AFTER an interval of precarious peace France is again at war. Again she is fighting not only for her existence, threatened by German imperialism, but for principles of liberty and individual human dignity without which the French people do not think life worth living. At first glance her situation seems difficult. She has had to start a new war when not yet finished binding up the wounds of the old. She had just emerged from the depression of 1931-36, which left a heavy burden of public debt. Her currency had lost four-fifths of its value as a result of the World War and half of the remaining one-fifth in the depression. Yet there are grounds for believing that she can organize her economy to weather the storm even if it lasts a long time.

In spite of the heritage of the World War and the depression, France enters this conflict in more favorable circumstances than prevailed in 1914. Then, too, war caught us in the midst of financial difficulties. For several years social legislation and rearmament had drastically increased expenses. Receipts had not kept pace, because France still had an antiquated flat-rate tax system. The fiscal reforms first proposed in 1907 had evoked violent political controversy; and it was not until the end of July 1914 that Parliament adopted the principle of the income tax.

This time the possibility of war was anticipated and our effort to prepare for it began as early as a year ago. First of all the budget was put in order. Administrative reorganization reduced certain civilian expenses; appropriations for public works were cut; and new taxes were established that would produce an added 15 billion francs per year. The new taxes included a sales tax of 1 percent, the proceeds earmarked for armaments; and the special levy on earned income was raised to 5 percent. Unfortunately, these are not very democratic taxes, but they will bring in a good yield in a period of rising prices and increased money incomes. The floating debt carried over from the last war was reduced by two-thirds, thanks to the foresighted sinking-fund administration, thus permitting the Government to issue short-term bonds for as long a period as two or three years. (As a result, the Government had no trouble this September in floating new short-term war bonds to finance mobilization.) Industry was emerging from the depression: the index of production rose from a mean of 83 in 1938 to 100 in June 1939 (taking 1928 as a basis), while at the same time unemployment fell from 416,000 in January 1939 to 320,000 in July. Exports rose 20 percent and in value surpassed all military purchases. Some 26 billion francs of capital which had fled abroad returned, increasing our gold reserves by a third.

Because of these favorable factors, there was relatively little dislocation during the first weeks of September 1939. This was in sharp contrast to the 1914 situation, when a run on the banks forced the Government to proclaim a general moratorium, the Bourse remained closed for several months, and the heavy selling of late July had to be regulated. This time no moratorium was necessary, thanks to intelligent coöperation between the Bank of France and the Government. From August 25 to September 15, the Bank, by discounts and advances, supplied the money market with 16 billion francs and increased the bank note circulation by 23 billions. Thus the men who were mobilized and the families who had to evacuate combat areas were able to go to commercial and savings banks and get the actual cash needed to settle their affairs. End of the month selling on the Bourse was normal; and ever since the outbreak of war commodity prices have held their own, rentes have even advanced, and so have the average prices of stocks. Shortly after mobilization had been completed, savings began to be redeposited in the banks, most loans were repaid, and banknote circulation became stabilized.

As a result of the planning and preparation which preceded the outbreak of war it has been possible to put governmental income and outgo on a more intelligent basis than was the case in 1914. At that time Parliament voted so-called confidence credits each month, and not until 1917 were any serious estimates made of military or even of civil expenses. This time, in contrast, France has had a regular budget of 80 billion francs since the beginning of 1940. It includes all items other than those pertaining to the military conduct of the war; it provides not only for ordinary civilian expenses but for what remains of the public works program, 14 billions of relief for families containing a bread-winner at the front, and 6 billions earmarked for interest on whatever loans are contracted during the first months of the war. In addition to the regular budget, there is a military budget of 55 billion francs for each quarter, or 220 billion francs a year. Thus the regular and military budgets for 1940 total 300 billion francs.

What of receipts? In 1914 it was impossible to make any estimate. The richest part of France was occupied by the enemy, and there was no tax system in existence that could be immediately used. We were literally in the process of creating a new tax system, and the income tax, though approved in 1914, was not actually levied until 1917. In 1940 receipts from taxation will cover 26 percent of the total costs of the first year of war. They include a continuation of the 5 percent levy on all earned income, which becomes 15 percent for men of mobilization age but not actually mobilized; a tax on war profits, ranging from 25 percent when the profits are less than 2 percent of business turnover to 100 percent when profits exceed 8 percent; and a tax of 40 percent on overtime wages paid to labor.

But no matter how great the loyalty and willingness of the French people, the receipts from taxation cannot cover even half of total expenditure. Assuming we wish to avoid borrowing from the Bank of France, which is nothing but disguised inflation, we shall have to borrow from the public -- first on a short-term and later on a long-term basis. There are great possibilities in this alternative, always assuming, of course, that the monetary circuit remains closed and the quantity of money constant. It is fundamental that extra wealth created by the state as a result of war expenditures shall return to the state either in the form of taxes or as loans. It must not be allowed to take flight abroad or to swell the demand for consumers' goods and so raise prices. In other words, the success of our financial policy is closely linked with our domestic and foreign economic policies. Let us now examine these.

