july 1934

The French Financial Outlook

Paul Reynaud

Volume 12 • Number 4

The contents of Foreign Affairs are copyrighted.©1934 Council on Foreign Relations, Inc. All rights reserved. Reproduction and distribution of this material is permitted only with the express written consent of Foreign Affairs. Visit www.foreignaffairs.com/permissions for more information. THE FRENCH FINANCIAL OUTLOOK

By Paul Reynaud

a a IN period that offers spectacle of constant and dramatic us a changes, and charges good price for the entertainment, an note. is contributing original The unexpected and recover almost offhand rapidity with which she is able to her bal a ance is source of unending astonishment to the world. Last summer an authoritative American critic voiced the fear that France would be unable to balance her budget and save the a we franc. Well, within period measured in weeks, found the French budget balanced, the railroad deficit halved by the stroke a of pen, French government bonds again soaring, gold streaming back into the Bank of France, American eagles and British sover on as a eigns dropping exchange result of decreased hoarding, and industrial securities again finding buyers in the stock markets. a was Confidence, in word, had been restored. And it done by simple, nay classical, procedures. same Much the thing has happened again in the three months since the events of the Sixth of February. Then many an era people abroad felt that of unrest and bloodshed might be opening in France. But lo! within two days the "Sage of Tourne a feuille," M. , had national coalition govern ment organized, calm had been restored, and a Chamber that had been cabinet after cabinet on the was upsetting financial question to to getting ready docilely authorize the ministry do by proc lamation things that it had been refusing for over two years to do itself. The matter-of-fact way in which France gets onto her feet an after apparent collapse is somewhat irritating to foreigners causes are who do not grasp the underlying of her conduct and inclined to see something shocking to established usage in her impulsive reversals of form. ii to The present situation goes back the Sixth of February. A ? a a tragic day and turning point. That evening Left majority was an in the Chamber giving impressive vote of confidence to the Daladier ministry. It was its first contact with it. It had done the same was with the five preceding ministries, and again all primed

