The Dollar, the Franc, and Inflation 9781512820294

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THE DOLLAR, THE FRANC AND INFLATION

T H E

MACMILLAN

COMPANY

N E W YORK • BOSTON . CHICAGO . DALLAS ATLANTA . SAN FRANCISCO MACMILLAN

& CO.,

LIMITED

LONDON . BOMBAY . CALCUTTA MELBOURNE T H E

MACMILLAN COMPANY O F C A N A D A , LIMITED TORONTO

THE DOLLAR, THE FRANC AND INFLATION BY ELEANOR L A N S I N G DULLES, PH.D. University of Pennsylvania, Author of "The French Franc" and "The Bank for International Settlements at Work"

HEW YORK THE MACMILLAN COMPANY 1933

Copyright, THE

19$$, by

MACMILLAN

COMPANY.

All rights reserved—no part of this book may be reproduced in any form without permission in writing from the publisher, except by a reviewer who wishes to quote brief passages in connection with a review written for inclusion in magazine or newspaper. Set up and Published

printed.

December,

19SS.

SET UP BY BROWN BROTHERS LINOTYPERS PRINTED I N THE UNITED STATES OF AMERICA BY THE FERRIS PRINTING COMPANY

FOREWORD

THIS brief study of inflation in the United States and in France was written in November, 1933, with the sincere conviction that there are serious dangers ahead which can still, to a considerable extent, be avoided by careful statesmenship guided by a strong expression of public desire for sound money. Inflation takes many forms, Government debt is the most insidious, bank credit the most volatile, and there are already signs there that there may be large quantities of both. Greenback may actually be less destructive than the unrestrained growth of various forms of borrowing. In preparing this book, I have used the studies of Professors James Harvey Rogers, Charles Rist, and R. G. Hawtrey, as well as my own. I find in their books emphatic warnings against budget deficits and inflationary borrowings on a large scale. I find warnings against rapid or continuous price increases. I find approval of a certain measure of appreciation to bring the franc up from its low 1926 level. I have been unable to find support for deliberate depreciation or a program v

vi

FOREWORD

of conscious inflation. If such evidence is there, it is not easily found by those well acquainted with what happened in France. Finally, I would like to say, that the observation of the effects of inflation in Germany, Austria, France, and other countries has convinced me that foreign exchange fluctuations are very destructive. It is the poor who suffer more than the rich, it is the middle classes who are practically annihilated in the first place, and the working man and the farmer who suffer the consequences in the long run. The rich are sometimes, not always, able to store away their wealth. A number of my colleagues and friends have been generous in giving their time to the reading of this manuscript. I wish in particular to thank Dean Joseph H. Willits and Professor Anne Bezanson of the Industrial Research Department, Wharton School of the University of Pennsylvania, for their helpful suggestions and for arranging my time in such a way that this book could be written. Miss Bettina Linn has been kind enough to go over the manuscript and make some very useful comments. It is also appropriate to mention again the assistance given me by the Harvard and Radcliffe Bureau for International Research during the years 1924 to 1927, when I was preparing my earlier book in Paris. Even a short study such as this is, incorporates suggestions from many quarters; this help I would

vii

FOREWORD

gladly acknowledge in more detail if it were possible, while taking upon myself full responsibilities for the ideas expressed here. ELEANOR L A N S I N G

Philadelphia, November, 1933.

DULLES.

TURNING POINTS IN T H E FINANCIAL

SITUATION*

1919 Reconstruction begins; franc unpegged, p. 14. Franc fell from 19 to 9 cents (i.e., 5.42 to 11 francs per dollar), p. 33. 1920 World price decline, p. 24. Deflationary agreement with Bank of France, pp. 25, 42. Franc fell from 9 to 6 cents (i.e., 10.8 to 16.9 francs per dollar), p. 25. 1921 World-wide depression, p. 25. Franc rose from 6 to 8 cents (i.e., 17.1 to 12.3 francs per dollar), p. 25. 1922 Major turning point in foreign and financial policy, p 27. French insistence on reparation, p. 28. Foreign distrust of franc, p. 28. Some monetary deflation, p. 42. Franc fell from 8 to 7 cents (i.e., 12.5 to 13.7 francs per dollar), p. 42. 1923 Ruhr occupation by French and Belgians, p. 41. Heavy reconstruction expenditures, p. 36. Large budget deficit, p. 36. Foreign speculative raid on franc (November), p. 43. Franc fell from 7 to 5 cents (i.e., 13.6 to 19.6 francs per dollar), p. 43. 1924 Franc continues rapid fall to low point of 3.7 cents (March), p. 43. Crédit National loan fails (January), p. 46. Increased taxation and Morgan loan bring rally (April), p. 44. Cartel of radical parties wins May election, p. 45. Reconstruction virtually complete, p. 45. 1925 Decline in subscriptions to short-term government loans, p. 45. Steady rise in prices, p. 46. Taxation increased (December) as Briand struggles against inflation, p. 46. Domestic speculation against franc, p. 46. Franc declined from 5% to 4 cents (i.e., 18.4 to 26.9 francs per dollar), p. 46. 1926 Struggle over government finance intensified, pp. 46-47. Price discrepancies increase, p. 46. Monetary crisis; public protests and riots, p. 47. Poincaré forms coalition government (July), p. 47. Franc rises from July low point of about 2 cents to 4 (i.e., from 50 to 25 francs per dollar), p. 47. 1927 Franc steady; government gold buying; unemployment increases; production declines, p. 48. 1928 Legal stabilization, June 28, 3.92 cents, p. 49. * The events in this table are mentioned in the following pages, as indicated. The values for the franc are approximate. Tables for the daily rates are to be found in The French Franc, page9 455-480,

THE COURSE OF INFLATION IN FRANCE* FRANCS PER DOLLAR

pER BILLIONS CtNT

FRANCS 900 90

700 70

500 SO

_ 100 10

111 il M 1111111 il il il 111 111 il il 11 il |li 11 im 11 n| M il inn 111 H I Ii I ni 11 1922 1923 1924 1925 1926 1927 * The data used in these curves are found in The French Franc, 1914 to 1928, pages 432, 455-480, 482-486, 510, 511.

CONTENTS PAGE V

FOREWORD I. II.

T H E C R I S I S OF 1 9 3 3 T U R N S ATTENTION TO P A S T INFLATION INFLATION

ALWAYS

AN

ATTEMPT

TO

E S C A P E H E A V Y BURDENS III. IV. V.

1 5

D E B T S U S U A L L Y THE CORE OF THE P R O B LEM FRENCH EXPERIENCE ANSWERS P R E S E N T - D A Y QUESTIONS

9

SOME 19

F R A N C E SUFFERED T W O SEPARATE I N F L A TIONS: W A R T I M E AND P O S T - W A R

23

T H E P O S T - W A R INFLATION

30

S W I F T C R I S E S IN THE Y E A R S FROM 1 9 2 2 TO 1925

40

F R A N C E PROFOUNDLY AFFECTED BY I N F L A TION

51

IX.

R I S I N G P R I C E S D I D N O T B R I N G PROSPERITY

56

X.

E S T I M A T E OF L O S S AMOUNTING TO M A N Y

XI.

CONTROL OF INFLATION FAILED IN F R A N C E

79

XII.

W H E R E C A N INFLATION S T O P ?

89

XIII.

T H E P U B L I C REVOLT A G A I N S T TION

VI. VII. VIII.

BILLIONS OF F R A N C S

67

DEPRECIA92

THE

DOLLAR, T H E AND

FRANC

INFLATION*

I T H E CRISIS OF 1 9 3 3 T U R N S ATTENTION TO PAST INFLATION

WHEN, as in the United States in 1933, a paper currency is divorced from gold every intelligent man and woman is confronted with serious doubts and troubling uncertainty. Confusion and fear rapidly increase. All property values are threatened by the official actions which tear from its moorings the price system of a nation, and there begins a period of unpredictable financial intervention by the government. Whenever this situation is realized, everyone with savings looks desperately for some way of protecting them from annihilation. Many with small fixed incomes know they face slow starvation. Others turn their energies to the desperate fight to increase their wages * The material bearing on inflation in France used in the study was gathered at the time the writer was preparing the manuscript for The French Franc, 1914 to 1918, the Macmillan Company, 1929. 1

2

THE DOLLAR AND THE

FRANC

or profits at a time when all costs are rising. Factory workers and farmers find their earnings will not cover the bare necessities of life, and they are further than ever from paying past debts. All those who acknowledge that the future prosperity of industry is an essential condition of national well-being try to find some way to restore a basic stability and to avoid the threat of financial collapse. Inflation is almost certain to end in disaster. History has shown this over and over again. Now, in the United States, at the beginning of a new period of experiments in money, the threat of financial collapse is very real. Inflation by almost any definition has been going on for some time. Money is inconvertible; prices have risen; depreciation in terms of gold and foreign exchanges has been rapid. Budget deficits have grown until the financing of the government debt has been possible only by means of short-term government notes of such low interest rates that they approximate money. Are there, now, any avenues of escape? Are there ways of avoiding the results of these changes? These are the questions in the minds of those who are active in economic affairs. They are the urgent problems confronting each citizen. What protections can be found, what safeguards devised? What should one buy and how invest savings? How fast will prices rise, and how can stability be achieved?

THE

1983

CRISIS

3

Fortunately, concrete evidence and direct testimony with regard to French inflation are available to guide American public opinion in the struggle over monetary policies. By measuring the changes in bond values and stock prices in France one can gain some idea of what will happen if inflation continues in the United States. By inquiring into the condition of industry, the situation in agriculture, the role of the treasury and the Bank of France, one can detect somewhat earlier than would otherwise be the case, profound changes which are bound to affect the life of the nation. Those individuals who have the power to check the first movement may find in this past experience emphatic warning that the later stages are worse than the first. In the history of the sudden dramatic reversals of speculation and value in 1924 and 1926 there may be some clues to the secret of stopping inflation. A short study can only outline certain of the important relationships, and point to some of the more decisive actions by governments and by individuals. Only the high lights of the picture can be given. It is possible, however, that such a treatment may be more useful at the present time than a detailed study which would stress the infinite subtleties of monetary theory. These are not of first importance at the present time. The issue is bold and clear-cut; the difference between currency inflation and stabilization is unmistakable.

4

THE DOLLAR AND THE

FRANC

For this reason the significant features of the French case can be most instructive if they are drawn in a sharp outline against the background of more intricate detail of economic change.

II I N F L A T I O N A L W A Y S AN A T T E M P T TO E S C A P E HEAVY B U R D E N S

THE French fight against monetary collapse in the years 1922 to 1927 is one of the most dramatic struggles of the post-war period. As in all battles against inflation, the issues were not at first clear. A variety of troublesome problems puzzled those who were guiding economic affairs. While these separate concerns were occupying the minds of different groups, by slow stages the situation of the budget and the banks altered profoundly. A condition of relative calm in 1922 was followed by a confused period of weak and dilatory government finance and, three years later, by months of apprehension and bitter controversy. Then the final weeks of monetary depreciation were characterized by panic and chaos which threw into sharp relief the inevitable choice between taxation and runaway currency. The public protests in 1926 forced a divided and hesitating Parliament in the direction of sound money and sane budget methods. In France, as elsewhere, after wartime disturb5

6

THE DOLLAR AND THE FRANC

ance the fundamental task of readjusting many factors to long-run conditions of production and demand was so complex that efforts were widely scattered and often conflicting. Valuable time was lost over inconclusive efforts until increasing maladjustments tended to bring forward one of the major factors as the apparent cause of all other economic difficulties. In France, this was the government debt. This mass of long- and short-term obligations seemed to dwarf all other problems as the swift changes in many departments of economic life left it unmanageable and undiminished. In times of economic distress there is almost always some scapegoat, or some apparent cause of trouble which is given increasing emphasis as the situation gets out of hand. This factor is usually of real importance, but it is seldom the principal cause of the disturbance, and even less frequently the only evil which should be wiped out. The emergence of one influence as responsible agent of economic distress, however, leads inevitably to the search for one method of cure, and as long as this illusion as to the reason for economic difficulties is dominant, the complicated interaction of many other influences may increase the difficulties and make a moderate solution of the problem almost impossible. The result of such conflicting efforts, and of hesitation and delay, has very frequently been currency depreciation.

AN ATTEMPT

TO ESCAPE DEBTS

7

In ways such as those suggested, public opinion and economic factors combine to determine the course of depreciation. One can fit each different case of inflation into a clear-marked pattern of economic relations. In repeated crises one can see how the many complicated problems sink temporarily into the background, as some particular outstanding issue claims first attention. Meanwhile false efforts and recourse to mistaken remedies seem to bring economic affairs to a hopeless impasse. At this later stage, inflation, which has begun almost unnoticed, is seized on by those who would have refused to consider it in more normal times, and is made a definite instrument of economic policy. Anyone who takes the trouble to follow the fluctuations of the French franc will find a typical example of this situation. Here, as elsewhere, the first confused policies in financial and political life interfered with consistent and courageous action. While the struggles over reparation and taxation were becoming constantly more intense, the swift currents of money values in the realms of reconstruction, foreign commerce, taxation, and maturing debt, were getting definitely out of control. By the time the nature of the situation was beginning to be realized, inflation was well under way. Then, as often, the tasks before the government were regarded as completely overwhelming and the only forms of action which seemed pos-

8

THE DOLLAR AND THE FRANC

sible were more borrowing, and more inflation. For a short time expansion and depreciation were frankly admitted and then as the disastrous results began to be apparent the conflicting political parties and economic classes definitely came to grips on the matter and the fight for stabilization began. Even the general outlines of what happened can be instructive to those who must make decisions about a future which is disturbing in anticipation. A summary of the stirring events, and the opinion of the French on monetary depreciation, serves to make more vivid the generalizations of theory which stress the importance of maintaining sound money. There is no way of foretelling events which lie ahead. Many inevitable risks must be assumed and dangers encountered. I t is, none the less, important to use what knowledge is at hand, and to analyze economic relationships in a time of monetary depreciation in order to recognize what phase in the evolution of financial affairs has already been reached—what changes are still to come. By using these indications of cause and effect, by applying the past measurements of speed and extent of movement, some of the worst losses and some of the more serious disturbances may be avoided.

