DURING the few weeks it has been in power, the Blum Government has enacted a broad program of reforms. Certain of these reforms were submitted to and adopted by Parliament under the pressure of immediate circumstances. Others were part of a program which had received careful consideration, which had been the subject of controversy before the election, which were the substance of electoral promises. The reform of the Bank of France belongs to this latter category. In conjunction with the bill for the nationalization of war industries, central banking reform was a subject on which the parties of the Left, unified in the Popular Front, were in complete accord. It was one of the major planks in the Popular Front platform, and it proved to have great propaganda value. It provided the Left with two excellent slogans. "Down with the Regents" implied that the administrators of the Bank of France were an enemy to be conquered. The other -- that the Banque de France should become the Banque de la France -- is difficult to translate. In general it implies that the Bank of France should become the Bank of Frenchmen, that the country's leading financial institution should no longer serve private but national interests.

The extent of the popular support behind the Bank reform is reflected in the vote, 444 to 77, by which the Chamber adopted the bill. Opponents could only muster 77 votes, although the Opposition normally amounts to 220. What happened was that 76 deputies of the Right abstained from voting at all, while some 60 others joined forces with the Left. The Senate, the bulwark of social conservatism, accepted the project, 190 to 74. These figures are significant, for they show the magnitude of the Popular Front's success. They also show the influence which it has acquired over men who, earlier, were either neutral or hesitant.[i]

Victory over the Bank of France is symbolical: it was the assault on the citadel, the fall of the Bastille of the moneyed aristocracy. But it is a very real victory as well. The Bank of France had gradually become the commanding center of all capitalist activity. Those who control this key position determine the course of French politics and economics. They can impose their will, they can dictate laws. In excluding this oligarchy, the new reform bill has eliminated the principal obstacle in the course of French democracy. The country itself now commands the levers which determine the fate of the economic system, of social reforms, and the nature of the political régime. That effective control of the Bank of France does really entail these wide consequences is apparent from the following historical sketch.


The Bank of France was founded in 1800 by Napoleon Bonaparte, then First Consul. It secured definite status in the laws of April 14, 1803, April 22, 1806, and the decree of January 16, 1808. The Bank was given the right of issuing the nation's currency -- in 1848 this became an exclusive right, and in 1897 the privilege was renewed and extended to 1945. One hundred and thirty years have elapsed since the establishment of the Bank of France. One political régime has followed another; an economic revolution has transformed the country; but through it all the Bank of France remained essentially the same. Small wonder that it appeared extremely archaic and ill adapted to modern ideas and demands. But financial superstitions are deeply rooted in France. An economic crisis of primary magnitude was needed before the shortcomings of the Bank could be altered.

There are some 40,000 shareholders in the Bank of France. Yet in accordance with Bonaparte's laws, only the 200 greatest shareholders had the right of participating in the General Council, i.e., the stockholders' meeting. The General Council chose from among its members the 15 Regents (directors) and 3 Censors (advisers). The state appointed the Governor and two Vice-Governors. The former had to own 100 shares of stock, the latter 50 shares each. Regents, Governors and Censors -- the latter had no voting power -- constituted the Regency Council which was the real directing body of the Bank. Thus French economic life was dominated by a financial oligarchy. Only the wealthy -- and among them only a few -- controlled the Bank of France. To be eligible as one of the 200 greatest shareholders presupposed, until very recently, that one had a minimum investment of 2,000,000 francs (about $133,000 at present exchange rates).

The 200 largest shareholders consisted of the leading capitalists, the large corporations, and particularly the 21 big insurance companies. So strong was the element of tradition, that certain seats have been transmitted in hereditary succession for over a century; thus of the 6 bankers who were Regents, 5 were descendants of the great financiers of the First Empire. Outstanding industrialists held 5 other seats. Typical of this group was François de Wendel, president of the Comité des Forges and one of the party leaders of the extreme Right. A memorandum submitted to the Chamber of Deputies during the discussion of the reform bill showed that 12 Regents, either directly or by the intermediary of their sons and nephews, were directors of 95 corporations: 31 private banks, 8 insurance companies, 9 railroads, 8 shipping concerns, 7 metallurgical industries, 8 mines, 6 electric companies, 12 chemical industries and 6 miscellaneous corporations. The Governor, appointed by the state, supposedly reflected the cabinet's views rather than those of the oligarchy. But experience proved that with few exceptions the Governor saw eye-to-eye with the Regents. Thus the Bank escaped from government control and was a law unto itself. Cabinets generally hesitated to dismiss Governors; whenever they did so the Bank gave it the appearance of a quasi-revolutionary act.