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to overthrow the new government a few weeks later when it would have to deal with the financial problem and try to take moment war veterans were action. At that very lines of marching down the Champs Elys?es carrying their battle-flags and singing were the Marseillaise. They headed for the Pont de la Concorde were beyond which lay their goal, the Chamber of Deputies. They as young men, afraid of nothing. Unarmed they were, they were dashed upon the cordons of police that guarding the bridge. was out en The police fired. Blood shed. The people of Paris turned masse for the funerals of the victims. There were wounded be men to sides. The notion that unarmed should be ready risk their lives for an idea came as a shock, and as a decided comfort, to those who loved France but had come to doubt her. The thing that was stirring in the veterans was above all a a sentiment of outraged honesty, very powerful emotion in the French population. A fifteen million dollar "swindle" had been so on made possible, it seemed, by political complaisance the Left. A Left ministry had declared itself opposed to the usual in commission on which all would be ?vestigating parties represented the only way of guaranteeing the seriousness of the effort to fix sense responsibilities. The of national pride is strong in Paris, and on was most of its deputies sit in the Center and the Right. Paris a disgusted with the impotence of Chamber that had overturned one five governments after the other in rapid succession. Paris rose was more in wrath, and the wrath the violent because the city had been suffering severely from the dropping off in the tourist trade. a wave The Daladier ministry collapsed before of popular indignation. And the Left majority, which had broken five gov ernments now was in twenty months, itself broken. The Left had held on romantic The two majority together? largely grounds. on which it rested the Radical-Socialist and the Social parties? ist were in disagreement as to ways and means of dealing with the problems of public finance. The Radical-Socialists had been for some time shifting back and forth between the Right and the Socialists. In the general elections of May 1932 they had made the an mistake of striking alliance with the Socialists without coming to an agreement on the issue of financial reconstruction. After the Sixth of February, they abruptly deserted their allies and com to a new bined with the previous opposition make up majority of so-called National Union (it does not include the Socialists, with 130 votes, nor some 20 Communists and others). The manoeuvre 6l2 FOREIGN AFFAIRS was an made possible by calling in ex-, M. same Doumergue. The thing had been done in July 1926 by call ing inM. Poincar?. The Doumergue ministry could boast the two party leaders of Right and Left, M. Tardieu and M. Herriot, both now former premiers and ministers pompously styled "without of portfolio." Marshal P?tain became Minister War. The port an folio of foreign affairs went to ex-premier, M. , who away back in 1913 had met the increase in the German army with the three-year service bill. act new was to one com The first of the government appoint mission to get to the bottom of the Stavisky scandal and another to fix responsibilities for the casualties of the February riots. a While these commissions were getting to work, budget was voted a in a matter of days instead of matter of months; then the Gov ernment sent Parliament home for a two months' vacation and at axe tacked the problem of balancing the budget, plying the of executive decrees to effect reductions in public expenses, the blows war falling on office-holders, retired public officials and pensioners a case men who had been drawing $40 year in the of of 50 years of age, and $80 in the case of men above ss* The war veterans had been accounted the most dangerous, especially after their victory of February 6. M. Doumergue handled them successfully with his was smiling good-nature, and the Government strong enough to issue the decrees which reestablished budgetary equilibrium. The Socialist Party had constantly maintained that the reduc tion of public expense by cuts in the wages and pensions of gov ernment and veterans would tend to the employees augment of depression by lowering the buying power of those portions the consuming public. The C.G.T. (Conf?d?ration g?n?rale du travail), which is closely connected with the Socialist Party and counts more office-holders than workmen in its membership, a in favor of opened campaign against the executive decrees and to even a organized resistance them, making veiled threats of to a general strike in the public services force reconsideration of or them by the Government Parliament. Some disturbance of routine work actually occurred, particularly in the postal and was at telegraph departments. The Government first considerate, then more or less inclined to be harsh. The agitation came to an end once it became clear to the leaders of the government employees was and the C.G.T. that public opinion hostile to any movement of protest. THE FRENCH FINANCIALOUTLOOK 613 was are a That hostility natural enough. All producers having hard time in France, whether in the mills or on the farms. Wages have been cut to the bone in most branches of industry and a a commerce, so that miner today is being paid less than farm are laborer. The young people who graduating from school, with are to their diplomas all in order, finding places closed them. on are State employees, the other hand, drawing salaries in paper francs that are seven times larger than their wages in gold francs before the war, whereas the franc has fallen only four-fifths. The so purchasing power of money has increased during the past four years that, even with the cut of 10 percent which the decrees are were made effective, public employees better off than they were four years ago. Of this they in general aware, and they also saw that the purchasing power of their salaries would be safe guarded if the budget could be balanced and the franc saved from a new depreciation. a Once the danger of revolt in the public services had been averted, the effects of the executive decrees began to become rose manifest. On the Bourse, French government bonds rapidly a in value; and indeed continuation of that improvement would seem as to justified, for whatever one's guess the future of the as as franc, it unquestionably is solid the Dutch florin and the are Swiss franc. Now Swiss and Dutch government bonds yield ing 4 percent while the French yield 5 percent, which is another are way of saying that by comparison the French undervalued by 25 percent. Foreign gold is meanwhile coming in to the Bank of as to France, especially from countries such Italy that belong the gold bloc. Confidence is returning. in

