IN a period that offers a spectacle of constant and dramatic changes, and charges us a good price for the entertainment, France is contributing an original note. The unexpected and almost offhand rapidity with which she is able to recover her balance is a 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 franc. Well, within a period measured in weeks, we found the French budget balanced, the railroad deficit halved by the stroke of a pen, French government bonds again soaring, gold streaming back into the Bank of France, American eagles and British sovereigns dropping on exchange as a result of decreased hoarding, and industrial securities again finding buyers in the stock markets. Confidence, in a word, had been restored. And it was done by simple, nay classical, procedures.

Much the same thing has happened again in the three months since the events of the Sixth of February. Then many people abroad felt that an era of unrest and bloodshed might be opening in France. But lo! within two days the "Sage of Tourne-feuille," M. Gaston Doumergue, had a national coalition government organized, calm had been restored, and a Chamber that had been upsetting cabinet after cabinet on the financial question was getting ready docilely to authorize the ministry to do by proclamation 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 after an apparent collapse is somewhat irritating to foreigners who do not grasp the underlying causes of her conduct and are inclined to see something shocking to established usage in her impulsive reversals of form.


The present situation goes back to the Sixth of February. A tragic day -- and a turning point. That evening a Left majority in the Chamber was giving an impressive vote of confidence to the Daladier ministry. It was its first contact with it. It had done the same with the five preceding ministries, and was again all primed to overthrow the new government a few weeks later when it would have to deal with the financial problem and try to take action. At that very moment lines of war veterans were marching down the Champs Elysées carrying their battle-flags and singing the Marseillaise. They were headed for the Pont de la Concorde beyond which lay their goal, the Chamber of Deputies. They were young men, afraid of nothing. Unarmed as they were, they dashed upon the cordons of police that were guarding the bridge. The police fired. Blood was shed. The people of Paris turned out en masse for the funerals of the victims. There were wounded besides. The notion that unarmed men should be ready to 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 sentiment of outraged honesty, a very powerful emotion in the French population. A fifteen million dollar "swindle" had been made possible, so it seemed, by political complaisance on the Left. A Left ministry had declared itself opposed to the usual investigating commission on which all parties would be represented -- the only way of guaranteeing the seriousness of the effort to fix responsibilities. The sense of national pride is strong in Paris, and most of its deputies sit in the Center and on the Right. Paris was disgusted with the impotence of a Chamber that had overturned five governments one after the other in rapid succession. Paris rose in wrath, and the wrath was the more violent because the city had been suffering severely from the dropping off in the tourist trade.

The Daladier ministry collapsed before a wave of popular indignation. And the Left majority, which had broken five governments in twenty months, now was itself broken. The Left majority had held together largely on romantic grounds. The two parties on which it rested -- the Radical-Socialist and the Socialist -- 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 mistake of striking an 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 combined with the previous opposition to make up a new majority of so-called National Union (it does not include the Socialists, with 130 votes, nor some 20 Communists and others). The manœuvre was made possible by calling in an ex-President of France, M. Doumergue. The same thing had been done in July 1926 by calling in M. Poincaré. The Doumergue ministry could boast the two party leaders of Right and Left, M. Tardieu and M. Herriot, both former premiers and now ministers pompously styled "without portfolio." Marshal Pétain became Minister of War. The portfolio of foreign affairs went to an ex-premier, M. Louis Barthou, who away back in 1913 had met the increase in the German army with the three-year service bill.

The first act of the new government was to appoint one commission to get to the bottom of the Stavisky scandal and another to fix responsibilities for the casualties of the February riots. While these commissions were getting to work, a budget was voted in a matter of days instead of a matter of months; then the Government sent Parliament home for a two months' vacation and attacked the problem of balancing the budget, plying the axe of executive decrees to effect reductions in public expenses, the blows falling on office-holders, retired public officials and war pensioners who had been drawing $40 a year in the case of men of 50 years of age, and $80 in the case of men above 55. The war veterans had been accounted the most dangerous, especially after their victory of February 6. M. Doumergue handled them successfully with his smiling good-nature, and the Government was strong enough to issue the decrees which reëstablished budgetary equilibrium.