Ill DEBTS USUALLY T H E CORE OF T H E PROBLEM

real and superficial differences in the problems in various countries at different times, make monetary policies emerge in a special form in each case that has occurred. This is an inevitable appearance. No experience can duplicate the past exactly because the public reaction to each new experiment, each act of speculation or of conscious policy is conditioned by the knowledge of crises that have gone before. History demonstrates in a striking manner how the world passes from the cruder forms of financial procedure to ever more intricate and refined methods of contracting and expanding purchasing power. Even though the actions of treasuries and of banks become increasingly subtle and in many ways more effective, the forces behind inflation and deflation are always fundamentally the same. Except for some variation in detail similar influences can be recognized in the successive crises and they are found to be very much alike from age to age, and from place to place. CLEARLY,

French inflation, therefore, may be taken ES Sb 9

10

THE DOLLAR AND THE FRANC

specific example of a monetary dilemma which recurs frequently. Granted a number of distinguishing characteristics, peculiarities of institutions, unique difficulties and special resources, the sequence of events followed the usual course from the first gradual rise in prices, through the more rapid increase, panic, and collapse. More specifically, it should be observed that the aim, insofar as there is an aim behind inflation, was the same in this stormy financial period as it has been in every recorded instance. There was an attempt in Paris, at times deliberate, and at times confused and groping, to avoid the direct impact of a large burden of debt which had come to weigh heavily on all economic enterprise. By devious means, and by various subterfuges, there was an effort to reduce or shift the pressure of loans and to substitute new and inflationary borrowing or indirect repudiation through monetary depreciation for the more direct means of cutting down the internal obligations that were considered intolerable. The French emerged from the war with an internal government debt which was almost nine times that of 1913. There is no denying the fact that the debt presented difficult problems. It is well to observe, however, that it was much less burdensome, in many respects, than the heavy load of private debts which accumulated in the United States in the lending up to 1929. In any

THE CORE OF THE

PROBLEM

11

case it was difficult for the French statesmen to see how they could carry the interest and maturing capital payments on these large obligations. Their debates and plans were constantly turned in the direction of expedients and devices to postpone the deflation. It was feared that the effect of the bold financial action to cover the debt charges by heavy taxation would disturb business. The fear of a repressive influence on economic life and of public revolt against high levies explains why they turned away from the English procedure of drastic taxation, which put the British debt in manageable form. This fiscal policy, or lack of policy, was based partly on the hope of gaining further resources from Germany in the reparation struggle and partly on the usual desire of every political party to shift unpleasant responsibility to others. The result of this inability or unwillingness to face the consequences of a heavy debt, was delay, uncertainty, and a soft money policy which ended in inflation. This accomplished the reduction of the internal debt since it cut the real worth of government securities to less than a fifth of their former value. Thus, the capital levy which the politicians had fought over, and which Parliament had refused, became a reality through the decline in the value of all savings and all bonds. The amount of national wealth which was destroyed or expropriated by this indirect procedure, was

12

THE DOLLAR AND THE FRANC

in all likelihood many times as great as would have been necessary if the taxation had been planned in a more rational manner. The loss of prestige, of production, of educational and cultural resources which came with monetary collapse, was much greater than that which would have been necessary if panic and confusion could have been avoided. In one way or another the cost of the public borrowing, accumulated during the war, had to be met. If instead of inflation more constructive methods of cutting debts had been used, the ruthless destruction of values might have been avoided. One of the important influences which cut economic development in segments, and which seem to separate one generation from another, is the piling up of debts in excessive amounts and the subsequent periods of painful liquidation. This up and down swing leads to strain on the economic system which is met by various devices but never without some disturbance to the normal processes of production and consumption. Sometimes these debts are the result of war, sometimes the result of rapid speculation; occasionally they accumulate almost unnoticed and for no very clear reason. The end of the building up of obligations comes by various processes of deflation or devaluation. The depression which accompanies this readjustment puts unusual pressure on governments. At such times the state is forced to undertake un-

THE CORE OF THE

PROBLEM

13

usual expenditures in the form of relief or reconstruction; it assumes unexpected obligations at home and abroad. Many of the measures adopted aim to postpone or transform debts, without accomplishing their liquidation. Then, as palliatives increase fundamental difficulties, a moderate and orderly solution of the problem seems impossible and inflation is urged as a way out. At such times the lure of monetary depreciation is increasingly powerful and the risks of a further deflation become obviously menacing. Thus, in a blind way nations move through periods of mounting debts, futile attempts to shift the weight of those debts by new borrowings, and erratic value changes, to a bitter struggle over direct inflation. Both France and the United States passed through these stages in the post-war decade. Sudden changes in the nature of decisions on monetary and fiscal policy in a foreign country always stand out in clear relief to the outside observer who can separate them partially from the maze of domestic politics. For instance, American experts who examined the financial programs of European countries condemned many actions which the nationals of those countries considered inevitable. Moreover, some of these experts came, later, to favor such policies in similar circumstances at home. Arguments that seem to be excuses in one case are brought forward as reasons in another. The new guise assumed by the prob-

14

THE DOLLAR

AND

THE

FRANC

lem in the most recent case always sets it apart from other experiments with monetary intervention. These are criticized for their obvious futility in the past but there is, inevitably, a considerable amount of illusion in judging economic actions in the present. This makes it difficult to weigh one's judgments evenly and to avoid tipping the balance either in the direction of destructive criticism, or in the direction of condoning actions which were inexcusably weak and confused. The new element in the French situation was the intricate way in which the public debt was linked with reconstruction on one side and reparation on the other. The new element in the American situation in 1933 was the deliberate use of the more sophisticated economic terms, statistical devices, and instruments to justify a policy of debt reduction through monetary means. In both cases the direction chosen, for a while at least, was the substitution of new debts for old, the avoidance as far as possible of taxation, debt conversion, or a more direct attack on the basic problem. In both cases, a period of subterfuge and delay permitted growing uncertainty and distrust of the future to undermine values, and thus to begin a depreciation which made later inflation almost inevitable. The struggle in France was waged, first, in the realm of foreign policies, as the attempt to collect reparation from Germany was urged as the only

THE CORE OF THE PROBLEM

15

way of reducing government debts. The struggle in America focused on the attempts to raise the price level with the deliberate aim of lightening the burdens on debtors at the expense of the creditor class. In both cases the original intention became somewhat altered with the passage of time. Depreciation of the currency on the foreign exchanges outran the rise in prices. Moreover, the problem of meeting particular debts was not solved by the short-run changes in value. Failures still occurred and budget deficits grew, as rising prices brought new problems for the government to solve. The fiscal policy of the French government in 1922 was justified in the eyes of most Frenchmen because they counted on German pay ments to reduce government obligations. The poi icy of the American government was justified b> many in 1933, because it was alleged that price control was a feasible and easy method of cutting the value of debts. The roads which each government took to reach its end differed markedly at the start, but the consequences became increasingly similar as the momentum of inflation began to mould economic relationships according to the long familiar pattern. Of course, some of the differences in methods employed will be reflected in variations in the length and depth of the movement initiated by inflationary policies. The United States will not pass through exactly those stages of depreciation

16

THE DOLLAR AND THE FRANC

which France experienced. Some knowledge of the past will serve as a guide to administrators and to speculators. The movement is apt to be more rapid at many points because the course of inflation is so well known. The influence of exchange depreciation on certain types of securities, is apt to push them up or down faster because the curves of other inflations can be studied and measured. More ample resources may check the speed of the movement here and there. Some danger signals may be noted, some points of weakness anticipated. In times of swift change and unfamiliar policy it is particularly important to try to survey what is happening with a detached and balanced point of view. This is peculiarly difficult when the savings or income of the observer are at stake. In any case the situation is hard to understand in the period of the first slow movements in an entirely new direction. The slow expansion of credit, the first piling up of deficits, and the inconspicuous substitution of one form of government borrowing for another pass almost unnoticed and generally uncondemned. This fact makes the later actions seem inevitable and predetermined by the initial decisions. Then as inflation accelerates, a certain amount of fatalism impels acceptance by many of policies which come from the established agents of central control and which are clothed with government authority.

THE CORE OF THE

PROBLEM

17

Despite all the intellectual limitations set bytime and space, however, it is possible to develop a keener knowledge of what is happening in one's own country by seeing what happened in others. It is easier to look on the swift drama of monetary changes with perspective and insight, if it is compared with the course of events elsewhere. Similarities at certain points suggest means of protection, or eseape. Differences can guide one's opinion as to the likelihood of achieving control or stability. The heavy social cost of financial weakness can be taken into account. The nature of the stabilization crisis can be weighed and analyzed. There are in the course of every experience with monetary depreciation times of respite during which deliberate action can effectively shift the direction of movement and lessen its speed. These moments of opportunity can be singled out in the French case, and similar turning points when stabilization is feasible may become evident in the evolution of American relationships. Even when one is armed with all possible knowledge and fortified by political determination of unusual force, it is extremely difficult to reverse a policy which has been in operation for many months. Inflation once started cannot be wiped out in short order. Stabilization cannot be achieved in a single bound. In fact it is generally admitted that only the most courageous action can prevent the increasing speed of momentum in price change

18

THE DOLLAR

AND THE

FRANC

once it has become pronounced. In view of the urgent need of restoring confidence and regaining normal economic activity, all these guides to action must be sought out, and every indication of ways of escape thrown into a clear light. The cost of inflation to creditors, and in some cases to debtors as well, is certain to be heavy if it goes on for many months. Every intelligent effort must be made to cut this cost to a minimum, and shorten the period of uncertainty.

IV FRENCH EXPERIENCE ANSWERS PRESENT-DAY

SOME

QUESTIONS

Although no past experience can answer all the questions which one would like to ask of the future, it is highly probable that the parallelism to be observed between inflation in France and that in the United States is the most useful guide to what is likely to happen in 1934. Some of these parallels have been suggested already, but they merit further discussion. This is true, first and foremost, because the French currency depreciation was moderate as compared with some of the more chaotic financial experiences which have swept other currencies to destruction. During the periods of price and currency fluctuations there are times of relatively slow change during which it is possible to compare the relations of commodity values to each other and to examine the effects of movements of these factors on production and commerce. The examination of the charts and a comparison of the data indicate some of the familiar effects of inflation which recur in practically every instance, while a review of po19

20

THE DOLLAR AND THE FRANC

litical crises, the shifting aims, and demands of public opinion show where the pressure was most felt in this—one of the less severe cases of monetary depreciation. A second similarity which increases the availability of information likely to shed light on American conditions is that the French financial crises are comparatively recent and have been recorded in a number of comprehensive studies. The facts have been registered in a number of books and reports, and can still be interpreted and explained by those who lived through these days of panic and collapse. Much more important in establishing the significance of these events, however, are certain points of likeness to the American situation which deserve careful consideration at this time. I t has already been suggested that there are important ways in which the two countries were alike. There are influences which seem to run parallel to each other for a considerable span, and which indicate some presumption that the evolution is likely to be comparable to a notable degree. I t is possible to take certain years of French inflation and trace out at least for short periods a series of events following each other in a sequence like that in American inflation. I t is even possible to find counterparts for a number of institutions which were instrumental in expanding purchasing power and lifting prices in France.

FRENCH

EXPERIENCE

INSTRUCTIVE

21

Certain speculative influences in America can be likened to some of the financial forces which bore on the French franc. Frequently, in new guise and altered form, the ever recurrent tendencyemerges to effect typical changes in various countries. Such a recurrent problem is the attempt to lighten excessive debt burdens. The existence of similar causes of disturbances does not . necessarily condemn any country to the same fate as that of any other. The knowledge which can be gained from past experience offers some hope that consequences can at least be mitigated. This easing of the situation is only possible, however, if a clear-sighted use is made of all the more pertinent material. Only by strenuous effort can other nations following along the dangerous road of unstable currencies avoid a few of the risks, and turn in time to choose a safer path of sound currency. Similarly, those who wish to find some measure of security may search in past experience in the effort to find ways of protecting their savings from annihilation. There are questions for individuals to answer as investors, and others to face squarely as citizens. There are difficult personal problems surrounding the earning of income and others connected with the spending of available funds. On every hand, deliberate choices between varying risks must be made as long as currency instability exists. No sound economic life was possible

22

THE DOLLAR AND THE FRANC

in France, nor can be achieved elsewhere unless inflation is halted and the monetary standard is reasonably stable. No steady stream of production and no calculable volume of demand can exist until people in general know how to value their money. In short, only with the help of strong and enlightened public opinion can chaos be reduced to order. In the development of such an opinion some further consideration of the French case is desirable.

