The Petro and the Assignat

In this guest post, Tony Yates compares Venezuela’s initial coin offering to the creation of assignats during the early stages of the French Revolution.

The launch of the Venezuelan “Petro” may sound familiar to students of the financial history of the French Revolution.

A brief oversimplification of what happened in the early 1790s:

The revolutionary government found itself at war with most of its neighbours. That raised the government’s spending needs and also limited its ability to borrow from the many lenders who lived in the countries France was fighting. Other lenders, including people who lived in France, were worried that the war’s progress and political turbulence generally would prevent them from being repaid.

The French government solved the problem by auctioning off parcels of church land that had been confiscated. Auctions took time to organise, so to raise money beforehand the government printed tokens called “Assignats” that could be used to bid for land later. Once it became clear that these tokens were selling, it was a small logical step to keep printing and selling the tokens. The problem was that the printing was out of all proportion to any realistic schedule of land auctions, which eventually led to inflation and shortages.

Back to today.

The Maduro administration in Venezuela is also fiscally challenged, to put it mildly. The economy has been collapsing, and tax revenues have been falling commensurately. The United States has imposed financial sanctions on the Venezuelan government, which prevents regulated US institutions from making further loans or buying new bonds. The new Petro is, like the Assignat, born out of financial distress.

Venezuela’s revenue mainstay had come from its oil reserves. These were long ago wrested from the control of what it saw as predatory Western corporations, in the same way that those church lands, which were supposed to back the Assignat, were taken from an institution judged to be complicit in the exploitative status quo before the Revolution.

(Lack of investment and management incompetence, however, had been reducing oil output for years. Production peaked about at 3.5mn barrels per day shortly before Hugo Chavez took power. In 2017, production barely exceeded 2mn barrels.)

The Petro was initially marketed as being “backed” by oil, just like the Assignats were to be one day redeemable for confiscated land. Discussions about initial pricing linked the price of one Petro to the rough price of a barrel of oil, $60, perhaps to reinforce the psychological link to oil in the name ‘Petro’. But so far as we know, there is no guarantee Petros can ever be exchanged for oil.

It is reported that the Petro will also be acceptable as payment against tax obligations to the Venezuelan authorities. That would be in stark contrast to what the 18th century French revolutionaries did: rather than use the carrot of accepting them as payment for taxes, they used the stick of threatening execution by guillotine for hoarding commodities like wine, grain and cheese for use as an alternative to the Assignat as a currency.

Some enthusiasts of crypto-currencies cherish the libertarian idea that they will discourage governments from using the inflation tax. The Petro must seem like a tragic counter-example; giving a government whose destructive paper inflation tax has run its course a chance to experiment with a digital one.

Tony Yates was a monetary economist at the Bank of England for twenty years before leaving to teach at Bristol University and then University of Birmingham. He is currently on leave to work on a book about central banking.

Related links:
If at first you don’t succeed, try re-adopting the gold standard? — FT Alphaville
A simple, three-step solution for Venezuela (updated) — FT Alphaville
The euro crisis and the French Revolution — FT Alphaville

Copyright The Financial Times Limited 2018. All rights reserved. You may share using our article tools. Please don’t cut articles from and redistribute by email or post to the web.

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The Petro and the Assignat

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