The Socialist Party had constantly maintained that the reduction of public expense by cuts in the wages and pensions of government employees and veterans would tend to augment the depression by lowering the buying power of those portions of the consuming public. The C.G.T. (Confédération générale du travail), which is closely connected with the Socialist Party and counts more office-holders than workmen in its membership, opened a campaign against the executive decrees and in favor of organized resistance to them, even making veiled threats of a general strike in the public services to force a reconsideration of them by the Government or Parliament. Some disturbance of routine work actually occurred, particularly in the postal and telegraph departments. The Government was at 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 and the C.G.T. that public opinion was hostile to any movement of protest.

That hostility was natural enough. All producers are having a 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 commerce, so that a miner today is being paid less than a farm laborer. The young people who are graduating from school, with their diplomas all in order, are finding places closed to them. State employees, on the other hand, are 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 purchasing power of money has so increased during the past four years that, even with the cut of 10 percent which the decrees made effective, public employees are better off than they were four years ago. Of this they were in general aware, and they also saw that the purchasing power of their salaries would be safeguarded if the budget could be balanced and the franc saved from a new depreciation.

Once the danger of a revolt in the public services had been averted, the effects of the executive decrees began to become manifest. On the Bourse, French government bonds rose rapidly in value; and indeed a continuation of that improvement would seem justified, for whatever one's guess as to the future of the franc, it unquestionably is as solid as the Dutch florin and the Swiss franc. Now Swiss and Dutch government bonds are yielding 4 percent while the French yield 5 percent, which is another way of saying that by comparison the French are undervalued by 25 percent. Foreign gold is meanwhile coming in to the Bank of France, especially from countries such as Italy that belong to the gold bloc. Confidence is returning.


Can one therefore conclude that the government of National Union, acting under the aegis of a former President of France, has succeeded in repeating in 1934 the manœuvre which was 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, has been a balanced budget, a revival of confidence in the public finances, and a lessening of tension in the political atmosphere that will be favorable to a resumption of business.

From a technical standpoint, there can be no doubt that the recovery in government bonds means a lower interest rate which will help manufacturers by lowering manufacturing costs. Holes in the budget had been plugged by preceding governments with a steady stream of loans issued at higher and higher rates of interest. The effect had been not only to increase the fiscal burdens of manufacturers, but to raise interest rates on the money which they had to borrow from the banks. Long-term loans cost almost twice as much in France as in England. Where a French business-man could get the use of a million francs for an interest charge of 80,000 francs his English competitor could get two millions. That handicap on French manufacturing will be reduced in proportion as the restoration of confidence results in lowered interest rates. Meantime, with deposits in the Bank of France increasing, and hoarding coming to an end, the franc is beginning to glitter with a new lustre. The franc is the only stable currency that rests today on a gold reserve of any very considerable proportions; and the stability of French currency and confidence in its future are contributing an atmosphere of security to domestic business.

Such are the immediate advantages procured by the political right-about which France has made in these few weeks past, and by the resultant budgetary reform. The causes of the rejuvenation of spirit have been both political and technical.

All the same, there is no escaping the fact that the situation that M. Doumergue faces today is not the situation that M. Poincaré successfully dealt with in 1926. Then there was no danger in the foreign field: the French treasury was in difficulties, but France was a particularly prosperous country in a prosperous world. The monetary readjustment effected by M. Poincaré doubled the value of the franc within the space of a few months (125 to the pound sterling instead of 248). Nevertheless, the purchasing power of the franc was small abroad and great at home. French industry was therefore well situated for export, since France was the cheapest country in the world to live in. That was 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 country in a ruined world, the ruin in both cases coming from the depression. It is one of the most expensive of all countries to live in today, the purchasing power of the franc being great abroad and small at home. Today it is an advantage to be earning francs in France and spending dollars in New York. The results have been so disastrous for the French export trade that France showed an unfavorable trade balance of 10 billion francs in 1932 and a similar one in 1933. In certain respects France may view the currency situation with pride, since she is the last large country to possess a stable currency and to allow free entrance and export of gold. But in other respects she has good reason to worry. Her unimpaired franc is a handicap to her in competition on 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 factors now 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 France and in other countries. France, they argue, is making a mistake in doggedly holding the franc up instead of bringing it into alignment with other currencies. It is thought that the policy will entail a long period of hardship, and might even 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 mutiny because of a threat to reduce their pay by 20 percent, while their salaries were cut 37 percent by the devaluation of the pound without their noticing it. How miss the point of such an interesting example, and how fail to follow it? If France does not bow to plain facts, it is said, her gold reserve will gradually be depleted to cover her unfavorable trade balance; this can no 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. What a pity that Frenchmen inevitably associate currency devaluation with their ghastly memories of inflation! The conclusion reached by these observers is that France had better come to her senses and undo a mistake which bleeds her economic system and risks involving her in social disorders.


