THE disease which is eating away the economic frame of France is a currency disease -- the depreciation of the franc. It has been characteristic of our situation for several years. What are its causes?

There is one general reason which certainly does not, as we shall see, exclude the subsidiary reasons, nor does it provide us with an excuse for our own mistakes, but which must always be borne in mind. That reason was admirably stated by Mr. Winston, Assistant Secretary of the United States Treasury, in his speech at the Bankers' Club of Kansas City, on October 11, 1925. "After the armistice," he said, "France was confronted by two possible solutions: either to resign herself to becoming a second-class power, to playing a minor rôle in the world, and to renouncing her position in foreign commerce; or to build up her industries again at no matter what cost. But the restoration of the devastated regions involved an enormous expenditure in excess of current receipts, causing further inflation and delaying stabilization. France chose the second alternative, and she was right."

One is tempted to add that there really was no choice. No Frenchman would have accepted any other solution. By force of circumstances we were compelled to sacrifice financial reform to the economic reconstruction of the country. As Germany did not fulfil her engagements, we had to effect the work of reconstruction out of our own resources. Today between 87 and 90 percent of the material damage has been repaired. So much stands to our credit. As against that, we must debit ourselves with the cost of reconstruction, about 80 milliards of francs. We once more are equipped with an industrial and economic plant of the first order, but our currency is depreciated.

Great Britain adopted the contrary course. She disregarded economic reform and concentrated on the restoration of her currency. As a result, she now has a sound currency, back at par, but in revenge her economic machinery is out of date, and she is involved in social and economic difficulties which are none the less serious because they are not financial. It might be said that Great Britain also had no choice. Her course was dictated by her entire financial past, by a national instinct.

Fate allowed the United States to end the World War with its gold standard intact and with a marvelously increased economic power.


The depreciation of our currency expresses itself in two ways. First, by the decline of the purchasing power of the franc at home. No country has escaped that decline, which is due to the worldwide revolution in prices. Even in the United States the dollar has lost about 34 percent of its purchasing power since 1914. It might be argued not only that the currencies of Europe should be stabilized, but that gold also should be devalued, as a result of the destruction of stocks and reserves consumed by the war. Without agreeing with all the theories of Mr. Irving Fisher, one must admit that the distinguished Yale professor is right in demanding the stabilization of the purchasing power of money.

However, the extent of the decline in domestic purchasing power varies according as the currency of the country is stabilized or not. There is a constant discrepancy between the index of a country with a stabilized currency, like Great Britain, and that of a country like France. The wholesale index in Great Britain, expressed in gold values, was 166 on the first of January, 1925, and 149 on the first of January, 1926. In France, on the same dates, the figures were 146 and 126. The difference is a measure of the domestic depreciation, due not to general but to particular causes -- to the currency disease of the country.

In an even clearer manner the depreciation of the franc is seen in the rates of exchange, for those rates influence our financial and political standing in the world and in addition reveal the difference between the paper money rate and the gold standard.

What is the history of French exchange since the war? Let us briefly recall it by periods, bearing constantly in mind the essential cause of the trouble as defined above, but noting also our own mistakes.

1. From the war to the armistice. During the war, from August 1, 1914, to November 10, 1918, the average rate of the dollar in France was practically par. It varied from 5 frs. 18 (minimum) to 5 frs. 97 (the monthly average for May, 1916).

France negotiated her foreign securities and pledged part of her stocks of metal; the expenditures of the English expeditionary forces, and later of the Americans, were an important asset; in addition, the Inter-Allied agreements provided her with credits. At this time there was no free exchange market.

2. The year 1919. In the course of this year the value of French currency was halved. From 5 frs. 45 in January, 1919, the dollar rate went to 10 frs. 78 in December (monthly average).

France began the restoration of the devastated regions, but two mistakes were made: first, by the Allies, when on March 13, 1919, they abruptly broke the exchange agreements instead of arranging for the transition from war-time finance to peace finance; secondly, by the French Government, which incurred a lot of ill-considered expenditures -- the so-called war "liquidation" -- wasted its resources instead of adopting a strict policy of retrenchment, bought great quantities of raw material abroad, and heavily burdened our commercial balance.

