and pre-Marxist agitation. Welcome to the hellscape that is the economics of the pre-industrial world.
Money backed by seized church property, massive American state inflation differentials (where are the arb bots?), and oh my dear lord don’t let the peasants vote because all they’re going to do is forgive taxes, and abolish property rights! People tried, I mean they really tried, and this was pre-Libertarian so it was fairly avant-garde thinking. Introduction advice; don’t enact free markets for grain going into a famine (France), don’t promise to pay your soldiers a lifelong pension and then renege while simultaneously devaluing the currency (America), and don’t create a constitutional monarchy, call it a commonwealth, and then have Cromwell refuse to be the Lord Protector(England). The fun was non-stop as you will soon see.
If you’ve never read any of my articles before please feel free to check out my ‘Roman Rules of Crypto Series’ - Parts I, II, III, and IV.
On to the revolutions, below is a timely piece of paper illustrating the risks of the Americans not declaring independence from the English.
I’ve been inspired by another Mike Duncan podcast called ‘Revolutions’ and after the US war of independence, but before the US Constitution was written there were the ‘Articles of Confederation’. I’ve attached an image of a part of them below, but needless to say they didn’t work out. I’ve done some research on the English Revolutions, and I’m about halfway into the French Revolution, but the American Revolution does reign supreme as the best example since the Romans of figuring out monetary policy and governance on the fly. You could easily argue that all the first thirteen states were just sub-DAOs of the Super DAO that is the United States of America. Distrustful of each other, lacking national standards on everything from trade, to dealing with the European powers. It’s amazing that the USA is even present today.
Slavery was a big sticking point, although the South saw it as a de facto economic pillar, and unfortunately it was mostly a monetary decision at the time. The North had already made up it’s mind in a moral sense, but you could argue that their entire economies didn’t depend on it like the Southern states. I’m not trying to argue the morality of slavery - merely pointing out that the negotiation surrounding slavery with the thirteen states was argued more in the monetary lens at the time. Life was cheap, and was treated as such; property rights not subject to a monarch, or head-of-state’s whims were more on the minds of the Founding Fathers. Taxation only through representation.
(above the ill-fated Articles of Confederation pre-mint America)
These articles were basically dead in the water on launch. The thirteen states at the time did not want a central government taxing them since - well they had just gone to war with a central authority that was taxing them. Unfortunately the states learned the hard way that if you don’t provide a central authority with any means to collect taxes, then you’re basically just on your own like before. This is one of the reasons America is such a political mess today; no one wanted a strong Federal government taking taxes and telling the State governments what to do. After the war the Americans were forced to deal with the paper money they had created as sort of an IOU to merchants and soldiers during the American Revolution. Eventually they figured out the US Constitution, but they still had to deal with the Continental dollars that were in large enough quantities to make Powell blush.
The Continental Congress printed over $241,552,780 in ‘Continentals’ during the war for Independence. You can imagine how much that is worth in today’s valuation.
The Continental Currency dollar was valued relative to the states' currencies at the following rates (Continental to Shilling conversion):
5 shillings – Georgia
6 shillings – Connecticut , Massachusetts, New Hampshire, Rhode Island, Virginia
71⁄2 shillings – Delaware, Maryland, New Jersey, Pennsylvania
8 shillings – New York, North Carolina
321⁄2 shillings – South Carolina
You can imagine how convoluted and difficult this would be for merchants. Soldiers were promised lifelong pensions to stay in the war, militias were more common than the professional army George Washington wanted, and best of all; after the war the ‘Continentals’ were revalued to 1/40th of their value! Just HODL amirite.
Thank you so much for your support, oh what’s that? You’re super angry because the money we promised you is worth nothing? Dem’s da breaks.
The painful experience of the runaway inflation and collapse of the Continental dollar prompted the delegates to the Constitutional Convention to include the gold and silver clause into the United States Constitution so that the individual states could not issue bills of credit or "make any Thing but gold and silver Coin a Tender in Payment of Debts". (wikipedia)
The reason I bring up these stories from history about the monetary policies of the time is that this was when we really were all making it up as we were going along. Sure financiers and the ‘old money’ types were making a killing funding all of those wars, but economic theories were abound, and the general population were the test subjects.