The only way of avoiding inflation is to maintain an equilibrium between the production of certain kinds of consumers' goods and the demand for these goods. Our first task, then, is to combat the forces which tend to curtail production. One such force is the existence of 5 million mobilized men. The number, at present at any rate, is excessive. Originally we thought we would have to fight on three fronts, but maintenance of neutrality by Italy and Spain plus the narrowness of the actual German front have meant that the majority of soldiers under arms are without occupation. Already we have taken measures of partial demobilization: many workers have gradually filtered back to factories working for national defense; farmers will be given 40 days' leave for essential tasks like the planting of crops; and fathers of four or five children have already returned to their homes. This partial demobilization -- necessarily determined by front-line conditions -- will greatly help us to increase total national production.

The evacuations have also created problems. Evacuation in the Paris area, which was voluntary, has had no great effect on national production, for most of those who quit the capital were elderly people and children. Most women returned to Paris after seeing their relatives and dependents safely installed in the provinces; indeed, of the 600,000 adults who left Paris in September, more than half have returned. But we are also confronted with the problem of some 700,000 inhabitants of the eastern departments who were obliged to leave their homes precipitously to make way for the troops. Most of them are now in the south, and from the first their condition has caused the authorities much anxiety. They had to be housed; and although for many years people have complained about the exodus of population from rural to urban areas, the necessary facilities did not exist. For several weeks numbers of families had to live in barns; later makeshift houses were thrown up and barracks constructed. Relief had to be given to families without resources of their own. Extra schoolteachers had to be recruited. This was not easy, for schoolmasters have always made up a large proportion of the reserve officers in the French army and in September three-fifths of the masters joined the colors. The problem was finally solved by increasing the number of women teachers and calling back many from retirement. Employment bureaus were also set up and began an occupational census of the evacuées. As a result a good proportion of the people uprooted have gradually found work -- some in armament factories in the south, others as farm laborers. A few of the latter have obtained loans from agricultural banks and have established themselves on vacant lands as independent farmers.

We also have quite a different problem which nevertheless is of equal importance. Nearly 80 percent of the French army is recruited from the peasantry. With farmers away from the land, what about next year's crops? Everywhere women and children have undertaken the men's work, but they cannot be expected to maintain the usual level of agricultural production alone. In regions where the army is quartered, and particularly in the evacuated departments, soldiers have been assisting the farmers. But already we have had to consider the possibility of importing labor from the colonies or from abroad.

But our greatest effort must be concentrated on industry. Here it is a question of trying to maintain a normal volume of consumers' goods while simultaneously expanding armament production to the utmost. We have already seen that soldiers with particular skills have gradually been demobilized and are now at work in armament factories. The trade schools which originally were created for the unemployed have multiplied and are being used to train unskilled workers -- particularly women -- in the crafts demanded by the munitions factories. Concurrently the hours of work per week have been extended. The principle of the 40-hour week has been kept for factories but increased to 44 hours for stores and offices. In actual fact, many employees are working 60 hours a week; this very likely is excessive and cannot be maintained indefinitely. We have seen that on all overtime wages the government levies a special tax of 40 percent. This is one way of curtailing the increased purchasing power of many families and checking the growing demand for consumers' goods which, if allowed to work itself out, would result in an increase in prices. This special tax has been accepted in good grace by French workmen. They realize that with the peasants at the front it is up to them to make a special sacrifice in recognition of the fact that they work in comparative security.

All these measures are designed to increase armament production and still maintain, so far as possible, a normal volume of agricultural and industrial commodities. It is doubtful, however, if this can be done. War orders are bound to result in greater nominal wages, and these in turn will cause an increased demand for consumers' goods and, inevitably, a rise in prices. In addition to stimulating production, then, we must systematically and progressively decrease consumption. At first we worked toward this end only indirectly through increased taxation. Now we have laws forbidding the sale of meat three days a week, closing pastry shops on certain days, reducing allowances for gasoline and alcohol, limiting the size of orders served in restaurants, and in other ways decreasing consumption and avoiding waste. Actually, rationing at present is not necessary in order to conserve supplies; there are no shortages in France. However, we should not delay in regulating consumption even further, not to avoid shortages but to stabilize prices.

We reach France's most important economic problem in considering her relations with other countries. The war inevitably means greater imports of finished manufactures -- such as airplanes and machine-tools -- as well as of certain basic raw materials. It is, therefore, reasonable to expect that the unfavorable balance of trade will again increase, just as it did from 1914 to 1918. Our ability to import gives us a decisive superiority over Germany; for to import in time of war means that others are working for us. We have ample reserves to cover these trade deficits. The flight of French capital abroad, which in recent years caused so many difficulties, has become a favorable factor. We have seen that in the months preceding September about 26 billion francs were repatriated. Since September, and despite the imposition of exchange control in France, repatriation has quickened; and during the last thirteen months 60 billion francs have returned to Paris. Despite our purchases and heavy payments abroad since the outbreak of war, our monetary reserves have actually increased. French investments abroad are no less important. Together, France and Britain have resources abroad totaling 7.5 billion dollars -- gold on deposit in foreign banks, direct investments and marketable securities.

