The Monetary Problem of France 9780231895569

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The Monetary Problem of

FRANCE

The Monetary Problem of FRANCE PIERRE DIETERLEN Centre Nationale d'Information Economique

in collaboration with Honorary

CHARLES RIST Governor of the Bank of France

with a foreword by ANTONIN BÄSCH Chief Economist of the International Bank for Reconstruction and Development

+ Published

for

T H E CARNEGIE ENDOWMENT FOR

INTERNATIONAL P E A C E By KING'S CROWN PRESS, New

1948

York

COPYRIGHT THE

CARNEGIE

ENDOWMENT

Printed

in the

by Vail-Ballou

KINGS

1948 FOR

BY

INTERNATIONAL

United

States

Press,

Bingham

CROWN

of ton,

PEACE

America N.

Y.

PRESS

is a division of Columbia University Press organized for the purpose of making certain scholarly material available at minimum cost. Toward that end, the publishers have adopted every reasonable economy except such as would interfere with a legible format. The work is presented substantially as submitted by the author, without the usual editorial attention of Columbia University Press. H M S

Foreword THE PUBLICATION of this study is indeed timely, because with the beginning of the European Recovery Program, the problem of monetary and financial reconstruction in European countries is gaining new importance, and because prance undoubtedly holds in this respect a key position on the European Continent. T h e authors, Professor Charles Rist and Professor Pierre Dieterlen, are eminent experts in this field, and their competence is well known. T h e distinguished French economist, Professor Charles Rist, has long been associated with French monetary policy, and his share in Poincare's program has not been forgotten. Professor Dieterlen, w h o is in charge of the French National Economic Intelligence Center, has been advising various French government agencies, and was a French delegate at the International T r a d e Organization Conference in Geneva in 1947. It is interesting to compare the French postwar policy with the Belgian policy since 1944, which was so well analyzed in the preceding volume in this series, Monetary Reconstruction in Belgium, by Leon H. Dupriez. Belgium began its monetary reconstruction with a consistent and rather orthodox policy. Soon after the end of hostilities the excess purchasing power was frozen; strong determination was shown in the attempts to check inflationary public spending; and the exchange rate of the Belgian franc was fixed at what was considered to be near the real value of this currency. Belgium was reluctant to introduce radical social and economic reforms. In carrying out its commercial policy Belgium endeavored to obtain as large supplies from abroad as possible, and did not put quantitative restrictions on imports. T o d a y the position of the Belgian franc is the strongest of any among the currencies of the liberated

vi

FOREWORD

European nations. T h e r e are few controls left in the Belgian economy, and the country has become a creditor in its commercial relations with most European countries. Production has surpassed the prewar level; industry is being modernized and trade expanded. B u t even Belgium could not escape from the general problem facing intra-European trade, namely, lack of commodities which could be offered to Belgium in exchange for its exports, and the shortage of dollars. Some countries proceeded in a way similar to that followed by Belgium, while the French policy has been somewhat like that of Italy, whose monetary reconstruction will be the subject of the next volume in the series. A l t h o u g h it must be taken into account that the French war losses were much greater than were the Belgian, and the country was much harder hit by the war than Belgium, this still does not explain the French postwar monetary and financial policy. T h e proposal to carry out a monetary purge similar to that of Belgium was rejected in the spring of 1945, and the French policy so clearly pictured in the present study took a basically different direction. T h e r e is no doubt that—as M. Dieterlen so clearly shows—the effects of the prewar policy made the postwar settlement more difficult. It is also instructive to compare some features of the French postwar discussions on this topic with discussions in Germany in the early twenties, before the monetary reform in November, 1923. In the summer of 1946, for instance, it was not unusual to hear the argument that the stabilization of the franc was not possible because the French balance of payments was in profound disequilibrium, or because the French production had not yet attained a satisfactory level. Similarly, it was often stated in Germany in 1922 and 1923 that inflation could not be stopped because the German balance of payments was in great disequilibrium as a result of reparations payments. Until recently France maintained an overvalued rate of exchange which obviously had unfavorable effects on the balance of payments and on the domestic economy. It was impossible to balance the budget, and open inflation continued. Price and wage controls, which had been maintained during the war, broke down.

FORE WORD

vii

Wages remained far behind prices. Various proposed controls could not be carried through, and the black market remained, as during the occupation, a common phenomenon. During this period France spent a substantial amount of its gold and foreign exchange holdings, nearly exhausting its monetary reserves. In addition, it spent foreign credits amounting to more than two billion dollars. T h e French postwar monetary and financial policy may perhaps be better understood when one keeps in mind the fact that the political instability in postwar France prevented the Government from taking a different course. A study of the French situation could be useful for an analysis of the extent to which unstable political conditions are responsible for inflationary monetary and financial policy, and at the same time it would show the extent to which an open inflation aggravates political and social instability. T h e French postwar development provides also fertile ground for a study of another important problem. In its economic and financial planning France was half way between a liberal economy and an over-all planned economy. This system did not allow the full working of economic forces, while, on the other hand, the planning and controls were neither comprehensive nor strong enough to carry out tasks assigned to them. There is no question that France has achieved substantial progress in economic recovery and rehabilitation; that its industrial production has reached high levels, especially in some branches; and that the over-all economic activity in the whole country has been steadily expanding. Therefore, it is appropriate to ponder how much better the progress could have been if France had been able to change its monetary and financial policy soon after the war. After three years of inconsistent course, France reversed its policy in the winter of 1947-48 and is making great efforts to stabilize its exchange rate on a realistic level and to balance its budget, thus stopping inflation. T h e task is not easy, although the first months have shown promising signs of success. T h e Marshall aid will be of significant importance. It will strengthen the foreign exchange position of the franc and, under the new fiscal policy, should generate strong, automatic, anti-inflationary forces at home. More-

viii

FOREWORD

over, it will provide a feeling of security and growing confidence that the French monetary, financial, and economic program can be carried out. T h e French experience during the last months might also, perhaps, be of great help in devising the reconstruction programs for some other countries, if the lesson from the French history of the last three years is learned. T h e present study provides a valuable guide for analyzing all acute problems of European reconstruction, especially since it points out the mistakes made and half measures taken in the past and the effect of inconsistent policies. It clearly brings to the fore some basic economic truths which are valid, and shows that a policy which does not recognize them in time is bound to cause great damage. T h e authors of this book speak in plain and courageous language. T h e y do not hesitate to underscore the mistakes which were made and to emphasize what, according to their opinion, must be done to restore order and prosperity to the French economy. T h e monetary and financial problems were perhaps underestimated in the first postwar years and were not dealt with in a manner that would achieve economic reconstruction in a relatively shorter period. T h e European economic aid now provides an opportunity, to countries which have not yet been able to achieve a satisfactory degree of financial and economic reconstruction, to take measures which are indispensable. By now the statesmen and the experts certainly know the issues involved, and if their full understanding is accompanied by courage to introduce even unpopular measures, the European countries can hope to accomplish a real economic and monetary reconstruction. ANTONIN

Washington, D.C. May 14,1948

BÄSCH

Preface F O L L O W I N G T H E L I B E R A T I O N of France, wisdom would have directed the following course of action:

1. Reduction of military expenditures to the greatest possible degree, since the war was practically terminated and since our British, American and Russian allies were assuming the occupation of Germany. 2. Termination, as quickly as possible, of the systematic inflation organized in France by the Germans—and towards this end, balancing the budget without delay. 3. Supplementation of the general shortage of consumer goods, and especially textiles and food supplies, by importing these goods or the raw material which would permit the industries concerned to resume production. T h e opposite policy, however, was followed. 1. Military expenditures were increased to a level which in no way corresponded to the actual needs of France and which were completely out of proportion to the resources of a country weakened by four years of occupation and terror. 2. T h e authorities, instead of stopping inflation and balancing the budget, allowed a deficit to remain so that within two years the circulation of notes increased from 400 to 800 billion. 3. Instead of being satisfied with reconstructing destroyed equipment by means of loans, a large-scale improvement and reequipment program was undertaken, which was on much too broad a scale considering the financial limitations of an impoverished country. T h e results of this policy are described with the greatest accuracy by M. Dieterlen.

*

PREFACE

As a matter of fact, it was q u i t e unrealistic to hope that political and financial wisdom would prevail at once, after a war of such duration, which had imposed upon F r a n c e intense h u m a n , material, and m o r a l sacrifices—sacrifices which can be fully realized only by those who have e n d u r e d those four years on French soil. It was to be expected that the p r o f o u n d disturbances which had beset the minds a n d hearts of the F r e n c h people would reflect on the economic policy; the subtle influence exercised for over fifteen years by rightist or leftist totalitarian ideologies also played a part in the psychological trends of the country. B u t after two years of financial m a n a g e m e n t in which for the most part good intentions h a d to give way to political passions, F r a n c e faced a monetary situation completely d o m i n a t e d by an inflation which had been increasing for six years, first because of the malice of the enemy a n d then, following the L i b e r a t i o n , because of the ignorance of those who took over the reins of government. T h e s e people were, moreover, deeply impressed by the functioning of the British war economy. T h e success of wartime controls in E n g l a n d was facilitated by G r e a t B r i t a i n ' s access to most of its food supplies through a restricted n u m b e r of ports, and distribution starting from these ports was relatively easy to control. In France, the large peasant p o p u l a t i o n is spread throughout the country; this makes r e q u i s i t i o n infinitely more difficult, and hence distribution of goods is a n almost s u p e r h u m a n task. W h a t e v e r the excuses may be for those who have pursued this policy, the present situation demands an o b j e c t i v e attitude, and criticism directed towards the past is invalid. T h i s objectivity demands a return to the methods which proved so very effective after W o r l d W a r I despite overlong hesitation. W h i l e there is a great difference between the situation which followed that war and the one which exists today, there is o n e point on which everyone must a g r e e — t h a t the instability of the currency is the source of the greatest evil which we suffer. Consequently, the first duty of the financial authorities is t o re-establish this stability. Instability of currency creates an anxiety which is felt throughout the p o p u l a t i o n a n d in every household, and which every member of every family deeply resents. W i l l the income which today barely suffices to cover essential needs be enough for tomorrow?

PREFACE

xi

W i l l not price increases which soar from day to day upset the wisest calculations? Each time there is a rise in price of essential commodities, there is increasing anger directed at the fortunes accumulated on the black market—especially in large cities. T h e worker returns home each day to find his anxious and disappointed wife who, after having spent the whole day in interminable queues in front of shops, fears the possibility of not finding on the morrow what was so difficult to procure today. Generally speaking, the Minister of Finance, w h o has so painstakingly sought to balance assets and liabilities, is quite cognizant of the fact that, within three months, price increases will have upset all his calculations. Farmers, tradesmen, and industrialists, w h o are more fortunate and still make some profit, wonder how they will be able to retain what is left them by the State after the fiscal deduction, which grows continually from year to year. Stabilization of currency rapidly eases this apprehension, as is recalled by those who witnessed the events of 1926 to 1928. A t that time, the monetary stabilization which was finally achieved by M . Poincaré corrected price anomalies within a period of several weeks. A b o v e all, it brought back a feeling of security without which any activity, whether it concerned the worker, the entrepreneur, or the civil servant, would have been disappointing and discouraging. It renewed confidence and gave impetus to saving. H o w can this stability be achieved? Certain political conditions are, of course, necessary. Whoever assumes power will have to take into account certain technical conditions and organize a program of action which will testify to his will to reach a goal. T h e first condition lies in balancing the budget and in terminating the issuance of paper currency. W i l l this condition suffice to stop the price increase which is currently the greatest concern of all Frenchmen? It does not depend only upon ourselves. T h e persistent price increase in the United States (which is but the consequence of inflation, the effect of which was supposedly checked during the war) exercises an indisputable influence on European price levels. Nevertheless it would in itself be quite satisfactory if the French price level, however influenced it may be by external price levels, were to cease being at the mercy of national inflation. It is scarcely conceivable that the stabilization of French cur-

XII

PREFACE

rency can take place without an external contribution. Not that such contribution must necessarily become concrete. But the promise of such a contribution, in the present situation, is indispensable to assure the psychological success of any attempt at stabilization. T h e belief must be created that such a stabilization will be durable. This confidence will undoubtedly suffice to bring out in France itself the gold resources which are still hoarded and which could reconstitute the monetary reserve of the Bank of France. T h e prospect of seeing a decrease in the price of gold on the free market, the revival of purchases at variable rates on the market by the Bank itself, will be the definite indication of a policy which will be different from that of today. T h e effort made by the International Monetary Fund in this connection to prevent the creation of free gold markets, where these existed, seems to me, I admit, contrary to the very aims of this institution. Reality is not concealed by throwing a smoke screen around it. Craving for gold has always been determined by the issuance of paper currency. Suppression of visible gold markets will not check it. Furthermore, it seems to me that it is completely illusory to hope that, after the tremendous issuance of paper currency in all countries at war (whatever the technical form of this issuance may have been in various countries), there would be any possibility of maintaining the purchasing price of gold. T h e old deflationary policy has always failed. It consisted, after monetary circulation had tripled, of a return to the parity which existed previously between paper currencies and the international currency, i.e., gold. English and American experiments after World War I have fully proved this. There is no doubt but that the second World War financially ruined most countries to a much greater extent than the first. Material recovery will extend over a long period of time. In France, despite the amazing progress achieved in the last two years in all branches of production, the task is far from being completed. But it cannot be achieved in an atmosphere of financial and monetary insecurity which paralyzes the very best intentions and fosters social disturbances. M. Dieterlen's survey covers all the elements necessary to a solution of this vital problem.

