The Effects Of Inflation And Defaltion In Revolutionary France

2019 words - 8 pages

Revolutionary France from 1789 onwards experienced large political and economic upheavals. 1789 marked the beginning of the Revolution over an already crumbling monarchy, in London lay stored away the greater part of the world's stock of gold and silver, and, as after the Seven Years' War nearly every country in Europe had to borrow from London, the basis of European economic structure was changed from wealth to debt. Among these nations France became the more heavily involved, as she was compelled to borrow large sums in order to pay for British colonial imports and her own share of the cost of the war of the American Rebellion . Soon she was reduced to borrow in order to pay interest on former loans, this worsening of the economic situation partly led to the collapse of the Ancien regime. After 1789, the French experienced acute inflation and in the first part of this essay I will be detailing what inflation is and will explain how it came about and its effect in Revolutionary France in the period 1789-1796. In 1796 war was declared against the empire, there followed a period of blockades and collapse of French colonial trade these times were accompanied by marked deflation. In the second part of this essay I will be discussing the causes of this deflation and its effects on France.In order to answer this question we must first understand what inflation is, the causes of it and its effects. Inflation is simply a rise in the price level. There is link between nominal money and the price level, and hence between nominal money growth and inflation Persistent inflation must be accompanied by continuing money growth. Printing money to finance a large deficit is a source of inflation, when a government can no longer finance deficits by more borrowing, it can either tighten its fiscal policy or print money. Inflation is also linked to the nominal interest rate, the Fisher hypothesis says higher inflation leads to similarly higher nominal interest rates. At high inflation, although inflation tax ('the effect of inflation in raising real revenue by reducing the real value of the government's nominal debt') rate is high, the tax base - real cash demand - is now tiny because nominal interest rates are so high. Real revenue raised through the inflation tax cannot be increased indefinitely, something has to give, this is often the cause of hyperinflation, the only solution to which is to cut the size of the deficit .Deflation on the other hand is a 'decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending' .Revolutionary France experienced a period of acute inflation from 1789-1796. This inflation was caused by inherited problems of the pre-revolutionary period as well as economic problems created by the revolutionary government. During...

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