This thesis of the devaluationists is met 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 that portion of the French population from a policy of devaluation, but to view the problem as a whole. Devaluation would undoubtedly be a gain to some; but to 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 be attained by devaluation are in some degree contradictory. If devaluation is, as many hope, to cause a rise in domestic prices, that will not mean any appreciable or permanent gain for exporters, since the latter will at once find their costs going up. Many industries have to buy their raw materials abroad; indeed, that is so in most cases, the iron industry being a notable exception. Devaluation of the franc will increase the costs of raw 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 directly based on cost-of-living indices, a rise in domestic prices will force manufacturers -- and manufacturers of exports in particular -- to raise wages.

But suppose devaluation could be brought about without inflation and without any rise in prices? That, evidently, would put a premium on exporting, and the theoretical result would be to facilitate the sale of French products on foreign markets. But that advantage may prove illusory. It must not be forgotten that if French exports are now 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 prevent the premium on exports from materializing.

Furthermore, the export trade of a country is not the only thing to be considered. The measure proposed would certainly result in a falling off of imports, French purchasing power being reduced. Now is that result altogether desirable? Leaving aside the damage done to importers and to ports of entry, we can be sure that exporters would also be hit before long. In the last analysis, in all international trading, products and services are matched against products and services. If imports fall off, foreign purchasing power as regards French products is bound also to fall off, and French exports will eventually -- in fact very soon -- fall off in their turn.

But, as a matter of fact, the assumption that the franc can be devalued without any rise in domestic prices is purely theoretical. The example of the United States does not apply in this connection. To be sure, American prices have not risen in any degree corresponding to 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 abroad are relatively insignificant in comparison with its domestic supplies. In a country like France, on the other hand, where raw materials are largely imported, any lowering in currency values would at once show its effects in the prices of raw materials and consequently in the prices of finished products.

2. The American public has not yet realized clearly the consequences that will follow the devaluation of the dollar. The American experiment is still in its initial stages, and no one can foresee what the reaction is going to be when the costs involved in the Roosevelt experiment become apparent in an increased public debt, an unbalanced budget (with a tendency to remain so permanently) and a depletion of the nation's liquid funds.

In France, then, a devaluation of the franc, even if not accompanied by an increase in the volume of money in circulation, would result in higher prices on all articles containing imported raw materials. But that is not all. The French public has not forgotten the effects which inflation and the drop in the franc had on prices between 1919 and 1926. Everybody remembers that currency devaluation meant an increase in the cost of living and that its practical effect was to lessen the bank note's purchasing power. In these circumstances, any devaluation of the 1928 franc would be interpreted as a prelude to a new period of depreciated currency. The psychological reactions of that are beyond prediction. The public would have a right to conclude that if a devaluation of 5 percent or 10 percent was possible, there would be nothing to prevent a new devaluation if the first did not achieve all that was expected of it by those who stood to gain by it -- as would certainly be the case. That feeling would be very hard to overcome. Thus devaluation would profoundly disturb the mechanism of exchange.

Undoubtedly the paper notes now 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. So far as such notes were applied to the purchase of merchandise, they would contribute to a rise in prices; but a considerable portion of them would doubtless go abroad in the form of foreign securities, and the nation's liquid funds would be reduced by that much. There can be no assurance that hoarded savings would be spent. On the contrary, experience proves that the threat of monetary depreciation provokes an active search for investments in real values, especially abroad.

Even assuming that hoarded money would go into consumption, the advantage could only be temporary, based on an extravagant use of purchasing power long held in reserve. Meantime, new savings would be going abroad and so depleting the volume of floating capital. In order to keep the balance and to replenish the supply of ready money, notes would simply have to be printed without real security -- in other words, there would be inflation pure and simple. All that one can at present make out from the first results of devaluing the dollar confirms the impression that the effects of such measures on a nation's economy and on the general trend of business are on 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 serious embarrassments to banks and savings' funds, which would be asked to repay depositors. As a result, business concerns would be unable to make loans, interest rates would rise, and that would not only increase production costs, but in many cases put enterprises out of business and contribute to unemployment.