PREFACE

xiii

There is no doubt as to the precise method to be used in achieving this goal. Before all, it is necessary to find a rate of exchange for the franc in relation to the dollar which would roughly correspond to the difference in price levels. It is necessary that this rate be allowed to fluctuate rather freely so that this fluctuation may exercise its restraining or stimulating action on exports and imports. T h e n , individual firms should be allowed to choose the commodities to be exported or imported. Such are the features of a rational monetary policy oriented towards the return to a much greater freedom. It seems however, that for the next two years or so it will be necessary for certain essential raw materials (coal, steel, petroleum) to be returned to a system similar to that which existed during the war, namely, the supplying of commodities redeemable at a long date and also in kind. Without this method it would be difficult for the exchange market to find its equilibrium. All effort must be directed toward this goal. It implies close collaboration between France and the United States. As for me, I cannot conceive of the future of the world without the existence of a great Atlantic community endowed with the role entrusted to European states until the discovery of America. T h e future of the civilized world depends on this Atlantic community. CHARLES

RIST

Contents I

DEVELOPMENT

OF

THE

MONETARY

SITUATION

UP

TO

•914

II

»

1. Devaluation of 1936

2

2. T h e floating franc

3

3. Pegging the franc on sterling

3

4. First phase of the war (September, 1939, to J u n e , '944) 5. T h e occupation

4 4

MONETARY

SITUATION

FOLLOWING

THE LIBERATION

Monetary a n d Financial Data

11

11

1. Acquired and potential inflation

11

2. B a n k i n g system

16

Material Data 1. Decrease in production

18 19

2. Disorganization of transport

19

3. Changes in the distribution of incomes

19

4. Changes in the utilization of incomes

22

5. Destruction and wear of capital

23

6. Reversal of fortunes

24

Psychological and Political Data 1. Liberation psychosis

25 25

2. Increased power of labor unions

26

3. Hostility towards ill-acquired property

26

4. Clandestine atmosphere and disrespect of the law

27

5. T h e vital m i n i m u m

27

xvi III

CONTENTS THE

INTERNAL PROBLEM

29

Absorption of Excess Currency

29

1. T h e Corsican precedent

30

2. T h e Belgian experiment

30

3. Absorption by deflation

31

4. Absorption by loan

35

5. Policy of loans

36

6. Exchange of notes

39

Absorption of the Deficit

43

1. Effect on expenditure and revenue

IV

2. Confiscation of illicit profits

46

3. Capital levy and tax on accrued wealth

47

4. Continued deficit and inflation

48

T H E EXTERNAL PROBLEM

53

T h e Parity of the Franc

53

1. Foreign exchange control First stage: from September, 1939, to J u n e , 1940 Second stage: from J u n e , 1940, to September, 1944 T h i r d stage: from September, 1944, to December, •945 Fourth stage: from December, 1945, to the present 2. Return of the franc in Alsace-Lorraine 3. Currency of Overseas Territories Monetary Reserves

V

43

54 54 54 55 58 59 61 63

1. Extent of monetary reserves

64

2. T h e balance of payments

66

3. Foreign capital

68

Loans

69

Investments

71

T H E P R O B L E M OF P R I C E S AND T H E F U T U R E O F T H E F R A N C

73

Regulation and Price Control

73

CONTENTS

VI

xvii

Subsidies Development of Prices Price and Monetary Circulation Increase Price and Wage Increase Price Policy

75 77 77 80 81

CONCLUSION

83

SUPPLEMENTARY CHAPTER

88

BIBLIOGRAPHY

G7

The Monetary Problem of

FRANCE

MONETARY

CIRCULATION,

P R I C E S AND W A G E S

1939-1947

I Development of the Monetary Situation up to ig44 S T R I C T L Y SPEAKING, F R A N C E has not had a "monetary policy" in recent years if by that term one means agreement on objectives, means, and results. For neither the means used nor the results obtained have fulfilled the objectives desired by those who had been entrusted with maintaining the stability of the franc. In this respect the monetary policy has actually been beset by a series of disappointments, by failure to take advantage of opportunities at hand, and by complete disillusion. T h i s has been true since the depression of 1929-1933, and despite the maintenance of the franc at its parity from 1928 to 1936. This latter date, however, is a turning point in the more recent history of the franc. If, in the course of the last decade, French economy has ill adapted itself to the monetary status, the fault is definitely not that of the financial authorities. A t least, this status was strongly defended against wind and tide with an obstinacy that may be either lauded or deplored, but not without some degree of success—it was a definite policy, albeit good or bad. Within the framework of a weakened economy the franc held its own. T o what extent this policy actually contributed toward weakening the national economy is quite another matter. T h e currency itself was endangered by the weakening; this had been underestimated except by a select few. T h e gold bloc nevertheless extended over three more years the application of principles which its protagonists had defined at the 1933 London Conference. In spite of their ultimate failure, these principles were still sufficiently coherent to merit the term "policy."

2

DEVELOPMENT

OF THE

PROBLEM

After 1936, on the contrary, ultimate failure was replaced by immediate failure. Illusions no longer lasted for several years; they vanished in a period of weeks. Whether it was a question of currency, prices, or the general economic situation, events were contrary to those anticipated by the Government. It is true that this contradiction of facts was often already in existence in the very principles on which these facts were based. Faulty solutions caused the real problem to re-emerge in a more serious form. Consequently, this problem has recurred persistently for more than ten years. In other words, the situation of the franc, as it is today, is not only the consequence of war but also of the errors begun in September, 1936. In order to understand what happened, we must begin with that date and consider as a whole a situation which the war and its aftermath merely precipitated. From its inception up to the present the outstanding phenomenon has been the flight of capital. T h i s has affected the gold holdings of the Bank of France ever since 1933 and in accelerated measure since 1935. From the end of March, 1935, to the end of March, 1936, the holdings dropped from 82.6 billion francs (at 1938 parity) to 65.5 billion. For the month of April, 1935, the exodus of gold reached 1 1 . 5 billion. This export of capital was not caused by a deficit in the balance of payments, since the deficit was estimated at only 400 million francs for the year 1935. T h e rates of the sterling and dollar for which 3-months-forward terms reached respectively a decline of 4 3 % and 2 3 % per annum on September 25th, 1936, indicated that devaluation of the franc was more and more likely. Devaluation was indeed imminent. As a matter of fact, until the outbreak of war, depreciation of the franc occurred in three successive stages: by the law of October 1, 1936, then by what was termed franc floltant (floating franc), and lastly, by the pegging of the rate of the franc to the rate of the sterling. /. Devaluation

of 1936

A decree issued on September 28, 1936, prohibited the export of gold, except by special permission granted with the approval of the Bank of France. T h e law of October 1, 1936, devalued the

DEVELOPMENT

OF THE

PROBLEM

3

franc within a margin fixed between 34.35% and 25.19%, and created an exchange stabilization fund intended to function in coordination with the American and British funds, in accordance with an agreement signed on September 25, 1936. T h e sponsors of the 1936 monetary reform expected results comparable with those obtained previously by Great Britain, the United States, and Belgium. They particularly anticipated a mass return of the exported capital and a revival of business. These hopes, however, did not materialize. T h e deficit of the balance of payments, deficit in the budget, increase of prices at home—everything pointed to the fact that the franc was susceptible to further weakness. T h a t is why there was only a temporary return of capital and why the depreciation of the franc continued until the spring of 1938. 2. The floating

franc

By a decree issued on June 30, 1937, the margin allowed for the variations of the gold parity of the franc was abolished. Between this date and May 4, 1938, the rate of sterling rose from 128.98 francs to 169.625; the rate of the dollar, from 26.015 to 35.88 francs. 3•

Me franc on sterling

On May 5,1938, the Government announced that the rate of 179 francs per sterling would not be exceeded and that the official exchange rate was actually 178.90 francs; this corresponded to a gold parity of 27.5 milligrams, whereas the parity of the Germinal franc had been 322.6 milligrams and that of the 1928 franc, 65.5 milligrams. Moreover, the franc was no longer pegged on gold, but on sterling, a currency which itself had no permanent tie whatever to gold. This state of affairs remained unchanged until the outbreak of war. The economic and financial situation visibly improved from May, 1938 on. Exported capital came back and this return was accelerated after November. Net excess of capital import was estimated at 7.7 billion francs for 1938 and at 17 billion francs for the period between January 1 and August 31, 1939. Nevertheless, compared to 1936, depreciation of the franc reached 60% and was more than compensated by price increases. Indeed, between May, 1936,

4

DEVELOPMENT

OF THE

PROBLEM

and December, 1938, the wholesale price index of the 45 essential items rose 80%. 4. First phase of the war (September,

19)9, to June,

1944)

By a decree issued on September 9, 1939, foreign exchange control was instituted. Thereafter, the exchange stabilization fund operated at fixed rates for the benefit of l'Office des Changes (Foreign Exchange Control Office)—43.60 francs when buying and 43.80 francs when selling dollars; 176.50 francs when buying and 176.75 francs when selling sterling. T h e Franco-British monetary and economic agreement of December 4, 1939, fixed the rate of 176.50 francs as valid for the duration of the war and for the ten months following the conclusion of the peace treaty. However, the rate of the franc in New York continued to depreciate, dropping from 2.655 cents on August 25, 1939, to 1.85 cents in May, 1940, but rising again to 2 cents, i.e., 50 francs to a dollar, in June, 1940. 5. The

occupation

T h e armistice of June, 1940, marked a new turning point. By an ordinance of May 17,1940, the occupying forces set the parity of the Reichsmark at 20 francs, namely, a depreciation of 24% in relation to the rate of the Reichsmark in Paris in March, 1939 (15.16 francs). This was an excessive depreciation. T h e parity deduced from the definition of the gold Reichsmark and from the gold-buying rate of the Bank of France was at this time 17.50 francs per Reichsmark. T h e parity resulting from the respective price levels in both countries scarcely exceeded 14 francs per Reichsmark. On the other hand, the commercial modus vivendi concluded between France and Switzerland on October 23, 1940, set the rate of the Swiss franc at 10 French francs, as against 8.42 French francs in August, 1939— i.e., a depreciation of 14.80%. From May, 1940, the German army introduced in the occupied areas of French territory notes and coins issued by the Reichskredit Kassen—ordinance of May 17, 1940, notice (Bekanntmachung) of May 19 and July 27, 1940—which were established in several French towns. T h e issuance of the R . K . K . reached a total of 1,300 million Reichsmarks, i.e., a counter-value of 26 billion francs. Finally, by an agreement reached in August, 1940, with the Bank of France, they gradually stopped. T h e notes issued were removed

DEVELOPMENT

OF THE

PROBLEM

5

from circulation by means of exchange into French notes at the Bank of France. T h e exchange was practically terminated in 1942. In accordance with the terms of the ordinance of May 3, 1940, the R . K . K . notes were created "to supply German troops, as well as German administrative authorities, with currency, and to maintain transactions and economic activity in the occupied territories." Their transitory appearance on the French monetary market did not have any durable effect. T h i s was not the case with the permanent measures taken by Germany in order to exploit the French economy for its own profit during the entire German occupation. T h e pretext given for these measures was: (a) occupation costs; and (b) foreign trade. a) T h e occupation costs were originally set at 400 million francs per day payable every ten days. T h e y were reduced on May n , 1941, to 300 million francs and raised on November 1 1 , 1942, to 500 million francs. In order to estimate the actual cost of the occupation, it is necessary to add to these "costs" the expense of billets and barracks, personnel, and provisional advances of funds pertaining to requisitions. For the period starting in May, 1940, and through the end of August, 1944, the total occupation cost rose as follows: occupation costs various furnishings and requisitions Total

617 billion francs 14 billion francs 204 billion francs 835 billion francs

b) T h e sum total of external trade between France and Germany, or countries occupied by Germany, was settled by clearing through the Deutsche Verrechnungskasse in Berlin, which credited the French Clearing Office with Reichsmarks for French exports to these countries, and also debited the French Clearing Office with Reichsmarks for imports bought by France from these very same countries. T h e German balance of trade with France, as well as with other occupied territories, having always been unfavorable, the French Clearing Office retained in its name the credit balance which rose consistently; its counterpart in francs was financed by advances from the Treasury. During the entire occupation these advances reached 157 billion francs.

6

DEVELOPMENT

OF THE

PROBLEM

T h e operations thus financed represented in the guise of commercial transactions, what was in fact the flow of free supplies from France to Germany. T h e i r inflationary effect was exactly similar to that of the occupation costs and diverse requisitions. It must, therefore, be included in the total losses inflicted on French economy by the German occupation. T o this burden which was directly imposed by the enemy, there was added that which arose from the inefficient functioning of institutions in time of war. In fact, operations had ceased to be normal for a long time past, and the deficit in the budget had become a chronic disease long before 1939. In this respect there are three successive phases, as follows: In the first phase, following the economic depression, income dropped more rapidly than expenditure ( 1 9 3 1 - 1 9 3 6 ) ; In the second phase, following a rise in prices and preparation for war, expenditure increased more rapidly than income ( 1 9 3 6 1939); In the third phase, the war proper, characteristics similar to the above phase, and somewhat more exaggerated, can be attributed. T h e budget years following the monetary reforms of 1928 were balanced as follows (in billions of francs): EXEXPENDITURE

INCOME

Ord. Extraord. T o t a l

Ord. Extraord. T o t a l

CESS -JDEFI-

1928 !

"

2

9 9

»93°

««

%, and 3 % . T h e discount rate of the Bank of France, which remained fixed at 1 % % after J u n e 25, 1945, was raised in J a n u a r y , 1947, to 1 % % f o r public securities and negotiable bills representing sales, and to 2 y 4 % insofar as other negotiable bills were concerned; then on October g, 1947, respectively to 2 % % and 3 % . T h e creation of differential rates is something new in France. It aims at favoring public securities as well as productive commercial operations. But it is evidently difficult to distinguish the latter from purely speculative operations, since in both cases the bills can appear in the same form. A f t e r several years of continuous ease, the tendency of the capital market and the money market was definitely reversed. T h i s reversal, which was at first motivated by the market situation, was subsequently deliberately utilized in connection with price policy. W e shall come back to this point when we discuss this policy. T h e loan policy which was followed after the Liberation recourse only to voluntary loans. T h e Government did not fit, despite the mounting difficulties to which the Treasury exposed, to call for compulsory loans and thus to engage in policy suggested by L o r d Keynes at the beginning of the war called "compulsory savings."

had see was the and

A n experiment was conducted along these lines, but was nevertheless unsuccessful. Following the marked rise of civil servants'

THE

INTERNAL

PROBLEM

39

salaries, which came about through the ordinances issued on January 6 and February 12, 1945, the Ministry of Finance proposed that a portion of the net salary over and above 100,000 francs (the portion to vary in relation to the salary and in accordance with the family circumstances of each individual civil servant) be frozen under the heading of peculium, the latter to be utilized by its owner only under certain limited and specific cases. In this manner, part of the new buying power put at the disposal of civil servants might have been invalidated. This new buying power was estimated at 30 billion francs annually. T h e proposed withholding from wages raised serious objections. Why aim at civil servants who certainly are not, amongst the various income groups, the one group whose excess buying power is most strongly felt? As for making a general rule of this withholding of wages, as was proposed by the financial committee of the Consultative Assembly, this general rule would have created much difficulty. It is clear, moreover, that certain groups of income would not have been affected—precisely those which it was most important to invalidate, because they were in the higher brackets and of the most shady origin. 6. Exchange

of notes

Although those in favor of absorption by loan triumphed over those in favor of absorption by deflation, everyone agreed on the reasons which made exchange of notes necessary. According to the Finance Minister's declarations, the aim of the operation was as follows: a) T o make the State beneficiary of the value of the notes and bonds not presented for reimbursement, i.e., lost or destroyed notes, notes removed by the enemy or fraudulently exported, and notes which the bearers preferred not to exchange in order to conceal certain profits; b) T o "photograph" the essentially anonymous portion of wealth owned in the form of notes and bonds, the exchange of which would render possible the drawing up of an inventory, and thus to detect at least part of the illicit profits subject to confiscation, and at the same time to facilitate the mapping out of the national solidarity tax which was then being drawn up in the Offices of the Ministry of Finances.