Can one therefore conclude that the government of National Union, acting under the aegis of a former President of France, has manoeuvre was succeeded in repeating in 1934 the which carried out in 1926, saving wholly and permanently the bad situation created by the mistaken financial policies of the Left? What the National Union has achieved, by the same tactics used in 1926, a a has been balanced budget, revival of confidence in the public a finances, and lessening of tension in the political atmosphere a that will be favorable to resumption of business. a can no From technical standpoint, there be doubt that the recovery in government bonds means a lower interest rate which 6i4 FOREIGN AFFAIRS costs. will help manufacturers by lowering manufacturing Holes in the budget had been plugged by preceding governments a at and rates of with steady stream of loans issued higher higher to interest. The effect had been not only increase the fiscal burdens of manufacturers, but to raise interest rates on the to money which they had borrow from the banks. Long-term a loans cost almost twice as much in France as in England. Where French business-man could get the use of a million francs for an interest charge of 80,000 francs his English competitor could get on be two millions. That handicap French manufacturing will as of results in reduced in proportion the restoration confidence Bank lowered interest rates. Meantime, with deposits in the of to an France increasing, and hoarding coming end, the franc is a new is the beginning to glitter with lustre. The franc only on a reserve stable currency that rests today gold of any very French considerable proportions; and the stability of currency an and confidence in its future are contributing atmosphere of security to domestic business. Such are the immediate advantages procured by the political and right-about which France has made in these few weeks past, The causes of the by the resultant budgetary reform. rejuvenation of spirit have been both political and technical. no All the same, there is escaping the fact that the situation not M. that M. Doumergue faces today is the situation that was no Poincar? successfully dealt with in 1926. Then there was danger in the foreign field: the French treasury in difficulties, but France was a in a particularly prosperous country prosperous world. The monetary readjustment effected by M. Poincar? doubled the value of the franc within the space of a few months the (125 to the pound sterling instead of 248). Nevertheless, pur was at chasing power of the franc small abroad and great home. was since French industry therefore well situated for export, to was France was the cheapest country in the world live in. That a time when it was good luck to be earning dollars in New York and spending francs in Paris. That situation has now been reversed. France is a ruined coun cases try in a ruined world, the ruin in both coming from the de one most of all countries to live in pression. It is of the expensive abroad and today, the purchasing power of the franc being great small at home. Today it is an advantage to be earning francs in been France and spending dollars inNew York. The results have THE FRENCH FINANCIAL OUTLOOK 615 an so disastrous for the French export trade that France showed unfavorable trade balance of 10 billion francs in 1932 and a simi lar one in 1933. In certain respects France may view the currency to a situation with pride, since she is the last large country possess stable currency and to allow free entrance and export of gold. un But in other respects she has good reason to worry. Her a to on impaired franc is handicap her in competition the world market. The dollar has lost 40 percent of its value, the pound 37 percent, the German mark, really, 40 percent, to say nothing of the yen, the drop in which temporarily reinforces the permanent now factors aiding Japanese industry. A number of people in France, and many abroad, view with alarm the predicament in which French industry is placed by reason of the different levels of manufacturing costs prevailing in a France and in other countries. France, they argue, is making mistake in doggedly holding the franc up instead of bringing it into alignment with other currencies. It is thought that the policy a even will entail long period of hardship, and might eventuate in social disturbances which could easily be avoided by following the example set by many other large countries. An example quoted in this connection is the story of the British seamen who rose in a to 20 mutiny because of threat reduce their pay by percent, were while their salaries cut 37 percent by the devaluation of the an pound without their noticing it. How miss the point of such not interesting example, and how fail to follow it? If France does to reserve bow plain facts, it is said, her gold will gradually be to cover can no depleted her unfavorable trade balance; this longer be made good by coupons collected abroad and by the invisible exports resulting from tourist purchases in France. The franc can not forever bear up under this hemorrhage of gold. a What pity that Frenchmen inevitably associate currency devaluation with their ghastly memories of inflation !The conclu sion reached by these observers is that France had better come to her senses and undo a mistake which bleeds her economic sys tem and risks involving her in social disorders. IV This thesis of the devaluationists ismet with the official French thesis, which runs as follows: It is necessary not to think only of the advantages that would accrue to the Government or to this or a that portion of the French population from policy of d?valua 6i6 FOREIGN AFFAIRS