3. From 1920 to 1923. The dollar fell from 14 frs. 56 in 1920 to 13 frs. 45 in 1921, and then to 12 frs. 29 in 1922.

The period opened with the new parliamentary elections (National Union). France achieved the major part of the work of reconstruction, despite Germany's default. The consequences of the mistakes of 1919 became painfully evident. Furthermore, the world economic crisis at the beginning of this period aggravated our situation. Nevertheless, we succeeded in slowly improving our exchange, which at one moment (April, 1922) fell to the level of 1919.

4. From 1923 to the last half of 1924. The dollar rose from 12 frs. 29 in 1922 to 16 frs. in 1923 (yearly average), rose to 27 frs. 08 on March 11, 1924, and fell to 15 frs. 32 on May 7, 1924, on the eve of the parliamentary elections.

France almost completed the work of reconstruction, and for that reason this burden weighed more heavily than ever on the currency. At the same time foreign speculators tried to profit by the situation and there was a tendency to bring political pressure to bear upon France's position in the Ruhr. The franc was sold wildly. J. P. Morgan and Co. opened credits to the Bank of France, helping it as the latter used to help before the war when American finance was in need. Speculators in francs bought back; the dollar fell. The Morgan fund remained intact, and important exchange reserves were effected.

5. From the last half of 1924 to July 22, 1926. The dollar rose from 15 frs. 32 to 21 frs. 22 in 1925 (yearly average) and to 46 frs. 90 on July 22, 1926.

The new elections gave the Chamber of Deputies a majority with Socialistic sympathies. Although the reconstruction expenditure for the devastated regions was trifling, the policy pursued by the ministries of the "Cartel des Gauches" produced an unprecedented crisis. Inflation became the rule; the statute of the Bank of France was frequently violated; the Morgan fund was partly used up. The period ended, after several weeks of acute crisis, with the return to power of the Ministry of National Union.

Since the accession of M. Poincaré the position of the franc has rapidly improved. As I write this, at the end of October, the dollar stands at 33 frs. But French currency and securities have declined in value by one half since May 11, 1924, exactly as in 1919 and for the same reasons of domestic politics.


In the new period which is opening before us, what will be the position of the franc? There are three possibilities:

1. The integral revaluation of the franc. At certain periods in our exchange history the margin between the dollar rate and par was not very great, and it was reasonable to believe in the possibility of revaluation. Since the recent disturbances that margin has unfortunately vastly increased, and we can only repeat with the Committee of Experts: "The integral revaluation of the franc is today chimerical, because it presupposes continuous and systematic deflation, which would be ruinous to the taxpayers crushed by the burden of a public debt whose nominal value would represent the total wealth of France, and ruinous for industry, commerce and agriculture, which could not stand an indefinite fall in prices and the consequences of engagements contracted since the franc depreciated."

2. The abolition of the franc and the creation of a new currency. During the last of the periods described above this possibility was to be feared, so rapid was the rate of depreciation of the franc. The example of Germany was present to all minds. Fortunately that danger no longer exists today.

3. Currency reform by stabilization. There remains this final solution -- to stabilize the franc as rapidly as possible, and then proceed to reform the currency. France should stop the fall of the franc, and then establish a new par for her sound currency.

Unfortunately, serious obstacles stand in the way of stabilization. Just those obstacles sum up our financial difficulties. To surmount them is to overcome the danger that threatens us.


In order to stabilize the franc we must first restore its normal functions to our bank of issue, the Bank of France.

It is the business of a bank of issue to see that the instruments of fiduciary payments are sound. How do we stand here?

A bank note is sound in certain well-defined conditions. There must be, on the one hand, a metal reserve sufficient to guarantee possible demands for redemption in view of payments to be made abroad, or there must be sound commercial securities representing wealth that not only has been created but has been put into the circulation of exchange. The merchant receives bank notes when discounting securities at the bank.