4o

THE

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PROBLEM

c) T o stimulate the transformation of a certain number of idle notes into Treasury Bonds and Liberation Bonds. T h e details of the operation were defined by an ordinance issued on M a y 30, 1945, and by an agreement signed the same day with the B a n k of France. T h e choice of this late date (compared with that of the Belgian experiment) was dictated by two contrary considerations. T h ^ longer the wait to achieve this operation, the more it was to be feared that the notes fraudulently exported would only find their way back into France illicitly. For this reason the exchange had to be rushed. On the other hand, exchange of notes prior to elimination of the black market was equivalent to liberating from all restrictions the profits which black marketeers would eventually acquire. For this reason the exchange of notes had to be delayed. It was equally important not to effect the exchange before a thorough determination of all practical details had been consummated, and this under circumstances which would hamper the economic life of the country as little as possible. It was principally with this practical consideration in m i n d that the chosen date was determined. A primary feature of the operation, which distinguished it from the Belgian experiment, must be emphasized—the exchange included no freezing and withholding of notes except f o r the very short period of time practically necessary for carrying out the plan. A l l notes, with the exception of twenty-franc, ten-franc, and fivefranc notes, which represented 2 % of the sum total of circulating currency, had to be presented for exchange between J u n e 4 and 15, 1945, at a bank, postoffice, recette des finances, or savings bank, the choice to be made by the bearer. Proof of the deposit was established by detaching a coupon from the ration book of the depositor or the person in whose name the deposit was established. A t first a depositor received only a m a x i m u m of 6,000 francs plus 3,000 francs for each person named on the deposit list. T h e surplus was returned after completion of exchange operations. T h e exchange offices were thus spared the inconvenience of being flooded by excess notes. T h o s e people with bank accounts could at any time withdraw new notes from their accounts. N o steps were taken — a n d this is to be deplored—to take a census of Government bonds and securities. B u t as f a r as Treasury bonds, Savings bonds,

THE

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PROBLEM

41

Liberation bonds, Armaments bonds, etc., were concerned, they had to be presented together with the notes. Bonds equal to or lower than 10,000 francs were stamped and returned to depositors. Bonds of a higher value were exchanged against bonds of a new type. Bonds and notes which were not presented were from then on valueless. W h a t were the results of this operation? a) From a practical point of view the exchange, which had been carefully prepared, was carried out under satisfactory circumstances. b) T h e reduction of fiduciary circulation was less extensive than had been anticipated and did not exceed 30 billion francs. Part of this sum represented dead notes, void of any buying power. T h e i r cancellation therefore has no economic significance. Finally, it alleviated by just so much the balance sheet of the Bank of France and equally benefited the Treasury. But this procedure obviously was not undertaken with these results in mind. c) O n the contrary, it enabled anonymous wealth retained in the form of notes or bonds to be photographed rather accurately. Fraud, resulting from accommodation deposits does not seem to have any serious importance. Due to the absence of freezing, people threatened by judgment for illegal profits had the latitude of eventually transforming the notes and bonds presented at the exchange into other assets not subject to confiscation by the Treasury. In numerous cases, however, the Administration took advantage of its right to conduct immediate investigation in the case of individuals w h o had made sizable and suspect deposits. d) Also it does not seem that, during the exchange, any marked quantity of notes had been directly converted into bonds, as the Finance Ministry had hoped. W h a t did h a p p e n — a n d it was anticipated—was an increase in bank deposits. Between May 15 and June 3, bank deposits increased 3 5 % in Paris and 50% elsewhere in France; deposits in savings banks increased by 26 billion francs, and by 30 billion francs in postal checking accounts. T h e depositors were assured of the possibility of getting new notes when withdrawing money from their accounts, and when this arrangement was adequately complied with they abstained for the most part from withdrawing more notes than they needed at the moment. A

42

THE

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PROBLEM

financial reporter 1 noted in this respect that, for every 100 francs of paper money, scrip currency was worth 75 instead of the former 33 francs. Certainly nothing was more desirable than this dishoarding for the benefit of bank deposits, all the more because it continued to some degree after the reasons which caused it had been eliminated. T h e evolution of actual deposits in the four large credit houses has, as a matter of fact, been as follows: April 1945 May 1945

54 billion francs 76 billion francs

June 1945

100 billion francs

July 1945 August 1945 December 1945

94 billion francs 90 billion francs 96 billion francs

At the same time, the sum represented by the total currency in circulation was as follows: April 1945 May 1945 June 1945 July 1945 August 1945 December 1945

580 548 — 444 469 562

billion francs billion francs billion francs billion francs billion francs

By comparing these two columns of figures, it is estimated that the relation between deposits in the four large credit houses to the notes in circulation has evolved as follows: April 1945

9%

May 1945

13%

July 1945 August 1945 December 1945

21% 19% 17%

Aside from its advantages, in the long run it represents for the monetary market the relative accumulation of bank deposits which produced immediate results insofar as the following is concerned: a) currency in circulation decreased from 586 billion francs on 1. See Jean Claudel, Figaro, July 10, 1945.

THE

INTERNAL

PROBLEM

43

May 17, 1945, to 444 billion francs on August 2, i.e., 142 billion francs, or 24% (whereas the number of bills not presented for payment amounted to only 35 billion francs); b) purchase of Treasury bonds; 80% of these represented the counterpart of deposits in banks. For the related period, the figures are as follows (in billions of francs): ISSUANCE

April 1945 May 1945 J u n e 1945 July 1945 August 1945

REFUND

BALANCE

50.3 74.7 110.4

40.7 62. 32.3

+ 9.6 +12-7 +78.1

59-3 55.6

47-5 47

+11-8 + 8.6

Therefore, if direct conversion of notes deposited for exchange into Treasury bonds has not completely fulfilled the hopes placed upon it, because of the increase of deposits in banks, it has produced most gratifying results, the surplus of purchases in June being 78 billion francs, in lieu of only about 10 billion francs during each of the preceding and subsequent months. ABSORPTION

OF T H E

DEFICIT

Here we approach a domain which, although directly determining the monetary evolution, belongs less to monetary policy in the rigid sense of the term than to financial policy in its wider sense. T o skim over it would be to render the monetary problem unintelligible by omitting its most important data. T o examine it in detail would involve us in developments incompatible with the scope of this study. Let it suffice, therefore to recall to mind its general features, and let us give precise details only on some exceptional measures such as confiscation of illicit profits, duty on capital, and tax on excess wealth. 1. Effect on expenditure

and revenue

There are two ways of absorbing the budgetary deficit—retrenchment in expenditure and expansion of income. In the situation in which France found herself after the Liberation, there was no question of retrenching in the general expenditure. The tasks which fell to the State were tremendous and the

44

THE

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PROBLEM

basic tendency to raise prices immediately made any desire for general reduction of public expenditure completely illusory. A t least this arrangement would have had to be rigidly controlled and limited in detail. As f o r the burden of the national debt and the life annuity debt, of the salaries of civil servants and para-civil servants, as well as of military expenditures, no difficulty of principle was involved. Everyone was in agreement on the policies concerning lower rates on loans; on the necessity, insofar as pensions were concerned, not to be liberal to excess; and on the need of higher-salaried and fewer functionaries. In practice, nothing startling could have been undertaken. As for military expenditure, retrenchment was undertaken tardily and insufficiently. T w o other expense items also motivated theoretical discussion— subsidies and reconstruction. We shall return to the important question of subsidies when we examine price policy. As regards reconstruction, let us remember that the expenses involved are estimated at 2 billion francs, i.e., on the economic plane, a sum equivalent to the work of one million men during a period of ten years. W h o will undertake responsibility for these 2 billion francs? T h e State alone? Or will it be necessary to limit its participation in this problem by leaving part of the expenses to the responsibility of those who suffered war damages? T h e Vichy government decided on this solution, for reasons which were not completely economic. As regards this point of view, the advantages which it seems to offer at first glance do not hold good upon further scrutiny. Whether responsibility is divided between the State and private economy or not, the number of working hours, the amount of machinery, and the raw materials used will be much the same. In other words the saving will be the same whether it is achieved directly by the public or indirectly by the State. T h e monetary effect, barring waste and misconception, will be the same in either case. In general, in addition to the fact which seems to indicate an eventual increase in national expenditure, there is also a decided ill-will on the part of the beneficiaries of these expenditures. T h i s very ill-will seems very likely to be stronger than any declaration

THE INTERNAL

PROBLEM

fj

of principle and the intentions of the Government itself. This doubtless indicates one of the most unfavorable aspects of the French monetary problem. And insofar as the increase of income is concerned, the prospects are not any more encouraging. It is not that the fiscal burden in relation to the population or to the national income is exorbitant. T h e works of Colin Clark have shown that in countries like Great Britain and the United States, the fiscal burden in the long run had had an inflationary effect when it exceeded 25% of the national revenue. In 1946 the fiscal income rose to 438 million francs, that is, 11,000 francs per person and 2 1 % of the national revenue. For the same year the fiscal burden rose in Great Britain to £ 7 1 , or 34,000 francs per person at the official rate and 34% of the net national revenue. In the United States, it rose to $307, or 36,000 francs per person and 26% of the national revenue. In France, on the other hand, distribution of the fiscal burden is abnormally uneven. Frenchmen are divided into two categories: a majority who enjoy fiscal immunity in right or in fact (peasants and members of liberal professions); and a minority who bear the entire burden of taxes (wage earners and shareholders). The complexity of the fiscal system and its exorbitant rates facilitate fraud and hinder efficiency. A better fiscal system would certainly provide the State with a decidedly more adequate income, and that is why fiscal reform has been studied carefully for a long time. In 1946 the Commission Supérieure à Etudes Fiscales (Higher Commission for Fiscal Study) was established with this end in view. Bearing in mind the political and technical problems involved, and the notably basic changes which would have to be effected in the current organization of the state monopolies (i.e., services of the Finance Ministry upon which is incumbent the collection of taxes), it is therefore probable that projects currently under study will be put into operation after a short time. T h e only hope for any serious improvement of the fiscal income is in the development of economic activity and in the progressive disappearance of clandestine transactions which in the long run escape taxation. Even supposing that the estimate of the Monnet plan is not realized integrally, economic activity must reach levels definitely higher than those of prewar times, which from 1932 on have continued to be abnormally low.

46

THE

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PROBLEM

With this in mind, it is important to note the exceptional measures taken in fiscal matters since the liberation—confiscation of ill-acquired profits, tax on capital, and tax on excess profits. 2. Confiscation

of illicit

profits

Confiscation of illicit profits was decreed by an ordinance issued on October 13, 1944. By illicit profits, the decree implies profits acquired either by trading with the enemy or by infraction of regulations on rationing and price control. N o problem is more revealing of economic disorder than illegal profits; no problem brings more clearly to light the chasm which divides theory from practice. In a well-functioning economic system there can be 110 illegal profits. Its existence not only attests to the impotency of regulations and controls, but is the basis of price disorders. It is both their cause and effect. If, and this is legally true but practically inaccurate, any authorized rise in prices has as counterpart an equivalent and previous rise of cost, the margin of profit is invariable. T h e result is that any increase in profits is, by definition, illicit. On the other hand, as increase of profits necessarily corresponds to increase of buying power and of monetary income (this increase itself born of inflation), the result is that the volume of the sum total of illicit profits is equal to the volume of inflation. T o confiscate illicit profits is, therefore, to absorb the inflation at one and the same time. T h e result which monetary tapping did not succeed in achieving was made possible by confiscation of excess profits. But here one can put one's finger on the heart of the problem: price regulation has in fact officially recognized certain increases in profits, especially along commercial lines, where the formula of taux de marque (margin rates) was applied. Global increase of profits, therefore, corresponds only in part to illicit profits. These profits, accumulated over a period of five years, were partly consumed, partly invested, partly hoarded. Assuming that their increase was definitely known, the State would be unable to recover the part consumed, unless by eventual confiscation of assets which the black marketeer owns outside of his profits; he could have his invested profits transferred, but payable in kind; only hoarded profits could be confiscated in kind, and deflation possible to

THE

INTERNAL

PROBLEM

4J

achieve is limited to that portion, undoubtedly modest, of a sizable total. And that is not all. How is one to identify these profits which everyone discusses and the existence of which is certain? In this respect a great deal of latitude has been extended to confiscation committees charged with this delicate and subtle task. T h e sum total of confiscation announced on October 14, 1947, rose to 80 billion francs, only a part of which can actually be collected. On the same date actual collections rose to 25 billion francs. This is a rather mediocre result; however, one must be rather naive to be disappointed by it, especially since the principle involved was inspired less by financial considerations than by absolutely legitimate political and moral principles. 3. Capital levy and tax on accrued

wealth

In a country impoverished by war, the Government did not limit itself to the confiscation of illicit profits; it seemed to it that any accumulation of wealth, even legal—that any capital, even when not increased—should be taxed. Confiscation of excess profits corresponded to the concept of purge; tax on capital and tax on accumulated wealth corresponded to the concept of solidarity. T h a t is why the double assessment instituted by the ordinance of August 15, 1945, on capital and wealth bears the title, Impôt de solidarité Nationale (National Solidarity Tax). Any measure of such importance, without precedent in French fiscal legislation, could not prevent from recurring the old theoretical dispute which, in France, as elsewhere, puts into opposing camps the partisans and adversaries of the tax on capital. T h e elements involved are too familiar to discuss here. T h e authors of the legislation, however gave this factor intense consideration. a) T h e tax on capital is moderate, and the basic margin of capital which is tax free is wide. T h e rate of the tax is gradual; it varies from 3 % up to 500,000 francs (this basic margin of exemption having been taken into consideration) and 20% above 300 million francs. T h e joint-stock organizations, whose capital (or value of assets) exceeds 5 million francs and whose securities are listed on the stock exchange, are subject to deduction of 5 % of the registered capital,

48

THE

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PROBLEM

payable either in kind or by allocation of equivalent number of stocks to the State. b) T a x on excess wealth is more severe both as regards exemptions and rate. It rises from 5 % to 100% above 5 million francs. Precautions have been taken, however, to strike only at actual accumulations of wealth. In order to spare accumulation which comes as a result of work and saving, half of the incomes declared in the course of five years of war were added to the basic margin of exemptions. T h e tax on wealth had to be paid off in one lump sum before the end of February, 1947, while the tax on capital is payable in four equal parts at the beginning of 1946, 1947, 1948, and 1949. T h i s arrangement was intended to facilitate the payment of often substantial sums. At the same time, it also indicated the exceptional nature of the tax; the money collected is spread over several budget years. By a strange contradiction, the law makers took this into account recently by decreeing, at the time when the budget was voted for 1947 (law of J u n e 25, 1947), the payment of a fifth quarter, falling due on November 18, 1947. T h i s measure, which is equivalent to increasing the tax by 2 5 % , opens the way to an indefinite series of supplementary "quarters," which would result in transforming a law originally stressing the exceptional into an instrument of recurrent taxation. On May 3 1 , 1947, the money collected in the name of the national solidarity tax rose to 64.7 billion francs. 4. Continued

deficit and

inflation

It was possible to limit the deficit, as all the measures outlined above indicate, but it was out of the question to absorb it. C o u l d the deficit have been any lower? By all means, especially if a serious effort had been made to restrain military expenditures in due time. On this point, it can be estimated that 100 billion francs have been squandered annually since the Liberation. T h e outstanding factor, however, is perhaps not so much the importance of the deficit as it is its very existence. For it alone determines the orientation of monetary policy. There exists a politique de l'équilibre (balanced policy) which is classic monetary policy with which we are all acquainted either by having seen it in

THE

INTERNAL

PROBLEM

49

practice (since 1 9 1 4 — i t existed in France only between 1927 a n d 1931), or by h a v i n g learned the rules from a m a n u a l . T h e r e also exists a politique du déficit (a deficit policy), the rules of which were not codified a n d w h i c h we were taught to h o l d in contempt. Is that w h y governments w h i c h practice deficit policy in fact w a n t e d to apply to it the rules of balanced policy? T h e very attempt was absurd. B o u n d to fail, it could only intensify the psychological effects of the deficit, as well as its material amplitude. T h a t is not all: there is a policy of m i n o r deficit and a policy of m a j o r deficit; an occasional and an endemic deficit policy; a decreasing a n d increasing deficit policy; a current a n d an inveterate deficit p o l i c y — p o l i c i e s which are essentially different a n d the choice of w h i c h presupposes cognizance of the deficit. Some sound minds have had the courage to face this cognizance. O n the contrary, gems of ingenuousness were used to "camouflage" the deficit. In a country where statistics are inadequate and arouse but slight curiosity, everything w h i c h c o u l d have enlightened the people on the situation was w i l f u l l y left in the dark, as if it sufficed to suspend publication of statistical data relative to the inflation a n d its effects, to stop these very effects from being noticeable. For e x a m p l e , publication of the index of the cost of living was terminated, or it was published only after considerable delay, for fear of furnishing the w o r k i n g class w i t h arguments favorable to the increase of wages—as if the basic argument were not the price of bread and clothing. T h e Administration thought to gain time but, of necessity, lost it. For indeed it is a loss of time to apply to the deficit principles valid in a balanced situation and to apply the policy of minor, occasional, decreasing, a n d recent deficit to what is actually a m a j o r , endemic, increasing, a n d inveterate deficit. Is this a pessimistic estimation? L e t the f o l l o w i n g figures speak for themselves (in billions of francs): 1945 N e t deficit Increase of debt

273 long-term

1946 327

national 185.51

4'-2

194J

THE

INTERNAL

PROBLEM 1

Percentage of this increase in relation to the total debt existing at the start of the period Increase of floating debt Percentage of this increase Increase of the monetary circulation Percentage of this increase Increase of deposits in the four large banks Percentage of this increase

945

45% 119.9

'946

110

1

947

6.8% -4

10%

9%

—2.5

151.8 26.6%

48 100%

95 2 81%

130.4 18%

Persistence of the deficit has as a corollary the inflation in a primary stage which can be prolonged over a period of several years: planned inflation where the creation of a fictitious buying power precedes rise of prices and determines it. This period is characterized by a great monetary freedom and allows governments a wide range of action which is designated by the name of policy of facility. This primary stage had not as yet been terminated by the end of 1944. There is also a second stage which can still be rather prolonged: compelled inflation, where the creation of buying power follows a rise in prices and is determined by it. Then monetary freedom disappears, economic deflation is combined with financial inflation, in the sense that the creation of buying power is lower than the need for buying power. But the government still retains control of the situation. It seems that France may from now on have entered this second stage. The third stage is much shorter than the preceding ones: acute inflation, where the rise of prices becomes almost vertical and where the government loses complete control of the situation. In the course of each of these phases, inflation occurs simultaneously on different planes: Long-term inflation: increase of the funded debt; Latent inflation: increase of the floating debt;

THE Immediate

INTERNAL

inflation:

PROBLEM

5/

increase o£ monetary circulation a n d bank deposits.