V FRANCE SUFFERED T W O SEPARATE I N F L A T I O N S : W A R T I M E AND P O S T - W A R T H O S E who fix their attention mainly on wartime inflation in France will fail to see some of the points of strong likeness between what happened there and what has occurred in recent months in the United States. They tend to exaggerate the differences and underestimate the similarities. Actually there were two fairly distinct periods of inflation in France which differ markedly in mechanisms and policies. The depreciation before the armistice was the direct result of war finance and the cost of hostilities. It became inevitable after the first heavy expenditures were met by short-term government loans, and after it was clear that taxation would not be increased in proportion to the growing budget deficits. Depreciation on the exchanges did not, in fact, become evident as quickly as did the inflationary increase in prices within the country because of artificial intervention to protect the value of the franc. While the war was being fought, Great Britain and the United States aided

23

24

THE DOLLAR

AND THE

FRANC

France on a number of occasions in pegging the value of its currency on the foreign exchanges. It was not until 1919, when foreign support was suddenly withdrawn, that the rapid decline in the value of French money abroad made evident what had been happening for a number of years in France. The quotations for dollar exchange which stood at only 5y2 francs during most of the time until the end of the war, rose to more than 10 francs in 1919. From 1920, when the dollar rose as high as 17 francs, to 1922, the value of the franc fluctuated up and down in a wide zone, although the rapid changes involved disturbed many normal relationships and worked real hardships. Wartime inflation was a definite and understandable phenomenon and could hardly have been avoided under the circumstances. It is true that not all the inflation between 1914 and 1919 was necessary. France could certainly have paid for a somewhat larger share of the war costs out of contemporaneous taxation. It would probably have been better for the nation if this had been done, but for a number of reasons, the government judged it wiser to postpone the issue, and borrowed and spent billions of francs during four years of fighting, while taxes rose very slightly. The end of wartime inflation came with the reversal of many other tendencies in 1920. After this date two things occurred to change the cur-

TWO INFLATIONS

IN FRANCE

25

rent of events. The world depression, starting outside France, brought prices tumbling down at a rapid rate, and in the same year a convention between the government and the Bank of France inaugurated a serious effort to deflate the currency and raise the value of the franc according to a "sound money" policy. From that time on for a considerable number of months the franc moved upward on the foreign exchanges while the prices of commodities fell and then remained fairly steady at a level much lower than the postwar peak. The months between May, 1920, and June, 1922, constituted a period of reaction during which France could probably have chosen another course if political leaders both at home and abroad had been more quick to see the future consequences of a weak monetary program. In 1922, for instance, a different stand with regard to Germany, and a change of attitude towards internal taxation would have made the second and infinitely more disastrous inflation avoidable. Even granted this possibility, however, it is most unlikely that the franc could have been brought back to par. The very great amount of deflation involved would have been too disturbing to internal production and too depressing to foreign trade. Even a well-balanced and vigorous effort to tax would have made such a program highly destructive. In fact, the wiser course, as viewed from the point of vantage which a later period

26

THÉ DOLLAR AND THE FRANC

gives, would have been to move determinedly toward a stable value at levels indicated by the period of relative balance in 1922. This would have meant accepting the deflation of prices, and the rise in the value of the franc which came after the 1920 depression. I t would not have meant a return to the old par, however. This rate of exchange which was considerably less than the pre-war value, was tested successfully by the speculative forces of the depression and recovery period, and probably could have held without repressing either production or commerce. This level for currency stability would have been comparable to that in force during the early part of 1933 in the United States. It would have led to a reconstruction of industry on a level of prices which had been established by the free play of many independent forces. Neither inflation nor deflation would have been necessary. The burden of the internal debt would have been tolerable. Clearly the large totals of the government debt which represented wartime inflation, could not be ignored. Some could have been refunded if confidence had been maintained; some might have been paid off as economic life became more active. Taxation could have been raised if the destructive alternative, inflation, had been clearly understood. French mistakes in fiscal policy can be explained but they cannot for that reason be excused. I t is true that the past bore heavily on

TWO INFLATIONS

IN FRANCE

27

the future and made constructive action difficult. Here, as in other cases, an early inflation was passed on to the later period in heavy unmanageable debts. Even the United States can trace back a chain of influence from war borrowing to the burdensome 1932 mortgages. These factors exert an influence but there was no inherent necessity for piling up still further debts, nor were there sound reasons for engaging on new inflation after the first post-war readjustment had been partially accomplished. Nineteen hundred and twenty-two serves as a dividing line both for government attitudes and for price and currency relationships. Up to this date, public confidence in the government and in the Bank of France was largely unimpaired. There was a considerable foreign speculation in favor of the franc. Foreign commerce was reviving slowly; unemployment did not constitute a major problem. Unfortunately, the hope of collecting payments from Germany led to a superficial optimism, which was responsible in large measure for future difficulties. In fact, if France could have steered a middle course between the extreme policies of the conservative parties who attempted to put unreasonable pressure on Germany and the radical proposals of the left groups who favored a heavy capital levy, she might very well have achieved stability without undergoing the distressing experiences of her second large-scale inflation.

28

THE DOLLAR AND THE FRANC

In June, 1922, the French took a stern and unrealistic position in regard to Germany which reacted inevitably against a strong budget policy at home. They refused the proposal of the international bankers' committee to grant the Reich a loan. This stand indicated something of their attitude toward their internal debt problem. They were unwilling to tackle the debt as if it were mainly dependent on a far-sighted foreign policy, public confidence, and wise taxation. The very great difficulty in the way of handling the fiscal matters was made a reason for doing almost nothing about reform at a moment when a relatively small immediate sacrifice might have prevented serious difficulties to come. It was at this time that foreign speculation turned against the French franc, and that widespread disappointment regarding reparation built up a pessimism which was to affect the later crises in government credit. In some ways, this aspect of the situation sets the case of France apart from others, but in other respects it is evident that the initial reasons for the financial confusion are of relatively little importance. Time after time it is evident that once the tide has turned in the direction of soft money, the earlier causes sink into insignificance as compared with the factors tending to pile up the destructive force of the wave that finally bears down on economic institutions with an almost irresistible force.

TWO INFLATIONS

IN FRANCE

29

It is important to observe, in any case, that even before the decisive movement in the foreign exchange market registered the beginning of the second depreciation, world recovery had stimulated some measure of improvement. A number of constructive influences are evident in production and commerce. Here certainly can be seen a moment of real opportunity, not so clearly evident at the time, of course, but plain enough in retrospect. At this time, if ever, a broad and well-balanced program to meet the needs of the next few years was, in all likelihood, an economic possibility. Thus a severe economic depression, a rapid fall in prices, and a brief period of normal recovery cut the French experience with inflation into two distinct segments. On the threshold of rapidly growing prosperity for the world as a whole, with reconstruction very well advanced, France became entangled in the complex meshes of an unwieldy debt and was reduced to financial chaos that destroyed large amounts of real values. The contrast between these years of confusion and distress and the slow but steady recovery which might, perhaps, have been possible, should serve as a guide and warning in the choice between the divergent ways of stabilization and inflation which comes at times to all nations.

VI T H E POST-WAR

INFLATION

IT is, then, the second and definitely post-war inflation that one must examine in order to gain some knowledge of how the phases develop and where one can find protection. Here, in this avoidable and to a certain extent deliberate attempt to meet the problem of indebtedness by easy money policies and further borrowing, one can find the best indications of the way to sound reconstruction. In a limited degree this experience can be used as a laboratory or testing ground for theories in price relationships and for an examination of monetary influences which are of extreme importance for the immediate future of the United States. A brief comparison of the similarities and differences between France in 1922, and the United States in 1932 and 1933 serves as a chart to an exploration of the problems of inflation. This comparison can rest, in part, on quantitative data but it includes also estimates and judgments the validity of which cannot be proved by statistics alone. A combination of all the evidence avail30

POST-WAR

INFLATION

31

able leads one to believe that there are a number of directions in which the parallels between the two countries are instructive. There is certainly no other case which comes so close to the United States either in respect to the causes operating in the early stages of inflation, or in respect to the tempo with which the movement developed. In fact, if this analogy fails to throw light on the situation there is little hope of finding helpful comparisons elsewhere. Nowhere in history probably are there such clear instances of large-scale expansion of credit and inflation of government loans hemmed about by so many potential restraints. In no instance have there been so many avenues of escape from the final disastrous collapse, such as that which ruined Germany in 1922. In fact, there are some grounds for thinking that if France avoided paying the full price for inflation, America, too, may cut short the period of decline and check the wild movements of value that drive a nation to complete financial collapse. The outstanding likeness that dwarfs all others in its importance is the part played by internal debts in inducing an inflationary policy. On the one hand, in the United States, there was a deliberate adoption of a program for raising prices to meet a particular need; on the other hand, in France, there was a delay in formulating policy which moved in the same direction, by reason of

32

THE DOLLAR AND THE FRANC

the makeshifts in government finance. In both cases the desire to avoid deflation was a real factor and, in both, the net results of conflicting policies tended to follow along the same lines. It is clear from such an analysis as has been outlined that the part played by the visible trade and the balance of international payments was negligible in the early stages of inflationary policy in the two countries. Neither was forced to adopt this type of action by the demands for foreign payments. Whereas Germany was driven to monetary excess in large measure because of the insistent need of acquiring foreign exchange to pay the Allied nations reparation annuities, and England suspended the gold standard because of an unfavorable balance in short-term credits, France and the United States could meet their foreign obligations without undue strain. The flow of commodities in and out was approximately equal. The French payments on war debts were offset by receipts from Germany. Up to the time when a large speculative movement of funds developed, there was no serious problem in meeting international financial obligations. This favorable situation is the more striking in view of the fact that both countries were presumably on the verge of a slow but steady recovery from a very severe economic depression. I t is not possible to insist on the certainty of this recovery but subsequent events, reenforced by the

POST-WAR

INFLATION

33

evidence of upward moving curves of prices in the world at large, give some indication of a turn in the tide which would have brought about a considerable expansion in internal production. If this is true it is highly significant that artificial factors leading to an increase in prices were introduced at a time when an upward movement would, in all likelihood, have occurred at a slower rate. The 1921 depression in France was not as severe as the decline from 1929 to 1933 in the United States but it served to complicate very much the problems of taxation and reconstruction with which the country was faced. The need for expenditure to aid the peasants returning to devastated villages, was as insistent, and politically as imperative, as the demands for unemployment relief in the United States. Neither could be ignored, and both called for prompt action and the assumption of unusual financial burdens. The movement of prices in France from the 1920 peak to the 1921 low point involved a decline of 268 points on the index, or approximately 48 per cent. This was as great as that experienced in the 1929 depression in the United States. The price collapse in France was accompanied by a decline in production, which brought the index number from the peak of post-war recovery to 49 per cent of the 1913 figure. There was real suffering and perplexity as to the right course of government policy, even in spite of the stimulus

34

THE DOLLAR AND THE FRANC

to production growing out of reconstruction efforts to rebuild the devastated regions. There was considerable distress and financial embarrassment. Generally speaking, however, France in 1922, like the United States in 1933, was economicallystronger than most of her neighbors. In natural resources, in balance of activities, in gold, and in goods, the nation was well equipped to face the future. The restoration of certain territories to France had added valuable mineral resources. The ratio of agriculture to industry gave the country a strength and flexibility not enjoyed by many others. The standards of workmanship, and ability to manage industry had stood the nation in good stead. The payments from Germany had added to the commodities and funds in the hands of the government a small but still not negligible amount to set against war losses. The cost of the war had been very great, but this appeared mainly in the form of the internal debt, as time made possible the restoration of the normal working conditions of an industrious and adaptable economic system in France. Thus, inflation came about, not because of a persistent drain of funds out of the country, not because of the general weakness of the economic position but because the effort to shift financial burdens of past expenditures, led to extensive borrowing on the part of the government. The budget and the financial corporations set up espe-

POST-WAR

INFLATION

35

cially for the purpose of borrowing, or those diverted from their normal functions to fit into a government program, formed the mechanisms and channels for inflation. In the creation of the Credit National in 1919 one sees the institution of a semi-public body comparable to the National Credit Corporation in 1930 and the Reconstruction Finance Corporation in 1932. In the borrowings of the government from the Bank of France one can trace influences similar in some respects to those which led the Federal Reserve system to hold large amounts of government securities. To be sure, in the one case, the government was in direct and urgent need of funds, while in the other case, the pressure was brought to bear on the banking system in order to sustain or raise the price level. The actions in France were kept to a considerable extent under cover, while in the United States the public announcements openly declared a policy of bank operations to stimulate a rise in prices. These differences are of importance, and influence the character of the various crises, and the sequence of events in each case. The French clearly did not realize what inflation was being injected into the financial system. The Americans thought there was more definite inflation at some points than actually existed, and ignored the threat of delayed action of government debts, and budget deficits on the future price level. In both cases, however, without any doubt, there