We must, however, think of our gold and foreign securities as reserves, to be used accordingly. Given a long war -- and everything supports the belief it will be that -- these reserves should be kept intact in the early phases so they will be available for the final effort. Moreover, marketable securities can be liquidated only gradually if one wishes to avoid a sharp break of prices. Gold itself -- despite the size of our reserves and the fact that each year Britain receives new gold from South Africa -- should not be used indiscriminately. Otherwise at the end of the war one country will have all the gold and the world will have a serious monetary problem.

To reiterate, our gold and foreign securities should be treated as reserves. We should pay for imports in the normal way, that is, by exports. In this war, the export industries should be thought of as being fully as important as armament industries. Instead of transferring a Parisian seamstress from dressmaking to an airplane factory, where her productivity will be reduced, she should remain at her regular occupation. We should encourage the manufacture of dresses for export and sell them in the United States in exchange for airplanes. Today Schiaparelli as well as Creuzot can aid in national defense. With large exports we shall be able to supplant Germany in the trade of neutral countries and reduce her power of action. Lastly, the existence of an export trade will mitigate the post-war depression. For the export industries will continue to be active when the munition factories have closed their doors.

Although Frenchmen are agreed in recognizing the basic rôle played in their economy by the export industries, it must be frankly admitted that so far the Government has hardly begun applying the policy outlined above. As a matter of fact, one of the first consequences of the outbreak of war was a sharp decline in French exports. The export industries, like many others, were disorganized by the mobilization of men for the army; the cessation of overseas telephone communications, the delay in cables and slow and infrequent mails made foreign business transactions difficult. Submarine warfare simultaneously increased freight rates and the convoy system made great delays in transit.

The French merchant marine has so far suffered very little from submarine warfare; the amount of tonnage lost is really negligible. More important have been the high freight rates and the transfer of a considerable number of ships from the merchant to the military marine. No wonder activity in most French ports during September and October was only half the normal. But here, too, reorganization is bringing improvement. Construction of new tonnage is proceeding at an accelerated tempo; a number of ships taken over by the navy have been restored to commercial uses; and we have engaged a considerable amount of neutral shipping, including a number of Italian bottoms now in use in the Mediterranean trade. Moreover, all available merchant ships, though remaining the property of their owners, have been commandeered by the state for the duration of the war. The state organizes them into convoys and assigns cargo with due regard for the export-import program.

Our commercial policy -- and by "our" I mean the British as well as the French -- is an organic whole and functions in accordance with certain general principles. It has nothing to do with sentiment, but is based on sheer expediency and necessity.

(1) To keep down our unfavorable trade balance we control imports strictly.

(2) We have a definite order of preference for our imports, depending on the country of origin. (a) As a result of the Anglo-French pooling agreement, first preference is given to goods that can be purchased in the two Empires. (b) Second preference is given to products from the neutral countries of Europe. In buying these we achieve a double objective: we strengthen their general economic position and reduce their dependence on Germany. (c) Next in order of preference are countries (e.g. some in South America) which are in default on debts to the Allies, and which by increased sales to France and Britain will be able to resume their interest payments; and countries which are in a position to extend credits to us, thereby permitting us, momentarily at least, to keep our reserves intact. (d) Last in order of preference are countries which at one and the same time demand cash on the barrelhead and refuse to accept any increase in imports from us. From these we shall buy only raw materials and manufactured products which we cannot get elsewhere. (Incidentally, it is inevitable that our increased purchases of American airplanes and machinery, coupled with a decline in our purchases of agricultural products due to our lack of cash, will add to the growing disparity between agricultural and industrial prices in the United States.)

(3) Exports will likewise be consciously regulated. They will be sent to those countries where they can compete directly with German exports and thus reduce Germany's chances of getting foreign exchange. Next in order of preference are the countries to which we shall sell because we wish to buy in return. On all fronts a herculean effort is being made to increase French exports. Special credit facilities have been extended to the export industries. They alone have escaped price control and the heavy war profits tax which consumes nearly all the profits of other businesses. We hope that not only will our export losses of the early months of the war be quickly wiped out, but, with French prices actually lower than world gold prices, French exports will soar.

Two great and harmonious policies thus are at work in France. There is an important productive effort; this, in conjunction with heavy taxation and stiff rationing will keep a balance between supply and demand of certain kinds of consumers' goods, thereby enabling us to avoid inflation or at least limit or delay it. Secondly, there is a policy of stringently regulating imports and encouraging exports; this will enable us to postpone the day when our foreign exchange reserves will be depleted.

We still cannot foresee what will be the chief economic and financial difficulties of the post-war period. But even now we can see that a wise policy of mobilizing our industrial and commercial potentialities will enable us to wage the war for a number of years and to hold out until the final military victory.

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  • ANDRÉ PHILIP, Socialist Member of the French Chamber of Deputies; Professor in the Faculty of Law in the University of Lyons; author of "Labor Problems of the United States"
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