T h e above-mentioned figures indicate the respective e v o l u t i o n of these three m a i n stages of inflation. B u t the basic character of inflation lies in their coexistence a n d their relative proportion. T h e stronger the p r o p o r t i o n of notes in circulation, the weaker the f u n d e d debt a n d the more inflation becomes a disease. A s for the floating debt, the dangers inherent in demands for mass reimbursement are more theoretic than actual. In fact, the largest p a r t of these bonds is retained either by the banks as counterpart to their deposits, or by large firms as re-investment of their excess liabilities. A mass d e m a n d for reimbursement could spring only f r o m an e q u a l mass w i t h d r a w a l of deposits and from a sudden d r a i n i n g of the current assets w h i c h w o u l d normally accompany mass dehoarding. A triple p h e n o m e n a , difficult to conceive if it is not tied u p w i t h a s i m u l t a n e o u s a n d sudden rise in prices, w h i c h w o u l d result in r e d u c i n g in similar proportion the relative burden of the debt a n d w h i c h can only h a p p e n in the third stage of inflation, is acute inflation. It is n o t certain that the monetary hardships to w h i c h France is exposed w o u l d not reach this paroxysm. W e are not, however, at this stage. Doubtless, and w i t h good reason, the effort has been directed largely on the absorption of excess circulation of currency rather than on f u n d i n g of the floating debt. O f the two dangers involved, the latter was the less of two evils a n d the less immediate. Nevertheless, the three forms of inflation caused a basic transformation i n the structure of financial liabilities as is shown by the f o l l o w i n g table: '90 Frcs billion Monetary circulation . 2 . 6 = 7-7% Floating debt 0 . 2 = 0.6% Funded debt 31.2 = 91.7% Total

34

1938 Frcs billion

'946 Frcs

billion

108.5 = 20.8% 126.8 = 24.2% 286.9 = 55%

721.8 = 26.8% 1,332.2 = 4 9 4 % 642.7 = 23.8%

522.2

2,696.7

F r o m 1913 to 1938 a n d 1946, the respective proportions are as follows: T h e monetary circulation increases from 7.7 to 20.8 and 26.8%, therefore a relative increase which must make itself felt.

53

THE

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PROBLEM

T h e floating debt increases from 0.6 to 24.2 and 49.4%, therefore a massive relative increase. T h e funded debt drops from 91.7 to 55 and 23.8%, therefore a proportionate decrease. In other words, the evolution denotes a progressive defunding of the monetary and financial system, a defunding which adds an obvious element of insecurity to the total increase of the financial liabilities.

IV The External Problem T O G E T H E R W I T H the police technique, monetary technique has made uncontested progress insofar as foreign finance is concerned. It is now at least known how to control the operation of a monetary system on the foreign exchange market, if not how to isolate this system from that market; how to superimpose, if not substitute, one or several artificial parities on the natural parity. Contrary to an opinion often maintained, gold retains its monetary functions, but instead of these being confused by reciprocal reference with each other, they are henceforth dissociated, the Administration using alternately one or the other, at times changing the gold parity to preserve the reserves, at other times using the reserves in order to preserve the gold parity. T h e two elements of the problem nevertheless remain the same: one relates to parity, the other to the utilization of reserves. THE

PARITY OF THE

FRANC

T h e parity of the franc should not be confused with its value. Even under a system where foreign exchange is free, it happens that the parity of a currency deviates more or less from its value. T h i s is called overvaluation or under-evaluation of a currency. Such an actual deviation (or supposed deviation) has nothing abnormal in itself. If its parity is an obvious and accurate fact, the value of a currency is always to be questioned, because of the multiplicity and complexity of the elements from which it springs. Actually, the value of a currency varies within an indeterminate zone which tends to extend when the economic situation of the moment is unstable.

THE

EXTERNAL

PROBLEM

On the other hand, the field to which foreign exchange policy applies is limited. However rigorous exchange control and foreign commerce control may be, the maintenance of an exchange parity too far removed from the actual value of a currency can only result in a dead loss. T h i s has been clearly demonstrated by the various alternatives of foreign exchange policy in France since the inception of foreign exchange control. i. Foreign exchange

control

Since its inception in September, 1939, foreign exchange control has been progressively strengthened. Its regulations are in no way original and were inspired by experiments previously made by several foreign countries. On the other hand, the French experiment is instructive in the sense that official parities of the franc have, since 1939, undergone basic modifications. Because the parity of the franc was at times set below and at other times set above its actual value, it had successive contradictory influences on the economic situation of the country. There are four stages in this development to be borne in mind: from September, 1939, to June, 1940; from June, 1940, to September, 1944; from August, 1944, to December, 1945; and from December, 1945, to the present. First stage: from September, 1939, to June, 1940. T h e parities set at the time of the establishment of foreign exchange control, as well as by financial agreements (176.5 per sterling in the FrancoBritish financial agreement of December 4, 1939) are slightly higher than those which were formerly current (179 francs). However, they seem to have been rather lower than the actual value of the franc at the said period. Exchanges and especially war supplies should have been facilitated by it and it would have been foolhardy to act contrary to the psychological depreciation of the franc—which was an actual fact. Second stage: from June, 1940, to September, 1944. During this period, the parity of the franc was calculated in terms of the Reichsmark and not in relation to the Anglo-Saxon currencies. We have seen how the exchange rate of the franc fixed at 20 francs per Reichsmark by the occupying power sets off the under-

THE

EXTERNAL

PROBLEM

55

valuation of the franc to a more marked degree than in the period preceding the Armistice. T h e advantage to Germany of this undervaluation is quite clear: it meant stimulating the afflux of French merchandise to the other side of the Rhine while inflicting upon France a chronic loss of economic substance. We have also seen how this result was reached by the combined play of occupation costs, exchange rate, and clearing. It is true that by a rise in prices, the actual value of the franc had tended to approximate its official parity. It did not, however, coincide with it, as is shown by the fact that the Germans did not believe it necessary to modify this parity. Third stage: from September, 1944, to December, 1945. In order fully to understand what happened in the course of this period, it is necessary to go back a bit. At the time of the landing of the Allied troops in North Africa, the parity of the franc had at first been set by the Allied authorities at 400 francs per pound and at 100 francs per dollar. These rates, which sanctioned a more than 5 0 % devaluation of the franc, came as a great surprise. Pursuant to negotiations between the Allied authorities and the Algiers government, parity was returned to 200 francs per pound and 50 francs per dollar in February, 1943, and this parity was retained after the Liberation. Taking into account the intervening rise in prices, this parity was definitely higher than the actual value of the franc. There are three reasons for its having been chosen. Influential government members were inclined to confuse monetary parity with political grandeur and to think that France would appear all the more powerful if the rate of the sterling and dollar were lower. On the other hand, it was unknown then as to how much longer hostilities with Germany would be prolonged and how much longer Allied troops would remain on French soil. A relatively high parity of the franc would act as a brake on the purchasing power of the troops and would thus help avoid further economic disintegration. Finally, France's participation in the war imposed upon her sizable purchases from abroad of war material and various imports, and it was believed that these purchases would tax the budget more were the parity of the franc lower. Whatever the merits of this argument were, insofar as the im-

i6

5

THE

EXTERNAL

PROBLEM

mediate future was concerned, it was clear that the chosen levels could not be maintained for any length of time, unless there were a definite decrease of internal prices, which did not seem to be near at hand. From then on, as prices rose still higher, the situation became untenable, though not enough so for all people to be convinced of it. Debate on the question was not long in springing up, and continued for long months in an atmosphere of utter confusion. T h e conflict consisted of three elements: the principle of devaluation, its date, and its level. a) Principle of devaluation. As for those in favor of devaluation, the overvaluation of the franc created an obstacle in the revival of exports in spite of costly subsidies and standardization of tariffs; it encouraged fraudulent export of capital and the black, market of foreign currency; it transformed into a veritable gift, to the detriment of the Treasury, the foreign currency allotted to French people going to foreign countries; it doomed all tourist activity and, in general, all invisible exports. It therefore became necessary to bring the franc closer to the parity of purchasing power. T h e principal arguments of those opposed to devaluation were both political and social. Devaluation would be prejudicial to the prestige of France and, consequently, to its power. It would certainly encourage the psychosis of higher prices of which the poor, especially the working class, would be the victims. It would completely ruin the people living on fixed income from securities, and would compromise public credit while supplying the State with false and dangerous financial advantages. Finally, it would solve nothing, for it would leave the basic durable causes of the depreciation of the franc completely intact. Supposing that the current rate of the franc were arbitrary, the new parity would not take long in becoming equally arbitrary. Furthermore, from the avowal of its strongest adherents, devaluation constituted a last resort. b) Date of devaluation. T h r e e viewpoints were presented on this question: those who in principle opposed devaluation and therefore foresaw no date; those in favor who foresaw some remote date; those in favor of a closer date. T h e latter pointed out that, the problem having arisen, exporters were uncertain on the matter and it was necessary to terminate the problem by assigning an ade-

THE

EXTERNAL

PROBLEM

57

quate parity to the franc as quickly as possible. However, the argument which finally brought things to a head pertained to the fact that France's adherence to the Bretton Woods agreements was going to deprive her of her freedom of action beyond the 10% provided in these agreements. It was therefore necessary that this question be settled beforehand. c) Level of the new parity. Since the calculation of the parity of purchasing power could only be approximated, a primary problem arose. Was it preferable to select a parity slightly over-valuating the franc or under-valuating it? For reasons which are superfluous to recall, most specialists rallied to the second thesis. A second question arose, which was infinitely more difficult. H o w was the new parity to be calculated? Numerous studies have been made on this subject by specialists. Four criteria could be taken into consideration: the quantity of currency, the price level, the importance of the fiscal burden, the wage level. T h e inadequacy of the monetary criterion has been stressed many times over. Monetary criterion does not take into account either the velocity of circulation or the level of production; that is, the two elements which, under current circumstances, had experienced and were likely to experience the strongest variation. T h e fiscal criterion, although frequently utilized in financial crises, gives rise to various objections. T h e actual fiscal burden is difficult to estimate. It is in itself variable and can only be related to other variables—production level or national revenue. Furthermore, it is not the most essential burden which production sustains. In a study which is remarkable for its clarity and precision, M. R e n é Courtin 1 proposed a composite method utilizing the wage level in France and the price level abroad. M. Courtin demonstrates that the method of the purchasing-power parity would tend to create in France an excessive depreciation of the franc. As a matter of fact, French prices were prices adapted to a period of scarcity temporarily inflated by the low level and improper conditions of production. Furthermore, it is impossible to calculate this parity 1. Cf. Recherche des éléments qui doivent déterminer la justement du change français. (Study of the elements which should determine the adjustment of French foreign exchange). Etudes et Documents, September-October, 1945.

58

THE

EXTERNAL

PROBLEM

adequately as long as the official price index remains manifestly below the price level. On the other hand, the output of the French worker being less than that of the American worker who has superior tools of production, the parity of wages would tend to impose upon France the relatively low prices existing abroad, which would then create an exaggerated appraisal of the franc. M. Courtin proposed to calculate the theoretical level of French prices in relation to nominal wages and output in France, and to set the rate of the franc at the parity of these theoretical prices and existing American prices. As a result of complicated calculations, whereby he endeavored as far as possible not to deviate from reality, he reached a parity of 126 francs per dollar by the wage method, and 154 francs per dollar by the combined method. T h e notice of the Foreign Exchange Office, published on December 26, 1945, which set the new parity of the franc at 119.10669 francs per dollar and 480 francs per sterling, showed that the Administration did not believe that they had to limit themselves to a rigid method. It undoubtedly seemed to them that any system in such a complex matter was but illusory. Some experts considered this new devaluation level inadequate, and to a section of public opinion it seemed rather considerable. Some of the arguments opposed to devaluation carried weight. T h u s there arose a degree of restraint on the part of the originators of the reform. They were more psychological than logical. No resentment can be held against them. Fourth stage: from December, 1945, to the present. T h e respite attained by the monetary reform of December, 1945, was of short duration. Less than a year later, the prospect of a new devaluation was unfolded. In some circles, especially abroad, it was announced as being near at hand. Had the 1945 parity of the franc been lower, the problem would have been posed almost at the same time and under the same terms. Prices, instead of slackening as was anticipated by the restoration of production, rose precipitously for reasons which we shall examine more closely when we examine the problem of prices. In short, actual depreciation of the franc had continually been more deep-rooted than official parity.

