The Russian Military’s People Problem
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PUBLIC opinion abroad has been much impressed by two figures frequently published in the press. On June 25, 1928, when the franc was legally stabilized, the gold reserve of the Bank of France was 29 billions of francs. On October 28, 1932, the gold reserve of the Bank was 83 billions. This fact, presented in this manner, has impressed the entire world and still provokes the most contradictory arguments. The countries whose gold stocks have been depleted to the advantage of France cannot believe that this movement of gold was natural. It is taken as proof of a French desire for hegemony. The Bank of France is accused of having deliberately drawn in the yellow metal, of hoarding it, and of rendering it sterile. My aim in the present article is to show, first, how the gold came into France, and second, how it has been used there. I shall let the facts speak for themselves.
THE GOLD AND FOREIGN BALANCES OF THE BANK OF FRANCE
First of all, by contrasting the 29 billions of gold francs in the Bank of France on June 25, 1928, with the 83 billions on October 28, 1932, a false impression is created. The inference is that in the brief period of four years the Bank has, to its own profit and the detriment of the rest of the world, drained into its vaults a mass of gold and capital to the extent of 54 billion francs. The false picture is given of an enormous transfer of wealth, which is supposed to have coincided with the world depression and to have aggravated it. France is made to appear to have profited by the misfortunes of others.
The truth is quite different. On June 25, 1928, the Bank of France had not only 29 billions in gold, but also 26 billions of foreign balances which were worth gold and were already virtually gold. Not only did these balances represent gold, but the stabilization law, establishing in France not the gold exchange standard but the gold standard, placed upon the Bank the obligation of converting them into gold. The only latitude remaining to the Bank was in choosing the time when this should be done. The Bank has incurred much criticism for the manner in which it exercised this choice. Yet, how carefully it proceeded! In order not to embarrass the Bank of England, for example, France delayed as long as possible the conversion of its pounds into gold. As a result, when England went off the gold standard in September 1931 the Bank of France owned 62 million pounds on which the loss was 35 percent, or 100 million dollars. So far as the United States was concerned, the Bank of France acted with a similar sense of the obligation of coöperation. The conversion of dollars into gold was made gradually, on agreement between the Bank of France and the Federal Reserve Bank as to the best way to proceed.
In order that the action of the Bank of France should not accentuate the pressure which might be put upon the dollar, the Bank operated as much as possible through direct sales in the market, taking into account what the latter could absorb. Moreover, this policy seemed particularly desirable to the American authorities in the very interest of the United States, since it tended to eliminate from the New York market an element of doubt and uncertainty which was weakening the power of the Federal Reserve Bank. It was only because of a tightening of the American exchange market that the Bank of France was obliged to ask the Federal Reserve Bank to convert a part of its dollar assets into gold. Furthermore, on each occasion notice was given of this intention and, in addition, when it was decided in February-March 1932 to transfer the gold held in New York only on French boats, the Bank very clearly showed that sense of prudence and moderation which has always inspired it.
If this desire for coöperation seems to have been overlooked by the general public in America, it has been recognized by those closely in touch with the operations. Let me recall in this connection that last April the Bank of France received from high American sources the assurance that the manner in which the operation was being carried out was appreciated, and that it was very unfortunate that a portion of the American and European press had misconstrued French intentions.
On this first point, then, the truth is very different from the legend generally believed. It was not 29 billions of gold which the Bank of France possessed at the time of the legal stabilization of the franc. The gold reserve and gold balances of the Bank of France at that time actually amounted to 55 billions of francs. On October 28, 1932, the gold reserves were 83 billions. The amount of the increase, therefore, is cut to 28 billions.
What explanation should be given for this displacement of the yellow metal? Ought we, as some writers suggest, to regard it as the result of the German reparations payments?