Benjamin Franklin even noted that the devaluing of the currency had acted as a tax to pay for the war. It wasn’t intentional, but as we can see this sort of playing with monetary policy has dramatic effect.
Even Benjamin Franklin, probably the first, great, internationally-known American knew that inflation was in affect a tax on the people.
Inflation
So what the hell was inflation like in the 18th century? Well for starters it was an absolute shit-sandwich for local merchants that even accepted the ‘Continental’ currency. After the US won their independence they had no ability to raise any funds for a federal government - let alone was there any interest in doing so. Early on the French had sat on the sidelines, unsure if the US colonial militias could even operate remotely close to a professional army. The results at the beginning were not encouraging.
The main mistake by the British was assuming that there was not a strong patriotic sentiment for an independent nation. The prevailing belief was that English loyalists would provide a lot of support and men - especially in the Southern states, but alas the colonies had been mostly ignored for decades by then, and thus they thought of themselves loosely as an independent people. That’s how you end up with thirteen states defeating the British, but then having no idea what to do afterwards.
Oh yeah, this part is about inflation - so what do you do when there is already an existing currency (Sterling Pounds), and a plethora of local paper currencies?
Well they needed a little help from Mr. Constitution and Mr. Robert Morris the famous banker who chartered the Bank of North America -
The bank merged in 1923 with the Commercial Trust Company to become the Bank of North America and Trust Company, which merged in 1929 with the Pennsylvania Company for Insurances on Lives and Granting Annuities. That company (as the Pennsylvania Company for Banking and Trust) merged with the First National Bank (Philadelphia) in 1955 to become The First Pennsylvania Banking and Trust Company. This was later acquired by CoreStates Financial Corporation (1991), First Union/Wachovia (1998) and Wells Fargo (2008)
Yes, Wells Fargo is technically the first ever US bank.
The original charter as outlined by Hamilton called for the disbursement of 1,000 shares priced at $400 each. Benjamin Franklin purchased a single token share as a sign of good faith to Federalists and their new bank. Hamilton used his pseudonym "Publius" (later immortalized in the Federalist Papers advocating in the late 1780s for adoption of the United States Constitution) to endorse the bank.
The greatest share, however, 63.3%, was purchased on behalf of the United States government by Robert Morris using a gift in the form of a loan from France, and a loan from the Netherlands. This had the effect of capitalizing the bank with large deposits of gold and silver coin and bills of exchange. He then issued new paper currency backed by this supply. (Wikipedia)
Perhaps the new solution to hyperinflation in the present day will be capitalizing a new bank like Custodia in Wyoming with Bitcoin, Ethereum, and stablecoins.
Needless to say the Continentals were over-printed and basically useless at the time. History has proven that some store-of-value must be backing a paper currency to have it succeed, otherwise it’s just another dump on retail, aka the poor.
French Revolution
1770-1790s
The French Revolution is just a phenomenal example of economic theorizing and governance experimentation. People were unbelievably patriotic, and it was the age of the enlightened monarch; free trade ideas were starting to percolate to the surface - but ran into the freight trains that were famines, war, and corruption. Montesquieu inspired the Americans in the style of their constitution and the upper levels of the Catholic church was rife with greed and bureaucracy.
Enlightened Absolutism/Depotism: Educated monarchs caring about their subjects, wielding enough power to force through the kind of reforms advocated by enlightened men of letters.
Most of the French philosophes like Voltaire were in favor of strengthening the monarchy. Strong examples of the time were:
Frederick the Great, Prussia
Catherine the Great, Russia
Joseph the II, Holy Roman Emperor
All 3 modernized their kingdoms, promoted arts and sciences, reformed outdated legal systems, military structures, and economic relationships.
One of the main causes of the French Revolution was that the Ancien Régime was greatly in debt both financially and morally. As for crypto comparisons there are many; the European salons, or coffeehouse culture was allowing for ideas to spread far and wide with great discussion, discourse and writing taking place. This is very similar to the Discord, Telegram and Twitter DMs flying around the Internet. Ideas can be quickly disseminated, beaten up, discarded, or taken up anew. Just today I was reading about how DAOs are more like countries than corporations and I couldn’t agree more. We live in a new age, with a new set of choices of how to manifest our futures, and with this I could not be more excited. Naturally it comes with similar stakes as with the French Revolution. Many people who were revolutionaries at the beginning became enemies later of the peasants and workers who had an axe to grind for generations of poor treatment. All sorts of great and bad ideas were tried and most failed, whereas some important ones did succeed. Many people died; many suffered. The point I always try to make with my friends is that it always feels like the time you live in is the most unfair time, the most challenging time. This is crypto in essence to me. It is a chance for change, but only if we learn from history about the mistakes we have made in the past. Life is always brutal, and hard; that’s why it’s worth living.