THE

EXTERNAL

PROBLEM

59

This depreciation, however, should not be judged by the rate of the French currency on some foreign markets, notably Zurich. For several reasons, and especially pursuant to sales effected by some German holders, the rate of the French note in Switzerland suffered an obviously exaggerated depreciation which caused it to drop below one Swiss franc for 100 French francs (0.82 in November, 1944). In the first months of 1947, the rate of the French note definitely rose in value, simultaneously with the effort to lower prices, which we shall discuss later. In April, 1947, the rate of the French note reached 1.70. Since then, it has returned to approximately 1.30. T h e difference between this rate and that which seems to result from the purchasing-power parity is no longer as marked as in the past. Because of the internal rise of prices in France, it is diminishing. 2. Return of the franc in

Alsace-Lorraine

T h e conversion into francs of Reichsmarks, which circulated in Alsace-Lorraine following the Liberation, was the object of an ordinance issued on November 15, 1944, and supplemented by three decrees dated November 16, 1944, January 23, 1945, and March 8, 1945. T h e problem was complex, and apart from determining the persons who were qualified to benefit from the exchange, it was still more complex than at the time of the return of Alsace-Lorraine to France in 1918. T h e Administration wanted to avoid the errors committed then. T h e measures then taken were criticized as being fragmentary and demagogic. T h e value assigned to the mark, namely 1.25 francs, was slightly above its gold parity, while the free rate of the mark had already dropped decisively below this parity. An unfortunate speculation had thus been encouraged. But above all, the price level of Alsace and Lorraine remained higher than internal French prices. T h e legislation passed in 1944 was the result of two considerations: one, to fix clearly the regulation of exchange of all categories of credit accounts, especially deposits, the conversion of which caused regrettable delays in the period following 1918; two, to select a suitable conversion rate. Since the economy of recovered

60

THE

EXTERNAL

PROBLEM

territory had been practically integrated into German economy, it was important to bear in mind the conversion rate which would eventually be applied to the Reichsmark by the Allied authorities, a rate which would probably be lower than 20 francs. On the other hand, although the occupying powers had set the parity of the Reichsmark at 20 francs in March, 1940, salaries and wages had since then undergone a less marked valorization inside France than in Alsace and Lorraine under the German regime. T h e parity of wages constituted the most adequate basis of estimation. Bearing in mind the rise of wages which was in the process of being decided for the territories of the interior, preparatory studies led to the adoption of a rate of 15 francs for 1 Reichsmark, applicable to the total of assets in cash and in bank deposits. However, one exception was made in favor of rightful claimants and debts on J u n e 16, 1940, as well as for certain credit accounts at that date. A rate of 20 francs per Reichsmark was applied to them. T h e creditors in the recovered territories thus found themselves in the same position as creditors in France. On November 27, 1945, the Reichsmark ceased to be legal tender and exchange operations were to take place between November 20 and 26. Immediate exchange, which followed deposition of declaration, was limited to 500 Reichsmarks per individual, plus 150 Reichsmarks for the mate and for each minor. Employers further received 400 Reichsmarks per employee, the remainder payable within two months. Conversion also posed another question: many firms, and particularly banks, had been obliged to invest in Germany a part of the assets which constituted the counterpart of their liabilities. Their financial balance risked being seriously compromised by events. T h a t is why, in accordance with the terms of an ordinance issued on February 8, 1945, State gave its guarantee to recovery of holdings in Reichsmarks constituting the counterpart of accounts forcibly converted into francs, in accordance with the ordinance of November 15, 1944. T h e guarantee covers risk of exchange excluding risk of transfer and insolvency, except in the case of certain holdings nominally designated and for which guarantee is complete.

THE 3. Currency

EXTERNAL

of Overseas

PROBLEM

61

Territories

From the monetary point of view, Overseas Territories can be administered in two ways: either their monetary system is their own and they enjoy monetary autonomy; or else they are under the monetary system of Metropolitan France. T h i s second method has always prevailed in the French colonial empire. Not that Metropolitan French francs would circulate effectively there. Each Overseas Territory had an individual currency (Algerian franc, Moroccan franc, Indochinese piastre) issued by its own banks of issue. But this currency was attached by a rigid tie to the Metropolitan French franc which simultaneously served as a coverage for this currency. T h e seat of the bank of issue was in Paris. T h u s , under the appearance of monetary diversity there existed an actual monetary unity. T o this, however, there unfortunately was no adequate corresponding economic unity. Although certain territories such as Algeria, whose administration was integrated with Metropolitan France, had close economic ties with France, such was not the case with all the Overseas Territories. Indochina, for example, was closely bound on an economic basis with its Chinese hinterland. T h e change of the piastre, which was originally a silver currency, into a gold currency tied u p with the franc (decree issued May 31, 1930) resulted in binding the price of Indochinese merchandise to the gold standard, while this same merchandise was produced, sold, or bought by neighboring countries where the silver standard prevailed. In other words, the cost of Indochinese merchandise was a gold cost, while the sale price of this same merchandise was a silver price. T h e result was that any variation of silver value in relation to g o l d — a n d it is well known how strong these variations a r e — w o u l d reflect directly on Indochinese economy which thus found itself constantly unhinged. From 1933 to 1936 the tie of the Indochinese piastre to the gold bloc created great difficulty for the Indochinese rubber planters, since the rate of this raw material was a sterling rate. Production was only maintained by grace of a system of premiums created to palliate the excessive increase of Indochinese costs. From 1936, the Indochinese piastre suffered the fate of the franc. A l t h o u g h there

62

THE

EXTERNAL

PROBLEM

were very obvious reasons for the depreciation of the French currency, these same reasons did not pertain to the piastre. After having been overvalued in relation to the silver currency of its neighboring countries and of the sterling, the piastre was undervalued. Many other anomalies which were due to the over-stringency of the monetary system as applied to the French colonial empire could be pointed out. During World War II disruption of communication between Metropolitan France and some of the Overseas Territories created an entirely unprecedented situation. Deprived of the Metropolitan French market and no longer receiving any supplies from it, it was ncccssary for these territories to look elsewhere. Thus, new economic currents were established. T h e price evolution differed in each case. When at the time of the Liberation the territories of the French Union regained contact, prices had reached a terrific disparity and in the heart of Metropolitan France the prices were highest. Under these conditions and considering the level of prices, to bring the Metropolitan franc to the level of the currency of the Overseas Territories would have been to impose on the latter an excessive monetary depreciation. T h i s would have meant risking the internal prices of these territories to a marked increase and this would have meant many disadvantages. It therefore appeared necessary to reconsider the problem. Was this an opportunity to solve it completely, that is, to give each Overseas Territory a monetary status bearing adequate terms of flexibility and autonomy? Several difficulties intervened: survival in many circles of a tradition of centralization and preconceived ideas in its favor, the complexity of the problem and the need to act quickly, and the fact that the question of political status arose simultaneously with that of the monetary status. So long as the political problem remained unsolved, the monetary problem could only be solved partially and provisionally. T h a t is precisely the result of the monetary reform of 1945. It restricts itself to modifying the parities of colonial currency in relation to the Metropolitan franc. T h e Overseas Territories are divided into three groups: a) the North African territories (Algeria, Tunisia, Morocco)

THE

EXTERNAL

PROBLEM

6)

where the franc retains the same parity as that of the Metropolis. b) the French colonies of A f r i c a and Saint-Pierre-et-Miquelon, where the parity of the franc is set at 100 francs for 170 Metropolitan francs (decree issued on December 25, 1945, art. 1 and 2). In similar vein, the parity of the Indochinese piastre is set at 17 francs instead of 10. c) New Caledonia, the N e w Hebrides, and the French settlements of the South Seas, where the parity of the franc is set at 100 francs for 240 Metropolitan francs. Outside of this, nothing was altered in the monetary status of Overseas Territories. A t their new parity, the colonial currencies are bound to the franc by a tie as rigid as it had been. T h e reform in colonial currencies created a great deal of criticism. A l t h o u g h everybody agreed on the need to modify the former parities, the choice of the new parities was not very satisfactory. T h e classification of the Overseas Territories into three categories grouped regions some of which had nothing in common, and it did not sufficiently take into consideration specific circumstances. Under these conditions, the reform not only leaves most of the difficulties unsolved but creates others. Colonial circles complained of not having been adequately consulted. It is consequently probable that the question will be reconsidered at some later time and on a broader plane, when the political status of the French Union will have been adjusted. MONETARY

RESERVES

By monetary reserves one generally implies gold and foreign exchange holdings which are in the hands of the Central Bank and of the Treasury. Under the heading of reserves it is important to include also gold, foreign exchange, and the total of foreign assets, so far as the latter are known and do not elude the control which the Administration today seeks to establish over them. In countries where there has been a long economic tradition, as in Great Britain and France, the role of reserves which were abundant was uniquely transformed. In the past when they were a stabilizing and compensating factor in the balance of payments, they normally increased. T o d a y , when they are faced with an im-

64

THE

EXTERNAL

PROBLEM

mediate and distressing situation, their rapid exhaustion is anticipated. After having been considered as a source of income, they play the role of disposable capital which can be used. However, these reserves are limited and they are not elastic. T h e first question which arises is: what is their amount? But the implications of this amount evidently depend on the current supply and demand of francs. T h e second question which arises therefore consists in evaluating the elements in the balance of payments in the course of the coming years, current items in the balance of incomes, and also the movements of capital necessary to achieve a balance. T h u s , a third question arises: that of external or foreign credits. i. Extent of monetary

reserves

France has traditionally enjoyed considerable monetary reserves. In relation to its population, these reserves were the highest in the world. T h i s was certainly true of gold reserves and foreign exchange, perhaps less of foreign assets since British assets exceeded French assets by far. T h e latter, as well as can be gauged, were nonetheless considerable. Under these conditions, it was easy to find a solution to the monetary difficulties, as serious as they may have been. T h i s was experienced in 1926. It is no longer so today. T h e gold holdings of the Bank of France are practically exhausted. T h e credit balance in foreign exchange is but the residue of foreign loans in the process of being exhausted. As for French holdings abroad, if their actual sum total is much higher than the total of the holdings which have been declared or identified, their use from a monetary point of view creates serious difficulties. Requisition, by definition, affects only declared holdings, the liquidation of which calls for great precaution. As for a spontaneous repatriation similar to that which took place during 1926-1928 and then in 1938, it cannot be relied upon as long as foreign exchange control is maintained. Will the return to a more liberal regime suffice to motivate a mass return of capital? T h a t is doubtful. Unless one imagines a radical change in political circumstances, it is probable that those with holdings abroad will re-import them only to the extent necessary to cover their current transactions, which could represent, it is true, a rather substantial contribution in foreign ex-

THE

EXTERNAL

PROBLEM

63

change. T h e same holds true of clandestine gold reserves belonging to individuals—reserves which in total seem to reach a very high figure. According to i n f o r m a t i o n issued by the Finance Ministry after the Liberation, the situation had evolved as follows (in millions of dollars): P U B L I C H O L D I N G S IN G O L D AND F O R E I G N

CURRENCY

1

944

'945

August 31 December 31 December

31

I — G O L D HOLDINGS

Gold holdings of the Bank of France Gold of the Stabilization Fund Central Overseas Treasury (Caisse Centrale de la France d'Outre-Mer)

...

TOTAL

1

2,000

214

11.3

>776-4

1.089.5

214.1

457-5

5.5

2,225.3

I>99

6

II—HOLDINGS

IN

>>558 J

*944 August

11

945

December

December

31

FOREIGN

CURRENCY

Dollars and currency convertible into gold Holdings in Sterling GENERAL TOTAL . . .

389

92 2,706.3

417 6

259.4

92 2,505.6

1,817.8

As for private holdings abroad, the census still has not been completed. Provisional results are as follows: Gold and h a r d foreign currency $237.2 Transferable securities in h a r d foreign currency 7 1 0 -7 Total $947-9

million million million

66

THE

EXTERNAL

PROBLEM

In order to appreciate the relative importance of these reserves, it is necessary to examine at this point the evolution of the balance of payments. 2. The balance of

payments

In the disturbing period which elapsed between the two wars, the balance of payments of France underwent important variations. In 1920 the balance of current payments showed a deficit of 20 billion francs; between 1921 and 1930, a surplus of 65.2 billion francs; between 1931 and 1937, a deficit of 19.9 billion francs. 1 T h e current balance of payments was practically balanced in •938Indications relative to the period from 1939 to 1944 are most questionable. For 1945, the deficit rose to 24.6 billion 1928-francs, i.e., 1,640 million dollars. T h e 1946 balance of payments represents a deficit of 236.9 billion francs (against a provision of 248 billions), i.e., 1,974 million dollars, due principally to the decline of income. Amongst these, the most important item, namely exports, reached 66 billion francs, or 550 million dollars. It only covers 3 7 % of the exports instead of 66%in 1938, and 79% in 1929. T h e counterpart of the deficit was assured by capital movements and specifically by foreign loans, the total of which reached 1,090 million dollars, and by reduction of the gold reserve and foreign exchange, which reached 1,030 million dollars. 2 It is important to note however, that the balance of payments in 1946 still corresponded to a situation far removed from normal. Exports in particular scarcely recovered and they expanded somewhat only in the course of the fourth quarter, while imports had to meet particularly urgent needs. In the course of the coming years, imports will remain difficult to reduce, but an increase in exports reasonably can be anticipated. Thus, for 1947, the debit balance and the balance of payments is estimated at 198 billion francs (against a forecast of 188 billion) i.e., 1,658 million dollars. T h e decrease is therefore 316 million 1. Cf. Léonard Rist and Philippe Schwob, Revue d'Economie Politique, January-February, 1939. 2. Notes documentaires et études No. yoo de la "Documentation française" (Documentary notes and studies No. 700 of the "Documentation française").

THE

EXTERNAL

PROBLEM

67

dollars as compared with 1946. Opposed to an import figure of 1,950 million dollars, which represents an increase of 290 million dollars compared to 1946, a sizable increase of exports is anticipated, which would reach 1,190 million dollars, compared to 550 million dollars in 1946, i.e., an increase of 640 million dollars. Foreign loans are estimated at 825 million dollars, of which 250 million dollars have been granted by the International Bank for Reconstruction and Development. Lastly, the estimate takes into account a deduction of 755 million dollars from public and private holdings of foreign assets. As can be seen, the balance of payments remained quite unfavorable in 1947. T h e situation will be no less critical in 1948. In fact, imports are difficult to reduce. Since 1947, the effort to increase exports has been carried to its maximum. Their development presupposes preliminary investments, a portion of which will have to be bought from foreign countries. However, it is clear that France, which is not even in a position to satisfy immediate needs with its current income, finds it absolutely impossible to finance a program of justified and complete investments if she is reduced to her own resources. T h e studies published by the Commissariat Général du Plan clarify this situation as follows: In the report presented at the second session of the Conseil du Plan (Planning Council) in November, 1946, the needs for foreign currency not covered by the current revenue of the balance of payments or by mobilization of French holdings in foreign countries would reach 1,300 million dollars for 1946-1950. This figure, which does not represent more than 1 2 % of prospective payments, must be juxtaposed to imports of equipment provided by the Plan, imports which rise to 2,100 million dollars in the same period. Consequently, it is clear that if France cannot obtain sufficient credits, imports of equipment will have to be reduced by so much; the current import of supplies appears difficult to reduce. It would, however, be erroneous to believe that the decrease in the import of equipment would be reflected by a net corresponding saving of foreign exchange. In fact, export prospects were established bearing in mind the increase of productivity expected from new equipment. Under these conditions, exports will be markedly

68

THE

EXTERNAL

PROBLEM

affected by any reduction in the import of equipment and the result will be not only a prolongation but an immediate aggravation of the deficit in relation to the Plan. T h e authors of the Monnet Plan followed a rigid line of reasoning, perhaps too much so. Whereas the Plan takes into account all statistical data, it of necessity omits non-statistical factors and these are the most important. T h e authors of the Plan reckon with a level of economic equilibrium, a very high level which runs the risk of not being attained. T h e y depend on a delay in its completion, a very brief delay which runs the risk of not being fulfilled. It is already so. For these two reasons the Plan suffers from too great a degree of optimism. It also suffers from too great a degree of pessimism. Insofar as the delay is concerned, there is nothing imperative about it. Were the objectives which the Plan assigns to French economy to be attained in ten or fifteen years, it would be a great achievement. Insofar as the level is concerned, if the proposed balance is the best because it is the most ambitious, there are other possible balance levels which experience will reveal. T h e choice of 1929 as a reference period only can be accepted with reservation. At that time French economy benefited from advantages which, from the external as well as the internal point of view, were doomed to vanish. Since then, technical and social data have been basically transformed, and this in a sense which evokes both hope and fear. In this matter, whichever reference is chosen, the latter is valuable only as a means of presentation; as a means of comparison and deduction, it is perforce questionable. Furthermore, the principal danger does not lie in the non-realization of the Monnet Plan or in its insufficient realization. It is immediate: it lies in the inadequate means of foreign exchange, which cannot be coped with in good time without foreign aid. 3. Foreign

capital

It would be erroneous to limit to long-term or short-term credits the aid which a national currency can receive from abroad. T h e restoration of Central European currency, following the war of 1 9 1 4 - 1 9 1 8 , rendered customary the practice of stabilization loans. Loans obtained by German communities from foreign countries

THE

EXTERNAL

PROBLEM

69

have been, for several years, an element in the German balance of payments and a support for the Reichsmark. But it is evident that the part which foreigners play in national enterprises, or in the launching of enterprises by foreigners themselves in a specific country, brings a similar support to a currency. Therefore, the question of foreign capital in France should be viewed under two aspects: loans, and investments. Loans. Up to the War of 1914-1918, France was a lending country, exclusively a lender of capital. Contrary to what happened in England, this capital was principally exported in the form of loans. France, in its turn, became a borrowing country after World War I. However, she did participate in several loan operations in foreign countries, especially in the Dawes and Young loans. As for export of capital provoked by monetary disorder, this export was of a provisional nature. All in all, although the structure of the French holdings in foreign stocks has been modified, it is not certain that these holdings have increased. Today the situation has changed completely. T h e only export of capital which can be realized in France is an illicit export. Although endemic, its importance is negligible. What is important is that Frenchmen have ceased for some time now to cut a figure as lenders on the international financial market. T h e loan operations on the foreign market which took shape after World War I should be considered today as a unilateral current. These loans can assume the form either of official loans negotiated by the Government or by French official establishments with foreign Governments, or official foreign establishments, or private loans. On the official plane, the resources in foreign holdings which France has been able to procure since the Liberation have been of various origins. First, it is important to note payment agreements concluded with various countries. They procured a supply of foreign exchange for France of an essentially fleeting character, but which has been nonetheless an element of elasticity in external financial relations.