36

THE DOLLAR AND THE FRANC

was a determined effort, expressed or concealed, to postpone deflation. In both cases, the government endeavored to put off the day that must inevitably come when payment for past expenditure would be exacted from the nation. There was an apparent inevitability in the policies of France, which is to be observed from the first stand in regard to the Versailles Treaty and after the first rapid spending to rebuild the devastated northern provinces. The claims on the government which were handed out in the form of credit certificates to peasants returning to their ruined villages implied the later inflation of purchasing power. Statesmen took the stand that it was necessary and right that those returning to their homes should have every possible aid. Help was given in clearing the fields of barbed wire, in removing munition dumps, in filling in trenches. Paper claims on the treasury were given to war victims. With these they bought building materials, live stock and agricultural equipment. A remarkable energy soon transformed the face of the wasted provinces, and the average French citizen felt that a measure of justice had been done. To a considerable extent it must be granted that the piling up of the huge internal debt on top of a large structure of wartime obligations was unavoidable. Some go further than this and say that inflation was the only way of unloading this debt and freeing the government from an in-

POST-WAR

INFLATION

37

tolerable burden of fixed charges. Those who lived through the stress and strain of 1926 in France would be quick to dispute this point. They would argue that no form of taxation is as disturbing as the confiscation of values that comes with inflation. They would suggest that a readjustment of prices and debts is easier to endure before a nation has gone through a period of wild changes in value, than after the disorganization of the price system by rapid expansion. Turning from the demands of post-war reconstruction to the problems of a nation that has been through two periods of unrecognized inflation, one is forced to admit that the United States faced a very distressing problem of debts in the trough of a depression. Wartime inflation of land values and cereal prices was passed on to the future in the form of high mortgages. I t was extremely difficult to readjust the unwieldy structure of agricultural prices. In a similar fashion the security market inflation in Wall Street that came in the prosperity that followed the depression of 1920 was passed on in the form of an unstable mass of collateral loans, brokers' loans, and other forms of exaggerated financial expansion which undermined the banking system. Those who owed debts as well as some of the creditors exerted terrific pressure on the government for radical adjustment, which some interpreted as an inescapable demand for inflation. On top of these

38

THE DOLLAR AND THE FRANC

heavy responsibilities, weighing down on the government calling for reforms and for large revenues, came the growing need for unemployment relief. The United States, like France, seemed to be cornered by past actions and driven to quick adoption of financial expedients which would avoid the more bitter political issues, and which would seem to circumvent, at least temporarily, the pressing need for higher taxation. A brief survey of the conditions of both countries at the beginning of inflationary action, therefore, indicates that both France and the United States moved in this direction in an effort to avoid the deflationary pressure of a large internal debt. They did not suffer from an unfavorable balance of payments calling for heavy exchange buying. There was no serious lack of national resources. There was apparently enough gold in each country to maintain the value of the currency at the levels which existed before there was any rapid increase in notes and bank credit; and there was a fiscal condition calling for strength and foresight, but not insoluble if political skill had been sufficient to achieve a well-balanced tax program. In both cases, the banking systems were highly vulnerable, and in both there were tendencies for rapid speculative changes which made consistent action very difficult. Other instances of depreciation are distinct from these two in many respects. I t is not pos-

POST-WAR

INFLATION

39

sible to learn much from the extremely swift decline of the German mark, except to find in it a warning that the later stages of inflation are worse than the first. The same may be said of Poland, Russia, Austria, and the other countries which suffered complete collapse. England offers little that can be instructive to a nation already well launched in inflationary schemes. The British had been quick to tax and slow to expand their currency. A stable price level had seemed more desirable than a lightened government budget, and debt conversion had made possible a slow but steady progress away from the dangers of repudiation. In short, while all experiences with inflation or depreciation help to throw light on some of the financial mechanisms and price relations, some arouse an interest that is mainly abstract and not directly applicable to present emergencies.

VII SWIFT CRISES I N T H E YEARS FROM 1 9 2 2 TO 1 9 2 5

A BRIEF account of what happened in France, with emphasis on the major decisions and the more dramatic crises, indicates in a useful way how up to a certain point a little inflation calls for more. Then, as increasing pressure of price changes brings the development of a sharp division of political forces, the fight for and against a further expansion becomes intense; and finally, the inevitable revulsion of public opinion arouses a unanimous protest against the destructive effects of uncertainty. It is interesting to observe in such a review of significant influences, that at no time in the experience under consideration did the rise in prices and the increase in currency come mainly through a crude printing press inflation. It is true that the thunder and crash of the machines in the cellars of the Bank of France turning out billions of paper francs did signify a quick response of the circulating money to the upward movement of values. It is true that the figures in the weekly Bank statement showed a fairly steady increase in the notes outstanding. Never40

THE YEARS

1922 TO 1925

41

theless, the actions taken in the Ministry of Finance some blocks away on the rue de Rivoli, and in the stormy sessions in the Chamber of Deputies, were more effective directly in influencing speculation, exchange depreciation, and credit expansion, and indirectly, in making inevitable flood of paper money in a later phase of development. Even before the current had set strongly in the direction of soft money policies, the struggle between the conservative and radical elements of the French Parliament had indicated the battle lines of future conflict. The Conservatives in matters of financial action were the more extreme in pressing for an uncompromising attitude in foreign affairs. The left wing parties had repeatedly favored a milder attitude on war claims, and were willing to consider a friendly policy toward Germany. They came to see the solution of the financial difficulties in the form of a capital levy. The refusal of Poincaré to cooperate in a loan for Germany in June, 1922, a turning point in financial affairs which has been mentioned above, did not represent the united opinion of the entire nation. There were some who saw that the uncompromising demands on a defeated and impoverished Germany were unreasonable and that these aroused false hopes for large payments which could not be counted on. Even during the Ruhr occupation, which began

42

THE DOLLAR AND THE

FRANC

in January, 1923, there were some men in all countries who realized that the liquidation of the costs of French reconstruction and debts to the Allies would not be achieved easily by means of reparation. The pessimism with regard to the financial policy of France, which increased steadily in outside financial centers, was registered clearly in the falling value of the franc as quoted in dollars and pounds. The growing doubts in France were not made articulate in an emphatic way, however, until later the election of 1924 brought the radical parties that made up the Cartel into power. Meanwhile, during the two years which preceded this change in political leadership, deficits had been increasing. The time for heavy maturities on the internal debt was approaching fast. The deflationary effort called for by the FrangoisMarsal convention of 1920, had not been carried out as intended. In face of a rising price level and the increasing foreign exchange prices which indicated the fall in the franc, there had been no real possibility of repaying the Bank of France. Thus, the 1920 agreement to deflate the currency by several billion francs could not be carried out. Funds turned back from the treasury to the Bank had been reborrowed. Deflation had been seriously considered as a partial remedy to disordered finances. In the over-simple form of this early plan, there had been no proper provision to offset

THE YEARS 1922 TO 1925

43

tendencies to initiate inflation in handling the budget, debt, and reconstruction. Thus, this first deflation was found to be an illusion. Meanwhile, the cost of living was rising, so that the fear of imposing higher levies became greater at the time when such action was most needed. The government was more and more disturbed by the complexities of a situation already highly charged with explosives and hesitated to turn to an increase in the indirect categories of taxation. The proposal brought forward by the radical group in power after May, 1924, was, therefore, a capital levy. Immediately the sentiments of the conservatives, not prepared for the drastic penalties of inconsistency and delay, were shocked by this terrifying symptom of the possible destruction of national values. The clear issues of debt and budget before the nation were not evident in 1923. At the end of that year, the beginning of a severe bear raid on the franc, originating abroad, and driving down the value of the currency on all the more important exchanges, shook the financial foundations of France. The movement which was initiated by a relatively small group was surprisingly successful in bringing about a vertical decline in the French money. The value of the franc fell from approximately six cents in November to little more than three cents in March of 1924. Speculators gained and lost huge sums in

44

THE DOLLAR AND THE

FRANC

the process of the decline and subsequent rise of the franc on the exchanges. Financiers within the country were drawn into the swift movement and became bears on their own currency, as the government and the banks seemed helpless in the first months of the year. This drive on the franc has little significance except for the way it reveals the lack of confidence which made the money extremely vulnerable. It became apparent in dramatic fashion that the outside world was disturbed by financial policies in the country, that there was no clear indication of the probable future value at which the currency would hold, and that short of strong measures in a number of directions, foreigners distrusted the future of French values. Once a wave of pessimism begins to bear down on a currency unit, everyday financial devices such as the raising of the discount rate in France in January, 1924, are of no avail. What was most feared was a weak tax policy and further inflation. The way to recovery could come only by action aimed to reorder both taxation and money. The support which was given to France by the house of Morgan in March, 1924, the critical moment of this decline, was, in fact, conditional on an increase in taxation. The action taken by Parliament in the last week of February, increasing income taxes, was the preliminary action which made bankers and speculators willing to change

THE YEARS 1922 TO 1925

45

their position and to anticipate a rising French exchange. The shift in political parties that came after this exchange crisis was influenced by considerations in domestic finance as well as by a desire to change the orientation of foreign policies. The election of Edouard Herriot on May 11, 1924, followed the failure of stern attempts of France to collect from Germany by armed force. Unfortunately, however, the severe foreign exchange crises came too late in the development of financial relations to make possible a really moderate solution of the currency and debt problems, such as the conditions of 1922 or 1923 would have permitted. During the months between the turning point in French affairs of June, 1922, and the acute difficulties in government finance of 1925, inflation was implicit in various kinds of action, but was not a definite issue before the French people. When the decline in subscriptions to the short-term government notes called bons de la defense became very marked, the problem was placed squarely before the French people. The failure of individuals and institutions to renew or rather to replace the short-term government notes as they fell due, meant that the treasury had to pay out large sums in cash to meet the steady stream of maturities. This difficult crisis in government finance was the more significant in that it came on the heels of the virtual failure of a

46

THE DOLLAR AND THE

FRANC

longer term issue of government obligations offered by the Crédit National in 1924. The fact that the public had demonstrated, on two successive occasions, its unwillingness to invest its funds in government securities meant that the alternative of tax increases or inflation could no longer be avoided. From this moment on, the struggle in Parliament became ever more intense. Different finance ministers, one after another, brought forward programs for balancing the budget, on paper at least, and were overthrown without being able to determine the future trend of fiscal policy. The climax of these struggles came in December, 1925. At this time Briand took a determined stand against inflation and indicated more clearly than any of his predecessors had done that the nation was facing the disasters of a runaway currency. The outcome of the stormy battles was so indecisive, however, that no clear-cut reversal of inflationary tendencies was possible at this time. Briand won on December 3rd, but was forced later to yield to a succession of other finance ministers in the ebb and flow of French debate over the best course to pursue. During the first half of 1926 various leaders attempted to dominate the situation as the franc slipped swiftly down in the foreign exchange and domestic markets. Rapidly rising commodity prices, uncertainty as to the future, disorganiza-

THE YEARS 1922 TO 1925

47

tion in foreign commerce, and political restlessness, made the situation increasingly threatening to the national welfare. The final panic came in the month of July. At that time the public ceased to be interested in the refinements and complexities of makeshift financial programs. They were no longer willing to listen to prolonged debates as to the way in which depreciation could be halted and deficits ended. Their protest was made emphatic by public rioting and attempts to mob the Parliamentary representatives as they entered the Chamber of Deputies. Caillaux and Herriot were overthrown in quick succession and Poincaré took the helm at the head of a national union government. The fact that the nation turned, in this time of extreme stress and strain, to the representative of the more conservative groups and was willing to submerge very real animosities in an attempt to save itself from the disaster of collapse, is impressive evidence of the suffering and distress experienced in previous months. N o less dramatic( is the sudden shift of speculation in favor of the franc. From the moment when it was known that Poincaré was at the head of the government, until the time when the Bank and the treasury began to intervene to stabilize values, the franc rose with few interruptions from a low point of approximately two cents to about four cents, a point at which it oame to rest. This rapid appre-

48

THE DOLLAR AND THE

FRANC

ciation of value is mute testimony to the widespread belief that the French debt and budget could be handled by a strong and clear-sighted government without recourse to the printing press and large quantities of fiat money. Surprisingly little additional taxation was needed to restore public confidence. Moreover, the reduction of the capital value of the debt, which was arranged for in the August meeting of the National Convention at Versailles in 1926, called for only a very gradual decline in the totals of government obligations. The important thing was the clear expression of public will to the effect that further inflation should be avoided at all cost. As a practical matter, these costs in the form of taxation and of a short stabilization depression were not excessive. There was no crushing increase in direct levies to meet budget deficits nor were the losses which came with the temporary decline in production greater than could be borne. Some sacrifice was inevitable but France escaped from the worst consequences of ill-considered financial action because the time of uncertainty and hesitation was comparatively short. Moreover, as has been indicated above, the nation was in a relatively strong position and able to recuperate more quickly from the monetary disease than might have been possible for other nations. In any case, in spite of past difficulties peace

THE YEARS 1922 TO 1925

49

in finance was restored. From July, 1926, until final legal stabilization on June 25, 1928, there were no further confidence crises in government finance and the return to normal economic conditions was fairly easily accomplished. The measures adopted and the economic characteristics of the stabilization period indicate the wisdom shown in steadying the franc at a level which called for only a slight amount of deflation even though it was well above the low point of two cents. This new par was circumscribed with protective buying and selling, and a narrow zone of fluctuation established with the aid of the operation of the natural forces of demand and supply. Once there is a strong tendency for the value of a currency to move within a narrow range, it is possible to set up tentative limits which are like the limits established by the gold points when a currency is convertible into the precious metal. Once it is clear that the many-sided speculation of different exchange markets and the price relations indicated by various commodities have come to approximately the same estimate for the value of a currency unit, then the task of government in establishing this as a sure and unchanging foundation is relatively easy. It has been found in the experience, not only in France, but also in Germany, Austria, England and elsewhere, that money tends naturally to keep relatively stable once the strong motives for inflating a currency,

50

THE DOLLAR AND THE FRANC

or interfering with a normal adjustment of credit, are removed. Suddenly men stopped talking inflation and got down to business. Thus, almost overnight the French debt which had seemed an intolerable burden during a part of this period, ceased to have a predominant influence and public confidence was restored. It is true that the value of the debt was reduced but it still amounted to a figure very much above that which the nation had established before the war. The secret of the problem lay in the easy flotation of new government securities to replace the old, once a gesture in the direction of amortization had been made and as soon as the currency value of these obligations was secure. The evidence shows that France passed from a time of half-understood and ill-coordinated efforts at deflation to a time of confused political action, and that this period, marked by sudden crises in exchange markets, was followed by a determined battle on the inflation issue. The victory on this score was not won until the public was fully aroused to the dangers growing out of a weak financial policy and until the importance of a stable unit of value was widely realized.