GOLD AND REPARATIONS
Nothing could be more untrue. German reparations payments played a negligible part in the increase of the stock of gold in the Bank of France. From June 25, 1928, to June 30, 1931, France received $719,000,000 on reparations account. But this total includes $379,000,000 of deliveries in kind, which represents no cash transfer and which consequently played no part in increasing the gold reserves of the Bank of France. Cash reparations amounted to only $340,000,000.
Let us see now what sums France has had to pay out against these receipts. During the period in which she took in $340,000,000 she paid the United States $117,000,000 on war debt account, and England $191,000,000 under the Caillaux agreement and the Hague agreements -- a total of $308,000,000. In other words, out of the annuities paid over to her on reparations account, France has kept only $32,000,000.
It is necessary also to take account of the sums which came to France under the Young loan. France's part in this loan was $120,000,000. But $85,000,000 of the loan was subscribed for in France. The amount subscribed for in France resulted in no international movement of gold. France's part in the Young loan, therefore, has augmented her foreign balances by only $35,000,000.
To sum up: The net receipts of foreign currencies under the reparations system during the period June 25, 1928, to June 30, 1931 (the date of the Hoover moratorium) amounted only to $32,000,000 on reparations account, and $35,000,000 resulting from the issuance of the Young loan. These sums are an insignificant part of the total of 28,000,000,000 francs by which the gold stock of the Bank of France increased.
Let us now see what are the real reasons for the accumulations of gold in France in these last years.
THE REAL CAUSES OF THE ACCUMULATION OF GOLD BY FRANCE
The real causes must not be sought in any preconceived plan of the Bank of France, whose rôle was limited to that imposed by the monetary law. The Bank simply bought at fixed rates, as it was obliged to do, the gold which was offered, and sold the gold for which there were purchasers. Between February 21, 1930, and May 2 of the same year, the exchange being then in favor of the foreigner, the Bank saw 600 million gold francs go out of the country without intervening in any way. But that was the exception. In general the franc was in constant demand on the world's markets from 1928 to 1932.
France's attraction for the floating capital of the world is easily explained. It was the result of the fall in the price of money on the great foreign markets, and of the safety offered by the French currency. The Bank of France explained the process as follows:
The extension of the general economic crisis considerably reduced the credit requirements of foreign markets. In London and New York the rate of short-term investments remained at an exceptionally low level. The French banks, which had invested a small part of their funds in these great markets, were not able to have their loans renewed on such favorable terms as in the past. Consequently, when on several occasions they had to meet important demands from their customers for francs, they were naturally tempted to repatriate a part of their less productive assets, rather than to have recourse to the facilities offered by having their paper rediscounted by the bank of issue.
The shipments of gold which the domestic market received were not solely due to the repatriation of French assets. In part, they are explained by the influx of foreign capital, anxious to profit by the stability and security now offered by the franc. They are a tribute to the effort at financial recovery made by our country, whose currency is now one of the most solidly secured in the entire world.
The extension of the depression thus contributed to the increase of the Bank's stock of gold. Turning away from long-term investments, capitalists looked for short-term credits. They felt that a sight credit on the Bank of France was the surest and most liquid investment. The resulting purchases of francs naturally determined the flow of metal to the Bank of France. It is therefore correct to say that the Bank of France submitted to the importation of gold but did not in any way provoke it. These movements of gold were the result, not the cause, of the depression.
But, it may be said, if the Bank of France played a passive rôle in these importations of gold, did it not, on the other hand, incur a heavy responsibility by not putting the stock of gold thus accumulated to more productive use? Let us see whether the gold imported into France was, as people have said, sterilized.
THE SO-CALLED STERILIZATION OF GOLD IN FRANCE
Contrary to the opinion frequently expressed abroad, France never practised a policy of sterilizing gold. France never tried to neutralize the effect which the importations of metal might have on the volume of credit. As is required by the gold standard system, imports of metal into France resulted in the creation of a corresponding number of francs. The amount of gold and foreign balances in the Bank of France increased, as I have pointed out, by 28 billions of francs from June 25, 1928, to October 1932. Simultaneously the amount of sight obligations of the Bank of France rose from 72 to 107 billions, or an increase of 35 billions of francs. Consequently the increase in sight obligations -- that is, the creation of new francs -- was greater than the increase of gold.