Throughout the nineteenth century the Bank of France was virtually a state within a state. It never hesitated to oppose and checkmate the Government whenever the latter's policies were not in harmony with its own. Its opposition was particularly strong if cabinets and popular opinion were liberal rather than conservative. The Second Republic suffered the hostility of the Bank; while Louis Napoleon found it favorable to his coup d'état of December 2, 1851, which ended the Republic and created the Second Empire. In 1870, after the surrender of Napoleon III at Sedan, France was invaded by the Prussian army. Gambetta, the organizer of national resistance, threatened to uproot the Bank because of its refusal to give proper financial aid to the cause of national defense.

The intervention of the Bank of France in politics is hardly new. But during the postwar years its power was exercised more frequently and at times decisively. The Bank's influence and means of action increased, for to its old functions it added that of defense of the franc. During the first few years of the postwar period France was governed by the parties of the Right. Cabinets of the Right have the blessings of the Bank; yet even they have been known to complain of the selfish and unjust demands of the Regents. In an official document dated December 13, 1923 -- this was during the second Poincaré ministry -- a high ranking official in the finance ministry complained of the unjustified demands made by the Bank and the latter's means of winning its point by a press campaign "created and subsidized by the directors of the Bank." At a time when the Bank was most exacting towards the state -- it endeavored to secure advance repayment during a period of financial stress -- it indulged in a program of ostentatious extravagance. Throughout France it constructed luxurious offices; it purchased collections of objets d'art for its Paris headquarters. The cost was great enough to make it possible for the Bank not to declare an extra dividend -- a certain proportion of which could have been claimed by the state.

The elections of May 1924 brought to power the Left Cartel, dominated by Herriot and the Radical-Socialists. The political quarrel between state and Bank was complicated by the growing chaos in public finances. The Bank of France took a definite stand on both issues. Financially it pretended to oppose inflation and devaluation, although nearly everyone recognized this as inevitable due to tremendous wartime and postwar expenditure. The Bank convinced the Government of the righteousness of its cause; it won public opinion, thanks to a devoted press. Thereafter it had little trouble in making the Government adopt its policies so that in the end the parties of the Left should bear the opprobrium for inflation and devaluation. At the beginning of 1925 the Bank consented to overlook the fait accompli of inflation. In return it demanded of Herriot, then Prime Minister, that he abandon measures approved by the Cabinet penalizing fiscal evasion. The Cabinet was under obligation to publish such a list. On April 10, 1925, the Herriot ministry was forced to resign.

From April 1925 to July 1926 the problem of the franc became the major issue of French politics. It cost the lives of several cabinets and ended the tenure of many finance ministers. The latter frequently denounced the Bank's ill-will. Joseph Caillaux, in a letter dated June 1925 and addressed to the Governor of the Bank of France, accused the Governor of "placing his own preferences over general interests" and stated that he, Caillaux, "was reconciled to foregoing a coöperation which the Bank refused him." A year later, Raoul Peret in resigning as Finance Minister gave as his reason "the absence of an essential coöperation which he had every right to expect." Despite the fall of ministries and the decline of the franc, the Bank refused to pledge its gold reserves "until a government of more moderate (conservative) tendencies would guarantee success to technical measures." In such words did one of the principal Regents describe the Bank's policy at a conference at the Finance Ministry in May 1926.

The Left, exhausted by the struggle, and held responsible in the eyes of the public for the fall of the franc, gave way on July 23, 1926, to a government of National Union headed by Raymond Poincaré. A few days previous, during a short term of office at the Finance Ministry, Joseph Caillaux had dismissed the Governor of the Bank of France and appointed a man whose loyalty to the Government and personal authority over the Regents greatly facilitated the subsequent financial recovery with which the name of M. Poincaré is associated. But even Poincaré found that the power of the Bank of France was such that he at times must capitulate. In 1928 the question arose of stabilizing the franc. In replying to certain of his critics, Poincaré remarked that it was with great reluctance that he had been obliged to accept certain clauses of the new agreement between the state and the Bank.

Poincaré's immediate successors remained on good terms with the Regents. Several factors explain this harmony: a period of prosperity dulled the sharp edge of conflict; the cabinets were of Right tendencies and therefore were approved by the Regents; and the ministers themselves were careful not to provoke the Olympian wrath. Take but a single example. In 1931, as the result of the devaluation of the pound sterling, the Bank of France suffered a severe loss in its portfolio holdings of sterling notes. The loss was at least two billion francs ($133,000,000 today). The Laval Cabinet agreed that the state should bear nearly all of this amount. But between 1928 and 1931 the Bank of France had made a considerable profit in the depreciation of the franc in terms of foreign currencies. Hence the opposition in the Chamber of Deputies insisted that these earlier gains be deducted from the subsequent loss before the state be asked for compensation. Such a step was both intelligent and equitable. The Government refused to adopt it. Supported by the press, the Laval Cabinet obtained the approval of the Chamber and the Senate.