The war seriously impaired this machinery. First the Bank of France was compelled to abolish convertible notes and to introduce fiat money, and then it had to feed the Treasury for reasons of national defense. From that time onwards the state borrowed from the Bank and the notes issued on its demand had no counterparts that were liquid and realizable on short term, but only Treasury Bonds issued by the state: the phenomenon which constitutes inflation. As an economist has well put it: "The Treasury Bonds which represent the state's debt to the Bank are a lien on the future production and savings of the country, whereas the notes paid to the state against its discounts are a lien on existing production." As anyone can see, the difference is fundamental. The following table (in millions of francs) clearly shows how the war impaired the normal machinery:

1913 1918
Metal Reserve 3,972.1 5,690.0
Portion of Metal Reserve on Deposit Abroad none 2,039.9
Commercial Securities (yearly average) 1,644.7 1,082.8
Advances to the State (balance at end of financial year) none 17,150.0
Notes in Circulation 5,665.0 27,532.0

In order to put the Bank on a sound basis, as soon as hostilities ceased we should have adopted a policy of amortizing the state debt which appears in the balance sheet for 1918. The exact opposite was done. As a result of the extravagant policy pursued by the Eleventh Legislature, above referred to, the authorized maximum of advances to the state increased, in the course of 1919 alone, from 18,000 millions to 27,000 millions, while the notes in circulation rose from 27,532 millions to 34,774 millions. But during the same time the metal reserve remained almost stationary and commercial securities actually declined from 1,082.8 millions to 1,034.6 millions.

Consequently, in 1920 the newly elected Government decided to put an end to inflation and to undertake seriously the repayment of the loans contracted by the state. From the 27 billions of Bank loans permitted at the end of 1919 the figure was reduced to 22 billions. Circulation was the sounder by 5 billions. The following table (in millions of francs) shows the process:

1920 1924
Metal Reserve 5,812.0 5,843.0
Portion of Metal Reserve on Deposit Abroad 1,970.4 1,864.3
Commercial Securities 2,198.8 4,522.0
Advances to the State (maximum) 27,000.0 22,000.0
Notes in Circulation (yearly average) 38,186.0 39,950.6

But early in 1925 began another and terrible period of inflation. Nothing could be more eloquent than the following table:

1924 1926
(Yearly average) (August 5)
Metal Reserve 5,830.4 5,886.5
Commercial Securities 2,386.9 7,866.1
Advance to the State (maximum) 22,000.0 38,500.0
Notes in Circulation 37,317.0 57,258.6

It is obviously urgent that the normal functions of the Bank of France should at once be restored. But to make the same effort as in 1920, to resist all further inflation, to stop the printing of paper, when the Treasury has acquired this convenient habit of satisfying its needs--all this requires no little courage. However, with the present government, it would seem as if nothing further need be feared in this connection, and we are no longer threatened by the issue of more notes.

But it is even more difficult to absorb the enormous debt of the state, for in addition to the moral courage we must have the indispensable resources and practice a policy of methodical repayments. A reading of the weekly statements of the Bank of France shows that advances from the Bank to the state fell from 38,351 millions on July 22, 1926, to 36,300 millions on October 14. In other words, since the Poincaré Ministry came to power, 2 milliards of francs have been repaid. At the same time, 930 millions were repaid to private banks, enabling the latter to lighten their commercial securities account discounted by the Bank of France.

The enormous size of the state debt, however, shows how visionary it is to believe that it can ever be paid off entirely. Provided the franc is stabilized at a reasonable figure, the debt, without completely disappearing, will be sufficiently reduced to permit of covering the notes in circulation. At what figure, it may be asked? In questions of this sort free rein may be given to the imagination. It is easy enough to calculate the proportion required to cover the notes according to the different rates of stabilization. For example (to confine ourselves to the existing rates) if we stabilize on the basis of the dollar at 30 francs, the notes would be covered by deposits and liquid securities in the proportion of 55 percent, the state debt representing 45 percent. Stabilization on the basis of 35 francs to the dollar would mean that the notes would be covered to the extent of 63 percent, the state debt representing only 37 percent; and so on.

Within such limits, is stabilization feasible? Yes, if we are to judge by what other nations have done since the war. The most famous experiment, that of Czechoslovakia, is particularly instructive. The following will show how the Czechoslovak crown was covered:

Circulation Covered Percent
(in millions of crowns)
Middle of 1920 8,729 3,031 33.4%
End of 1920 11,289 5,197 46.5%
" " 1921 12,630 5,311 42.0%
" " 1922 10,084 3,687 36.1%
" " 1923 9,599 4,266 44.4%

The comparison is in our favor.