In the United States the influx of gold immediately after the World War was not followed by a corresponding increase in the sight obligations of the banks of issue. In fact, the Federal Reserve Banks reduced their bills, drafts and negotiable instruments, either because of repayments by member banks or because of the sale in the open market of paper held by the Federal Reserve Banks. In 1921, for example, the gold in hand in the American banks of issue rose from 2,080 to 2,870 million dollars. During the same period the amount of currency declined from 3,270 to 2,440 millions and private deposits from 1,820 to 1,690 million dollars.
In England, after the return to the gold standard (that is, from 1925 to 1931), the Bank of England tried on numerous occasions to neutralize the inflow of gold by selling Treasury bills. This was done to avoid any expansion of banking credit, the pounds created to offset the importations of metal being cancelled by the pounds withdrawn from circulation as a result of the sales of Treasury bills. The Bank of France has never adopted such a policy. It has never at any time tried to interfere with the normal effect of gold imports on the volume of the country's banking credit. The increase in its sight obligations is irrefutable evidence of this, as the following table clearly shows:
|CURRENT ACCOUNTS AND DEPOSITS IN THE BANK OF FRANCE[i]|
|End of 1925||3,100 million francs|
|" " 1927||4,500 " "|
|" " 1928||6,300 " "|
|" " 1929||7,500 " "|
|" " 1930||11,300 " "|
|" " 1931||23,200 " "|
The situation revealed by this table is comparable to that existing in the United States at the present time. In 1931, and especially in 1932, the Federal Reserve Banks wished to ease the American money market, and for this reason bought large quantities of government bonds. But the dollars created to offset these purchases merely permitted the member banks to pay their debts to the Federal Reserve Banks or to increase their reserves in those institutions. On the whole, the volume of American credit was not noticeably affected. In France the situation is similar. Owing to the decline in business, the French banks have not been able to use their funds in foreign markets. Although obliged to pay interest to their depositors, they have been compelled to see their funds lying unproductive, owing to the scarcity of good discountable paper.
Again, it was the custom of the French banks to invest part of their funds in London. They have always maintained the closest relations with banks in the City. When England went off the gold standard they were deprived of this form of investment, as the instability of the pound involves a risk which they are not in a position to assume, as their total obligations are reckoned in francs. True, the French banks might have invested their funds in certain other European countries which were suffering from a lack of credit. But the political, economic and monetary insecurity which prevailed in those countries -- and which still exists -- prevented any investment of that kind. The Swiss and Dutch banks, which also have relatively large cash accounts, followed the same policy as the French banks in this respect.
Because of the excess funds which were on hand in private banks the Bank of France could not have the slightest influence on general credit conditions. If it had tried to interfere with the market the attempt would have failed. The funds it created would have gone, like those created to offset the gold imports, into the accounts of the private banks; general credit conditions would not have been affected.
Moreover, when people talk of the sterilization of gold in France, they constantly forget one fact. The stock of gold held by the Bank of France does not all belong to French people. It is largely "mortgaged," so to speak, by the credits owned by foreigners in France. It would have been extremely imprudent of the Bank to put all its gold to work, even had that been possible. The Bank of France has the duty to be forearmed against the possibility of a sudden withdrawal of foreign funds. Its policy of prudence is dictated by the interests of the foreign creditors themselves, who must be assured that they could withdraw their credits at any moment without the risk of loss or a moratorium.
What is the amount of short-term capital invested in France? According to the figures published by M. Meynial in La Revue d'Economie Politique, the importation of foreign capital into France from 1928 to 1931 reached approximately 20 billions of francs. This figure represents the net imports of short-term capital; that is, the exports have been deducted. These imports are due, to a certain extent, to the repatriation of capital invested abroad by French banks prior to 1928. But assuredly this factor has been of little importance, because the banks extended their foreign investments chiefly after the legal stabilization of the franc. To estimate it at 5 billions of francs is certainly generous.
