FRANCE has achieved her political revolution in an orderly manner: she has regained stability and established new political institutions to safeguard it. But without an economic renewal the political renewal of the past year would have had no meaning. Consequently, the Government of General de Gaulle has from the very beginning laid emphasis on economic and financial policies which would assure the expansion of production while maintaining monetary stability.

The rehabilitation plan has gone through two stages. From June to December 1958, the Government's action aimed to put the French economy into shape to bear the impact of the rigorous measures which were going to be necessary. The most pressing needs were to control the rise in domestic prices, to limit the balance of trade deficit and to float a large public loan. The success of the loan made it possible to replenish the State Treasury.

The patient work of the French Government during these six months in 1958 set the stage for launching the plan for economic and financial rehabilitation--the economic revolution which would be the necessary counterpart of the political revolution.


After a long period of expansion, the French economy seemed to level off at the end of 1958. In fact, since the preceding spring, but particularly during the latter months of the year, there had been a tendency toward reduced activity in several sectors. This development came later in France than in other Western countries, but its effects were felt at a moment when the disparity between French and foreign prices made it difficult to direct a larger share of the national product into exports. The Government thus was faced with unacceptable alternatives: either to ask for new aid from abroad, something which might have been difficult to obtain, or to cut the volume of imports drastically and deprive industry of indispensable raw materials.

The restraint exercised in drawing up the 1958 budget and the success of the loan floated in June enabled the Treasury to withstand the demands made on it toward the end of the year. But preliminary drafts of the 1959 budget revealed a deficit for the year twice that for 1958; indeed, the difference between inevitable expenses and anticipated receipts, limited to 600 billion francs in 1958, threatened to mount to 1,200 billion.

A deficit of this size could not be covered by borrowing from savings available after the most important investments had been financed. In consequence it would have been necessary to turn to the Institute of Emission and increase the supply of money without being able to find a corresponding expansion in production. That meant inflation.

The French economy thus was subject to serious threats, both externally and internally. Moreover, it seemed obvious to many that in the long run one cannot consume more than one produces, buy more than one sells and spend more than one receives. But few Frenchmen had an exact notion of the spread between the needs and the means of a country weakened by a grave imbalance in these respects. What had to be done first of all, then, was to make the true situation plain to everyone and then to impose a régime of austerity in order to set the nation on a right course and enable it to shoulder the great tasks ahead.

The matters which it had to face and deal with included: (1) to create a modern state administration; (2) to equip the country with means of production comparable to those of other large industrial nations; (3) to undertake the long-delayed construction of housing and schools; (4) to build up the French-African Community; (5) to meet the international commitments under the North Atlantic Treaty, the Organization of European Economic Coöperation, and the Common Market; (6) to pacify Algeria, and develop it economically and socially; (7) to develop new resources discovered on European or African soil; and (8) to raise the standard of living of France's growing population.

The Government could not follow a laissez-faire policy; that would have had serious consequences for the country for many years to come. Yet the evil was of a more or less hidden and creeping character: inflation and running into debt are progressive phenomena, the seriousness of which becomes apparent to the public too late. It therefore was the Government's duty to make a prompt choice between possible policies.


Two methods of intervention could be considered. The first was based on the acceptance, as a given fact, of a certain dose of inflation, with an attempt to neutralize its effect as much as possible. The second assumed a categorical refusal to accept inflation and a determination to endure the consequences of that stand. The choice lay, in a sense, between medical treatment and a surgical operation.

The first method--the medical method--consisted in bringing the budget to a more tolerable level, to something on the order of 900 billion francs. This would be done by carrying out certain budgetary restrictions and by accepting, on the other hand, some inflationary pressures.

This approach could not even pretend to avoid a series of adjustments in prices, wages and salaries growing out of economic difficulties and social conflicts. To keep such increases in check it would be necessary at the same time to maintain provision in the budget for subsidies, with the result that the investment credits allowed for in the budget would have to be reduced. In this manner economic expansion would be jeopardized in the name of encouraging production.

Furthermore, continued price rises would further aggravate the disparity between French and foreign prices and diminish the possibility of exporting French goods. The ability to export could be maintained only on the assumption that foreign trading nations would accept certain commercial advantages which we were not in a position to grant.