VIII FRANCE PROFOUNDLY AFFECTED BY INFLATION

No brief survey of the sequence of events in France can give an adequate picture of the disorganization and distress that inflation caused. Just as the full effects of depreciation in Germany were not realized until the prolonged economic crises and the political revolution of the last two years revealed the indelible changes in national life, so in the case of France the balance sheet cannot be totalled until the full story of economic and political struggle in another decade has been written. The immediate results of an inflation policy are, concealed because the most subtle influences lead almost imperceptibly to the destruction of whole classes, to intellectual bankruptcy at certain points, and to destructive changes in the international financial alliances which have been developed over many years. Thus, there is no doubt that what is sometimes called the "security complex" of the French is in part the result of months of currency fluctuation and the feeling of defenselessness as the franc plunged downward and as 51

52

THE DOLLAR AND THE

FRANC

criticism and attack from abroad accentuated the speed of decline. Similarly certain changes in commercial attitudes and industrial aims cannot be recorded in a factual way, although a shift in direction under the dominance of larger corporations and more speculative leadership by industrial adventurers is remarked by many who are familiar with the nature of pre-war economic life. In addition to the difficulty of appraising the nature of these profound changes, there is the obscurity surrounding the position of the middle classes in their efforts to conceal their poverty. The slow reduction of the standard of living that most individuals face with rising prices is at first glossed over by many little devices and subterfuges. Families share with each other to postpone the day of real hardship, and savings are reduced to zero. Then as the inevitable moment for replacing clothes, furniture, and various kinds of equipment comes, those who have put up a valiant fight against poverty withdraw themselves more and more from their friends, in the effort to avoid the ultimate humiliation of conspicuous distress. Every country that has been through rapid monetary fluctuations has witnessed this. At the very time when a few of the new rich are spending their speculative gains in ostentatious living, while the restaurants are full of gay living and lavish spending, retired professors, government clerks, those dependent on conservative in-

FRANCE

PROFOUNDLY

AFFECTED

53

vestments, others living on insurance or annuities, move to smaller and smaller quarters. The whole meaning of life changes as they patch their garments, and hide themselves away from those who have known them in their days of comfort and respectable economic security. No statistics can measure the suffering involved in this slow starvation of the old, and the reduction in living standards of all those on fixed salaries and incomes. There is a general demoralization which spreads from the persons most nearly affected to others who come to the decision that savings are futile and foresight unrewarded. Even the younger and more active elements in the population, are disappointed because they cannot take over the influence which the middle classes are forced by monetary confiscation to lay down. This power goes rather to the speculative leaders and to those who can take advantage of sudden changes in value in order to move from goods to securities, or from securities to foreign exchanges. It is the more daring of the industrial leaders, who can benefit by the widening spread between wage cost and selling price and who are so far from the ultimate consumer that they are willing to raise prices in a very direct response to falling money values. Those who are very close to consumers' demand, feel the repressive influence of the fall in the real value of incomes. The small shopkeeper and landlord are hemmed in by

54

THE DOLLAR AND THE

FRANC

the restrictive influence of the buyers' plight. At the same time many of the larger units find themselves in a more powerful position and can control the conditions of purchase and sale in ways which are impossible to the individual. Thus, in the increasing intensity of economic struggle with wide uncertain fluctuations reducing all business to speculation, those with large funds, or with extensive borrowing power play the markets, and win on the turns, while thousands of helpless individuals cut down on food, shelter and clothing, as they are threatened with complete insignificance in national life. Those who had invested their savings in government securities before 1914, confident in the provision for future needs, found that what had been worth a thousand dollars at the time of investment was worth about a hundred dollars in 1926. The distress which came from this depreciation built up the strong national protest which led to the stabilization of the currency in that year. The only measure of the suffering involved is the complete reversal of political policy. The only proof that the life of millions had been reduced to abject misery, was the insistence that inflation must end. Though thousands of individuals had hidden their losses and concealed their distress, the recovery of economic activity toward the end of 1927 gave an illusion of prosperity which deceived many casual observers.

FRANCE

PROFOUNDLY

AFFECTED

55

Many intangible items must be taken into account in an attempt to understand what happened in France because no aspect of foreign policy or domestic development escaped from the influence of a wildly fluctuating money. Through changes in leadership, in policies, in resources, and incomes, the character of the life of France was changed. Some of these quantitative changes can be studied to advantage by those who consider inflation as a solution to debt and credit difficulties.

IX R I S I N G PRICES D I D N O T B R I N G PROSPERITY

BY far the most important changes which radiate through monetary influences into productive enterprises are those which are registered in price movements. So much has been said in manycountries about the restoration of former price levels and the lifting of world commodity values, that it is worth considering the French experience in some detail. The reasoning of those who advocate raising prices falls under three main headings in the light of the methods employed and the results obtained elsewhere. There are, for example, those who argue that rising prices always act to stimulate industrial production, and that this makes all payments on new and old debts possible. There are others who are less anxious about general prices and who are more interested in bringing relative price groups closer together, particularly the prices of agricultural and industrial products. A third group simply look to the dollar value of debts and the goods value of debts, and advocate a change in prices which will make the goods value of money owed less formidable. 56

RISING

PRICES

DISTURBING

57

It is interesting to see, by an examination of the changes in prices and production, what happened in France to ease the burden of old obligation and lighten new commitments. The rise in prices from 1922 to 1926 was about one hundred per cent, or considerably more than that contemplated by those who urged the restoration of 1926 prices after the decline to the low level of 1933. The increase in French prices in any one year, however, was somewhat less than that which was advocated in bringing forward many of the currency changes in 1933. In fact, the movement of prices in a few months of 1933 outran the inflationary rise in France in each year of inflation. There is clearly good reason then to consider the effects of such price changes, since they have been urged as deliberate measures to be put into effect by inflating currency or credit. The relation of the movement of prices to production emerges fairly clearly from consideration of the statistics which are available, these throw into sharp relief the fluctuations in the curves of business changes in France. For instance, the best single index shows an increase in production of approximately fifteen per cent in 1924 and about ten per cent in 1925, the years of the steadiest price rise. This upward movement, which represents some improvement in real wealth as well as some artificial activity not necessarily adding to the well-being of the nation,

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FRANC

was actually rising at a slower rate during inflation than in the previous years when France was engaged in reconstruction to a larger extent. Various necessary qualifications which must be made, and cautions in the use of this figure, lead one to conclude that the part of the increase that is clearly attributable to inflation is probably small. This inference is reenforced by the observation that the foreign trade of France, in terms of weight, changed very little during this period, so that the apparent increase in value did little more than reflect the new levels of cost in terms of paper money. In fact if the totals for imports and exports were lumped together and considered as an indication of the general volume of business done, the result would indicate a stationary rather than an expanding industry. The production of coal, though small, is indicative often of the condition in other lines of activity. This was practically stable, and suggests no decided expansion in the demand for goods in general. Carloadings show some greater response to the stimulus of monetary changes, although in no year of French inflation was there a rise as rapid as that experienced in the United States in 1933. The curves of steel production tended to flatten out despite the new demands which had led to expansion in the heavy industries growing out of the needs for rebuilding devastated territories and new industrial plants. This impetus

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PRICES

DISTURBING

59

tended to diminish, however, as reconstruction was completed and as inflation progressed. In fact the curve levels off in such a way that, probably, if the figures could be analyzed in minute detail, it would be found that there was no net increase in output directly caused by the price rise or resulting primarily from the depreciation of the franc. Other indications of the trend of economic affairs corroborate the general impressions gained from these figures. In fact there seems to have been no marked improvement in the activity of French factories and mines, no brilliant response of productive energy to the injection of an artificial stimulus. The upward swing of some of the curves was no more marked than that which was almost certain to come with the recovery from the business depression in 1921, and resulted in no large increase in the national wealth. Reconstruction still played a part in the business revival of 1923; but it came to have less effect on general conditions in 1924; and the upward surge of prices did not take its place as a mechanism for increasing the output of real wealth. Inflation in France, like all other speculative) movements, brought a multiplication of efforts in the realm of finance and a corresponding loss in, the relative importance of the production of physical goods. Swift changes in value are always a distracting influence. The movement of ability and enterprise into the market place was particu-

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THE DOLLAR AND THE FRANC

larly obvious during the times of panic and collapse. I t was reflected also in the figures for bank clearings, and stock market activity during the entire period of monetary uncertainty. From this shift of emphasis no lasting good could come to economic institutions, for it did not improve the conditions of banks or security markets, but made them rather the victims of sudden incalculable speculative waves. Obviously, in retrospect, much of the apparent increase of business in France was of this character and proved to be ephemeral and uncertain when stability turned attention away from the fictitious changes in value to the underlying problems of productive efficiency and consumer demand. ' T h e upward movement of production that a falling currency can give, would seem, in the light of this experience, to be very slight. Certainly no such swift climb as that which occurred in the summer of 1933 in the United States took place in France. Even the slower movements seemed to be caused by a multitude of supply and demand factors, and may perhaps have been hampered as much as helped by the change in money values. In fact, by comparison with other cases there is reason to think that the upward surge in production in the United States represents a maximum of what can be accomplished by artificial stimulation and that this response is always short-lived. Certainly no decisive argument for inflation as an

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aid to industry, agriculture or commerce can be based on what happened in France. The second main consideration in regard to rising prices which deserves consideration at this time, is the effect of monetary stimulus on the interrelation of various kinds of prices as the whole group tends to push upward. I t is of the utmost importance to know whether on the one hand a rise in prices tends to close gaps which have opened up since more prosperous times, or whether it tends to favor certain groups at the expense of others. The primary concern in most agitations for inflation has been to bring agricultural prices more nearly into line with industrial prices. On this point the evidence offered by the French figures is conclusive. In the first place, there is no possible doubt that the range of commodity price indices was much greater after inflation had gone on for many months than it was at the end of 1922. Whereas most of the price relatives which indicated the value of principal commodities on a pre-war base were fairly closely bunched together at the beginning of the second inflation, there was a rapid opening up of discrepancies, which increased as monetary uncertainty and price rises became greater. This meant that some individuals gained a relatively larger share of the national income than had been possible before, while the producers of the more sluggish commodities found them-

62

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selves handicapped in a new and intolerable fashion. In this spreading apart of price indices, which cannot be considered to be a normal condition, it should be noted that many of those articles that had been lagging behind during the war, continued to lose during inflation. It is notable in particular that foodstuffs, which were less highlypriced than the general run of commodities, lost ground during inflation and were still below the general average at the end of 1926. There was no time in the course of the swift upward rush of values when the price of foodstuffs caught up with the soaring costs of industrial products. In fact, the gap was as great after the decline of the currency as it was at the beginning of the period. This same lag was to be observed in both vegetable products and meats. Only a few imported food products such as rice showed a strong upward tendency that outran the general course of the movement. Wheat in particular had gained a few points in relation to the general average of prices by 1926 but only after it had lagged far behind for a period of more than two years. In fact, during 1924 and 1925 all the more important domestic cereals lost ground in terms of the value of industrial products, and only later tended to increase somewhat faster in a number of cases. The goods that gained most rapidly, and that tended to pull the whole complex of the price

RISING PRICES DISTURBING

63

structure out of line, were those imported metals, minerals, and chemical products mainly produced outside France. Even though these commodities did not enter into French commerce in large quantities they served to push up the price level at certain points, and to increase the lag of domestic products behind the gold value of those articles on the world markets. The index numbers for oil of various sorts were much above the general average during most of the period under consideration. Cotton and wool were both more responsive to inflation than other commodities because they were purchased at world prices, and paid for in foreign exchange, and these items moved so erratically as to embarrass the industries which they supplied. Detailed facts with regard to the movements of various raw materials were at hand to prove the contention often put forward by theoretical economists that the rapidity of the upward surge of general prices, particularly when it is of a highly speculative nature, leaves some far behind, while it moves others to unprecedented levels, often way out of line with production and demand conditions. In the course of this fanlike spreading apart of values it is notable that most agricultural prices fall behind in their slow upward movement and are able to overtake industrial commodities late, if ever, in the course of the inflationary process. The general impression derived from the