Thus the amount of foreign capital invested in France between 1928 and 1931 would appear to be at least 15 billions of francs. It has further increased subsequently because, despite a certain deficit in the balance of payments, the Bank of France has lost only 2 billions of francs in securities. It may be presumed that the amount of foreign capital in France today is considerably more than 15 billions and is probably near 20 billions of francs. And this refers only to short-term capital. If long-term foreign investments in France are added, the figure would be measurably greater. And, as I have said, the policy of the Bank of France must be guided by the amount of foreign funds invested in France.
It ought further to be remembered that the United States (which between 1921 and 1925, when the dollar was practically the only gold currency, had received considerable quantities of foreign capital) always regarded a part of its stock of gold as not its own. The Federal Reserve Banks even tried to neutralize the effect of the influx of gold on the volume of credit by offsetting the increase of metal in hand by decreasing paper. In its report for 1926 the Federal Reserve Board stated that: "The existence in America of these foreign balances consequently presents a condition in the banking situation to be taken into account in determining the Federal Reserve System's credit policy with a view to maintaining the country's banking system in a position to meet demands for gold from abroad without disturbing business and credit conditions in this country."
Unlike the United States, the Bank of France has never tried to neutralize the influx of gold into France. It felt that such a policy, by maintaining artificial credit conditions, would actually have stimulated the import of gold and aggravated the monetary difficulties of other countries. It was determined not to interfere with the normal working of the gold standard although it would have been justified in acting as the Federal Reserve Banks did, in view of the facts which led to the influx of gold.
It is none the less true that the Bank of France must be very careful in discounting, because a sudden or large-scale withdrawal of foreign capital would rather seriously disturb the credit market. It is the duty of the Bank of France to guard against this danger by maintaining, not a sterile gold reserve, but a margin of available credit, so that it may intervene at an opportune moment and so far as possible modify the effect produced by the withdrawal of foreign capital.
But if the Bank of France is vigilant in matters of credit, this does not mean that it withholds from the French financial market the funds which it needs. The discount policy of the Bank of France has always been more comprehensive and broader in this respect than that of other central banks.
THE DISCOUNT POLICY OF THE BANK OF FRANCE
At the time the franc was stabilized, in June 1928, the French money market enjoyed an abundance of funds. The Bank's discount rate, which had been raised to 7½ percent in July 1926, at the time of the extreme crisis of the franc, had been progressively reduced to 3½ percent at the beginning of 1928. It was maintained at this level during 1928 and 1929, whereas in London and New York the official discount rate was respectively 6½ percent and 6 percent during the summer of 1929. The importations of gold into France which occurred after July 1929 were in no sense due to any attraction exercised by the rates of interest prevailing in the French market.
After the beginning of 1930 the economic crisis and the decline in business greatly reduced the demand for credit throughout the world. Moreover, in New York as well as London, an attempt was made to steady the fall in prices by maintaining large credit facilities. In this respect the policy of the Bank of France was no different from that of the other central banks. The following table shows that, in recent years, the discount rate of the Bank of France has generally been lower than that of other large banks of issue:
|Bank of France||Bank of New York||of England|
|Reichsbank||Netherlands Bank||National Bank|
The first remark suggested by this table is that the discount rate of the Bank of France varied very much less than did the rates of the Federal Reserve Bank and the Bank of England. There was no tension, especially in 1929, like that observable in New York and London. The French market had participated only slightly in the excessive speculation of that time, which culminated in the crash on the New York Stock Exchange in October 1929.
Nevertheless, in the course of 1930 and 1931 the Bank of France took into account the fall in the money rate abroad, particularly in the United States, by lowering its rate from 3½ to 3 percent on January 30, 1930, and to 2½ percent on May 1. The Federal Reserve Bank reduced its rate to 2½ percent on June 19. At that moment, then, the official discount rate was the same in Paris and New York.