The election of May 1932 returned the Left to power and opened a new period of political tension between the Bank and the state. It was complicated by the advent of the depression in France. For four years, from 1932 to 1936, the Bank of France endeavored to prepare the way for political conservatism by making itself the champion of the strictest financial orthodoxy. It utilized all its resources to defend the franc and obtain a deflation of prices. To force successive governments to decrease public expenditure and achieve a balanced budget, the Bank of France refused to offer the Treasury the facilities of an ordinary central bank. Most central banks during the depression have been willing to discount Treasury Notes, thereby ensuring an elastic money market. The Bank of France refused to discount short-term Treasury Notes except to an insignificant degree. At the same time it rigorously limited the amount of such notes it would accept from any one client. Because Treasury Notes were not easily convertible, the Government had difficulty in procuring funds on the money market. Loans were contracted at higher and higher interest rates. Meanwhile the Bank, to check the flight from the franc, raised its discount rate. The dearness of money and the Bank's defense of the franc reduced the country's income and, as a result, tax receipts. The deficit mounted; the state was obliged to make new economies and contract new loans. By the end of 1932, the circle had become vicious.

Confronted with insoluble problems and forced to adopt measures that were both unpopular and inapplicable, ministries fell in rapid succession. The Bank of France remained firm in its adherence to deflation; and it supported its stand by a well-directed press campaign. Subsidies of the press had become one of its regular means of action. A former Governor, testifying in 1931 before the commission investigating the Oustric bank scandal, asserted that the Bank of France had adopted the practice of distributing sums of money to the newspapers. From 1932 to 1935 newspapers published many articles -- some were written by the Bank's own functionaries -- supporting deflation against the alternatives of devaluation or a cheap money policy. To induce Frenchmen not to imitate the monetary policies of other countries, the French press was deluged with false news concerning the American experience with devaluation. The Belgian experience, according to a cabinet minister of that country, M. Vandervelde, was systematically misrepresented in the French press at the instigation of the Bank of France.

The political crisis, which was nothing but the result of the economic situation, reached its climax in the riots of February 6, 1934. A ministry of National Union (and therefore conservative) was formed by M. Doumergue. In financial matters it followed the Bank's suggestions in a docile spirit. It adopted a deflation more severe than before. But the results were no more satisfactory. In November 1934 the Flandin Cabinet assumed power. It inclined somewhat to the Left and contemplated reversing the economic and financial policies of its predecessors. It hoped to end deflation and create cheaper money, although at the same time maintaining the value of the franc. As a step towards this goal the Cabinet appointed a new Governor of the Bank of France. But the subsequent course of events showed how well the Regents could win a state-appointed Governor to their side. Flandin demanded greater facilities for the discount of Treasury Notes. They were granted in such a niggardly way that the results were negative.

Meanwhile the Bank had decided on a renewed deflation. The policy was announced to the Congress of the Republican Federation held at Nice in April 1935 by François de Wendel, the most influential of the Regents. He insisted that the Government institute drastic economies. The speech [ii] was the equivalent of a command. The press made it known that if the Cabinet were not immediately given special powers to cut expenditure, the franc would be endangered. A mild panic occurred. There was a flight of capital and millions of francs in gold left the country. The Bank showed no anxiety to adopt the usual steps capable of stopping the exodus. The newspapers exploited the situation. After a short resistance, the Flandin Cabinet capitulated and asked the Chamber of Deputies for special powers. The Chamber refused Flandin and also his successor, Bouisson. The newspapers merrily continued their course, and the panic with them. Finally Pierre Laval succeeded in forming a cabinet. All became peaceful.

Throughout the crisis, the Governor of the Bank of France had very obviously played a rôle of primary political importance. The parties of the Left protested this intrusion into politics. The same protest was made by various members of the Right, who, no longer sharing the monetary ideas of the Bank, favored devaluation. Meanwhile the Laval Cabinet had carried out the deflation program which M. de Wendel had sketched at Nice. In return Laval was liberally accorded the rediscount facilities which had been denied his predecessors. The Bank of France made no mystery of its policy. In articles which had appeared in the press during the Flandin crisis, the Bank made it patent that the extent of credit facilities which it would accord the Government depended entirely on the Government's attitude or policy. Thus the Bank appeared openly as the inspirer of ministerial policy. It is not surprising that it should bear the unpopularity of the Laval budget decrees.

One would hardly expect to find the likes and dislikes of the Bank manifesting themselves in the realm of foreign affairs. But high Bank officials disapproved of the League's application of sanctions against Italy, and they manifested this aversion in their actions. Finally, in the period preceding the general election of 1936, the Left accused the Bank of secretly supplying campaign funds to the parties of the Right. The Bank never denied the charge.