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publicly voiced protests of the peasants, is thus reenforced at many points by the colder evidence of statistics. Careful scrutiny of the sequence of economic events, figures, curves, and the judgments of individuals indicates, therefore, that in France, neither of the objectives first mentioned here was achieved by inflation. First, production was not definitely stimulated by inflation in any marked degree. The rise that can be noted here and there was limited in amount, and may well have been due to other factors, rather than to monetary depreciation. Second, the gaps between certain groups of prices, and others with which they seemed to be out of line were, generally speaking, widened rather than narrowed by the upward movement of the whole system of values in terms of money. A third possibility still remains to be considered in order to understand the potentialities and dangers of inflation. The effect of price increases on the ability to carry heavy debt burdens must certainly be taken into account. Here one must recognize that the public debt occasioned difficulties that were in some cases greater and in some cases less than those which grow out of private debts. In any case the results of the action of a particular country will not be identical with results achieved in another, and the likeness and the peculiarities must inspire a high degree of caution in arguing from one experience

RISING PRICES DISTURBING

65

to another. There is in spite of this qualification, however, some similarity between the budget problems of an individual or a business and those of the central government, and some comparability in what happens in different countries. In both cases, many obstacles must be faced in the process of meeting charges which are partly fixed and partly varying; in both cases, there are difficulties in attempting to gain increases in income against serious resistance at many points. The French government found itself circumscribed by many complicating factors as the rise in some of the government expenditures failed to be offset by an increase in revenues. Treasuries like individuals find it hard to increase incomes at some points enough to secure a net gain above rising costs. In France, as elsewhere, it was not easy, with rising prices, to build up any surplus for the reduction of the debt. The position of a government is at times much like that of an individual, whose added income from a few sources is absorbed by a rising cost of living, so that there is no surplus remaining to pay off a mortgage, even though in theory the commodity value of that mortgage is less than before inflation. In fact the difficulty of the French budget, like that of many of its citizens, seemed to be increased during the first two years of inflation; the pressure of the payments on interest and capital of debts was more difficult and not easier to meet.

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AND THE

FRANC

There seems no reason to think that the shortrun position of the man who has a mortgage on his farm, or a heavy load of commercial debts, can be different in kind from that of the French government. The long-run position of both maybe better, but in the long run the inflation movement must stop and give way to monetary stability. Many months before relief has become available to the individual debtor by the complex interaction of prices on production and of production on personal incomes, other emergency measures, reductions or receiverships will have been taken to lighten the pressure of debts. Recovery comes about through a complex interaction of many monetary and non-monetary influences and only well-balanced and sound recovery can make the payment of debts easy. In short, past experiences make it evident that not inflation but the prosperity which can eventually emerge, despite inflation, is the main factor in making debt burdens bearable.

X ESTIMATE OF LOSS A M O U N T I N G TO M A N Y BILLIONS OP FRANCS

have been made to estimate the loss of wealth which came as the result of French inflation. It is not possible, of course, to arrive at any definite figure or conclusive statement because of the intricate nature of the problems involved. A special complication is introduced by the evident impossibility of judging what would have happened during the years of depreciation if another course had been pursued, so that the result of a statement of an alternative situation is bound to be little better than guess work. In view of the elusive nature of the facts, it is probably best to tackle the problem by looking at the various positions of different classes of the population in order to measure as accurately as possible how much they gained or lost during the period of fluctuating currencies. The result of such a survey leads one to believe that there was a net loss in real wealth involving hundreds of billions of francs, and probably rising to magnitudes of the order of the private and government debts in the ATTEMPTS

67

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THE DOLLAR AND THE

FRANC

year 1922. Certainly the holders of these particular debts lost, on the average, four-fifths of their claims, in terms of gold or goods, and it is difficult to see that any group gained equivalent sums to make up for these large losses. Thus, if an estimate were possible, it could hardly be set at a figure lower than that of the value of the government debt and to this should be added a very considerable fraction of the private obligations outstanding. The total would most certainly amount to hundreds of billions of francs and probably come well above fifty billion dollars. A great many people have turned their attention to the question of how much is lost during inflation. They are agreed that no quantitative measures can be found, but they also agree to the significance of the light thrown on the problem by certain types of facts. Some of these lie primarily in the social and political fields, and can be judged only in terms of the general strength of a nation, its stability, its foreign relations, its place in the general progress of world relations and industrial development. Other facts emerge from a study of standards of living, industrial equipment, national resources, commerce and industry. Still others can be judged from a consideration of the prestige and standards in financial life, the strength of institutions, the promise of future ability in enterprise. The drawing up of such a balance sheet calls for an intimate knowl-

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69

edge of the country concerned and a clear view of its position in the broad trends of economic progress. I t is not enough to consider the per capita taxation of France, though that indicates something with regard to post-war monetary policy. I t is not enough to fix attention only on gold or goods, although here again facts of importance to millions of people are revealed. In addition one must attempt to judge whether France kept pace with world expansion and gained in power and flexibility during a period of widespread prosperity. In fact, the upward movement of trade takes on a different meaning when it is compared with the faster recovery of certain nations. The expansion of commerce looks small when set beside that in a number of other countries. Moreover, the intangible, and none the less real losses through mental strain, reduced security, and the impoverishment of certain classes, become the more ominous against the background of later threats of European war. The position of various classes of investors, and those living on earned income, or on other types of property, varied considerably at different stages of depreciation. Some were affected by the rising costs of import and export commodities very early during depreciation. Others did not feel the effects until the movement of domestic prices became rapid. Still others hardly realized what was happening in the world of finance until the up-

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FRANC

ward pressure of the cost of living caught them in a vise and reduced their standard of living in an inexorable fashion. Investors, likewise, suffered varying degrees of loss. Those who held bonds were not immediately aware of the fact that they were losing the real value of their assets. Those who invested in industrial securities gained or lost according to the time of investment, and the period during which they held the securities, as well as according to the type of equity which they had bought. In a few periods and in a few instances profits were made, but the real value of these profits was always less than it seemed. A careful search for an offset to the real losses that came with depreciation, disorganization, and the virtual repudiation of debts, makes it apparent, that the only direction in which such a gain may be presumed to exist is in the negative advantage that taxes may not have been as high as would otherwise have been the case. That is to say, the government took the money from its citizens through reducing the value of their holdings, which meant that they may have taken a smaller share of the yearly earnings of these same people to meet the continuing service on the reduced internal debt. For this reason it is likely that taxes did not rise quite as fast as would otherwise have been the case. This advantage is hard to appraise, and must be held to represent a somewhat uncertain and problematical saving

ESTIMATE OF LOSS

71

since it is not clear that the taxable income would have been the same without inflation. In fact, many would argue that the national production and individual incomes would have been greater if sound money policies had been consistently followed. In any case it is worth examining the attempts of individuals to escape large losses through depreciation, and to try to gain some impression as to which are the most successful ways of protecting savings from loss. I t is appropriate to divide the efforts to avoid the effects of depreciation into three groups: first, the efforts of those persons who have incomes somewhat variable in response to changing conditions, second, those whose incomes are relatively fixed, and finally, those others whose problem is not one of adjusting incomes to living costs but rather of protecting capital assets from dissipation and loss. The situation affecting those whose incomes varied has been hinted in the consideration of price movements which was outlined above. There were some wages and salaries, as there were some prices, which were very sensitive to inflation and which moved upward fairly rapidly as value changes set in. Generally speaking, however, there was a lag of many months in the adaptation of wages to the changed conditions and in many cases workers' pay never caught up

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THE DOLLAR AND THE FRANC

with the price level. This slow response is usual for, after a period of considerable unemployment, and without the backing of strong trade unions, many workers hesitated to make claims with no reasonable prospect of success. The issue which was to become plain in the later stages of inflation was not clearly seen by either workers or employers in the first two years of depreciation. There is no doubt that for the greater part of the inflation period the standard of living of many workers fell, although French statistics have to be reenforced by general observations, since figures regarding wages and the cost of living are not very complete, nor entirely conclusive during the early part of this period. The failure of salaries to rise during the period of rapid price increases, is even more conspicuous than the lags of wages which determined the plight of the wage earner. The situation of clerks and teachers, and others who lived on small incomes which gave them a normally secure though not luxurious standard of living, was particularly distressing, since they had not regained their prewar position in the period that came after the armistice. In respect to these incomes, clearly, the effects of two inflations were piled one on another to accentuate the suffering which either alone would most certainly have caused. There is here some contrast to be made between wage earners and the white-collared class, who lost ground

ESTIMATE OF LOSS

73

steadily after 1914, and were in a very weak position to face a second inflationary price rise. There were few instances in which those on salaries could gain back any part of the position which they lost. Generally speaking, they had to submit as helpless victims to a rapidly rising cost of living, and found their power and influence hampered in every direction. There had always been a very real feeling of security attached to the status of the bureaucrat, and the clerical worker, which, added to the important influence of the small shop keeper and the peasant, gave a great stability to French economic life. With inflation, this sense of certainty was uprooted at least for a time. The French were infected with a spirit of speculation which was not typical, and began to seek out extraordinary means of enhancing the nominal value of their resources as the real value fell. More speculative nations disrupted by swift changes such as those that upset the normal relations of French production and consumption, would in all likelihood rush headlong into wild gambling which came only relatively late in the French experience. In any case, in France even the most solid elements of the population came, with increasingly rapid price movements to bend their energies to smuggling capital out of the country, petty forms of commodity hoarding, rash stock market gambling, and irrational waves of buying and sell-

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ing. The normal character of French life, dominated in considerable measure by this central group of functionaries and reliable citizens on small salaries changed very suddenly in the later stages of speculation, and fundamental processes of production were distorted by speculation in the wild scramble of those with small funds to retain at least a bare living as the commodity value of their resources dwindled. Those who had capital assets of various forms, were quicker to grasp the meaning of the changes which were taking place and in a few cases worked out means of hiding their wealth in other countries. This was possible in certain instances by means of collusion between the exporters with funds due from abroad, and capitalists in France. Those with large funds in francs acquired foreign exchange values abroad by secret agreements at home. Many found ways to build up large balances in dollars and pounds. They held funds in Holland and Switzerland and a dozen other countries. Not permitted by law to send their capital out of the country, they managed by smuggling, false records of foreign commerce, and transactions in international securities to evade the laws and to convert their assets into foreign currencies. The fact that this was done in very large measure is evidenced later by the steady flow back into the country of billions of francs, once confidence had been restored. The volume of capital which es-

ESTIMATE

OF LOSS

75

caped and returned later was astonishing even to those who were well aware of the kind of practices carried on during depreciation. The injustice, and the harm in such a situation, consisted in large measure in the fact that it was only the more wealthy capitalist who could work out efficient devices for exporting his capital. In most cases he could not act successfully unless he had important connections, and sufficient funds to take the risk of government censure or prosecution. Moreover, the cost involved in such illegal action was an item which made it prohibitive to' the man with small savings, and little surplus income. It is true that clerks and wage earners, peasants and shopkeepers, did make efforts to get around restrictions. Well-authenticated stories of the smuggling of coins hidden in cheeses, carrying securities over the unwatched parts of the frontier, and the smuggling of paper notes by airplane show that the preoccupation with this kind of traffic was very widespread, even though the means for protecting assets were not always highly effective. The fact that the government did not recognize the difference in worth between gold francs and paper francs and permitted no open gold transactions made it seem advisable to many to ship the metal out of the country for foreign sale. Large sums were probably lost to France in this way, though some of the metal came back to the

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country in the subsequent gold flow after stabilization had been accomplished. The movement was important not so much because of the draining out of the country of some valuable resources, but as an index of the disturbance to normal investment processes and as a sign of the desperate attempts of individuals to protect their capital from depreciation. The purchase of international securities and the active investment in such shares as Rio Tinto, Suez Canal and other companies that were linked to gold or metals with a recognizable world value, are reflected in the sharp upward swing of the quotations of these securities on the French exchange. It is probable that many who turned to this form of investment kept the real worth of their funds intact, though others seeing the significance of depreciation later on in its progress were only able to buy high-priced stocks at values which made full protection impossible. It is of importance to note, however, that only a few such securities kept pace with the rise of wholesale prices for considerable periods, and, in some cases, actually gained on retail prices during many months of depreciation. During this same period the value of government securities fell rapidly so that neither on paper, nor in terms of goods was the investor in possession of the real worth of what he had originally put aside as a tangible evidence of the patriotic and sound use of his capital.

ESTIMATE

OF LOSS

77

Meanwhile the bonds of private companies declined for most of the period in real and nominal value, as did the stocks of those companies that did not benefit directly by inflation. It was only during the later stages of depreciation that the stock market received the full stimulus that comes with a large volume of transactions and an eager attempt to make on quick turns and to trade against the future value of money by holding equities and commodities. The owner of real estate was faced with more complex problems than was the speculator in securities. In certain cases, he was fortunate in holding tangible assets that could survive the assaults of inflation. In other cases, he found restrictive laws, high taxation, and the embarrassed financial position of his tenants, a very repressive influence. He was not completely free to raise rents, nor was he able to exact high paper prices for his properties if anxious to make a quick sale. A slow lag of values behind the rising price level was characteristic of this branch of economic life. Meanwhile the high cost of construction material, and the upward pressure of wages in the more aggressive trades, made it difficult for him to keep his property in repair. He came through the period of wild monetary fluctuation with tangible property; but often the depreciation in the physical condition of his property offset to a considerable extent the rise in the paper value. In short, the conclusion reached by those who would

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look to the French experience as a guide to possible real estate dealings during inflation is that in this respect, conditions not only differ from country to country, but vary widely from place to place within each country. Investment in real estate for immediate use may be a very real protection of value but dealings in lands and houses for sale or rent are accompanied by high costs and considerable risks which make them unattractive to many people.