But the fiduciary currency of France is not limited to bank notes. There exists in addition a currency in a special sort of fiduciary paper issued by the Treasury. In order to stabilize the franc, not only must the functions of the bank of issue be reëstablished, but also those of the Treasury. The Treasury has become, and has remained only too long, a huge bank of deposit. Let me make this point clear.

As it proved impossible during the war to feed the Treasury with bank notes without disrupting the entire currency system, we had recourse to short term loans. The Government proceeded to issue three to twelve month bonds, called National Defense Bonds, on which interest was paid in advance. At the time of the armistice they totaled some 33 milliards of francs. In November, 1916, a consolidated 4 percent loan was issued, which somewhat reduced the short term debt. Unfortunately, this overdue effort at consolidation was not followed up. The year 1919, which might have been employed in procuring permanent resources for the Treasury, actually brought up the floating debt to the enormous figure of 46,140 millions. The bank note inflation was aggravated by the inflation of the short term bonds.

The Government in 1920, aware of the danger to French finance of this avalanche of floating debt, undertook to consolidate it; the undertaking was parallel to the deflation which we remember occurred at the same time. Two consolidated loans, one in March, 1920 (5 percent Rentes) and another in November, 1920 (6 percent Rentes), made it possible to reduce the amount of the floating debt perceptibly. At the same time, 150 million dollars were repaid to the United States and 100 million dollars were consolidated at long term.

This effort should have been continued, but the bonds were so useful to the Treasury, the machinery of renewal was so supple, that the Governments in power between 1921 and 1924 could not make up their minds to continue the process of consolidation.

As a matter of fact, nothing could be more ingenious and convenient than this system of bonds. In normal circumstances the public retains the notes that it needs, and only these. When bank notes leave the government coffers as a result of an excess of expenditures over receipts (inflation), the public soon brings them back and subscribes to bonds bearing interest -- a fact not to be overlooked -- and repayable on a fixed date of maturity. Inversely, when the state receipts exceed expenditure, the public as a whole -- its currency requirements not being changed by that fact -- demands the redemption of the bonds. This process is known as the circuit of currency.

That circuit is not automatic. It depends upon the will of the public. If for any reason the public believes that the political and economic situation is uncertain, that the state may fail in its engagements, or if there is a currency "shyness," it will stop subscribing. It hoards its bank notes or invests them in anything rather than government bonds. And when the bonds already issued mature the Government is faced with wholesale demands for redemption. Thus the psychological element, the factor of "confidence," enters into the matter and disturbs a piece of technical machinery which in itself is highly ingenious.

During all the period from 1920 to 1924 the circuit was completed without any difficulty, and it seemed as if it must always be so. The Treasury easily repaid vast sums at maturity because fresh subscriptions were constantly coming in. Let us remember that, from the end of the war up to December 31, 1925, the total bond issue has reached the formidable sum of 760 milliards of francs, and that 715 milliards have been repaid or converted. This machinery must, however, be manipulated with enormous care and intelligence. The moment public opinion was alarmed, the instant doubt crept into peoples' minds, sinister warnings of collapse were heard and the floating debt problem at one blow became the most terrible of all.

By the end of 1924 those warnings could be heard; and in the course of 1925, down even to recent months, we found how terrible a problem it could be. Why? Because the working of the Treasury, in clumsy hands, was absolutely wrong. Instead of seeing that the circuit of currency was completed as rapidly as possible, the Government which was elected in May, 1924, announced urbi et orbi that the Treasury might quite possibly be unable to meet its obligations. Dates of maturity were denounced as fatal dates which, unless some miracle happened, would necessarily usher in the bankruptcy of the country. Sweeping recriminations against the past were indulged in freely, and the supposed creators of the floating debt were roundly denounced, but no efforts were made to ward off the danger.

What was the result? In the first place, the spring of new subscriptions dried up, and those that were made were for increasingly short terms. From July, 1924, to July, 1925, the proportion of twelve-month bonds had steadily increased, while that of three-month bonds had decreased. During the last month of 1925 the contrary happened, as the following figures show:

Of the total bonds in circulation in 1921, 57 percent were twelve-month bonds. In 1922 these rose to 62 percent; in 1923 to 68 percent; in 1924 to 71 percent; in January, 1925, to 74 percent; and in July, 1925, to 76 percent. During the same period the proportion of three-month bonds declined from 9 percent in July, 1921, to 4 percent in July, 1925, and the proportion of one-month bonds from 6 percent to 4 percent.