Even that is not the whole story, nor the worst of it. Devaluation 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 gain, and that would involve a mere transfer of purchasing power from creditor to debtor. But in the case of credits to foreigners, the operation would represent a loss to the French community as a whole and an advantage to the debtor, who could clear himself in depreciated currency. Devaluation would pare down the assets of everybody living on fixed incomes, and especially of bondholders, who are not in a position -- as salaried people are -- to exact compensation.

In general terms, and quite aside from the moral effects, devaluation would reduce the purchasing power of a large group of consumers, both by the rise in domestic prices that would result from increased interest rates and by the failure of fixed or semi-fixed incomes to adjust themselves. So the effort to 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 of the problems that face the country at 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 of credit. It would strike such a devastating blow to public and private credit and occasion such an exodus of capital from the country that one may well ask whether, after such a shock, the gold standard could long continue to function at a new level of parity. Devaluation would therefore involve the risk of placing the country on the road to a 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.

Devaluation of the franc would, finally, encourage other countries to devaluate their moneys and start a race in depreciation which would tend to intensify the present confusion. Those who look with favor upon a devaluation of European currencies on the basis of the pound, and especially of those currencies that do not 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 be faced with the same problem of adaptation which she encountered between 1925 and 1931 and which she solved very unsatisfactorily by cutting her domestic prices and costs of production. If one compares export percentages for the various countries between 1929 and 1933, one notes that England has barely held her own, improving her figures from 10.74 to 10.93, and the United States has experienced a falling off from 15.61 to 11.53; whereas the countries of the gold bloc all show improvements, France moving from 5.95 to 6.50, Germany from 9.72 to 10.40, the Netherlands from 2.43 to 2.62, Belgium and Luxembourg from 2.68 to 3.52, Italy from 2.42 to 2.80 and Switzerland from 1.21 to 1.48.

We have a choice, at bottom, between two systems only: between an effort to stabilize prices by dint of monetary manipulations (managed currencies) and -- the principle we are defending -- a permanently stable currency. What Frenchman could we ever persuade that if we resorted to monetary devaluation now we would not be tempted to resort to it again some years hence on the pretext of new economic difficulties?


That is the thesis of the French Government.

The partisans of devaluation reply that the recent example of Czechoslovakia proves that the catastrophes predicted for countries which devalue a second time are imaginary. As regards public credit, is it not better in England, where there is a mobile currency, than it is in France, where money is convertible into gold? They add that it may be that by a policy of sheer heroism France can get along without currency devaluation, but that it will be at the cost of untold sufferings: for if French prices were to fall to the level of world prices, the French taxpayer, in order to meet the accrued public expenses of 1934, would have to contribute twice as much merchandise to the treasury as he did in 1928. As a matter of fact, the technical situation of the franc is so strong that, in our judgment, the question would really arise only if world prices, instead of rising in terms of gold, were to continue to fall, a contingency that might result from any further drop in dollar and pound. In that case the partisans of devaluation would launch a new offensive. Meantime, the governmental stand against devaluation is being supported by the important newspapers and is accepted by French public opinion, in spite of wistful longings on the part of our farmers and the small traders in the towns for the high prices of 1928.

The National Union ministry has adopted the expedient of large public works as a means of fighting the depression. This is the suggestion of the Minister of Labor, who represents the new-style Socialist Party inside the cabinet. Public opinion has been much struck with the slogan that the state might as well pay a man to work as pay him to do nothing. Better informed people are inclined to think that, as regards France, public works managed by the state are not a specific for the depression but a sedative that may ease the patient's nerves 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 currency stabilized and delicately gauged, with a spirit of economy and saving in her hard-working population, with a colonial empire that is absorbing a third of her production, with a line of fortifications on the east barring the road to the periodic invasion she has known in the past, France seems to be one of the fulcral points of resistance in a world sorely beset by the depression.

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  • PAUL REYNAUD, former Vice-President of the Council of Ministers of France, Minister of Finance, and Minister of Justice
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