as a tion, but to view the problem whole. Devaluation would un a to to doubtedly be gain some; but the great majority of the French public it would amount to sheer confiscation. In the first place, it is pointed out, the objectives supposedly to are some be attained by devaluation in degree contradictory. as cause a If devaluation is, many hope, to rise in domestic prices, mean or ex that will not any appreciable permanent gain for once porters, since the latter will at find their costs going up. to raw Many industries have buy their materials abroad; indeed, a that is so in most cases, the iron industry being notable ex raw ception. Devaluation of the franc will increase the costs of materials. Then again, given the way in which labor is at present organized in France, and the fact that most labor agreements are more or less based on indices, a rise in directly cost-of-living? domestic will force manufacturers and manufacturers of prices ? in to raise exports particular wages. But suppose devaluation could be brought about without in flation and without any rise in prices? That, evidently, would put a on to premium exporting, and the theoretical result would be on facilitate the sale of French products foreign markets. But that advantage may prove illusory. It must not be forgotten that if are now French exports in difficulties the fact is largely due to the innumerable restrictions (tariffs, embargoes, quotas, transfer restrictions) in force against French products. Devaluation of the franc would tend to make those burdens heavier and so to pre vent the on from premium exports materializing. a Furthermore, the export trade of country is not the only thing to be considered. The measure proposed would certainly a result in falling off of imports, French purchasing power being reduced. Now is that result altogether desirable? Leaving aside we can the damage done to importers and to ports of entry, be sure that exporters would also be hit before long. In the last are analysis, in all international trading, products and services matched against products and services. If imports fall off, foreign as to fall purchasing power regards French products is bound also ? soon ? off, and French exports will eventually in fact very fall off in their turn. can But, as a matter of fact, the assumption that the franc be devalued without any rise in domestic prices is purely theoretical. not in connec The example of the United States does apply this not tion. To be sure, American prices have risen in any degree THE FRENCH FINANCIAL OUTLOOK 617 to corresponding the devaluation of the dollar; but that fact is determined by two circumstances peculiar to the American situation: 1. The raw materials which the United States is obliged to buy are abroad relatively insignificant in comparison with its domestic a on raw supplies. In country like France, the other hand, where are materials largely imported, any lowering in currency values raw would at once show its effects in the prices of materials and consequently in the prices of finished products. 2. not con The American public has yet realized clearly the sequences that will follow the devaluation of the dollar. The no one can American experiment is still in its initial stages, and foresee what the reaction is going to be when the costs involved an in the Roosevelt experiment become apparent in increased an a to so public debt, unbalanced budget (with tendency remain a permanently) and depletion of the nation's liquid funds. In France, then, a devaluation of the franc, even if not ac an companied by increase in the volume of money in circulation, on would result in higher prices all articles containing imported raw materials. But that is not all. The French public has not for on gotten the effects which inflation and the drop in the franc had cur prices between 1919 and 1926. Everybody remembers that rency devaluation meant an increase in the cost of living and that was to its practical effect lessen the bank note's purchasing power. In these circumstances, any devaluation of the 1928 franc would as a to a new cur be interpreted prelude period of depreciated are rency. The psychological reactions of that beyond prediction. a a The public would have right to conclude that if devaluation of or 10 was there would be to 5 percent percent possible, nothing prevent a new devaluation if the first did not achieve all that was to ? as cer expected of it by those who stood gain by it would overcome. tainly be the case. That feeling would be very hard to Thus devaluation would profoundly disturb the mechanism of exchange. now Undoubtedly the paper notes being hoarded would issue from their hiding places, and the holders would try to forestall further reductions in money values by purchases of real values. as were to So far such notes applied the purchase of merchandise, to a a they would contribute rise in prices; but considerable por tion of them would doubtless go abroad in the form of foreign securities, and the nation's liquid funds would be reduced by that 6i8 FOREIGN AFFAIRS

no much. There can be assurance that hoarded savings would be spent. On the contrary, experience proves that the threat of an monetary depreciation provokes active search for investments in real values, especially abroad. Even assuming that hoarded money would go into consump an tion, the advantage could only be temporary, based on ex use reserve. travagant of purchasing power long held in Mean new so time, savings would be going abroad and depleting the to volume of floating capital. In order keep the balance and to the of notes would have to replenish supply ready money,? simply be printed without real security in other words, there would be one can inflation pure and simple. All that at present make out from the first results of devaluing the dollar confirms the impres measures on a sion that the effects of such nation's economy and on are on the general trend of business the whole disappointing. Partisans of devaluation might, to be sure, meet the argument just outlined with the objection that prices might nevertheless be maintained with a much lower volume of money in circulation, since the velocity of circulation would be speeded up. That is very doubtful. Though the flight from money might increase the velocity of circulation, the creation of monetary suspicions would damage private credit, in other words, diminish the circulation of capital. Who would lend money when values might fluctuate widely between the time the loan was made and the date of repayment? And the weakening of credit, meantime, would occasion to serious embarrassments banks and savings' funds, a which would be asked to repay depositors. As result, business concerns would be unable to make loans, interest rates would rise, not and that would only increase production costs, but in many cases out of business contribute to unem put enterprises and ployment. Even that is not the whole story, nor the worst of it. Devalua tion would reduce the assets of everybody who heretofore has made loans either in France or abroad. In the case of credits to French citizens, the creditor would lose while the debtor would a mere gain, and that would involve transfer of purchasing power from creditor to debtor. But in the case of credits to foreigners, a the operation would represent loss to the French community as an a whole and advantage to the debtor, who could clear himself in depreciated currency. Devaluation would pare down the assets on of everybody living fixed incomes, and especially of bond THE FRENCH FINANCIAL OUTLOOK 619 ? are not a ? as are to holders, who in position salaried people exact compensation. In general terms, and quite aside from the moral effects, a devaluation would reduce the purchasing power of large group re of consumers, both by the rise in domestic prices that would or sult from increased interest rates and by the failure of fixed to semi-fixed incomes to adjust themselves. So the effort procure new outlets for French products abroad would only close ready made outlets at home. In a word, currency devaluation would not, by itself, solve any at of the problems that face the country the present time; it would merely shift them about and aggravate them. For anybody at present holding francs it would be outright confiscation; and it would destroy the confidence required for the normal functioning a of credit. It would strike such devastating blow to public and an of private credit and occasion such exodus capital from the a country that one may well ask whether, after such shock, the to at a new gold standard could long continue function level of of parity. Devaluation would therefore involve the risk placing on to a the country the road period of monetary disorder, monetary anarchy, from which, in the final accounting, the speculator would be the only gainer. It would put the seal of ruin on everybody who has hitherto trusted the honesty and the pledged word of the state. coun Devaluation of the franc would, finally, encourage other a race tries to devaluate their moneys and start in depreciation which would tend to intensify the present confusion. Those who a on look with favor upon devaluation of European currencies the not basis of the pound, and especially of those currencies that do suffer from the causes that weakened the pound in 1931, fail to perceive that this policy would involve England, for example, in very serious embarrassments. British prices would again become too high as compared with continental prices, and England would same en be faced with the problem of adaptation which she countered between 1925 and 1931 and which she solved very un costs satisfactorily by cutting her domestic prices and of produc tion. If one compares export percentages for the various countries one between 1929 and 1933, notes that England has barely held to her own, improving her figures from 10.74 IO-93> and the a to United States has experienced falling off from 15.61 11.53; whereas the countries of the gold bloc all show improvements, ?20 FOREIGN AFFAIRS

