Montreal, March 19, 2006 • No 171



Martin Masse
is publisher of QL.




by Martin Masse


          This presentation was delivered at the Austrian Scholars Conference organized by the Ludwig von Mises Institute on March 18, 2006, in Auburn, Alabama.


          Everybody knows that New Orleans was founded by the French. But the area where we stand in Alabama also used to be part of the French North American empire in the 18th century. Not far from here, north of Montgomery, was a military fort called Fort Toulouse. The French controlled one third of the continent at the time.

          The reason why I have to deliver this presentation in English today, however, is of course that the French lost most of their empire in 1763, at the end of the Seven Years' War – or what Americans call the French and Indian War.

          The French were great explorers but, as the saying goes, their empire was a giant with clay feet. Although France was by far the largest country in Europe – it had 20 million inhabitants in 1700, compared with six million for England and Wales – it sent very few settlers across the Atlantic. Most of the ten million or so French Canadians who live in Canada and the U.S. today are descendants of only some ten thousand settlers who stayed on this continent.

          Huguenots were forbidden to settle in the colony and hundreds of thousands went elsewhere in Europe and North America instead. But the main reason why so few Frenchmen crossed the Atlantic is that there was not much to do in Canada – not because of the weather, to which colonists quickly adapted, but because of the abysmally stupid French economic policy.

          Mercantilism was of course the official doctrine in France, just like in England. The colony was seen as a source of raw materials for the benefit of the mother country. The fur trade with the Indians was its main economic activity. This could have allowed colonists to accumulate some capital to develop other activities. But during most of the period, it was in the hands of a monopoly, and profits went to France instead of being reinvested in Canada.

          There weren't many opportunities for investments anyway. There was very little that could be profitably produced in Canada. Apart from small-scale crafts, manufacturing was forbidden when it would bring competition to metropolitan producers. The prices of various goods were controlled. And silliest of all, trade with the neighbours – the English colonies to the south – was forbidden, although contraband was widespread.

          One thing the French managed particularly badly was money. Until the 1660s, when there were still only about 3,000 French settlers in the St. Lawrence Valley, economic exchange in the colony took place primarily by barter. Beaver pelts constituted the most commonly traded commodity, but other types of pelts, as well as liquor, served as alternative media of exchange. Religious orders brought some money to the colony, and once a year, the King would send a large sum to pay for the administration and the soldiers stationed in the colony. Most of that money was paid to metropolitan merchants for imported goods and brought back to France.

          The government started manipulating the money in 1661, by ordaining that the value of currencies circulating in Canada should be 25% higher than their nominal values in France. This was designed to induce currency imports, favour the monetization of economic exchange and integrate colonial economic activity with that of the mother country. But of course the revaluation had its perverse effects. It led to an inflow of poor quality French coins containing a large proportion of copper, while merchants only accepted gold and silver coins as payment. By most accounts, the price level in Canada gradually increased to accommodate the revaluation so that the purchasing power of metropolitan currency was unchanged in the long run.

          In his History of Money and Banking in the United States, Murray Rothbard writes that apart from medieval China, the world had never seen government paper money until the colonial government of Massachusetts emitted a fiat paper issue in 1690. In a footnote however, he explains that the only exception was a curious form of paper money issued five years earlier in Quebec, which became known as "card money."

Playing Card Money
1685-1728 (front)

Playing Card Money
1685-1728 (back)

          You won't be surprised to learn that war and protectionism had something to do with the appearance of paper money, in both New France and Massachusetts. To simplify a bit, the two empires were then vying for control of the Great Lakes area, which at the time was the new frontier of the fur trade. The Dutch and English merchants in Albany, New York, were able to offer a higher price than the French for the pelts and were attracting some of the Indian allies of the French, as well as French adventurers who were selling fur in contraband. They were also arming their Iroquois allies and encouraging them to attack French parties and their Indian allies.

          The French were constantly at war with the Iroquois. In 1684, new soldiers had arrived from France for another campaign against them. However, in the fall of that year, the annual appropriations failed to arrive. The intendant of the colony, Jacques de Meulles, had no funds to pay colonial officials and troops. (The intendant was what could be called the top bureaucrat in the colony, second only to the governor who represented the king.)

          In June 1685, he decided to issue his own credit notes. Because good paper was rare, he collected the playing cards in the colony and, with his seal and signature, issued them in various denominations as paper money. By an ordinance, the cards became legal tender and merchants had to accept them.

“It is perhaps just a coincidence, but it is certainly fitting that inflationary paper money, which is often called ‘funny money,’ appeared on this continent as playing cards with a bureaucrat's signature on them.”

