IX. THE GOLDEN JIHAD

The forebodings were only worsened by a semimessianic drive by the French to force a gold-based deflation on the rest of Europe. Rather like some born-again evangelists, the conversion came after a period of riotous monetary dissipation, and was carefully cushioned by the 80 percent devaluation of the franc, well under the free market rate. In effect, the French gold parity was a tool to transfer wealth from France’s trading partners. The French dogmatism, moreover, was laced with more than a dash of revenge-seeking against both Germany and Great Britain. Throughout the post-Versailles process, there had been a subtle pairing of the United States and Great Britain acting together to monitor how France and Germany worked out their war settlement. In the Locarno meetings, Chamberlain behaved as if Great Britain had no dog in the fight, usually intervening only when things got off track. But his opinion counted because he was still joined at the hip with America, who controlled the money. Germany and France, in effect, were at the kids’ table, while the parents who dominated global finance quietly pulled the strings. That would be bad enough, but to French eyes, the adults consistently resisted placing limits on Germany, while diligently undercutting the years of French efforts to construct a reliable bulwark against being run over by a resurrected and reenergized German war machine.

But worms can turn. After Poincaré and Moreau pegged the franc to the dollar in 1926, they adopted a financial program much like the one the IMF imposed on repentant emerging market countries in the 1990s—balance budgets, reduce taxes, and pay off debt. Their twist was that they refused to consider foreign exchange as a reserve, insisting only on gold, francs, and high-quality commercial paper, a view that Benjamin Strong had shared. The French Monetary Law of 1928 converted the peg into the officially supported price for the new gold franc, while fashioning a stone corset for policy makers. The preference for not counting foreign exchange in the French reserves, for example, became a commandment.⁸⁵

Experts considered that the franc had been valued at about 15 percent below its true purchasing power, while The Economist calculated that internal French prices were as much as 25 percent lower than in the rest of the world. Spreads like that precipitated a flood of hot money into France, seeking to profit from the imbalance. Under the old gold standard rules, such an influx would have triggered French inflation, removing the profit opportunity. But the Bank of France maintained price stability by sterilizing the inflows (offsetting them by withdrawing equivalent amounts of system liquidity). At first, that just increased the inflows, which the French deterred by selling back the foreign currencies to their home banks and insisting on gold.⁸⁶

From the end of 1926 through mid-1928, the French gained $335 million in new gold and about a $1 billion in foreign exchange. Over the next three years it reduced its foreign exchange holdings by $350 million, but increased its gold holdings by $1.16 billion, raising its share of world monetary gold from less than 8 percent to more than 20 percent. During that time, there were no dramatic changes in American gold holdings, which fluctuated around 40 percent of the world total. Altogether, from 1926 until the world gold crisis of April 1931, the French absorbed $1.47 billion in gold while the United States took only an additional $290 million. By 1932, the French were actually drawing even with the United States in gold holdings—$3.5 billion for the United States and $3.2 billion for France, an absurd ratio for a country with a manufacturing output only 15 percent the size of that of the United States.⁸⁷

The obsessive accumulation of gold on the part of the French had mixed political and doctrinal motivations. The politics were straightforward. Moreau must have enjoyed making a diary entry recording how the Bank of England finally understood that the French could knock them off the gold standard at any time. High French monetary circles also must have taken pleasure watching Schacht futilely struggling to ward off default as the French methodically pressured his limited supplies of gold. At the same time, the French were probably sincere in their commitment to maintaining the supremacy of gold as the global measure of value. The withdrawal of gold from world markets led to a vast contraction in available money and drove down most world prices near to those of France. The Bank of France celebrated the event, noting that “world prices have become fairly well adapted to the rate at which the franc was fixed in 1928.” And again, “among the group indexes the index of imported commodities declined more than did the index of French commodities,” suggesting that it was the French prices that were correct. Rist also expressed satisfaction with the price movements, complaining that there would have been “a general decline in the price level earlier if efforts had not been made from all sides to stimulate consumption artificially and to maintain it at a level superior to that corresponding to real income. It is there, in our view, that it is necessary to seek the specific origin of the present crisis.” In the same vein, Rist complained that Federal Reserve easing only “obscured the impending decline in prices and… hindered the deflation of credit.” After 1929, the deflation of credit was pretty much untrammeled. Between 1928 and 1930, British industrial prices fell by 27 percent, the price of goods imported into France fell as much as 40 percent, while internal French prices fell only by 4 percent.⁸⁸