At the end of 1930 the Federal Reserve Bank reduced its rate to 2 percent and a few days later, on January 2, 1931, the Bank of France did the same. When, however, at the beginning of May 1931, the Federal Reserve Bank of New York reduced its rate to 1½ percent, the Bank of France did not feel justified in taking the same step. Unlike the Federal Reserve Banks, which as a rule do business only with banks and are rediscounting houses, the Bank of France discounts directly such paper as may be presented by merchants and industrialists, provided it is furnished with three signatures of recognized solvency. This paper is treated exactly like that of the banks. By lowering its rediscount rate, the Bank would have enabled all sorts of enterprises to get cheaper credit and would have encouraged them to maintain their level of production at a time when the shrinking of markets resulting from the depression called for a reduction.
Moreover, the Bank of France could not overlook the fact that, owing to the prevailing lack of confidence, capitalists were hesitating to put their money into long-term investments, and also the fact that the rate for long-term money remained at 5 to 6 percent, whereas the rate for short-term money had fallen to a very low level, oscillating between 1 and 2 percent. The Bank believed that, far from helping business, too great a discrepancy between the rate for long-term and short-term money would only encourage investors to tie up their capital in short-term investments (as happened in Germany). This practice, which has little enough to recommend it in normal times, is particularly dangerous in times of crisis, when the return on locked-up capital necessarily diminishes because of restricted consumption.
Finally, the Bank of France could not ignore the fact that too great a fall in the short-term money rate compels private banks to reduce their rate to depositors. Experience has shown that when funds put in banks by the general public do not bring in a sufficient return, they are withdrawn and hoarded in the form of currency. The French public is inclined naturally to hoard. Since the beginning of the depression hoarding of currency has greatly increased, as witness the increase in the circulation of notes of the Bank of France, which rose from 67 billions of francs at the end of 1929 to the present figure of more than 81 billions. A more drastic reduction in the rate for short-term money, apart from any question of lack of confidence in the debtor houses, might have stimulated the withdrawal of bank deposits, a movement which would have seriously threatened the financial structure of the country.
During this period of crisis, therefore, the Bank of France has endeavored to extend to the French economic system all the credit it needed on advantageous terms, without departing from those rules of caution which must always govern the policy of a bank of issue which is anxious to safeguard the position of its currency. While recognizing the necessities of wide international coöperation, the Bank of France has remained faithful to its traditional principle of maintaining a discount rate as low and as stable as possible. Within these limits the Bank has always freely met all demands for credit. Its holdings of domestic commercial paper at the beginning of the crisis, in November 1929, amounted to more than 10½ billions of francs; after the stabilization of the franc, in June 1928, they had increased by more than 7½ billions.
It is true that during 1930 and the first six months of 1931 these holdings fell off considerably, so that they were little more than 4 billions in July 1931. This falling-off is primarily to be explained by the decline of business in France. Furthermore, the effect of the crisis was to increase considerably the funds of the banks. French capital which up to that time had been invested abroad returned to the country and was left on deposit in the credit houses; and these had at the same time received an important amount of foreign capital.
This influx of capital into the French banks, coinciding as it did with a diminution in the volume of negotiable paper as a result of the crisis, was reflected in a most pronounced fall in the rates on the money market. The banks had sufficient funds to wait until the paper which they had discounted fell due. Moreover, in case of necessity they could negotiate the paper which they held at rates varying from 1 to 2 percent, so that they had very little need of the services of the bank of issue. In these circumstances, a new decrease in the official rate would not have caused any additional paper to be rediscounted by the Bank of France.
On the contrary, when certain establishments found themselves in difficulties in September and October 1931, the Bank of France came generously with its discounts to the assistance of such houses as were in a position to furnish the guarantees which the Bank's statutes required. In a few weeks its holdings of negotiable paper increased by nearly 5 billions (from 4.1 billions to 8.7 billions).
