VI. THE FRENCH ROLLERCOASTER

Like all the belligerents, France had financed its wartime expenditures by printing currency. By the time of the armistice, its wholesale price index was 3.5 times higher than the prewar index, and by mid-1920, it was 5.5 times higher. The French monetary system was still quite primitive. Much of its commerce was carried out in cash, often in gold coins, which consumers carefully hoarded in coffee tins and larders. Even reasonably-sized businesses settled accounts in cash rather than by checks. The currency to deposit ratio in prewar French banks was only 3:2, compared to 20:1 in the United States and 16:1 in Great Britain, so the money multiplier inherent in fractional-deposit bank payment systems was not nearly as important as in the Anglo-Saxon countries.⁶²

The backwardness of French banking turned out to be an advantage. The country’s households had deep pools of savings and little regard for the wartime paper currency, so the government could mop up the currency overhang by selling short-term below-market-interest bonds. It was a strategy that at first produced sparkling results. Alone among the European economies, France saw its pace of business pick up handily at the end of 1921, with solid growth and low inflation. In just two years the price level dropped by 43 percent. With $4 billion of borrowing to rebuild its devastated northern areas, French employment markets were buoyant.⁶³

It didn’t last. The franc appreciated from its postwar lows, and loose international cash flowed into France, adding to the bounce. Much like the left Reichstag coalitions, the French parliament, led by the socialist Aristide Briand, could not pass meaningful tax legislation. The huge reconstruction debt, most of it short-term, was secured only by the swamp-gas promise of reparations. Prices were soon rising at a near-hyperinflation rate, and the burgeoning tide of short-term debt was blood in the water for offshore speculators. Many knowledgeable observers suspected that the British, or the American bankers associated with the Dawes commission, or the Germans, were behind the attacks on the franc. The historian Stephen Schuker has confirmed that all of them discussed such actions, but none of them actually added to the trading pressure. The British Treasury was almost too eager to use its power over French finance—a 600 million gold loan was overdue, for instance, and they mulled whether they should seize French gold on deposit with the Bank of England, or simply call the loan, but the political ministers would not hear of it.⁶⁴

The French temporarily came to their senses while the Germans were still wallowing in their piles of worthless Reichsmarks. The right-center Bloc National took power in early 1922 under wartime Prime Minister Raymond Poincaré, an experienced and trusted hand. It still took him until 1924 to push through the so-called double-decime, a 20 percent across-the-board increase in all taxes that brought the budget into approximate balance. The Morgan $100 million loan that played such a dominant role in the Dawes negotiations, topped up by a $20 million credit from Lazard, helped finance a classic bear squeeze, buying heavily in the forward franc market to punish the speculators betting on its fall. The franc quickly jumped by 40 percent. For his pains, Poincaré was turned out of office that spring, although not before he had the satisfaction of seeing the Germans call off the passive resistance to the French Ruhr occupation, which for the first time began to return a modest profit.⁶⁵

The Bloc’s brief rule was followed by another left alliance, the Cartel des Gauches, a highly unstable slurry of agendas that eventuated in a parade of governments, including that of Édouard Herriot, who was bullied by the Americans and British at the Dawes negotiations. One nine-month stretch starting in late 1925 saw no less than five cartel ministries and six finance ministers. The franc once more descended into free-fall. Part of the problem was that much of the short-term debt was not being rolled over as budgets had assumed. (The French had long made a practice of selling below-market-rate debt to their own citizens, perhaps counting on their relative lack of financial sophistication.) But any minimally attentive investor would have been scared away by the chaos of French left-alliance finance. To quote the Belgian fright advertising in the French press: “[Y]ou cannot place confidence in French credit; disorder is everywhere.… Belgian banks are prepared to aid you in gathering your indispensable treasure for the difficult times ahead.”⁶⁶

But common sense was still alive in France. A cabal of moderate-left deputies began to push for financial stabilization in early 1926, and by summer had a bloc of about seventy deputies. Although many of them had voted against Poincaré in 1924, they spearheaded a draft to bring him back as the head of a National Union Government. Briand and Paul Painlevé, both talented and experienced members of the Cartel were tapped for foreign minister and minister of war, respectively. Poincaré served as his own finance minister. His record inspired confidence, as did the fact that both left and right were in substantial agreement on the agenda—balancing the budgets and cleaning up the short-term debt. Neither was difficult. The budget had never been far out of balance, in great part because of Poincaré’s 1924 tax program. Judicious pruning and some modest taxes put the country’s fiscal position in order. Even better, in the burst of enthusiasm for the new government, once-expatriated franc holdings were flooding back into the country, easing liquidity pressures.⁶⁷

The evidence of a political consensus may have been as important as the specific policy moves. When the exchange rate moved up from 49 to the dollar in mid-1926 to 25 at year-end, the Bank of France chose to peg the franc to the dollar. Pegging was not the same as a return to the gold standard. Great Britain had pegged the pound to the dollar during the war, but it operated as a convenience. Nor did pegging put a brake on speculation, for markets assumed that a peg could easily be changed. But after two years of experience with the pegged rate, the government fixed the gold parity at the $1/25 rate in 1928.⁶⁸

It was an interesting decision, fraught with implications. In the first place, it was a full 80 percent devaluation from the prewar parity of $1=5. Prices were much higher in 1928, of course, but on a purchasing power basis the new franc was undervalued by about 10–15 percent with respect to the pound and the dollar. That would be a major spur to French exports, even as it acted as a tariff to discourage French imports.^* It also marked a dramatic conversion for Poincaré, who had usually been associated with advocates of full “revalorization,” or a return to the prewar parity, based on the same vacuous slogans that had driven the British to overvalue the pound in 1925. The aristocrats on the board of the Bank of France, like Baron Edouard de Rothschild and the steel magnate François de Wendel, fought a two-year struggle against devaluation, or at least one so steep. The primary driver of the decision was Émile Moreau, president of the Bank of France, who had the sense to follow the advice of two brainy economists, Charles Rist and Pierre Quesnay, who had fully absorbed the lessons of the British resumption. In private, when he was pressed to explain the devaluation, Moreau usually said that he would not repeat the mistakes of the British. For the next few years, in fact, the French economy was the golden-haired prodigy of Europe.⁶⁹