10

THE

EXTERNAL

Agreement with Belgium Agreement with Switzerland Agreement with Sweden Agreement with Denmark Agreement with Norway Agreement with Pays-Bas Agreement with Czechoslovakia . . . Agreement with Yugoslavia Agreement with Great Britain Agreement with Italy Agreement with Argentina Agreement with Uruguay Agreement with Brazil Agreement with Poland Agreement with Greece Agreement with Turkey

PROBLEM i ¿00,000 million Belgian francs 300 million Swiss francs 60 million crowns 35 million crowns 25 million crowns 40 million florins 250 million crowns exchange value of 800,000 dollars 150 million sterling 1 exchange value of 400 million francs 150 million pesos 6 million pesos exchange value of 25 million dollars exchange value of 5,100,000 dollars exchange value of 1 million dollars exchange value of 500 million francs

Furthermore, agreements have been concluded with Finland and Austria which included an overdraft possibility for the sole benefit of the co-contracting country. A n agreement with Hungary was concluded whereby settlements take place by credit or debit in francs from an account opened at the Bank of France in the name of the National Bank of Hungary, which has no limitation in this respect. On the other hand, the following long-term loans have been negotiated: With the Government of the United States (agreement of M a y 28, 1946), 720-million-dollar 2 % loan redeemable in 30 annuities beginning J u l y 1, 1 9 5 1 ; First credit from the Export-Import Bank (contract of December 4, 1945), credit of 550-million-dollar 2 % % loan, redeemable in 60 half-yearly payments beginning J u l y 1, 1946; Second credit from the E x p o r t - I m p o r t Bank (contract of J u l y 15, 1946), credit of 650-million-dollar 3 % loan redeemable in 40 half-yearly payments, beginning January 1, 1952; With the Canadian Government (agreement of April 9, 1946), 1. By virtue of Franco-British financial agreements, this sum was subsequently funded.

THE

EXTERNAL

PROBLEM

71

242,500,ooo-Canadian-dollar 3 % loan, redeemable in 30 annuities, b e g i n n i n g December 31, 1947. It is noteworthy also to mention the loan of 250 m i l l i o n dollars g r a n t e d in 1947 by the International Bank for Reconstruction a n d D e v e l o p m e n t , and the two 25-million-dollar a m o u n t s g r a n t e d the International Monetary Fund. O n this subject let us remember that France's participation represents 525 million dollars in each of these organizations. Investments. As for private investments, financial transactions have remained sporadic. Some interest has been manifested in French affairs amongst certain circles abroad. T h e latter seem more attracted by the Overseas Territories than by M e t r o p o l i t a n France. However, w i t h the exception of certain branches of activity such as the film industry, no foreign investment on any large scale has materialized. It w o u l d u n d o u b t e d l y be erroneous to consider as permanent the reasons which e x p l a i n this state of affairs. T h e first of these reasons relates to the situation of the internal capital market of countries w h i c h are normally lenders. I n the U n i t e d States, for example, where reconversion gave rise to a d e m a n d for capital which, u p to the present, suffices to absorb saving capacity, it is likely that excess saving will manifest itself w i t h i n a short time. T h i s excess will be directed abroad, w h i c h moreover will be the sole means of m a i n t a i n i n g A m e r i c a n exports. T h e second reason relates to the international political situation and to the French political situation. It seems that this has caused and is still causing some hesitation on the part of the f o r e i g n capitalist and especially the A m e r i c a n capitalist. H o w w i l l the political p r o b l e m be adjusted? N o b o d y knows. W h a t is definite is that the solution of the French monetary p r o b l e m depends u p o n the solution of the political p r o b l e m and is part and parcel of it. T h e solution of the political p r o b l e m will not, however, in itself eliminate all the obstacles to a flow of foreign capital into France. Such a flow of capital will hurt pride a n d interests, all of w h i c h are not illegitimate. W h e t h e r it be within the f r a m e w o r k of the Modernization Plan or otherwise, it will be necessary to adjust it so that it does not infringe u p o n indispensable priorities and o n the c o n t i n u a t i o n of vital activities. W h a t e v e r the importance may

73

THE

EXTERNAL

PROBLEM

be of the financial means thus placed at the disposal of French economy, the material means used will be directly or indirectly, and in a greater or less degree of French origin, French raw materials, French machinery, and especially French manpower. Do these not risk being diverted from activities which are distinctly more useful for the benefit of the foreign interest which will buy them up? This risk will seem all the greater because the extent of the flow of capital will be more important and the risk will also certainly be exploited by the numerous partisans of a fierce economic nationalism. Will these fears have more importance then the necessity of balancing foreign payment? It is doubtful, and it is to be feared that in the coming years monetary pressure leaves absolutely no place for free determination.

V The Problem of Prices and the Future of the Franc R E G U L A T I O N AND P R I C E

CONTROL

FREE PRICES CEASED to exist in France after 1937. However, the control a posteriori which was exercised by the Commissions de Surveillance des Prix (Price Control Commissions), instituted by a decree issued July 10, 1937, was still rather theoretical. It was not until 1940 that a stringent price control was established. T h e law of October 21, 1940, established the principle of price f r e e z i n g — except in some exceptional listed cases or on special authorization granted by the Central Price Committee. T h i s legislation, supplemented by a specific number of subsequent texts, was retained after the Liberation, and its principal features were re-established by an ordinance issued on June 30, 1945. It is noteworthy that the provisional Government felt it had to adopt one of the most u n p o p u l a r attacks on freedom which had been imposed upon the French people by the Vichy government. Moreover, the opponents of planned economy themselves did not at all foresee the possibility of reverting to the functioning of the market as long as shortages and inflation would exist. As far as the opponents of liberalism were concerned, they were not the last to denounce the imperfections of the system: the uneasiness imposed upon the field of production and trade due to complicated formalities and necessarily slow procedures; the continued disparities, some of which were desirable and socially justified, but others which simply attested to the fact that the responsible authorities were not infallible;

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the injustice of some decisions of the C e n t r a l Price C o m m i t t e e (however competent its members were, they were not always u p to the extremely complex and delicate mission entrusted to them); the inadequacy of the administrative machinery, both as concerned e x a m i n a t i o n and discussion of dossiers presented by the parties involved in order to support their applications for price increases, and control exercised a posteriori on the implementation of the regulations (economic control). Inadequacy of the b o o k k e e p i n g machinery, standardization of such methods is still not achieved in France and therefore open to all sorts of camouflage. T h e game was not fair between the manufacturers, w h o live in their business and w h o are acquainted w i t h all the tricks a n d secrets and d o not hesitate to use the services of the shrewdest chartered accountants nor to pull political strings, and the civil servants of the Price C o n t r o l Board (Direction des Prix), w h o are conscientious, often capable, but too few a n d underpaid and w h o are forced to examine numerous dossiers hurriedly. However, there were two basic reasons for the faultiness of the ruling: in the first place the available quantity of a great deal of the merchandise subject to its regulations was lower than the "vital m i n i m u m " and it was therefore impossible under these conditions to expect adherence to freely accepted discipline on the part of the p u b l i c ; secondly, the desire not to resort to extreme coercive measures w h i c h w o u l d meet with general disapproval. In spite of this, it w o u l d be unjustifiable to maintain that price control had failed. A t the time of the Liberation, let us remember that the wholesale price index rose to 275, the retail price index to 290, while the index of monetary circulation reached 627.5. T h e r e is no doubt but that if the price machinery had operated freely, the price level w o u l d have been decidedly higher. It was actually so, as a matter of fact, since the indexes only take into account the official prices and since prices on the black market were much higher. Yet the existence of such a divergence attested to the fact that the control had at least partially reached its goal. In fact, the commodities sold at the official price, in inadequate but not

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negligible quantity, were w i t h i n reach of those with a limited income and w o u l d not have been so w i t h o u t the price control. SUBSIDIES

Subsidies are a measure devised to supplement price regulation. T h e y a i m at m a i n t a i n i n g at an artificially low level, that is, below cost, certain basic products which, like coal, are necessary for every k i n d of manufacture, a n d certain products, such as bread, w h i c h must of necessity be w i t h i n the range of all. In this manner it is deemed possible to avoid, in the case of coal, increase of cost of p r o d u c t i o n and, in the case of bread, wage increase. T h e same reasoning applies to railroad tariffs. W e k n o w that the method of subsidies has been successfully a n d extensively a p p l i e d in Great Britain. A l l products considered essential have benefited by it. T h e success of the English e x p e r i m e n t is due to two things: first, the products affected were continuously distributed in adequate quantity, the lack of w h i c h was the black market's raison d'etre in France. Secondly, excess purchasing p o w e r distributed in the form of subsidies, was more than absorbed by excise taxes on luxury items. N e i t h e r of these two conditions were established in France. If subsidies succeeded in m a i n t a i n i n g the sales price of products for w h i c h they were intended above their cost, they did not prevent the rise of the general price level. Since surplus b u y i n g power, distributed in the form of subsidies, was imperfectly absorbed by taxation, the price maintenance of certain products at an artificially low level could only feed the price rise of non-subsidized products a n d because of this, cause a rise in cost of subsidized products. As a result, there followed a consistent and g r o w i n g divergence between the cost of production and the sales price of subsidized products, therefore an equally increasing volume of subsidies themselves and of their inflationary effect. T h e V i c h y government, w h i c h had inaugurated this regime, h a d already encountered serious difficulty as a result of it before the Liberation. T h e difficulty had accumulated for the provisional G o v e r n m e n t . W h e t h e r it was wages or the general price level, the pressure for

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rising prices became increasingly stronger. But, for example, wages are a determining factor in the cost of coal. Furthermore, it appeared illogical to subsidize consumer products such as bread, that is, to induce consumption, if not of bread, which was rationed, at least of other consumer goods which could be brought in larger quantity because of the lower price of bread, while the State was swamped by the job of reconstruction and while savings appeared inadequate to face this task. On the other hand, economic currents once set off and habits once created which were favorable to the policy of subsidizing were difficult to reverse. It was not a question of abolishing subsidies purely and simply—neither politically nor economically. T h i s of necessity had to be gradual. A l l this explains why the Government acted with prudence and some degree of timidity on this question. T h e principle of subsidies was condemned from its inception. It was the simplest. Effective elimination of subsidies was undertaken a little late and it does not seem that this elimination can be complete, especially in the field of transportation. T h e following table of figures, however, attests to the growing acuteness of the problem. T h e annual total of subsidies has been as follows in billions of francs: '939 »94° i94i »942

» 5 'i 13

'943 1944 '945 1946

25 59 85 97

T h e latest figure represents 2 6 % of the budgetary income, 1 6 . 7 % of the expenditure, and 4.8% of the national income. In Great Britain, where subsidies in the same year reached £ 2 3 2 million sterling, i.e., 1 1 1 . 3 billion francs at the official exchange rate, these same proportions were respectively 7 . 3 % , 4 3 % , and probably less than 2 . 5 % of the national income.

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PRICES

What characterizes price development since the Liberation is the accelerated rate of increase. C O E F F I C I E N T S OF P R I C E

August 1939-1944 1945 1946 January-September 1947

INCREASE

Wholesale Prices

Retail Prices

Wages

Monetary Circulation

35% 68%

29% 48%

125%

82%

38% 35% 1.8%

29%

32%

1

2

26% 18%

For the five years which elapsed between September 1, 1939, and the end of August, 1944, date of the Liberation, the annual average price rise had been 35% on wholesale prices and 38% on retail prices. In 1945, price increase reached 68% on the wholesale level and was much higher than the retail level, which was only 35%. In 1946, the rate of increase soared again—it reached 82% on wholesale products; but the retail price increase was still higher— as a matter of fact, it reached 1 1 8 % . In 1947 the rate of increase subsided a bit: 29%, wholesale, 3 2 % retail. But we shall cover the specific reasons which account for this momentary lag. This development must be examined from three points of view: In its relation to the monetary development; in its relation to the development of wages; and in its relation to the price policy as such. P R I C E AND M O N E T A R Y

CIRCULATION

INCREASE

The development of French prices since the war confirms an observation of long standing: there is no rigid tie-up between the price level and the volume of monetary circulation. 1. October, 1944, to October, 1945. 2. Monetary circulation returns from 572 to 570 billion francs subsequent to various operations effected in the course of years, especially in note exchange. It is therefore practically at a standstill.