From the foregoing it follows that the Bank of France, thanks to the suppleness of its discount policy, has always supplied the French market with all the credit necessary.
But, it is still argued, the Bank of France does not follow the "open market" policy pursued by the Bank of England and the Federal Reserve Banks. This, however, by no means proves that the Bank of France is more rigid than the other banks of issue.
THE BANK OF FRANCE AND AN "OPEN MARKET" POLICY
The Bank of France is advised to purchase securities in the market. In the first place, the Bank is forbidden to do this by its statutes. But, apart from the legal obstacle, it can easily be shown that in France such a policy would be both ineffective and superfluous. In its study of the gold problem, the Financial Committee of the League of Nations, while recognizing the opportune measures taken by France to stop the importation of gold, stated, in effect, that the Bank of France had been justified in not having recourse to operations on the open market which, as the Report says, "would not have had any appreciable effect upon the volume of credit and the level of prices, granted the peculiar structure of the French market."
The efficacy of a policy of controlled currency presupposes that an important part of the national debt is carried by the bank of issue and the money market itself, that is, by the banking organizations. By liquidating the securities which it holds, or by purchasing others, the central bank directly influences the volume of credit at the disposal of the market. As a matter of fact this situation (which prevails in England and the United States, where the banks hold a large portion of the floating debt and the consolidated debt) does not exist at all in France.
Of the 26 to 27 billions of National Defense bonds in circulation at the end of 1931, only 5 to 6 billions were held by the banks and were floating in the money market. The Bank of France did not, so to speak, hold any for its own account. At the same time, the four large credit companies and the twenty leading shareholders' banks held a total of commercial paper and bonds amounting to 25 to 26 billions and 49 to 50 billions, respectively, of deposits and sight accounts. Since a very appreciable proportion of the Defense bonds in the market were held by the Bank of France for the account of foreign banks of issue, the movable balance could not, in any event, represent more than 2 to 3 billions of francs, or scarcely one-tenth of the total holdings of the private banks. In these circumstances, what effect could the Bank of France have had on the market by buying at less than the official rate and for its own account Defense bonds, whether outright or conditionally? The only result would have been to disorganize the money rates and the market, thereby uselessly embarrassing the banks.
This observation applies with equal force to the purchase or sale of long-term securities. One of the essential characteristics of the French national debt is that it is spread amongst the general public. At the end of 1931 the twenty leading French banks had certainly not more than 100 millions in state funds in their balances. In view of that, how could the intervention of the Bank of France have an effect analogous to that of the intervention of the Federal Reserve Bank or the Bank of England, since in France state securities are held by a multitude of private accounts and are thus practically withdrawn from the money market? Would it have been right, in order to carry out a financial transaction the very principle of which is debatable, to bring about a shift of government bonds from private portfolios, a movement which would have been distinctly dangerous to the public credit?
The purchase of state securities by the Bank of France would also bring about disguised inflation. This would hurt the national currency and be advantageous to the bank of issue, which would thus abuse its privilege of issue in order to acquire securities the revenue from which would increase its profits.
Operations in the open market would be useless in France.
1. According to its statutes, the Bank of France, whether discounting or rediscounting, constantly offers everyone credit at the price which it has fixed, provided, of course, that the paper offered conforms to statutory requirements. If, from 1929 to 1932, private banks and business men who had credits abroad, sold it gold when they liquidated their obligations abroad, especially in London, it was because the rates in force on the English market were not high enough to justify the risk of holding an account in sterling. As a matter of fact, statistics clearly establish the correlation between the gold imports from England into France and the movements of the interest rate in London. During this entire period the French market had no need of supplementary credit. In this connection it is sufficient to bear in mind the amount of the sums which remained constantly inactive in the current account of the Bank of France, as indicated above.