to from to France moving from 5.95 6.50, Germany 9.72 10.40, the Netherlands from 2.43 to 2.62, Belgium and Luxembourg from to 1.21 to 2.68 to 3.52, Italy from 2.42 2.80 and Switzerland from 1.48. We have a choice, at bottom, between two systems only: be tween an effort to stabilize prices by dint of monetary manipula ? we are tions (managed currencies) and the principle defending ? a What Frenchman could we permanently stable currency. we to now ever persuade that if resorted monetary devaluation to resort to some hence we would not be tempted it again years on the pretext of new economic difficulties ? v

That is the thesis of the French Government. recent of The partisans of devaluation reply that the example coun Czechoslovakia proves that the catastrophes predicted for tries which devalue a second time are imaginary. As regards public a cur credit, is it not better in England, where there is mobile rency, than it is in France, where money is convertible into gold? a France They add that itmay be that by policy of sheer heroism at can get along without currency devaluation, but that it will be were to to the cost of untold sufferings: for if French prices fall the to meet the level of world prices, the French taxpayer, in order to twice accrued public expenses of 1934, would have contribute a as much merchandise to the treasury as he did in 1928. As mat so ter of fact, the technical situation of the franc is strong that, in our judgment, the question would really arise only ifworld prices, to a con instead of rising in terms of gold, were to continue fall, in and tingency that might result from any further drop dollar case launch a pound. In that the partisans of devaluation would new offensive. Meantime, the governmental stand against de valuation is being supported by the important newspapers and is on accepted by French public opinion, in spite of wistful longings our towns for the part of farmers and the small traders in the the high prices of 1928. of The National Union ministry has adopted the expedient as a means the This large public works of fighting depression. new is the suggestion of theMinister of Labor, who represents the has been style Socialist Party inside the cabinet. Public opinion as a much struck with the slogan that the state might well pay man to work as pay him to do nothing. Better informed people THE FRENCH FINANCIAL OUTLOOK 621

are to as inclined think that, regards France, public works are not a a managed by the state specific for the depression but that ease nerves sedative may the patient's temporarily but will none the less impair his general condition. Such is the economic and financial situation in France as we approach the end of the first half of the year 1934. With her balanced production, half agricultural, half industrial, with her a currency stabilized and delicately gauged, with spirit of economy a and saving in her hard-working population, with colonial empire a a that is absorbing third of her production, with line of fortifi on east to cations the barring the road the periodic invasion she has known in the past, France seems to be one of the fulcral of a points resistance in world sorely beset by the depression.