Nothing would have been changed fundamentally. The country would have sunk deeper and deeper into the morass. What we would have been attempting would have amounted to what in military terms is called an "elastic defense." It would by its very nature have precluded a return to economic stability in the near future. Under the existing system of escalator clauses linking wages and prices to the cost of living index, partial adjustments would have had an impact throughout the economy. And while opinion abroad would have continued to see us as the eternal laggard, the perpetual beggar of Europe, opinion at home would have begun to doubt that we had the will to bring about the change that was so essential.


The method which we found necessary to adopt was more brutal, but it also was more effective as a means of avoiding at one and the same time monetary inflation, economic recession and external insolvency. This, the surgical method, could be applied in the context of either a closed economy or an open economy, depending on whether or not it was decided to devalue the franc. In either case, the sacrifices demanded would be severe. The results, however, would be far more satisfactory in an open economy.

Unless the franc was devalued, a series of direct governmental controls to hold down inflation would have been required. Prices, wages and salaries would have to be frozen in order to avoid affecting the value of money. If public spending was to be cut, social expenditures would have to be drastically reduced, especially as economic subsidies had proved impossible to eliminate. To secure an increase in fiscal receipts there would have to be heavy taxation of income as well as of wealth.

Some of these measures, especially the ones affecting wage and salary earners, would lead to a restriction of consumption; others, mainly the ones affecting those who save, would result in diminishing investment. There would be a risk of lowering the standard of living and jeopardizing the foundation of economic expansion in order to achieve budgetary equilibrium.

Of the two, the risk of a fall in economic activity was the greater, since a refusal to devalue, even if it did not increase the disparity between French and foreign prices, would at best leave it as it was in 1958, namely on the order of 7 to 10 percent. This would have made any coöperation within the Common Market difficult and any liberalization within the O.E.E.C. imprudent. In order to avoid the risks, France would undoubtedly have declined the proffered opportunities for international coöperation. For if she honored her engagements she would have to bear the consequences under the worst circumstances; and if she renounced them, as would have been almost unavoidable, she would have been forced into a sterile autarchy, and that at a time when almost all Western countries were taking first steps toward convertibility and were seeking new forms of free exchange. The technical measures, moreover, would almost inevitably have had political implications. For a system founded on economic regimentation requires domestic controls that have to be generalized in order to be effective; it also demands isolation from the outside, and although this begins by being economic in character it inevitably becomes political. France did not wish to follow this road.


It was within the framework of a free and open economy, then, that France had to carry out the task of economic rehabilitation. The three immediate objectives were to acquire a competitive commercial position, financial equilibrium and economic expansion. Three sets of decisions had to be taken simultaneously: the franc had to be devalued; the budgetary deficit had to be reduced; investment had to be maintained. None of these would have had any effect without the others.

Whatever approach was chosen, the solution consisted, in essence, of the same series of measures. If one sought first to make French products competitive in foreign markets, it was indispensable, given the disparity between French and foreign prices, to devalue the franc. However, instances when such monetary adjustments failed to have lasting results are unfortunately all too numerous in French financial history. The reason has been the failure to take simultaneously the necessary measures to prevent uncontrolled price rises from absorbing little by little the beneficial results. Consequently, it was deemed of vital importance this time to ward off any kind of inflationary pressure, however small. This implied eliminating all public deficits, which required finding additional sources of income and curtailing expenses. But to maintain the competitive position of the national economy, budgetary restrictions could not be allowed to affect public investment; on the contrary, this must be augmented, for the size of our investments largely determines our competitive position. Thus if our external balance was to be corrected, simultaneous action was needed on the rate of exchange, the budgetary deficit and the level of investment.

The same series of measures would be necessary if one began by trying to establish financial stability in order to halt inflation. Reductions in expenses and increases in revenue would both be needed. In order not to jeopardize the rhythm of productive activity, and, in consequence, fiscal returns, the reductions must not affect investment. Large increases in taxes could not help but have repercussions on prices. The disparity between French and foreign costs would consequently increase. And to compensate for it, devaluation would again be necessary. The reëstablishment of financial stability would thus demand the same series of decisions relating to the elimination of the public deficit, the maintenance of investment and the readjustment of the currency.