Montesquieu - Governance Expert/Philosopher, somewhat the Father of governance at the time, with the grandfather being Publius from Roman times whom Alexander Hamilton et al. used as their pen names for the Federalist Papers written around the time of the American Revolution. Montesquieu is credited as the principle source of the ‘separation of powers’, most commonly the Executive, Judiciary, and the Legislature.
Thomas Jefferson was serving as American Ambassador at the time and was consulted when the ‘Declaration of the Rights of Man and of the Citizen' was written and the Founding Fathers were greatly inspired by Montesquieu’s ideas around governance. Hence the two revolutions are forever linked together by their ideas surrounding governance. Many of these thinkers were inspired by the physiocrats.
Physiocrats - Believed wealth of the nation resided exclusively in the land. Everything was agricultural labor. Wanted to destroy the guild system, believed the web of internal custom barriers were crippling trade, all the indirect taxes on consumer goods hurt the chain all the way from producer to consumer. Tax the products of the land, not the land itself.
Author’s Note: Just a little bit of advice learnt from the French Revolution before we continue. It is best not to experiment with free market ideas going into a grain famine.
The Famine Conspiracy (Pacte de Famine)
In 1775 a French economist and physiocrat named Anne Robert Jacques Turgot passionately believed in laissez-faire economic theory (Invisible Hand) Basically it all translates into ‘leave it alone and let it pass’.
In his efforts to revive the agricultural system, Turgot altered the urban production process. In 1775 he did away with guilds and moved the grain trade to a free trade system, removing police regulations. Sounds like something libertarian crypto would want for - well everything.
This unfortunately timed right into a massive famine, and led directly to an event known as the ‘Flour War’. The gist of the Famine Conspiracy is that the general population; mostly poor farmers and workers believed that they were purposely being starved by special interests. The French population had very recently grown by about six million and many believed that it was all on purpose. It most certainly must have felt that way as grain was being speculated on as a free trade on grain was declared by Turgot.
Reminder that there are no pure ‘isms’ only combinations of forms of government. There is no pure republic, no pure democracy, just an idea like beauty, or truth that we are constantly striving for. The Romans in my earlier articles experienced this all the time with grain as well, they learned to always make sure there was reasonably priced grain for the masses regardless if the state made a profit or not. Applying this to crypto would mean that there most be a product market fit for the masses, real use cases for improvement in standards of living and opportunities provided. We don’t want to just end up with a crypto bourgeoise and watch successful quants drink our milkshakes all the time.
Active Citizen vs. Passive Citizen
Midway through the revolution France ended up attempting to define classes of citizens. You can imagine how well this ended, but it was also a different time of nobles and landowners. The peasants were used to being treated like crap and just wanted opportunity and a fairer legal system
The French legal system was insanely Byzantine and beyond understanding at the time. It would take years just to find out what court would rule on your case, and there was no recourse, no agreed upon jurisdiction - just bureaucracy and corruption.
The French ended up defining active citizens as those who were > 25, owned land, male, spoke French, paid taxes equal to 3 working days a year, and had been a resident for more than one year. This was mostly in line with the whole concept that property rights denoted democracy, and that full democracy was a fool’s errand whereas full monarchy was just as bad. The French people were truly trying to solve the same problems that crypto faces today; albeit from a world government lens these days.
Passive citizens were basically everyone else (crypto normies could be a comparison here)
Eventually this would backfire spectacularly as the working poor of France had just endured a famine, and now it had been particularly dry preventing the water wheels from turning and grinding the harvested grain into flour to make bread. Hungry bellies do not make laughing citizens and stoked by certain papers the mobs screamed for blood.
(Above cartoon shows the 3rd Estate holding up the 1st and 2nd Estates.)