In July, 1925, the tide turned. From that date to April 30, 1926, the proportion of twelve-month bonds declined from 75 percent to 72.4 percent, while the proportion of six-month bonds fell from 16 percent to 10 percent, and then to 8.3 percent. On the contrary the proportion of three-month bonds rose from 4 percent (July, 1925) to 7.8 percent, and that of one-month bonds rose from 4 percent to 12 percent.

In other words, as a result of the policy of the Government at that time, the Treasury from being a short-term deposit bank -- in which capacity its position was already dangerous enough -- tended to become a sight deposit bank -- a thing frankly disastrous to public finance.

In the second place, the demands for repayment became more and more widespread. In order to meet them recourse was had to expedients incompatible with the good name of France.

The fall of the Herriot Ministry, which was succeeded by the Ministry of National Union, immediately resulted in everything becoming shipshape again. The excess of subscriptions to National Defense Bonds over repayments was 752 millions during the first fortnight in August; 1,003 millions during the second fortnight; and 634 during the first fortnight in September -- to such an extent does the factor of "confidence" enter into the movement of bonds. In the last analysis it is governed by public feeling. The demonstration was conclusive.

At the same time it is equally obvious how false was the conception which prevailed when the floating debt was incurred. At all costs the Treasury must cease to play a part which in no way becomes it. How is this to be done?

On the initiative of M. Poincaré, Parliament has just created a Floating Debt Management Account, which has been credited with considerable resources for purposes of amortization. To this department has been entrusted the monopoly for the manufacture and sale of tobacco. The funds thereby assured are estimated at 3,500 million francs. This sum guarantees the liquidation of the floating debt and gives to bearers of Treasury Bonds the assurance that they will be repaid without the state's having recourse of the Bank of France.

This gesture has a symbolic significance. It does not solve the problem. So a consolidation loan has been floated, limited to 3 milliards. Other loans may follow. But the stabilization of the franc alone can ensure a definite solution of the problem: first, because of the automatic reduction of the debt which will follow; and second, because the administration of the floating debt does not offer any great difficulties when the currency is stable. In England the floating debt is greater than ours, yet British Treasury Bonds are easily renewed because the pound sterling has been stabilized. Nevertheless, true amortization, which is affected by means of economy and thrift, must wait until fresh wealth has accrued.


This brings us to the very heart of the French financial problem: the problem of the creation of fresh wealth. Any financial expert can prove that the franc could be rapidly stabilized, with or without the help of foreign credits. None, however, will deny that the real difficulties will occur after stabilization has taken place, because, in order to maintain the rate of exchange and then reform the currency, the country must grow progressively wealthy; in other words, its trade balance must be on the credit side for many years.

The fiscal drain on France since the armistice has been too great for our taxable capacity, and it is systematically exhausting our economic strength. The drain has been all the greater because, as a result of inflation, the average French income has been very seriously curtailed.

It has been calculated that a fortune of 200,000 francs in transferable securities, invested in 1913, and divided amongst Rentes, shares in the six leading banks, six important industrial undertakings, and two railways companies, is worth today 149,060 paper francs, or 21,295 gold francs. It has lost, therefore, 89 percent of its gold value. Again, an investor who succeeded in doubling the nominal value of his income between 1918 and 1925, by saving a total sum of 11,616 paper francs, finds today that his savings represent only 1,696 gold francs, that is to say, he has really lost about 3,000 gold francs, or more than 61 percent of the amount saved. Many such instances might be cited.

Despite the impoverishment of the individual, French taxpayers have made an heroic effort. Of what use has this been? Principally to carry the burdens of their countrymen who were compelled to pay for the reconstruction of the devastated regions out of their own pockets. In the French Budget, even if there is still room for economy, most of the expenditure is productive; and in any case we are one of the few Powers which have reduced, not increased, their military expenditure for national defense. The following table of military expenditures (in thousands of dollars) testifies to this fact:

1913-14 1924-25 Increase or decrease
Great Britain 418,956 553,860 +32
India 103,991 207,905 +99
United States 257,354 617,762 +140
Japan 93,534 176,814 +89
Belgium 16,699 29,001 +74
Italy 178,173 159,149 -10.6
France 449,035 262,950 -41

These figures speak for themselves. They show how badly informed these people are who pretend that our financial difficulties are due to the high cost of keeping up our armies.