The fundamental factor in the development of economic activity is the level of aggregate investment. The State therefore had to make available substantial public credits, significantly larger than those of the previous year, and it had to make deliberate efforts to encourage sufficient private investment by facilitating, among other things, the return to France of capital from abroad. This required first of all that inflation be stopped, for without apparently affecting the amount of allotted investment funds, inflation in reality reduces the volume of operations. Consequently, the deficit could not be maintained at a level beyond the capacity of the Government to borrow from savings.

This assumed also that France would participate in the movement toward convertibility favored by most of our European partners. The franc should not be maintained at a rate which would nullify the possible advantages for us. Furthermore, our economic expansion would require sufficient raw material supplies and market outlets for our production. In other words, the appropriate measures for the correction of our external balance had to be taken without delay, which again meant that devaluation was a necessity.

The Government's general line of attack thus was clearly laid out. A policy which sought to avoid insolvency abroad, recession at home and monetary inflation demanded at one and the same time the devaluation of the franc, the expansion of investment and the elimination of the public deficit. By the same token, this policy permitted full participation in European coöperation. It demanded great efforts and temporary sacrifices; but it opened to France the wide perspectives of a country determined to build its future on a sound basis and to face outwards to the world, not inwards upon itself. If our progress was not to hang continuously in the balance, there was no other road.


Having the foregoing considerations in mind, the French Government chose measures which would obtain the internal stability necessary for the success of the devaluation and take maximum advantage of the opportunities presented by international coöperation.

We shall discuss first the measures looking toward genuine internal stability. In deciding upon them the Government set three kinds of guide lines for itself: it would make reasoned budgetary choices, accept limited price rises and distribute the indispensable sacrifices among all Frenchmen.

1. Reasoned Budgetary Choices. To conform to the plan, essential charges on the budget had to be met. Included in this category were: (1) The servicing of past loans, which the State could not repudiate; this by itself took 10 percent of the budgetary expenditure in 1958. (2) Public services; the cost of these had to be reduced, but not beyond the point at which they could perform their indispensable role in the life of the nation. (3) The carrying out of fixed national policies supported by public opinion.

For instance, the funds for national education had to be increased in order to obtain the new teachers needed to cope with the upward demographic trend. More housing and more schools had to be built. In addition, the expenses of the Algerian policy had to be met.

There could be no doubt, further, of the absolute necessity of financing the investments needed to maintain economic activity at a high level. Between 1958 and 1959 the total of credits made available for investment rose from 1,124 billion francs to 1,470 billion. Today they represent almost one-fourth of the total charges on the budget. Of the total, the expenditures for civil purposes (schools, atomic energy, public works, agriculture, equipment of Algeria, etc.) amount to 618 billion, about 20 percent more than in 1958. Investment loans granted by the State have risen from 233 to 335 billion, partly as the result of the transfer to public funds of that part of the investment in nationalized enterprises which was previously financed through medium-term credits rediscounted by the Bank of France. The investment programs of these enterprises are themselves increasing yearly by 85 billion. Authorized disbursements for the construction of medium-cost dwellings have gone from 155 to 184 billion; it has been decided to undertake an additional 50,000 dwellings in three years.

After meeting these permanent requirements, the Government's area of action seemed very restricted. It had a free hand only to deal with the remaining expense items and with receipts.

In the field of expenditures the State itself set an example by realizing important economies. Administrative expenses have been strictly limited. Taking into account the continuance of operations in Algeria, military expenditures have been reduced to the minimum compatible with the needs of national defense. In the end, efforts had to be concentrated on reducing the expense of economic and social subsidies.

Here the Government kept in view a double objective. First, it aimed to restore the price of goods or services to the level of real production costs, thus making sure that all taxpayers would not have to bear a share of what should be borne solely by the user or consumer. Second, it aimed to avoid choosing measures which would have indirect repercussions on the budget of a sort to cancel out the over-all benefits of the new fiscal policy.

In all, 257 billions have been obtained by price increases by nationalized enterprises and by eliminating or reducing subsidies and exemptions. This has led to a rise in the price of certain food products.

Regarding social matters, the Government has evaluated the relative utility of various charges on the budget in an effort to lighten those which could be considered the least indispensable or might offer opportunities for abuses, as in the case of subventions to health resorts. The Government has also demanded new sacrifices from certain war veterans by eliminating their pensions. And it has rearranged certain excessively expensive benefits of the social security system. All in all, 75 billions have been saved by these measures--without, moreover, infringing on the essential elements of the French social security system.