XI CONTROL OF INFLATION FAILED I N FRANCE

So much has been said about the possibility of a managed money, that it is worth considering the efforts made in France to control the value of the currency during inconvertibility. Almost all conceivable methods of limiting fluctuation were either tried or proposed. Many of them seemed to be effective for short times, others created an effect exactly opposite to that which was intended. None of them inspired confidence for any prolonged period, because the changes in policy and the fluctuations in value undermined the effect of the more constructive government intentions at some of the critical moments. The situation in the United States differed from that in France mainly insofar as some doubt was deliberately thrown on the eventual return to the gold standard, and because the attempts were directed to raising prices rather than to keeping them stable. This distinction is important at some stages of inflation and less so at others. Few, if any, would contend that a continuous rise in prices is a possible basis for economic life, and 79

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policy in all countries in 1933 turns in the direction of stability. I t is clear, therefore, that the problem of halting the increase, and limiting the zone of fluctuation, is essentially more important, than the interim policy of stimulating higher values for commodities. The notable thing, which stands out in clear perspective, is that direct efforts to control the currency value were much less effective, in all cases, than the indirect influences which indicated a determination to avoid further depreciation. It was not the laws restricting price change, not the attempts to prevent capital exports that halted the decline of the franc. The increase in the discount rate by the Bank of France was futile, and even the suggestions that gold be sold freely on demand caused more alarm than assurance. Only action in the realm of government finance, and only the announcement of the intention of restoring stable money according to familiar tradition were able to create calm. The action taken by the French mainly aimed to influence the value of the franc on the foreign exchanges in the first instance, and commodity price changes in the second instance. Price control had been tried during the war on a considerable scale, and almost all parties were united in condemning its continuance in the post-war period. Most of the restrictions were done away with in the months immediately after the armis-

CONTROL

FAILED

81

tice and there was a strong reluctance to enter again on this type of economic intervention. Rents were kept down by regulations introduced during the war and kept in force for some time. This interference to prevent the increases which would have come very rapidly under free competition was a material factor in keeping the cost of living much lower than would have been justified by price conditions alone. Specific regulations and general policy influenced the course of prices and wages at certain points but in general this part of economic life was fairly free to respond to the stimulus of depreciation. The government's part in increasing the speed of the upward movement of prices was mainly indirect, or limited to the dwindling demands for reconstruction materials in the early stages of inflation. The more aggressive attack on the problem of value was made in the efforts to curb speculation, and prevent the flight of capital as the shifting of funds abroad pushed the franc rapidly downward on every financial market. Here the government soon found that its efforts were unavailing. Neither banking procedures, laws, nor government announcements served to check the rapid flight of funds. Appeals to patriotism were futile. Laws were passed to circumvent specific ways of speculating against the franc. Neither gold nor money could be exported. The shipment of securities abroad was forbidden. Obstacles of many

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kinds were put in the way of those who sought safety in foreign markets, but the steady pressure on the franc was evidence of the fertile ingenuity of those who were alarmed as to the future of all French investments. Only the later years, however, revealed clearly the enormous volume of money that had taken refuge in other countries. The large sums of deposits abroad were a testimony to the futility of legal efforts to curb speculation, while the funds which were to bring on later crises in the world of international finance indicated the existence of myriad ways of smuggling funds and diverse channels of export for capital which the nation was reluctant to lose. It is possible that this multiplication of formal efforts to restrict speculation is always a characteristic of times of wild fluctuation. In any case, the variety of efforts increased as the situation became worse, and attention to the problem was greater as its success became less. The counterpart of the American efforts in 1933 to influence internal prices by transactions in gold may be seen in the pegging operations of the government and the bank. On a number of occasions the French tried to influence the course of the internal value of the currency by intervening in the foreign exchange markets to purchase and sell their own currency. Their efforts met with varying results at different times. In all those instances when the government policy was

CONTROL

FAILED

83

confused and uncertain, efforts to buoy the falling currency were completely futile. At other times of intervention, when a new determination gave hope of reform in budget and banking, relatively small funds were sufficient to achieve the desired result. The most striking instances of this power to influence the fluctuations in value are two: first, the period when American funds were used to raise the franc, in 1924, and second, the use of French capital to keep the value down in 1927. In the earlier case, the secret of the high degree of success seems to have been the new spirit in Parliament which made possible the passage of an increase in taxation and gave some promise that further currency and credit inflation would be checked. In the later case, in 1926 and 1927, the stabilizing effect was the result of a growing awareness of the fact that the government and the nation were united in the desire to keep the franc from rising in terms of foreign currency. At this time the aim of preventing further deflation in France was well balanced with the clear-sighted efforts to limit further expansion and to steady internal prices. It is reasonable to infer, then, that pegging or gold transactions in France were an important influence once the general situation gave assurance of the continuity of government policy and the soundness of banking intention. No other conditions gave hope for success in directing internal

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FRANC

values by transactions in gold or foreign exchange. It was natural that many expedients were tried for the distress that came with increasing uncertainty made efforts in many directions imperative. All the easier ways were sought in the attempt to avoid stern alternatives and the minds of many were busy in the search for new limits to hem in the fluctuations of money. It is interesting to speculate as to how far the gold-buying policy of 1933 in America was like the characteristic attempts of other countries to peg their money or to change its value by foreign exchange operations. I t is probable that the similarities are more important than the differences. The fact that dealings in gold were direct in the case of the United States and less so when France bought gold standard currencies, is a minor qualification. The fact that France was trying to raise the value of her currency in one case, and to prevent it rising in another, seems less important than the act of intervention, itself. The surprising thing to most observers of recent experiments, has been that the attempt to depreciate in America did not seem to go much faster because it was deliberate and that it seemed to be as difficult to achieve at least in the first phase as many attempts to stabilize. While it is usually assumed that the effort to raise paper prices is easier than the attempt to lower them, the American experience gives some indication that both

CONTROL

FAILED

85

tasks are difficult. In fact the results of conscious depreciation in the United States have been characterized by the same lags, and the same delays in response, as those which are observed in the unbridled inflation, or desperate efforts to stabilize in less controlled periods of finance. I t is not necessary to go into all the expedients which were adopted in France, nor the way in which these efforts reacted on general economic life. I t is sufficient, perhaps, to indicate that practically every kind of operation was considered at some time, almost every known experiment was tried. I t is true that price control was at a minimum, and that the thought of complete financial isolation was never seriously entertained, but aside from these two features of the American policy, almost everything was in evidence at some stage of the proceedings in France. The use of gold as an instrument of financial policy has been discussed. Sales of the metal were executed from time to time, and the proposal to use the entire gold reserve to protect the franc was brought forward in the last final collapse. Generally purchases of gold took the form of buying gold exchange in the stabilization period, and these transactions served to check, though not always to dominate, the movement of the currency. As a check to depreciation by attempts to divert domestic capital to home uses, internal

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trade was the object of a series of laws whose futility has been mentioned, while the official judgments and court decisions that the value of the franc was to be considered unchanged during inflation were circumvented by many special bargains and fees which did not receive the support of the courts. No laws could restrain the strong forces that swept the money out of control, and no appeals to patriotism or the common interest could prevent the wild scramble for personal security that came with the sudden realization of the uncertainty of the future. Thus each new link which was made between the franc and other currencies, domestic goods, security values, or future redeemability was discounted or ignored as long as the government was shifting its aims and experimenting with new procedures. Banking influence through the discount rate, cooperative efforts, and an attempt to limit the expansion of paper money, was of almost no consequence. Devices that had some effect in early stages of fluctuation became constantly worn out and ineffectual. The public could not be soothed by the promises of uncertain help once they began to suffer the results of past mistakes. The lag of understanding was as real a factor as the sluggish movement of prices, but both influences came to move very swiftly in times of crises and statesmen had no time to work out further intricate plans once the rush of depreciation was accelerated.

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It cannot be held that the French inflation proves the failure of all methods of managing a gold standard money. It is impossible to judge definitively all future efforts to moderate value changes by one experience alone. Some nations could perhaps handle financial instruments more effectively, while some would find their weakness even greater than that which has been described above. All that can be learned from this analysis, however, is a realization that management depends not so much on the mechanical nature of the instruments used as on the background of public intention and confidence against which they are projected. Intervention may be successful if the motives are understood and approved. Pegging may be effective, if the policies of government finance are in harmony with the action on the foreign exchange markets. Price movements may be modified, if it is clear that wild inflation is not contemplated. The ability of a government to carry out a group of policies all pointing in one direction and all leading in the direction of familiar relationships, and well-known devices, inspires confidence and patience, decidedly not characteristic of moments of transition and times of rapidly changing methods and plans. It is generally recognized that the sharp contrast should be made, not between managed and unmanaged money, but between degrees of intervention and the methods that are employed. The French had never allowed the completely free

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workings of the gold standard to influence internal financial conditions. During inflation the government and the Bank extended their efforts in many new directions and left the door open for incalculable changes in value. Intervention at one point was countered by restrictions at another and the complexity of laws and programs reduced normal business to a wild gamble over future prices.

XII W H E R E CAN INFLATION STOP?

examination of French inflation will be profitable as the evolution of American monetary policy shows where the nation is moving. Once the degree and intensity of inflation can be judged, it is possible to choose for consideration those stages of depreciation which are most instructive. During the first six months after the suspension of the gold standard there were few clues to the length and the depth of depreciation. The legal provision for a fifty per cent cut in the value of the dollar gives a suggestion of definiteness with regard to future control which is not borne out by study of French price and exchange movements. In every case the momentum set up by fluctuating value developed a speed which led to wide swings. The franc which was undervalued in the months of February and March, 1924, was overvalued in the latter half of the year. The decline in a number of instances went beyond the levels indicated by goods, gold, and government 89 FURTHER

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finance, and rapid appreciation in some cases seemed equally unwarranted. The final level chosen was not the result of a deliberate long-considered aim, but came as a familiar rebound from the unprecedented lows of July, 1926. In fact these unnecessary pendulum swings became more marked as the period of uncertainty developed, and the future was as incalculable as the past was confused. In 1922, by a different policy at home and abroad, the French might perhaps have prevented all post-war depreciation. Again, in 1924, the brilliant recovery of the franc gave promise of getting the movement under control. Later, in 1925, a more determined attitude might have spared the country its final chaotic decline. There were occasions when the public was quick to believe in a sound policy and ready to make some sacrifices, there were others when divided interests and intense rivalries subordinated general welfare to the speculative hopes of a few individuals. In the case of inflation like that in France, there are periods when the force of a particular movement seems to have run its course. As long as unrestricted recourse to the printing presses is checked, and as long as currency expands in response to depreciation and not in advance of it, there is still some hope of checking the movement. Credit has certain rhythmic reactions, speculation in exchange reverses itself

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occasionally and at these times a clear-cut program backed by majority opinion can moderate the swings and bring relative stability. Such moments of opportunity will be evident in the United States. There will be stages in development when foreign observers will conclude that the movement has been overdone, there will be times when business in the country will refuse to believe that collapse is ahead. These are the times for swift action and courageous government finance. A very little increase in taxes, a very moderate gesture toward debt reduction, and a very gradual progress toward international monetary agreements, may be sufficient to check the forces of panic and decline. As in the case of France, consistency and direction may be more important than the degree of restraint that is attempted ; for short periods the will may be taken for the deed, if no contradictory action is in process. Deflation is not necessary when inflation has been stopped. Only those who have turned their attention to the course and phases of depreciation can warn of its dire results. The illusion that comes with the first promises of this attractive panacea disappears before the grim realization of what has happened when money has depreciated rapidly. The economic fate of many countries and the distressing tangles of post-war Europe offer mute testimony to dangers ahead.