I might compare our tax burdens with those of other nations -- there is no want of imposing calculations -- but the tables which I should have to include would far exceed the limits of this article. Without going in for any international comparison, it will be enough to place side by side the figures of the principal taxes for 1927 and those of preceding years, for the reader to see the burden we have borne. The table is in millions of francs:

1913 1920 1927
Direct taxes 634 2,011 8,561
Income tax --- 1,094 2,400
Taxes on movable property 138 568 2,654
Turnover tax --- 942 7,581

I do not want to exaggerate. But I must put the question as to how, when 77 percent of an income is taken in general taxes, and as high as 60 percent of the balance is collected as income tax, and when on the death of the taxpayer 25 percent is deducted from capital inheritance from father to son and 55 percent from uncle to nephew -- how, in these circumstances, can a country's wealth increase?

My argument will be understood nowhere better than in America. In the United States a series of income tax reductions has been granted since 1918. An American taxpayer with a $10,000 income, in a currency which has not depreciated, paid $830 in 1918, $520 in 1921, $165 in 1924, and $101 in 1925. On an income of $30,000 the reductions have lowered the tax from $4,930 in 1918 to $3,520 in 1921, to $2,275 in 1924, and to $1,779 in 1926.

In 1926 there was a reduction of 387 million dollars in the income tax in the United States. The table which I have printed above shows that in France we have continually increased it.

There is one figure in that table which speaks volumes. The revenue from the tax on movable property rose from 138 million francs in 1913 to 568 millions in 1920, and for 1927 is estimated at 2 billion, 654 million. The implications of this are important. Even in gold values this tax, as compared with 1913, shows a formidable increase. Does it mean that the spread of limited liability companies in France has been comparable to their progress in the United States? Far from it. This increase is due to the fact that heavier and heavier taxes are being imposed upon the gross incomes of these companies, taxes so heavy that the point is not far off where the shareholder will be mulcted of all profits. Some examples quoted from the best securities on the Paris Bourse will show what is meant:

Gross Tax to be Net % of Tax to
Stocks Dividend Deducted Dividend Gross Revenue
Mines de Courrière 12 frs. 6.67 5.53 55.59
Gaz Lebon 18 " 9.80 8.20 54.40
Cirages Français 12.50 " 9.13 3.37 73.04
Cie. Générale Industrielle 10 " 5.90 4.10 59.00
Le Riploin 60 " 45.90 14.10 76.50
Brazilian Sugar Refineries 25 " 14.45 10.55 57.80
Chargeurs Réunis 25 " 19.34 5.66 77.38
4%Mines et Forges d'Alais 10 " 6.52 3.68 63.20
3½% Union des Gaz 17.50 " 8.20 9.30 46.85
Mines de Marles 10 " 5.72 4.28 57.20

Such are the percentages gathered in from these representative securities by the Revenue Department. What remains to the holder is further subject to a personal, progressive income tax.

Consequently, in every field of productive activity in France, progress is checked at the present time by the weight of taxation. Gradually taxation will absorb the entire taxable property. How mistaken those foreigners are who believe that our difficulty is to secure a larger return from taxation. No. The difficulty is to reduce the burden without hurting the budget, which is today in a state of "superequilibrium."

Nevertheless, I believe that once the franc is stabilized the taxpayers could obtain some relief. Further, I hold that unless they do our wealth cannot increase. Our revenue would not suffer because, if the rate of taxation is lowered, the amount of taxable property would increase.

We are still a country of immense possibilities. Notwithstanding the general impoverishment caused by the war, the total wealth of France, which was 320 milliards in 1913, cannot today be less than 240 milliards of gold francs. The essential thing is to derive from this capital a sufficient income to put our trade balance on the credit side. To judge by the results of our foreign trade during the past two years, the principal item in this account will show a credit balance in our favor. In 1913 our exports totalled 6,880 million gold francs. They rose to 11,239 million gold francs in 1925.

