* a **tax-smoothing** model like Robert Barro's {cite}`Barro1979`

* this normative (i.e., prescriptive model) advises a government to finance temporary war-time surges in expenditures mostly by issuing government debt, raising taxes by just enough to service the additional debt issued during the wary; then, after the war, to roll over whatever debt the government had accumulated during the war; and to increase taxes after the war permanently by just enough to finance interest payments on that post-war government debt

* this normative (i.e., prescriptive model) advises a government to finance temporary war-time surges in expenditures mostly by issuing government debt, raising taxes by just enough to service the additional debt issued during the war; then, after the war, to roll over whatever debt the government had accumulated during the war; and to increase taxes after the war permanently by just enough to finance interest payments on that post-war government debt

* **unpleasant monetarist arithmetic** like that described in this quanteon lecture {doc}`unpleasant`

* **unpleasant monetarist arithmetic** like that described in this quantecon lecture {doc}`unpleasant`

* mathematics involving compound interest governed French government debt dynamics in the decades preceding 1789; according to leading historians, that arithmetic set the stage for the French Revolution

* a **legal restrictions** or **financial repression** theory of the demand for real balances

* 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

* The Twelve Members comprising the Committee of Public Safety who administered the Terror from June 1793 to July 1794 used this theory to shape their monetary policy

We use matplotlib to replicate several of the graphs with which {cite}`sargent_velde1995` portrayed outcomes of these experiments

* thus, after a war, the government does *not* raise taxes by enough to pay off its debt

* instead, it just rolls over whatever debt it inherits, raising taxes by just enough to service the interest payments on that debt

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`.

Eighteenth-century British fiscal policy portrayed in Figure {numref}`fr_fig2` thus looks very much like a text-book example of a *tax-smoothing* model like Robert Barro's {cite}`Barro1979`.

A striking feature of the graph is what we'll label a *law of gravity* between tax collections and government expenditures.

* levels of government expenditures at taxes attract each other

* levels of government expenditures and taxes attract each other

* while they can temporarily differ -- as they do during wars -- they come back together when peace returns

{numref}`fr_fig2` showed us that in peace times Britain managed to balance its budget despite those large interest costs.

But as we'll see in our next graph, on the eve of the French Revolution in 1788, the fiscal *law of gravity* that worked so well in Britain did not working very well in France.

But as we'll see in our next graph, on the eve of the French Revolution in 1788, the fiscal *law of gravity* that worked so well in Britain did not work very well in France.

```{code-cell} ipython3

# Read the data from the Excel file

{cite}`sargent_velde1995` describe how the Ancient Regime that until 1788 had governed France had stable institutional features that made it difficult for the government to balance its budget.

Powerful contending interests had prevented from the government from closing the gap between its

Powerful contending interests had prevented the government from closing the gap between its

total expenditures and its tax revenues by either

* raising taxes, or

When the French government had confronted a similar situation around 1720 after King Louis XIV's

Wars had left it with a debt crisis, it had sacrificed the interests of

government creditors, i.e., by defaulting enough of its debt to bring reduce interest payments down enough to balance the budget.

government creditors, i.e., by defaulting on enough of its debt to bring interest payments down enough to balance the budget.

Somehow, in 1789, creditors of the French government were more powerful than they had been in 1720.

Therefore, King Louis XVI convened the Estates General together to ask them to redesign the French constitution in a way that would lower government expenditures or increase taxes, thereby

allowing him to balance the budget while also honoring his promises to creditors of the French government.

The King called the Estates General together in an effort to promote the reforms that would

would bring sustained budget balance.

bring sustained budget balance.

{cite}`sargent_velde1995` describe how the French Revolutionaries set out to accomplish that.

This coincidence fostered a three step plan for servicing the French government debt

* nationalize the church lands -- i.e., sequester or confiscate it without paying for it

* nationalize the church lands -- i.e., sequester or confiscate them without paying for them

* sell the church lands

* use the proceeds from those sales to service or even retire French government debt

The monetary theory underlying this plan had been set out by Adam Smith in his analysis of what he called *real bills* in his 1776 book

**The Wealth of Nations** {cite}`smith2010wealth`, which many of the revolutionaries had read.

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.

Adam Smith defined a *real bill* as a paper money note that is backed by a claim on a real asset like productive capital or inventories.

The National Assembly put together an ingenious institutional arrangement to implement this plan.

But they set out to remake the French tax code and the administrative machinery for collecting taxes.

* they abolished many taxes

* they abolished the Ancient Regimes scheme for *tax farming*

* they abolished the Ancient Regime's scheme for *tax farming*

* 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

* 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

---

mystnb:

figure:

caption: Index of real per capital revenues, France

caption: Index of real per capita revenues, France

name: fr_fig5

---

# Read data from Excel file

* from 1789 to 1799, the French Revolutionaries turned to another source to raise resources to pay for government purchases of goods and services and to service French government debt.

And as the next figure shows, government expenditures exceeded tax revenues by substantial

amounts during the period form 1789 to 1799.

amounts during the period from 1789 to 1799.

```{code-cell} ipython3

---

plt.show()

```

We have partioned {numref}`fr_fig9` that shows the log of the price level and {numref}`fr_fig8`

We have partitioned {numref}`fr_fig9` that shows the log of the price level and {numref}`fr_fig8`

below that plots real balances $\frac{M_t}{p_t}$ into three periods that correspond to different monetary experiments or *regimes*.

The first period ends in the late summer of 1793, and is characterized

One regresses inflation on real balances, the other regresses real balances on inflation.

Both show a prounced inverse relationship that is the hallmark of the hyperinflations studied by

Both show a pronounced inverse relationship that is the hallmark of the hyperinflations studied by

Cagan {cite}`Cagan`.

```{code-cell} ipython3

{cite}`sargent_velde1995` tell how in 1797 the Revolutionary government abruptly ended the inflation by

* repudiating 2/3 of the national debt, and thereby

* eliminating the net-of-interest government defict

* eliminating the net-of-interest government deficit

* no longer printing money, but instead

* using gold and silver coins as money