The victorious Popular Front considered it necessary to deprive of its power an organization which had shown itself, first, to have a political nature, second, to be hostile to its political philosophy. One of the first acts of the Blum Cabinet was to name as Governor a man whose loyalty to the Government could not be doubted, Emile Labeyrie. M. Labeyrie promptly ended the Bank's distribution of secret funds which the Left had always criticized and protested about. As concerns the matter of reform, the Government had at one time considered the possibility of nationalizing the Bank of France. But it became evident that such a draconian measure would encounter so much resistance that the success of any change at all would be compromised. Moreover, the desired end could be achieved by other means. The reform bill, as it was finally adopted by Parliament, was the result of an agreement between the Cabinet and the more moderate elements of the Senate. Outstanding among the latter is Joseph Caillaux, President of the Senate Finance Commission. This elder statesman regards the government of the Popular Front with little favor. But he has not forgotten his many struggles with those whom he calls "the great feudal lords" of finance; and he has remained resolutely hostile to their domination of the Central Bank.

The law of July 25, 1936, stipulates that the Bank shall be governed by a Council consisting of the Governor, two Vice-Governors, 20 Regents and three Censors (advisers). The General Assembly of shareholders -- henceforth composed of all shareholders, each having one vote irrespective of his holdings -- will as in the past elect the three Censors. It will also choose two Regents from merchants and manufacturers having no official connection with a banking institution. One Regent each will be appointed by: the National Economic Council; the Superior Commission of Savings Banks; the personnel of the Bank of France. The Ministry of Finance will select six Regents from the following associations: the National Federation of Consumers Coöperatives; the National Economic Council; the General Confederation of Labor; the General Federation of Artisans; the Assembly of Presidents of Chambers of Commerce; and the Assembly of Presidents of Chambers of Agriculture. Three Regents will represent the ministries of Finance, National Economy, and Colonies. The remaining six Regents will represent various official and semi-official organizations under the jurisdiction of the Ministry of Finance. No parliamentarian may qualify as Regent. Regents will serve a three year term -- the Board being renewable by thirds each year.[iii] The Governor and Vice-Governors will as in the past be appointed by the Cabinet, though henceforth they need not be shareholders. Thus of the 23 Regents, 12 are representatives of the state. This number does not count the Regents who will tend to support them because of hostility to the old financial oligarchy. No seat has been reserved in the Regency Council for private bankers; and shareholders are even forbidden to elect to the Regency Board a person associated in any way with a private banking establishment. The law provides that the Regency Council may delegate its powers. As the result, the administration of the Bank will be directed by a permanent committee composed of seven members: the Governor, the two Vice-Governors and four Regents, of whom one is to be chosen by the Ministry of Finance. Thus even in the permanent committee the majority will belong to representatives of the State.

One may hope that the new reform bill will attain its object. Certainly it contains all the guarantees which can be embodied in the text of a law. The execution depends upon men. Henceforth the Bank of France will be directed in conformity with national interests as interpreted and defended by the Government and its servants. Whatever may happen, the transformed Bank is unlikely to become a center of opposition against a strong, active Government supported by public opinion. Nor will the Bank be able in the future to launch a political offensive under the guise of financial threats and through a subsidized press. Henceforth it will not be able effectively to oppose any reform policy. But it remains to be known whether the Bank will actively support such a policy. This depends on the manner in which it functions. It is generally recognized that the doctrines and methods of the Bank need to be modernized. A clause in the law of July 25, 1936, stipulates that henceforth all certificates of the floating debt, during the three months preceding the date they fall due, will be discounted without limitation by the Institut d'émission. This is a reversal of the policy hitherto followed by the Bank. The new policy will protect the Treasury against difficulties which in the past have been exploited -- if not deliberately provoked -- by the Bank. It also should facilitate the organization of the French money market along British or American lines. The practice of an open market policy, which the old Bank of France had always refused to adopt, is not provided for by the new law. But the Government is contemplating introducing such a measure and M. Caillaux has declared himself in favor of it.

From all points of view the coming months will see a readaptation of the archaic mechanism of the Bank of France so as to bring about an expansion of credit. If circumstances demand, or if the evolution of political opinion permits, the problem of the future of the franc may be discussed. If so, one may reasonably suppose that the Bank of France, instead of creating obstacles, will facilitate the solution. Moreover, a modernization of the Bank's principles and methods will permit it to coöperate with central banks of other countries. This coöperation, which has been lacking on more than one occasion in the past, may facilitate a settlement of the international questions of currencies and prices.

[i] Similar non-government support was forthcoming in the vote on the law nationalizing war industries.

[ii]Le Temps, April 13, 1935.

[iii] For texts of the laws of 1803, 1806 and 1808, and of the law voted July 24, 1936, see L'Europe Nouvelle, August 1, 1936.

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