For decades before the First World War, the values of currencies were broadly stable. Fixed exchange rates against gold and convincing commitments by governments to maintaining the gold standard made this so. The war caused almost all countries to suspend their gold standards and many governments printed far more money and borrowed a lot too. As a result, currencies’ values became uncertain and in flux. France’s franc was one such currency. Obtaining stability once more was difficult for France in the 1920s. Crashes in the value of the franc were common and governments struggled to cope.
Franc After WWI
After having suspended the gold standard during the war, the French franc floated freely against other currencies. That said, loans from abroad and controls on capital movement helped France maintain the franc’s value during the war. Loans from abroad were converted into francs by buying that currency, supporting its value. Capital controls blocked others’ ability to sell francs and move money out of the country. So, the franc’s value held up. This was managed despite French currency in circulation growing from 5.7 to 37.9 billion francs between December 1913 and 1920. After the war, controls on the franc were lifted and the currency quickly lost half of its value and stood at 6.25 US cents value in April 1920.
The reasons for skepticism in French finances were obvious. The country was highly indebted, with public debts amounting to about 180% of GDP, much of it comprised of wartime loans that would need to be refinanced. Yet, budget deficits continued after the war, at least part of these driven by the large costs associated with rebuilding destroyed regions. France counted on German war reparations to pay for a lot of this, but these were not immediately forthcoming so the government borrowed instead. Despite this, the franc appreciated through early 1922, but then it sagged again.
Outside France, conditions were not much better and, in many cases, were actually far worse. There were numerous fiscal crises underway in Europe during the 1920s. Beyond the difficult budget situation in many countries, the tense circumstances were aggravated with the repudiation of debts by the new regime in Russia and postwar Germany’s experience with hyperinflation. In the early-to-mid-1920s, France was vulnerable because it was borrowing via short term instruments it could easily struggle to refinance. In late 1922, the value of these short-term notes outstanding stood at 76.6 billion francs.
In the coming years, the French franc moved higher when the government signaled fiscal restraint such as by raising taxes or cutting spending. However, this was not always simple. Taxes could encourage capital flight. Also, an anti-inflationary stance on expanding the money supply could damage public credit if it was too restrictive, as even many conservative voices in finance thought it was at times in the 1920s.
Meanwhile, the franc fell when the government seemed more willing to simply deal with its debt by inflation or when German reparations looked unlikely to materialize. In 1922, for example, diplomatic deterioration and chaotic conditions in Germany made delivery of reparations look like a very distant prospect. So, the French franc had fallen from a peak in April of 9.23 US cents back to 6.86 cents in value.
First Drop
The French budget was balanced in 1923 but only when excluding certain incurred expenses that were supposed to be met with German reparations payments, however doubtful that prospect seemed. Even in 1923, the French government was holding out hope that these would eventually come, though most others had come to dismiss such a possibility. This may explain why, in January 1924, a large government debt issuance had failed to be placed with investors. To blame was a lack of investor confidence, particularly from foreign buyers of French bonds in Germany, Austria, and the Netherlands. This was troubling because France had a lot of short-term debts outstanding. Thus, even after having drifted lower in late-1923, the franc lost further value, falling to 3.49 US cents or about 130 per pound sterling by March 1924.
Suitably, the government reacted by raising taxes to restore confidence. This was done by means of a nearly across-the-board tax increase of 20% (the double décime) after some delay in the French parliament. This tax increase had actually been proposed a year earlier by finance minister Charles de Lasteyrie but it took an emergency to see the legislation through.
This helped the government secure credit. A $100 million loan was secured through J. P. Morgan & Co. The size of a possible loan was inflating by the day; the French government eventually requested $50 million but the bank offered more on the condition that the tax increases were passed. Providing further help, the Banque de France intervened in currency markets to support the franc. All this helped bring about a stabilization that occurred in 1924.
As this was happening, foreign speculators were blamed. A law was even passed criminalizing “breaches of the credit of the state”, allowing the government to prosecute those spreading pessimistic news and speculating against the franc. The law also targeted salesmen convincing savers to part with their government bonds for private or foreign securities. In another sign of the seriousness of the situation, and the desperation, the Banque de France even resorted to manipulating statistics on currency in circulation to make it seem there was slightly less money issuance going on than there actually was.
After the panic, the governing Bloc National was defeated in the May 1924 elections. The left-of-center government that replaced it maintained a position of restraint. The French franc rebounded back to 6.71 US cents. Still, the budget was not yet truly balanced and the franc did slide back to 5 cents value.
Second Drop
A wealth tax was periodically proposed by the new government to raise revenue, as were other taxes, but these typically failed to get through both chambers of the French parliament. Then, a scandal erupted over the concealing of note issuance numbers, damaging the government’s creditability even though the false reporting had begun under the previous prime minister’s tenure. This kickstarted a frequent turnover in finance ministers and, rather than be brought under control again, franc banknote issuance rose steadily.
Thus, it’s not surprising that the government again struggled to place a loan in 1925. A balanced budget, enabled by five billion francs in tax increases, eventually passed but it did not arrest a fresh drop in the franc. In September 1925, the franc stood at 4.7 US cents and it fell to 2.05 in July the following year, or over 200 to the pound sterling. In response, there was another change in government. While thrown out of power after the 1924 elections, the fiscally conservative Raymond Poincaré was made prime minister again in July 1926. Stability then returned.
Recovery
The long fiscal and monetary struggle in mid-1920s France was likened to a ‘financial Verdun’, referring to the long, and in France a legendary, battle of the First World War. The balanced budget helped resolve matters and re-established political stability, increased interest rates, and the creation of a sinking fund to amortize the debt all helped restore the investment appeal of French assets. The franc recovered to 3.95 US cents by year-end 1926. The government began to accumulate large amounts of foreign currency reserves and, before too long, France became a model of fiscal and monetary strength in the remainder of the ‘20s.
Lesson
The First World War shattered a particular monetary order. Because this happened across several countries, the international element of these changes has often received substantial attention. Outside of Germany’s hyperinflation, the effect on individual countries in isolation, the political ramifications and so on, is less common knowledge. The principal lesson of France’s experience was the difficulty in finding stability once more after it had been lost.
More from the Tontine Coffee-House
Read about the hyperinflation of 1922-23 Germany and the fiscal situation in Austria around the same time. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Delalande, Nicolas. “Protecting the Credit of the State – Speculation, Trust, and Sovereignty in Interwar France.” Annales Histoire Sciences Sociales (English Edition), vol. 71, no. 01, Mar. 2016, pp. 119–50.
2. Krugman, Paúl, et al. “International Aspects of Financial Crises.” NBER Chapters, Jan. 1991, pp. 85–134.
3. Mouré, Kenneth. The Gold Standard Illusion. Oxford University Press, 2002.
4. Schuker, Stephen A. The End of French Predominance in Europe: The Financial Crisis of 1924 and the Adoption of the Dawes Plan. Chapel Hill: University of North Carolina Press, 1976.
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