XIII T H E PUBLIC REVOLT AGAINST

DEPRECIATION

inflation stands out from most other cases of depreciation primarily because of the unusual fact that a movement toward precipitate decline which had already developed considerable momentum, was checked before it had run into complete collapse. This is the reason why it is profitable to study the course of the franc and analyze the forces behind the various crises and the ultimate restoration of stability and calm. Only a brief summary of these characteristics can be made here. A detailed knowledge of exactly how things happened, and the specific evidence that bears out the general findings reviewed here must be sought in the longer studies and traced back to the mass of statistical data which is easily accessible to the student. FRENCH

The origins of the post-war French inflation are to be found in the need for government expenditure for the sake of reconstruction and in the resulting budget difficulties. The concrete form in which this difficulty presented itself was the overwhelming burden of government indebt92

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edness that mounted up each year as deficits and borrowings increased. In fact, the government debt was the main cause, and the fundamental maladjustment, just as, in the United States it was the mass of unsound private borrowings and excessive mortgages that made normal price adjustments difficult and led to the creation of new acumulations of uneconomic borrowings. In both cases it was the growing contagious desire to unload these debts in the trough of a depression, and to liquidate them at sacrifices, which brought on an almost hopeless situation. Thus, the French debt was both a main cause and, to a considerable extent, the mechanism of inflation, since the failure of the public to take new offers of treasury certificates forced the government to borrow in roundabout ways from the banks, and meet the immediate demands with new paper notes, secured from the Bank of France. It is unlikely that the other troublesome factors would have precipitated the panic which came about in this way, in fact, and it is important to observe that this difficult problem only became acute after the slow painful adjustments of deflation had to a considerable extent been accomplished. In France as, possibly, in the United States in 1933, the worst of the decline was over. I t is a disturbing fact that, as both these experiences show, when countries have been able to

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undergo a considerable amount of deflation, that just at the moment when the more severe losses are over, when values have been cut severely and a number of debts written down, when economic life is free in many directions to go on to a new and more solid prosperity, political patience wears thin and the revulsion of public opinion against existing policies because of the steady deflationary drain on their resources leads to the opposite and more dangerous policy of inflation. An over-simple view of the working of economic influences sometimes gives the impression that the rise in prices can be the direct counterpart of the downward movement. This has not in practical experience been the case, nor is there any way in which the wrongs created in the failures and losses growing out of one process will be righted by price changes in the opposite direction. The rise in the value of goods cannot restore equities that have been forfeited nor automatically give borrowing power to those on the verge of bankruptcy. Bond holders, for instance, failed to gain with the fall in prices, because of the lag of conservative securities behind the swifter moving value of more speculative types. They lost again even more heavily when both the real and the nominal values of their holdings were cut to a small fraction of their total, and they lost through the subsequent rise in commodity prices. Clearly those who are forced to sell out their hold-

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ings in a time of deflation, cannot benefit by a rise in values that comes later on with a reverse movement. Only those who are able to hold their equities securely through the short-run swings of a decade or more and who do not have to dump their holdings because of limited resources, stand a chance to balance the gain against the loss and find themselves when the swift changes are over in a position no worse than they held before. It is probable that only the very strong can survive inflation financially. These individuals are of necessity few, and unfortunately, they comprise the richer sections of the community who have not felt the pinch, nor been on the verge of severe want. The man with small resources is in danger of losing his equity in land or other property during deflation and may find himself unable to gain what slight profit he might find in rising prices as an offset to the burden of living costs and manufacturing expense. Even those who have debts, while often said to be in a good position theoretically find in practice that the surplus left between incomes received and necessary living expenditures is reduced so that it is difficult to carry interest charges. Failure confronts them just at the moment when they might perhaps find opportunities for bettering their position. France went through the alternate stages of a first inflation, deflation, and a subsequent inflation. These are parallel in some ways to those

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experienced in the United States in the first predepression rise in values, the later disastrous decline of 1930 to 1933, and the strong movement to inflate government credits which began in 1932 before the deflation was ended. France came to realize by bitter experience that one movement added new injustices to those created by the other. Slowly, but surely, in France as wider circles came to understand what was happening, men saw in terms of falling bond values, uncertain commerce, and prohibitive prices, the harm that was being wrought. Problems that were at first the concern of finance commissions alone, became subjects of general debate. The standard of living was seriously threatened. The conversation of the cafes was almost exclusively turned to the discussion of the probable crises yet to come. The revues and cinemas were preoccupied with satirical attacks on the patent medicine policies of political leaders. The peasant tried to think up new ways of hoarding. Those who were dealing with foreigners were obsessed with the idea that somehow security could be achieved by holdings abroad. Beginnings of a double price system were becoming evident in 1926. The attempt to charge gold values in pricing goods for those from abroad who were supposed to have gold value incomes, began to cause irritation. A multitude of devices tried previously in other countries for tying the money by sliding scales to vari-

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ous basic commodities, or of adjusting wages to the cost of living were under consideration. There was a general recognition of the need for protecting incomes as far as possible and of keeping a flexibility of contracts which would prevent the full impact of the destruction of currency value on business programs. Just at this perilous point, when the meaning of money began to disappear, when paper currency came to be a hindrance to the flow of trade and new standards of value were sought, the French checked the decline. They never reached the stage of depreciation in which prices are changed daily and commerce is carried on mainly in terms of foreign money. The flood of paper money never rose so high that the currency had to be carried in suitcases instead of in purses; nor was it necessary to have the new value of money restamped on old bills in order to multiply their value by tens or hundreds. Up until the very last crisis, many still thought of a franc as being the same franc, and were puzzled at the apparent inability to use it at its old worth. Monetary theory was still a mystery to most people and the evanescent value of money was still only vaguely realized. Despite this persistent faith in the currency which was stubbornly accepted for many purposes, the French had learned the fundamental lesson of sound financial policy. In a manner that

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now stands out as almost unique in monetary history, they checked the wild rush downward. They came to realize as a nation that the ground was being cut from under industry and trade. They saw in terms of a few simple principles that the new policy must be inaugurated regardless of costs. They insisted on the subordination of intense party strife to the public welfare, they expressed in various ways a willingness to submit to higher taxation and to pay more honestly the full toll of the old taxes which they had often in the past evaded. They discarded all ideas that debt reduction could be postponed. They did not wish to have the Bank of France the debt holding agent of the nation, while paper money completed a circuit between the treasury and the Bank and the debt, in ways mainly concealed and difficult to stop. They saw more clearly than before that laws against capital export and speculation were almost completely ineffectual, and that only general confidence could prevent the drain of resources from the country. In short, after years of evading central issues, they gave up the hope of finding a magic formula and started to work on the slow task of financial reconstruction which was to bring later prosperity. The moment at which the tide turned was determined not so much by the interrelation of economic factors, nor the value at which the franc stood in gold or in goods, as by the violent re-

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a-ction of public opinion. As long as people in general failed to understand what was going on, and underestimated the extent of the harm inflation brought, it was possible for those in authoritative positions to act in devious ways and to avoid direct responsibility for the standard of value. When real suffering brought sudden realization of the importance of a usable currency unit, the complicated devices of an unsound budget and debt condition were abandoned. The public could be satisfied only by the restoration of familiar safeguards and limits in regard to money. They looked forward to steady exchange rates and a restoration of the gold standard. They could no longer be put off with substitutes for stability in terms of world values, and a restrictive action to keep the amount of money within reasonable bounds. Some began again to think in terms of the quantity theory, others were watching the gold reserves, while the population in general was very exchange-conscious and entirely unwilling to save unless some assurance were brought to the support of a falling currency unit. The chaos which had increased as prices soared led to a reaction in policies away from the dominance of the radical left to the leadership of Poincaré and the more conservative groups. There was a desire for security and for peace in financial affairs, which has always been characteristic of the nation, but which became more intense as

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money ran wild. Certain types of progress in economic affairs at home and abroad, may have been slowed down by this sharp reaction but it was the inevitable result of the suffering caused by the uncertainty of the four years leading up to July, 1926.

Other countries following a similar course of monetary depreciation would do well to note the points at which the fatal slide may be checked. It is possible that the increasing awareness of value changes and sensitiveness to monetary factors under present-day conditions may bring a healthy anticipation of the danger of some phases of disaster so that they need not be experienced in their entirety. I t is possible that the course of events elsewhere may serve as a warning to bring about a quicker realization of cause and effect. T o the extent that a clear view of the past can accomplish this result, other nations may escape the full cost of rapid fluctuation and depreciation, and struggle to stability before the verge of the precipice has been reached. T h e United States has been considered unique by many observers in that inflation has been to a certain extent deliberate, and because the gold and trade position of the country made the gold value of the dollar relatively easy to protect. T o a considerable extent this special nature of the case is a mirage like that which hangs before each new instance of inflation and gives an appear-

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ance of new contours, and unexpected features. It is wise to attempt to penetrate these superficial impressions and recognize in the first place the similarities between all cases of inflation, and only in the second place, seek out those special features that may shorten or modify the destructive effects of a depreciation money. Inflation is only entered upon under severe pressure of emergencies. In the United States the banking crisis and the farmers' revolt were combined with heavy demands for unemployment relief. In France reconstruction costs and budget deficits brought a similar and almost irresistible pressure. Furthermore, inflation in its early period is only acceptable to those who determine government policies when it is looked on as moderate and controllable. For this reason, American money policy was called controlled inflation, and the French borrowings were concealed from the public for a number of years. Then when the movement gets under way legitimate needs for money seem to make further expansion inevitable. Partly because of this unawareness of what is going on, the results of a depreciating currency have always been looked on first as unprincipled exploitation and profiteering. There develops a strong emotional revolt against business leaders in general and against financial powers in particular. The increased sharpness of turns in the curves of prices and steepness of decline of the

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currency, as time goes on, creates the impression that many of the more sudden movements are due to the machinations of speculators. In the accusations and struggles which follow these crises many useful financial institutions become hopelessly discredited, and important instruments of control are discarded. Finally, in most cases there is a rapid sweep of opinion which reverses political trends and puts a new group in command as monetary stability in its simplest terms, and on a gold basis, is sought. In the typical sequence of events the only important modification that has been achieved by any nation is the -avoidance of the final stages which bring the complete annihilation of the currency. When this desperate state of affairs is reached it is necessary to make a new start with a new money, and with old debts and investments wiped out. Many times the world has witnessed the progress of this drama and seen profound changes in the civilizations of dozens of countries. Only in the case of France is there a conspicuous example of restraint after a vertical decline in value, only once, probably, has the multiplication of currency units and the precipitate collapse of the foreign exchange value of a money been halted in a rapid rush toward zero. Whenever a money is freed from normal restrictions respecting quantities to be issued and the rate at which it is exchanged for gold, it is bound

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to be subject to the impact of powerful waves of speculative attack. When in addition to this the intention of the government is not clear the point of probable future stabilization is in doubt. Then the whole structure of values on which a free system of production and exchange is supported becomes completely disorganized. At such a time, it is important that each individual recognize the fact that the retail prices which concern him as a consumer always lag three months, six months, or more behind wholesale prices in their upward movement. As the result of this he must expect an increasing inconvenience resulting from inflationary increases in the cost of living. He must realize that even after the direct influence of inflation has ceased to operate the pressure of costs on his personal resources will continue to grow. In addition to this it is important to consider that the effects of the change in the value of money cannot be met in a single decade but will carry over a considerable period of time. They will last, probably, until all those who have made investments and amassed savings before inflation are dead and until a new generation has succeeded in accumulating assets in terms of the altered standard of value. Moreover, it is clear that this threat to future security is extended insofar as the period of uncertainty in money values is longer, and as the decline in the value of a currency becomes greater.

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Even more important, however, than the destruction of past investments, is the existence of a condition t h a t prevents the renewal and replacement of those funds normally devoted to the maintenance of plant and the nourishment of new undertakings in production. Of necessity the inability to forecast the future value of present investments completely paralyzes security markets and tends to throw the whole burden of construction and capital goods on t h e government. The general signs of a beginning of this state of affairs were to be observed in French inflation, and they were even more significantly present in the United States in 1933. Such changes, if they are prolonged, inevitably strike a t the roots of industrial organization and threaten a complete transformation of both ownership and control. Inflation has always been a form of confiscation which takes saved wealth indiscriminately from those who have p u t it aside for future use. I t is a means of injecting a large unknown factor into price relationships, which can benefit few except professional speculators. I t is a course which impoverishes the middle classes and shifts t h e balance of power in industry. Those who are very young and very active gain if they are shrewd enough to see the course of coming events. Those who have large funds gain twice because they are in a position to save some of their capital while they can also borrow and buy. They can use real

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wealth which they never give back to creditors while they gain from the appreciation of the value of tangible goods or rising equities. The cost of stopping inflation is considerable, but it is infinitely less in the first stages than if it comes when the impetus has developed full force. T h e experience of a dozen countries since the war, and scores of them in the course of past history, shows that it is better not to wait for an ideal level of exchange value to be won, but to seek early stability whatever the cost that is involved. Only a value that is tested b y some months of de facto stabilization can safely be taken as a standard, however. Stabilization is bound to have a repressive influence on some enterprise. T h e inevitable slump is only moderate when the very short use of the stimulus of increasing money and credits has not permitted this stimulus to become essential to economic life. If action is taken quickly, and determinedly, the impetus which comes from having a reliable unit of account will very quickly outweigh the depressing effect of withdrawing the speculative element. This is because, only on the basis of a clearly defined monetary system can contracts be made; only with the help of a well-secured medium of exchange can business prosper. Naturally enough, some of those who have never been through inflation are willing to take the desperate chances that go with a new and

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reckless monetary policy. A temporary feeling that gains rapid headway, leads to the throwing over of old restraints. Unknown losses are easier to face than familiar hardships and the truth is sometimes realized too late. Fortunately for those those who are still in a position to avoid catastrophic inflation the French experience destroys many dangerous illusions. It shows, above all, that the landslide can be stopped if public opinion stiffens to resist the decline. It shows that the small capitalist loses to the man with more wealth, that the wage earner and farmer are financially weakened. There is no way in which the mad upward rush of values that comes with inflation can set industry right, or bring about a more balanced adjustment of prices to each other. In no important respect can inflation wipe the slate clean of old mistakes and make easier a new beginning. Those who have followed the French along the path of inconvertibility and through the subsequent inflation of credit and currency, may do well to imitate the firm action which after months of real suffering and loss, brought about the stability of the franc and the return to prosperity and creative enterprise.