          It is perhaps just a coincidence, but it is certainly fitting that inflationary paper money, which is often called "funny money," appeared on this continent as playing cards with a bureaucrat's signature on them. At first however, the issue of card money was not inflationary. The cards were backed by funds that were supposed to arrive from France, and were fully redeemed when those funds arrived. From the point of view of the authorities, they also had the advantage of being worth nothing to New Yorkers and New Englanders. They could not be used for trade and did not contribute to any outflow of currency – trade and currency outflow of course being bad from a mercantilist perspective.

          Five years later, the French and the English were again at war with each others. In 1689, during the Glorious Revolution, William of Orange had acceded to the English throne, and James II had fled to France. In North America, there were raiding parties on both sides of the border and major invasion plans were drawn up. A French plan to invade the city of New York and deport its population never materialized. But in the summer of 1690, a flotilla of 32 ships with 2000 men left Boston, while 2500 English soldiers and Indian fighters left on foot to invade the St. Lawrence Valley. Fortunately for my ancestors, bad weather, luck and an epidemic of smallpox among the troops saved New France.

          The English had to return to Boston without any booty. Soldiers were grumbling for their pay and there was fear of a mutiny. The Massachusetts government tried without success to borrow from Boston merchants. In December 1690, it decided to print £7,000 pounds in paper notes and, as Rothbard explains, pledged "that it would redeem them in gold or silver out of tax revenue in a few years and that absolutely no further paper notes would be issued. Characteristically, however, both parts of the pledge went quickly by the board: The issue limit disappeared in a few months, and all the bills continued unredeemed for nearly 40 years." Massachusetts would again issue massive amounts of paper money after another failed expedition against Quebec in 1711.

          As might be expected, in Canada too, the intendant got into the habit of issuing card money. As confidence in the new money grew, the population began to regard it as a stable asset and to retain a proportion instead of redeeming their entire holdings every year. But instead of keeping currency reserves to cover the card money still in circulation, colonial authorities increased their spending. They also started to issue card money in excess of the French government's annual appropriation. The cards were very useful but prices started increasing as people realized that there were more and more of them in circulation.

          In the early 1700s, the War of the Spanish Succession extended to the French and English colonies in North America. Military spending rose continuously and the growth in the supply of card money far outstripped that of the colonial budget. In 1705, the French Crown refused to redeem all of the card money presented to it, which amounted to a devaluation. The colonial authorities responded by creating more. Inflation was running rampant and the colonial economy was in disarray. In 1714, the Crown decided to get rid of this system and to buy back the cards at half their face value.

          For some years, the monetary situation reverted to what it had been before 1685. Various attempts were made to provide the colony with a stable currency, which only ended up creating more confusion. In 1729, a new issue of card money was made. By this time however, it wasn't the only form of paper money, nor the most important. The government started issuing promissory notes, which were redeemable by a bill of exchange on the Naval Treasury, in outlying regions where currency and even card money was in short supply. Unlike card money, they could be issued by any number of military officers and control of their supply lay beyond both the intendant and the metropolitan government. The inflation thus created amounted to a tax to finance military expenditures. (Robert Armstrong)

          The situation deteriorated until the fall of Quebec City and Montreal in 1759 and 1760, which brought about the final end of the French regime. The war years were marked by economic breakdown and something close to hyperinflation. During the peace negotiations, France agreed to convert card money and Treasury paper into interest-earning debentures, with discounts ranging from 50 to 80 per cent. However, with the French government essentially bankrupt, these bonds quickly fell to a discount and, by 1771, they were worthless.

          A Quebec historian, Gιrard Filteau, wrote (my translation):

          What is remarkable about the Canadian financial system is that it inaugurates a new kind of money destined to have a great future: the cards are the first banknotes in circulation. Another remarkable fact is that the country has no asset, no monetary reserve to guarantee the value of its paper money. This money is nothing but a representative sign, which gets its value from the honesty of the government and the goodwill of the royal treasury. Such a guarantee, based solely on morality, is insufficient in that it ties the value of money to the good behaviour of a few bureaucrats, and imposes on it fluctuations that depend on the integrity of some men and the vicissitudes of politics.

          At the time of the conquest, there were only 70,000 colonists in New France, as opposed to more than a million in the English colonies to the south. Paper money helped to destabilise and slow down the economic and demographic development of New France. It contributed to the downfall of the French empire in North America. Later, it would play a substantial role in the French and America revolutions. Today, unfortunately, it is used the world over and continues to distort economic calculations.