2. The rôle of the Bank of France in the distribution of credit is totally different from that of the Bank of England, or the Federal Reserve banks.
By the simple manipulation of its discount rate, as has already been said, the Bank of France has at its disposal an extremely elastic and efficacious instrument, for the following reasons:
1. The Bank of France does its rediscounting through its 360 branches over the entire country. The Bank of England has only seven branches. Consequently it has no means of directly controlling the joint stock banks, and must energetically intervene in the market if it wishes to exercise any decided influence on the trend of money rates. This is even more definitely the case with the Federal Reserve Banks, as they necessarily have no relations with the public but only with the member banks, cannot content themselves with varying their discount rate, and must, if they wish to affect the market, have recourse to the sale and purchase of securities, a process which is useless in France.
2. French commerce is essentially financed by bills of exchange discounted in the banks of the provinces and Paris, at a rate which is always in so close a relation to that of the Bank of France that it is possible to rediscount them without loss at the latter bank. Thanks to this arrangement, the bank of issue is in a position to furnish the market constantly with such funds as are necessary.
3. The Bank of France discounts directly for commerce and industry, thereby preventing arbitrary variations in the rate of money.
4. The use of checks in current transactions is much less common in France than in England or the United States. Discounting, therefore, furnishes the Bank of France with a sufficient means of control over monetary instruments.
5. Apart from the funds which the market procures by rediscounting, it is also supplied from the considerable resources which, thanks to the funds derived from the savings banks (which amount to more than 54 billions), the Caisse des Depôts et Consignations can partly put at its disposal by the payment of National Defense bonds.
Thus the money market is always provided with sufficient funds. At the same time, there is no danger of the volume of domestic credit being swelled abnormally because, before such a thing could happen, the French banks would have deliberately to sacrifice the usual equilibrium of their assets by ceding the greater part of their holdings to the Bank of France, in order to increase their foreign investments. But they have by tradition an instinctive repugnance against asking for help from the bank of issue. It may be added, in conclusion, that the prudence and wisdom of the French houses of credit have always led them to avoid carefully the risks of insolvency and exchange involved in having important holdings of foreign securities.
Inefficacious in their results, useless in principle, "open market" operations do not, in France, correspond either to the economic structure of the country or the organization of the credit system. The conception of such operations is quite foreign to the spirit and the statutes of the Bank of France, by virtue of which the bank of issue must not take the initiative in creating credit which is not obviously necessary, but must merely be in a position to furnish at any moment the credit demanded.
Even though the Bank of France has often been the subject of unfair criticisms -- which I have attempted to answer in this article by simply making an impartial statement of the facts -- justice has been done to it in a significant international document. The "Gold Delegation" of the League of Nations, in its final report published in June 1932, devoted a long paragraph to an examination of the policy followed by the Bank of France. For my part, I could not find any better words with which to conclude:
"The Bank of France has endeavored to limit imports of gold, which were disturbing the equilibrium of certain foreign markets. It did not, like the Federal Reserve Bank of New York, have recourse to open-market operations which, owing to the special structure of the French market, would have had no appreciable effect upon the volume of credit and the level of prices. The only method of preventing this influx of gold would have been to increase French investments abroad. Many steps have been taken in that direction. The Bank of France has maintained its discount rate at a low level. It has taken other steps to favor short-term foreign investments -- in particular, by encouraging the development of acceptance credits. The French Government, on the other hand, has considerably reduced taxation on foreign securities in order to encourage foreign issues in France.
"But these measures -- whose efficacy cannot be denied -- have not been able to produce their full effect because of the break in confidence which has occurred throughout the world and has, since 1930, been paralyzing international movements of capital. On the contrary, France has become a refuge for foreign capital, which greatly contributed to the entry of gold into France in 1930-31."
[i] These figures include private deposits in the Bank of France as well as the assets of the Caisse des Depôts et Consignations. They do not include the deposits of the Caisse Autonome d'Amortissement and the Treasury.