“The Wild Card: Colonial Paper Money in French North America, 1685–341719305ya”, 2021-08-02 ():
We use the first French experiment with playing card money in its colony of Quebec 1685–341719305ya to illustrate the link between legal tender restrictions and the price level. Initially, the quantity of playing card money and the government’s poor fiscal condition appears to have had little effect on prices. After 1705, however, the playing card money became inflationary. We argue that this was caused by the government’s increased enforcement of the legal tender laws and the adoption of a redemption plan intended to remove the notes from circulation.
This is a very strange monetary experiment in economic history. The governor of the colony printed money on the back of playing cards to finance expenditures when he ran out of coins. The “notes” were backed by incoming coin shipments.
Yet, and this might interest John H. Cochrane because of the fiscal theory of the price level implications, there was no inflation in spite of massive over-issues.
We argue, following points made by Lawrence H. White and George Selgin, that the weakness of legal tender enforcement explain the absence of inflation. Under weak legal tender enforcement (or absent even), bad money is driven out of circulation (falling velocity).
Thus, the low credibility of the government promises on the back of playing cards simply translated into falling velocity for cards but no effect on prices as other mediums kept circulating.
However, when the government announced a redemption plan in 1714, it imposed a time limit to redeem the 1.8 million pounds of notes (a per capita amount equal to nominal GDP per capita). If not redeemed before then, they became worthless.
This was a de facto enforcement (because of the wealth tax that was embedded in the features of the redemption plan) of the legal tender. To avoid losing whatever share of wealth they held in the form of notes, households were aggressively trying to get rid of them.
At that point, good money was crowded out and notes dominated circulation until their redemption. It is also in that period that there is rapid inflation (a doubling of the price level in one year).
Our story is one where the institutions (as per Buchanan and Brennan’s Power to Tax) matter to understanding monetary developments.
With weak/ineffective legal tender, fiscal theory (backing theory) of the price level is quite effective. With strong legal tender, the quantity theory is stronger.