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Between 1939 and 1944, the increase in the monetary circulation, the annual average of which was 1 2 5 % , surpassed by far the average price increase. In 1945, price increase was continued, although monetary circulation regressed slightly. In 1946 price increase surpassed by far the increase in monetary circulation, which was only 2 6 % . T o a less degree, it was much the same in 1947. On the other hand, the development of prices and of monetary circulation attests, for lack of a close parallelism, to a definite tie-up tempered by two factors: phenomenon of the circuit, then the unevenness between creation of purchasing power and price increase. Insofar as the mechanism of the circuit is concerned, of which we have just outlined the broader aspects, it shows that this mechanism functioned more and more badly, as witnessed, on the other hand, by the almost complete inaction of the financial market beginning at the end of 1945, and the narrowing down of the money market. Moreover, this phenomenon is linked u p with the phenomenon of uneaven levels. As long as the increase of circulating currency keeps ahead of price increase and remains higher than the latter, the market is undisturbed. Such was the situation until the beginning of 1945. T h i s is the first stage of inflation. But should the uneven levels be reversed, should price increase precede increase of currency in circulation or rise above it, the market is disturbed. T h e issue of currency is no longer the key to the creation of buying power and consequently to price increase. It is the latter which regulates buying power and hence the issue of currency. A process of concerted inflation gives rise to a process of compulsory inflation. It is the second stage of inflation. T h i s stage seems to have been reached in the course of 1945; it began at the end of the period which started with the Liberation loan (December, 1944) and was terminated by the exchange of notes (June, 1945), a period during which an effort had been made by the public authorities to restrain monetary inflation. T h e following table gives a very clear picture of this development. Compared with the index of wholesale prices established on a basis of 100 in 1938, the sum total of currency in circulation,

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Bank of France credit accounts, checking accounts, bank deposits, 1 savings banks and postal checking accounts, show the following figures: October-November June December March September 30,

1938 1944 1946 1946 »947 •947

250 billion 430 billion 255 billion 210 billion 217 billion 186 billion

francs francs (maximum) francs francs francs francs (estimate)

T h e last figure, which is equivalent to 23 billion Germinal francs, corresponds to the situation current in 1913. This, however, does not indicate that the bulk of the means of payment has come back to normal. During the prewar years, the public had accustomed itself to a larger amount of means of payment which can be estimated at 36 to 38 billion Germinal francs. Price increases, consequently, have had, in the course of recent months, the effect of a deflation of the means of payment. When taking into consideration the material and psychological data which caused an acceleration of price increase immediately after the Liberation, and bearing in mind the acceleration of price increase which actually took place subsequently, especially in 1946, it is permissible to think that the financial and monetary measures taken during the first months of 1945, although very inadequate according to some, have nevertheless put a brake on price increase; the latter would have been much more marked if these measures had not been taken. Naturally, since there was no increase in the monetary circulation in 1945, price increase was doubtlessly due to a greater velocity of circulation and to an increase of bank deposits, which we have already mentioned. As for the extraordinary 1946 increase, it does not seem to be due mainly to monetary factors. W e shall see presently that it is due to economic and political factors. 1. Until 1945, estimated at twice the sum total of deposits in the four large credit institutions; published regularly ever since.

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Even since wage freezing was abandoned, the wage level has never ceased to be below the price levels. It is true that each stage reached by wages has been immediately reflected in prices. T h e vicious spiral of wages and prices, however, is only a rough and superficial picture of the reality. Like all other economic factors, prices and wages are interdependent. But economic truth is first and foremost human truth. It is important to emphasize that wage-earners do not make prices; prices are set by industrialists, and this is particularly true at a time when shortages and inflation are current because supplies under such circumstances are chronically lower than demand. Businessmen, therefore, are the masters of the market and above all of their own profits. Very few of them resist the temptation of increasing their profits by raising sales prices according to market trends. Under these circumstances, the increase of buying power subsequent to inflation first creates an increase in sales price, and therefore in profits, secondly an increase in wages which in turn reduces profits if the afflux of the inflation ceases simultaneously. But since the latter condition is not fulfilled, businessmen simply project the increase of wages in sales prices. Such is its operation. It is impossible to question its mechanism after the events of 1946. Subsequent to demands from the C . G . T . (General Confederation of Labor), an economic conference was called in J u n e and July and resulted in a 25% wage increase. However, the index of wholesale prices rose 36% between J u n e and October. It is obvious that at least 1 1 % of this increase cannot be caused by the rise of wages but is due to other reasons, namely, to inflation and to the influence of businessmen on prices. Actually, far from fighting the price increase, the Minister of National Economy, under whom the Direction des Prix (Price Control Office) operates, has, on the contrary, helped prices to increase. A few of the Minister's advisers thought that a price increase would facilitate the revival of national economy and that it was at least less dangerous than the unbalance inflicted on the price mechanism by the combined effects of shortages, inflation, and regulations.

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POLICY

E x c e p t for the short period of time w h i c h we have just mentioned, a n d in the course of which the determination to let prices rise was never officially declared, the authorities have always followed a policy of opposition to price increase w i t h all the means at their disposal. W e have expressed above our o p i n i o n a b o u t price regulations themselves; we have also seen w h a t precautions had been taken in connection with the anti-inflationist policy insofar as the monetary question was concerned, and w h a t weakness characterized the anti-inflationist policy insofar as the budgetary question was concerned. B u t whereas price increase had been constantly, a l t h o u g h insufficiently, coped with, an attempt h a d never been made to lower prices. Such was the audacious enterprise that M . L é o n B l u m ' s C a b i n e t launched in December, 1946. T h e G o v e r n m e n t p l a n n e d two stages for the l o w e r i n g of prices, 5 % each, decreed respectively o n January 2, 1947, a n d February 24, 1947. Naturally, the decrease was not to be applied to certain categories of services, nor to wages; the latter were frozen once more. T h e most tangible effect of this policy was the appearance in every shop of posters a n n o u n c i n g a decrease in prices in accordance w i t h the legal percentage. In fact, the i n d e x of retail prices d r o p p e d from 865 in December, 1946, to a m i n i m u m of 837 in A p r i l , 1947, i.e., a decrease of 3 . 2 % . A s f o r the wholesale price index, it d r o p p e d from 842 in December, to 837 in A p r i l , after h a v i n g reached new highs in January and February. It is necessary to mention, however, that the above index includes a large n u m b e r of imported items. T h i s result was disappointing only to those w h o were in f a v o r of that policy, which was from that time k n o w n as the " B l u m Experiment." T h e y declared, however, that they were quite satisfied a n d that if the experiment had not been attempted, there w o u l d have been no price decrease whatever, and, moreover, that price increase w o u l d have soared incessantly, so that the current price level actually w o u l d have been much higher. T h i s approach indeed seems oversimplified. It must be remem-

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bered that when the experiment was begun, a very marked and rapid stage of price increase had just terminated. One of the features of any economic phenomenon, and particularly of price increase, during a period of marked inflation is that movements do not follow a straight line of progression. In the course of a movement of increase a movement of regression of lesser amplitude succeeds each excessive progression. It is possible to wonder whether the situation in December, 1946, was not such that a decrease in prices would have taken place even without the introduction of Government regulation. What is certain at any rate is that the decrease of prices, whatever its importance might have been, was bound to be short-lived since the essential causes for the increase remained (i.e., insufficient production and a budgetary dcficit). In fact, after April, prices continued to soar at greater speed: calculated on an annual basis, retail price increase, as observed between April and August, reached 85%.

VI Conclusion IF THE MONETARY PROBLEM were solved, it w o u l d be possible to formulate a conclusion as to the future of the franc. However, it is not only unsolved, but it becomes more acute daily. A complete monetary bankruptcy can certainly be avoided. Besides, it would in no way be a solution. As a matter of fact, the current price level has already brought the burden of the public debt to a very moderate level. 1 T h e major expenditures that the State has to cope with consist of current and future expenditures which monetary reform w o u l d not alleviate; neither would it reduce the purchases that France is compelled to seek from foreign countries.

Whatever the level of the stabilization of the franc and of prices may be, this result will be reached only under two conditions which to a large degree complement each other: 1) Elimination of the creation of fictitious monetary income; that is, re-establishment of budgetary balance; 2) Restoration of a normal level of production and subsequent re-establishment of the balance of payments equilibrium. A very serious effort has been undertaken lately as far as the first condition is concerned, but the persistence of unfavorable technical, economic, and political factors, of which the most essential have been mentioned in this survey, will certainly make it very precarious. T h e determining e l e m e n t — f r o m an economic as well as a politi1. O n December 31, 1946, the sum total of the long- and short-term p u b l i c debt, including the debt towards the bank of issue, was 1,974.9 billion francs, i.e., if o n e applies the price index to that figure (204.3 billion francs) instead of 413.7 billion francs on December 31, 1938.

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cal point of view—is the restoration of a normal production level. Whereas for almost a year the general production index has remained approximately what it was in 1938, we must not forget that since French economic activity was abnormally weakened during the same year, it is a bad reference period. In fact, and this has been very rightly noted by the authors of the Modernization Plan, the solution to the various current problems, and particularly the monetary problem, requires 1 3 0 % of the 1938 production. When will this level be reached? T h e period of five years for the Modernization Plan really seems too short if the completion of the Plan is considered a necessary and adequate condition for attaining this level. Adequate condition? T h e authors of the Plan are perhaps a little too positive in this respect as well. Whereas the philosophy of the Plan justifies their contentions, we must remember that any forecast is extremely difficult in a field as complex as this one. T h e greatest merit of the Modernization and Equipment Plan on the internal plane, like the Rapport des 16 (Sixteen Nations' Report) on the international plane, is not to be an imaginative effort, which is bound to be inferior to the scope and to the nature of the problems involved; its merit indeed is to be a recognition of the problems to which the authors, the readers, and the executors of the Plan have committed themselves. But these plans would be more dangerous than useful if their recommendations were taken literally and if they led to the belief that, apart from external loans negotiated between Governments, and from the combined modernization of basic industries, there is no salvation for French economy and its currency. There are however other possibilities: 1) In the economic sphere: readjustment of French production in relation to its abilities as well as to its international outlets. Will this readjustment be achieved by an extensive development of the steel and textile industries, by the systematic equipment of agriculture, although this agriculture is not directed to the production which is best adapted to the natural features of the soil? One might doubt it, just as it is possible to wonder whether planning (inspired by the desire to retain unsuitable branches of activity) can have any result other than to hinder the normal development

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of branches of production for which France has more suitable conditions. 2) In the financial and monetary sphere, the official inventories of existing assets as a matter of course overlook those which by their very nature are concealed from investigation by the authorities—gold hoarded in a clandestine fashion and undeclared foreign holdings. It is very likely that although these assets cannot be accurately estimated, they reach a very high figure and they could compensate, for many years to come, the current deficit of our balance of payments. How can they be included in the national economy? In a compulsory fashion? N o one can seriously harbor any illusions in this respect. B u t the political and technical conditions necessary for a spontaneous return of exported capital are well known. A description of such political conditions is not within the field of our present analysis. At any rate, they are very uncertain at this date. T h e technical conditions are already partially in existence. T h e tightening of the monetary market following price increase has restored to the Bank of France all its potentiality. T h e Bank already uses this potentiality in order to put a brake on stock-market speculation. Credit facilities are reserved as much as possible for really productive activities. But it is obvious that the monetary policy of the Bank can have but limited effects as long as the foreign exchange control isolates the French market from its normal relations with foreign countries and as long as the official parity of the franc remains on a completely different level from its actual parity. But simultaneously the quotations which have been listed for the past months on certain foreign markets, at Zürich for example, are no longer very different from the figures which would correspond to the purchasing power parity of the franc. Although they seem to underestimate the franc, it is necessary to remember that a slight under-evaluation of a national currency is one of the conditions without which the return to freedom of foreign exchange would not meet with success. In other words, a readjustment of the official parity of the franc to a figure closer to the current value on the free market would be in no way absurd, but would make pos-

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sible—and this alone can make it possible—the return to free foreign exchange with two additional conditions: (1) simultaneous return to a free foreign trade, except for a few essential items which would still be included in a program of priority imports; and (2) securing of a stabilization loan which would at the very start provide the Bank with the necessary operating funds. But naturally, in the first stage, the Bank would enjoy the latitude of allowing the franc to fluctuate according to market trends, and also of buying and selling gold at corresponding prices. T h i s procedure would probably result in accelerating the decrease of the price of gold on the clandestine market, a decrease which started many months ago, until it would reach the level corresponding to the price at which the Bank would currently be buying gold. T h u s , the gold black market would disappear. Moreover, businessmen and individuals w h o face increasing need for cash, and w h o would have no other way out than using u p their clandestine reserves or their foreign holdings, would bring either gold or foreign currency to the Bank in order to obtain francs. T h e Bank would in this manner re-accumulate reserves. T h e francs which would thus be issued as a counterpart of the reserves would create a definite ease on the monetary market, since they would be meant to finance private needs and no longer a budget deficit; and this ease would correspond to immediate production needs. These needs are so great that there is no need to fear the end of such a process before practically all of the assets, abnormally hidden or exported, would have been returned to their proper place; in other words, not before the time when the monetary situation and the economic situation would be simultaneously restored. W e must not forget that such a program would arouse many objections and much criticism. T h e y are the same which were posed to the suggestions of the Comité des Experts (Committee of Experts) in 1926. T h e monetary experiment of 1926-1928, however, was completely successful. Foreign exchange control nowadays creates an additional psychological difficulty. T h e war forced the authorities to adopt it. T o abandon a habit which has been pursued for more than eight years will certainly be difficult. But the major criticism which will be directed at the solution

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we advocate is that it is a classical solution. U n f o r t u n a t e l y , u p to now no other solution of the French m o n e t a r y p r o b l e m has been suggested, for there is no other. French economy remains a capitalist economy; to m a i n t a i n a certain n u m b e r of excessive compulsions, and particularly monetary compulsions, is inefficient as well as detrimental to its mechanism. It is therefore necessary either to radically transform the economic system of the country (with all the political consequences that such a transformation implies) or to readjust the monetary policy to the pattern of the existing economy.

Supplementary Chapter A NEW AND S I G N I F I C A N T FACTOR has intervened in the financial and monetary evolution since the preceding chapters were written. It came about as a result of two elements which altered both the French political and economic situation. 1. President T r u m a n and Mr. Marshall, as spokesmen for the United States Government, took the initiative in granting substantial aid to Europe. This decision created a new situation for France. T h e total amount of this aid cannot as yet be estimated with precision. However, substantial interim credit has been accorded France until the historic "Marshall Plan" begins to function actively. T h e role of the latter can be compared to the "Dawes Plan" following World War I. T h e Marshall Plan will provide France, for a period which cannot be foretold for the time being, with supplies of raw materials and particularly with the vital sources of energy (coal, oil, fertilizer), which she needs in order to restore her war-damaged industries. U p to date, French industry has reached an average of 90% of its 1938 production capacity. In some branches of industry, such as electric power supply, production even exceeds prewar levels, and this despite a greatly increased demand. Furthermore, English coal exports, revived in the Spring of 1948 combined with the coal supplied by the mines in the Saar region, will actually restore coal supply in France to an approximate prewar level. T h e tremendous advantage of the Marshall Plan is therefore that it will give a respite to the French economy so that France may re-establish her production level, and at the same time not be hampered by the obligations of immediate payment for goods received. 2. Following the general strike of October and November, the political situation has distinctly changed. In the course of this strike period, many workers refused to follow directives issued by the C.G.T.—under the influence of the Communist majority, and

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remain at work despite the pressure of the Communists. Furthermore, by maintaining freedom of work and by evacuating some of the factories occupied by some workers, the Government's firm policy succeeded in restoring work in all the industries after two weeks of strike, on condition that wages would be increased. Throughout this period, railroad traffic was but partially disrupted. T h e strike of longest duration was by the mine workers of the Nord area. T h e most important consequence of this strike was the schism inside the General Confederation of Labor. A section of the union members who, up to that time were affiliated with this federation, broke away with M. Jouhaux at the head, to set up a new confederation whose keynote is to keep the unions outside of party politics. It should not be concluded from these events that no demand for wage increases will arise in the course of the coming months. Since 1939, increase in workers' salaries, as well as professional wages, have remained far below price increase, especially the increase in the cost of food supplies. Wages have been multiplied by the ratio of 8 as against 14 for prices. Price increase has been speeded up in the course of the past six months in a rather disturbing manner. Furthermore, the latest rise in wages realized during the strike period will contribute considerably to this increase. It reaches approximately 3 0 % and at least an equal price increase must be expected in the forthcoming months. It has therefore become imperative to stabilize prices, especially those of foodstuffs, the price increase of which constitutes a grave danger for the first half of 1948. Following the strike period, the Government concentrated upon the solution of this problem. T h e stabilization of the franc became its major preoccupation. In order to accomplish this, two steps were taken: first, a considerable and sudden increase in taxes and above all, monetary measures, consisting in a new devaluation of the franc and the institution of a free foreign exchange market. Let us examine them in turn. A. Fiscal measures: Today everyone is convinced that with the budgetary deficit, the inflation, with the rise in prices which it produces, will not be stopped. Therefore, the first objective has been definitive balance of the budget by a substantial and sudden