The Devil’s in the Details
During the time of the French Revolution there were the Three Estates:
Clergy
Nobility
Commoners
Also in the nobility there were the ‘Sword’ Nobles and the ‘Robe’ Nobles. The nobles of the Sword inherited their titles back generations via their descendants; while the nobles of the Robe bought their titles as France pre-revolution was a country where titles were purchased for tax breaks, special privileges, rights and so forth. Generally ‘Robe’ Nobles were the merchant-style classes that were able to own multiple farms, inherited toll income via the convoluted system of trade the French employed, or numerous other methods. Pre-revolution many nobles were of the ‘Robe’ type. Basically it was the classic trope of ‘Old’ money vs. ‘New’ money and the old most definitely looked down at the new.
Now we’re going to jump right into this because it’s a Substack not a history course, but after the fall of the Bastille the Estates General was having a meeting to decide how the new government was going to function. On the table was a motion for the King’s veto; in the past the King had this weird veto where he could force through any legislation with a special privilege where he just showed up at the Parliament and boom - legislation passed. The revolutionary left wanted no veto at all, whereas the conservative right wanted an absolute veto. Many regular folks still liked the king, and weren’t ready to give up on the monarchy; they were looking for something more like the constitutional monarchy the English had setup for themselves. Eventually someone proposed a ‘limited’ veto and although the right-leaning members of the Estates General didn’t like this; they agreed to let the legislation pass, but in the end it was the committee led by the center-right faction that wrote the actual bill, and thus in the end the King’s veto was unlimited unless you voted against it in four straight parliaments - this basically meant it would take four years to remove any King’s veto; making it a de facto unlimited veto.
Moral of the story here is that if we want good, or even great crypto legislation we’re going to have to write it ourselves.
The French Treasury Bills (Assignats)
Lastly the French revolutionaries had to figure out a way to pay for things now that the revolution had happened. There are all sorts of details I’m skipping over, but the main decision they came upon was nationalizing the Catholic church lands, and using them as collateral for assignats - a sort of bond to be purchased with proper currency and used as preferred payment over other forms of money. The bond was originally set at 5%, backed by the lands that would be sold. The idea was that when assignats were used to purchase church lands; the assignats would then be burned. (Sound familiar???)
This is eerily similar to what’s happening right now with crypto versus fiat money. Paper money had just been experimented with in America with the ill-fated Continentals. Many politicians feared paper money would destroy France. The assignats were eventually declared legal tender in 1790 as the revolutionaries were unable to control the bonds, the interest rate was dropped to 3%. After another large printing of assignats they dropped in value by 5% again - many feared the price of bread would double. Smaller denominations were needed for daily life, the assignats were supposed to be a temporary bond, but were now legal tender.
Yes, pretty much all of France ate bread as their staple meal - it’s beyond the scope of this article.
More and more printing of assignats happened as more and more reasons to create them cropped up: paying the nobles who had lost their inherited titles and land, paying government contractors, paying for venal offices that were given up. There were no laws guaranteeing 1:1 exchanges of assignats for other currencies. The government started taking a 7.5% fee for exchanging large assignats into smaller coins. It all fell apart and after 50% inflation the assignat creators were either killed, or committed suicide. The British, Belgian, and Swiss started counterfeiting assignats at an industrial scale.
"Seventeen manufacturing establishments were in full operation in London, with a force of four hundred men devoted to the production of false and forged Assignats." On 17 October 1792, no less than 2,400 million assignations were in circulation. (Dillaye)
Caisse d'Escompte, a private bank was attempted to be nationalized by the revolutionaries, but failed. This was how the Bank of England had been formed after their revolution. Eventually the French issued Mandats (another attempt) - I’m not going to keep the story going, but eventually after hyperinflation the French ended up back to precious metals. There were a lot of references to ‘worthless fiat money’, take that for what it’s worth.
I’m going to have to end this here for now. I have many more ideas to cook up in regards to revolutionary finance, bonds, loans, and banks. I feel it’s very important to look back into the history of economic theory when we all get so busy talking about how Bitcoin is going to solve this, or Ethereum is ‘Sound Money’. Mostly, if not everything has happened before in some form or another, and although there is no exact situation to glean from; I believe there are a lot of answers for crypto and DeFi in world economic history moving forward.
Thank you all who have read with me thus far, and feel free to reach to me on Twitter at @bob_hlbok.
-Bob