I do not propose to discuss the question of whether France profits by this, or whether, as the Committee of Experts declares, we are "liquidating" our products at cut prices, since our raw materials cost us more. This controversy itself would prove, if necessary, how urgent is the stabilization of the franc. At all events, a reduction of the burden of taxation would enable France to reorganize production in such a way as to reduce costs to the producer. This would automatically ensure us credit trade balance.


To sum up, the condition of French finances, however complicated it may seem at first sight, justifies us in taking an optimistic view of the future of the franc. Stabilization of the currency is possible because all the conditions necessary to this operation are likely to prevail in the very near future. But the domestic difficulties are not the only ones. We have to consider the difficulties abroad. The problem of the inter-Allied debts is far from being solved. It will be obvious to everyone that the solution will definitely determine the state of our trade balance, once the franc has been stabilized.

This unknown factor is a redoubtable one, and the state can the less afford to neglect this side of the problem in that it has extended a series of credits to foreign nations. First, we have the credits made to nations other than Germany. The following is a statement of them up to April 30, 1926 (in francs):

Russia 7,553,000,000
Belgium 241,000,000
Serbia 1,783,000,000
Rumania 1,053,000,000
Greece 810,893,000
Poland 1,035,700,000
Czechoslovakia 490,100,000
Italy 1,156,000,000
Portugal 9,051,000
Lithuania 8,908,000
Hungary 798,000
Austria 379,000
Georgia 200,000
Albania 1,800,000
    Total 13,743,829,000

For a variety of reasons it so far has not been possible to collect these amounts. Furthermore, Germany, which should have paid reparations for war damages, began to make regular payments only after the occupation of the Ruhr, which brought about the establishment of the Dawes Plan: that is two years ago.

So much may be counted amongst our assets. Amongst our liabilities are our debts to Great Britain and the United States.

Needless to say we ought to pay our debts, just as our debtors ought to pay us. That is self-evident.

Confining ourselves strictly to grounds of finance, and leaving out all appeals to sentiment, is it possible, as a practical question, to wipe out the liabilities without realizing the assets?

In sound financial administration the only method to follow would be to effect the payment of all the accounts presented by the various treasuries concerned. For our part, we made Great Britain adopt this method at the Hythe Conference (1920). If we admit that a general settlement is more difficult today than in 1920, if we do not count provisionally on the credits of France to her former Allies, we ought at least to be able to count on the German payments under the Dawes Plan. A part of our assets will then be realized.

Should we not immediately amortize our liabilities by the same amount, adopting the principle of parallel dates of maturity?

But how is Germany paying her debt? One has merely to examine carefully the reports of Mr. S. Parker Gilbert to see that almost all German payments are effected in kind -- in merchandise of all sorts. The Germans who make these deliveries are paid by the German state in German money, whereas the French purchasers of these goods pay the French state in francs. This device avoids all transfers of marks which might effect the status of the new German currency. But France receives no foreign currency, or very little.

Would France's creditors, in their turn, be willing to be paid in goods, especially the United States? It is most unlikely. Thus we reach an impossible paradox.

One part of our assets -- credits to former Allies -- cannot be realized at present; the other part, which has been regulated -- German payments -- is being realized in a manner which gives us no compensatory advantages. In other words, France will not be in a position to transfer automatically to the United States the payments which she will receive from Germany, but will have to buy foreign exchange on every date of maturity. How heavily these transfers will weigh upon the franc!

Moreover, the German debt is by its very nature quite different from that of the French debt to its late Allies.

We cannot close our eyes to the facts. The absence of any parallel movement between the settlement of our debts and the machinery of the Dawes Plan, the proposition that we would be obliged to transfer currency, while being repaid chiefly in goods, simply means that our liabilities would be cleared off without reference to our assets. In that case our trade balance would be so heavily burdened that it would always be a debit balance. The franc could not remain at the figure determined and the reform of the currency would be compromised, to the disadvantage of both debtor and creditor. If the franc depreciates, France will not be able to meet her engagements, however good may be the intentions of her statesmen.

France must not be confronted by that alternative. It would be a blow to the friendship of France and America. It would postpone indefinitely the longed-for restoration of the world's economic equilibrium.

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  • F. FRANÇOIS-MARSAL, former Premier of France and twice Minister of Finance; member of the Finance Committee of the French Senate
  • More By F. François-Marsal