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increase in taxes. First, a tax on those in certain economic categories who u p to now were taxed less than others; then, a tax on those in categories already affected, by offering them a choice between a special levy and a forced loan. T h o s e in the economic brackets which have been least taxed u p to the present are the farmers and peasants, liberal professions and artisans, and the average businessman. W e know how difficult it has always been to ascertain the income of agricultural entrepreneurs, especially average and small farmers who have no accounts and who are exceedingly numerous. Because it is impossible to guage the exact amount of these incomes, a uniform levy of 5,000 francs was established for all agricultural entrepreneurs—mostly farmers and peasants, whose income was not known. As for those whose profits were known—these will pay 5 0 % and 8 0 % of their taxable profits. One other group of incomes is difficult to determine: non-commercial professions (doctors, lawyers, artists, etc.); their profits are determined in a rather arbitrary fashion. In accordance with the new law, these profits are taxed 2 5 % (on taxable profits) calculated on the basis of 1946 profits. For example, a taxpayer in this category who in 1946 made a profit of 146,000 francs, and who has no children, must pay 25,000 francs under this ruling. As for merchants, businessmen, artisans, they will be taxed between 20 and 5 0 % (after certain variable deductions in accordance with the said categories) depending upon whether their 1946 profits were lower than 25,000 francs or higher than 50,000 francs. T h e r e remain the taxpayers who are subject to a general income tax. T h i s group will be charged with a tax equal to 20% of the tax paid in 1947, if the said income is lower than one million, 3 0 % if it is between 1 and 3 millions, and 4 0 % above this figure. T h e taxpayers in this final category often also belong in one of the three preceding categories. In such case the tax demanded of them will not be cumulative (added to taxes due under other headings) and the highest tax will be imposed. T h e latter can be substituted by a subscription to a loan bearing 3 % interest for a sum equal to that of the tax. T h e total which the Government expects to obtain by this new fiscal effort is approximately 125 billion francs. W e must bear in mind that for the past three years an increas-

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ingly stringent demand has been imposed upon the taxpayer. Aside from the general income tax, which amounts to 7 5 % of the total income when the latter exceeds 1 million, let us recall that since 1946, a tax has been levied on capital, i.e., the "solidarity tax," which reaches very high figures. In 1947, this solidarity tax was increased by a sum equivalent to one fourth of the already required total. T h i s is what is termed the "fifth quarter." Will budgetary balance be attained by means of the abovementioned measures? It is difficult to affirm this at the moment. What is certain, however, is that without these very measures, the State Treasury would have been caught short in March or April. T h i s would have necessitated further increase in the circulation of notes. T h e new fiscal regulations, the effect of which should make itself felt in the course of the first quarter of this year, will bring about a mass influx of funds to the State which will undoubtedly facilitate hurdling—without a new inflation—the first quarter of the year, while the internal revenue situation adjusts itself. Much doubt still persists. T h e provisions of the ordinary budget call for 918 billion francs for expenditure and revenue. These very high figures represent approximately two and one-half times the 1945 figures. It has not yet been proved that such a new burden can be borne by the country's income, or at any rate, that the sum appropriated will come sufficiently early to prevent a new inflation. However, the fiscal receipts of the first 1 1 months of 1947 rose to 535.9 billion francs. At present, the French national income is estimated at approximately 4,000 billion francs. Taxes represent at least one fourth of this total. Actually, the drop in buying power of the franc was so powerful that a deficit of 100 billion today corresponds, in terms of 1938 francs to scarcely 5 billion francs, and probably to one billion 1914 francs. A heavy levy, such as has just been decided upon will certainly constitute a financial difficulty for many businesses and individuals. T h i s difficulty can only be alleviated by credit transactions, from which the economy will undoubtedly suffer, especially if the credit restrictions which have been decided upon should begin to function rapidly. B. Monetary measures: However, the fiscal regulations which we have just mentioned are only a part, and to my mind, the least important of the reforms proposed by the Government. Its mone-

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tary program is infinitely more revolutionary than its fiscal prog r a m . T h e latter is only a means to attain stability of the f r a n c — w h i c h is the actual goal. B u t in order to attain this goal, the G o v ernment has just taken t w o decisive measures. (1) Devaluation of the franc. T h e rate of exchange fixed in December, 1945, could have survived only if price increase in France, f r o m this date forward, w o u l d have actually b e e n checked. B u t the contrary occurred. T h e result is well k n o w n . Price increase o n the French m a r k e t resulted in a steady increase for foreign buyers w h o p a i d these prices in sterling or dollars at the official exchange rate. C o n s e q u e n t l y , French e x p o r t trade has become increasingly difficult. T h e foreign trade deficit reached 130 billion francs in 1947. T h e only way to meet this w o u l d have been to obtain credits f r o m the U n i t e d States, or to e x p o r t g o l d f r o m the reserves of the B a n k of France. T h e gold holdings of the B a n k of France d r o p p e d f r o m $2,500 m i l l i o n in 1938 to $540 millions today, of w h i c h $83 m i l l i o n serve as guarantee. In order to facilitate exports, the G o v e r n m e n t has compelled a great n u m b e r of industries—for e x a m p l e , the a u t o m o b i l e i n d u s t r y — t o reserve almost all of its production for foreign markets. T h e French market therefore was deprived of m a n y commodities w h i c h were indispensable or at least very useful, after five years of war in w h i c h so m u c h was lacking. Prices rose proportionately. A t the same time, these goods when sold on foreign markets c o u l d not cover their net cost. For example, a car sold on a foreign market has, for the past few months, represented a loss of 100,000 francs for the industry e x p o r t i n g it. T h i s p a r a d o x i c a l situation led the French Governm e n t to p l a n a new d e v a l u a t i o n of the franc. T h e new exchange rate is 8 0 % higher than the f o r m e r one. T h e value of the dollar is fixed at 214 francs instead of 120, the sterling value is 800 instead of 480. O n this basis, French exports may be resumed, providing that internal price increase ceases. (2) Alongside this f u n d a m e n t a l decision, a very i m p o r t a n t inn o v a t i o n has been introduced: it is the creation of a free exchange market where those w h o w a n t f o r e i g n currency and those w h o have it (actually, it concerns essentially importers and exporters) will decide the rate of exchange which they will use for their transactions. T h e comparison of private d e m a n d a n d supply of foreign

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pj

currency and francs is once again the standard rule for private exports and imports. Any rise of the exchange rate of the dollar or sterling on the Paris market will tend to reduce imports and stimulate exports—and vice-versa. Therefore, the only system which has until now created some equilibrium between exports and imports is brought back to life. Moreover, the intervention of the "Marshall Plan," the importance of which cannot be overestimated, permits the country to face the new freedom brought to the foreign exchange market, fearlessly. It enables the French market to import certain essential products without in any way straining the foreign exchange market, since these imports are to be reimbursed at long term and do not demand immediate payment. Supply and demand of foreign currency will therefore remain limited to non-essential products: food or industrial commodities such as tools and machinery can be furnished by French industry if foreign prices seem too high because of the very high rate of the dollar. Thus we see to what extent the Marshall Plan can contribute to the return of a free French economy. It permits return to normal international trade and reduces the complications and the intolerable delays created by foreign exchange control. But this is not all. T h e foreign exchange market will be supplied not only with dollars obtained through export of commodities, but also by French holdings in foreign countries which will be repatriated. It is anticipated that a marked and persistent drop of the dollar—in other words, a rise of the franc on the exchange market will, before long be followed by such return of capital, provided, naturally, that confidence in the financial future is maintained and that the budgetary deficit does not deteriorate. If this condition is fulfilled there is no earthly reason why these returns should not be rather considerable. T h e Bank of France, or the Stabilization Fund will then be in a position—in case of a fall in the dollar exchange note—as was the case during the Poincaré experiment—to intervene on the market in order to buy a certain quantity of the dollars supplied and thus reconstitute its gold holdings. It goes without saying that the export of French capital would remain prohibited. Finally, it is hoped that freedom of foreign exchange will stimulate two other consequences which could contribute on a large

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scale to the financial recovery of France. First and foremost (and this of course provided that confidence is re-established) it is anticipated that private credits will be granted by foreign firms to the French economy; these credits have not been granted until now for fear of a fall in the exchange value of the franc. T h e n , it is possible to conceive that gold hoarded in France—which is believed to reach a very high figure—(3,000 tons of gold is the figure which has been most frequently quoted) will reappear on the market and will be presented to the Bank of France or to the Stabilization Fund, in order to be sold, when the owners of these holdings will have abandoned all hope of seeing the price of gold increase. T h e B a n k would then be in a position to reconstitute its gold stock, as was the case after 1926 under M. Poincare's leadership. At that time confidence in French currency will be completely restored, and the hoarding of commodities which today is an important element in the rise of prices, will come to an end. We thus see the importance of the proposed monetary regulations. T h e y had been proposed more than a year ago by economists who are not obsessed by the theories of controlled economy. If the success of these measures takes shape in the course of the next few weeks, it might very well be a decisive success for the recovery of French economy and for the expansion of international trade. In the course of the negotiations which took place in the preparation of these regulations, the French Government encountered two obstacles. We must mention them at this point because they show to what extent monetary markets are nowadays tied up with each other. On one hand, the Government of Great Britain has feared the prospect of seeing free quotations of the sterling and the dollar on the official foreign exchange market in Paris. It fears seeing a sterling rate on that market different from that which now ties sterling to the dollar, i.e., 4 dollars to a pound. T h e rate commonly used is, as we well know, much lower. Sterling sells at $2.50 on the free markets. It is probably at about this rate that sterling would sell in Paris. It seems to us that Britain's fear is groundless. If we want to go back to a healthy international situation, we have to face reality. T h i s could imply that the difference between official prices—not only of currencies, but of commodities — i n all countries, is a fact to be taken into account. It is unbeliev-

SUPPLEMENTARY CHAPTER able that in this competition between two kinds of rates it will not be the free rate which would triumph in the long run. A l l efforts to maintain the official rate artificially seem doomed, unless exceptional circumstances should arise, but they are absolutely impossible to foresee. T h e other obstacle which the French Government had to cope with was the resistance of the International Monetary Fund, which is, so to speak, entrusted with the control of the official foreign exchange rates declared by all countries during the preceding year. T h e r e again, the truth is that those rates had been fixed prematurely at a time when the dislocations brought about in international relations as a consequence of the war, had not yet been fully realized. T h e Monetary Fund will not maintain its authority and play the role it was meant to play when it was created, unless it shows that it is capable of great adaptability and is able to comply with the most urgent needs of the countries bound together by the Bretton Woods Agreement. It would be disastrous if instead of becoming an asset in the recovery of the currencies of countries disrupted by war, it would stand for the defense of certain parities, and this for completely theoretical reasons which are definitely alien to the true interest of the countries seeking its cooperation. In this respect it may be useful to recall the text of Article X I V , Section 2, of the Agreement of the International Monetary Fund which reads as follows: "Section 2—Restrictions in Regulation of Foreign exchange: In the post-war transitional period members may, notwithstanding the provisions of any other articles of this Agreement, maintain and adapt to changing circumstances (and, in the case of members whose territories have been occupied by the enemy, introduce where necessary) restrictions on payments and transfers for current international transactions. Members shall, however, have continuous regard in their foreign exchange policies to the purpose of the Fund; and, as soon as conditions permit, they shall take all possible measures to develop such commercial and financial arrangements with other members as will facilitate international payments and the maintenance of exchange stability. In particular, members shall withdraw restrictions maintained or imposed under this Section as soon as they are satisfied that they will be able, in the ab-

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sence of such restrictions, to settle their balance of payments in a manner which will not unduly encumber their access to the resources of the Fund." If this Article has any significance, it obviously means that the members of the Fund are authorized not only to establish new restrictions during the intermediary period, but 'a fortiori' to introduce a greater freedom. It would indeed be paradoxical to use this Article for the purpose of creating new restrictions rather than granting a great freedom than that which was possible to conceive at the beginning. A t the time when the Fund was created, its founders were obviously fearful lest the current restrictions be maintained or even increased following the peace. However, they thought it better to maintain a liberal attitude toward the creation of new restrictions. Hence Article X I V as quoted above. Will they have a less liberal attitude today when it is a question of establishing an increasing monetary freedom on the market? This seems to me to be contrary to the aims pursued by the Fund and to elementary common sense; and I refuse to believe that such are the intentions of its members. It is important to note however, that they willingly allowed England (and very rightly so, I think) to suspend the convertibility of the sterling in July, 1947. O n the contrary, when it is a matter of re-establishing a freer exchange of the franc with foreign currencies, the members of the Fund are ill-disposed to this solution. It is my belief that the policy of the Fund should be to encourage sincerity and liberty in monetary matters wherever such efforts emerge in the midst of the greatest hardships. CHARLES

RIST

Bibliography R. Courtin, Le Problème financier (The Financial Problem), Les Cahiers Politiques, Juillet, 1945. Discours de A. Philip à l'Assemblée consultative, ième séance du 29 Mars 1945 (Mr. A. Philip's Speech at the Consultative Assembly, second session, March 29, 1945). Ph. Guignabaudet, Comment financier notre relèvement? (How Can We Finance Our Own Recovery?), Paris, 1945. Inventaire de la situation financière, 1913-1946 (Inventory of the French Financial Situation), Imprimerie nationale, 1946. H. Laufenburger, Crédit publique et Finances de guerre, 19141944 (Public Credit and War Finances), Librairie de Médicis,

»944L. Lebeau, Contribution à l'étude de la restauration financière de la France (A Contribution to the Problem of French Financial Recovery), Revue Economique et Sociale, Août, 1945. M. Mitzakis, Principaux aspects de la situation financière de la France, 1936-1944 (Main Features of the Financial Situation of France), Les Publications Techniques, 1945. F. Moliexe, Le système monétaire français (French Monetary System), Jouve, 1942. B. Nogaro, Le financement des dépenses publiques et la liquidation des dépenses de guerre (The Financing of Public Expenditures and the Liquidation of War Expenditures), Domat-Monchrestien, 1945. A. Philip, La situation économique et financière (The Economic and Financial Situation), Les Cahiers Politiques, Juillet, 1945. G. Pirou, Le problème monétaire en France depuis la libération (French Monetary Problem since Liberation), Revue d'Economie politique, Janvier-Février, 1945. Rapports au Conseil du Plan (Reports Presented at the Planning Council), Imprimerie nationale, 1946-1947.

BIBLIOGRAPHY Recherches des éléments qui doivent déterminer l'ajustement du change français (The Quest for the Elements Which Will Determine the Readjustment of the French Foreign Exchange Rate), Etudes et Documents, Septembre-Octobre, 1945. R . Sédillot, Le franc enchaîné (The Franc in Bondage), Sirey, 1945.