On the income side of the ledger, the fiscal measures adopted affect almost all taxes, starting with those which have only a very general effect on prices, such as taxes on corporations (for which the rate rose from 47.6 percent to 50 percent) and the proportional income tax which was increased from 19.8 percent to 22 percent. The Government wished also to catch persons whose style of living is manifestly above what might be expected on the basis of their declared income. Determined to establish fiscal justice, it has standardized methods for evaluating external signs of wealth.

As a result of these measures, direct taxes increased from 36.8 percent to 39.2 percent of all fiscal receipts. But the Government could not stop here. It had, in addition, to increase certain indirect taxes, particularly those on wine and other alcoholic beverages; and it has introduced also some simplifications and rearrangements in other areas. Finally, it has eliminated certain special taxes which either have not been very productive or are difficult to collect.

In the aggregate, these measures have made it possible to reduce the deficit to 587 billion, as against a deficit in 1958 of 600 billion.

2. A Limited Rise in Prices. In their cumulative effect the financial measures undertaken led almost inevitably to some rise in retail prices. Account had to be taken also of the indirect and secondary effects of these same measures on the prices of producer goods. And there had to be added certain increases in wages and salaries in consequence of the devaluation. But it was expected that counterbalancing forces would be at work. The behavior of the consuming public, the movement of the business cycle and the liberalization of the exchange could be expected to limit the influence of governmental measures on the price level.

The Government deliberately accepted the risk of a price rise which would give major prices a more realistic level and put them more in line with the cost of each good or service. A stable and lasting equilibrium was expected to result. At the same time the Government made plain that it would put limits on the rise.

It has definitely refused to accept any escalator clauses based on general price indexes. The budgetary reform assures that no imbalance in public finances will cause inflation, hence there no longer is any need to introduce the guarantees--in practice often illusory--of automatic adjustment clauses. Such clauses, particularly for agricultural prices, have therefore been eliminated.

The Government wished also to compensate the lowest paid wage earners for the price rises that were inevitable. Therefore, it ordered a special increase of 4.5 percent in the minimum legal wage.

3. Distributing Inevitable Burdens Widely. The magnitude of the sacrifices demanded was justified. The Government has tried to see that they were fairly distributed. Those engaged in agriculture and those who are wage and salary earners represent nearly three-fourths of the population and provide about 70 percent of the national income. The rise in the cost of living and the reduction of certain benefits have resulted in over-all losses of purchasing power, but the régime of austerity has at least affected all classes with approximately equal weight.

Now let us turn to the measures which would take the maximum advantage of the opportunities offered by international coöperation.

The new exchange rate was designed to compensate for the price disparities existing at the end of 1958 between French and foreign commodities and goods. It also would absorb the indirect rises which resulted from the Government's financial measures. And it would provide in addition a slight safety margin to guarantee the operation's complete success. Given these diverse objectives, the rise in the exchange rate had to be between 15 and 20 percent. The figure adopted was 17.55 percent.

In the second place, the liberalization of exchange which accompanied the devaluation should be in line with French commitments to the O.E.E.C. This made it possible to reassure France's partners in the Common Market, to satisfy the members of O.E.E.C. and to put France in a more favorable moral position in future negotiations. It also offered the possibility of influencing domestic prices through supplementary imports, in case one sector or another of the economy should get out of kilter.


The first results of the governmental action described above bear testimony to its effectiveness and also to the discipline of the French public.

The rise in domestic prices has remained within the limits foreseen, without a price freeze and without artificial measures. Four months after the economic and financial rehabilitation plan was introduced, retail prices had risen only by 4 percent.

The level of economic activity is equally satisfactory. Compared to her neighbors, France has been affected very little by the recession. The number of workers drawing unemployment benefits in France is now only 32,000; in other West European countries the figure amounts to several hundreds of thousands, even several millions. In addition, the average length of the work week is between 45 and 46 hours, which means that overtime payments are being made to many industrial workers.

On the money market as well as on the financial market a relaxation has set in. The Bank of France has been able to bring the rediscount rate back by successive stages to 4 percent. As for the Treasury, though it has given authority for loans to be placed by public subscription, it has been able to avoid borrowing directly in the market. Thus industrial investments can at present be financed either through less expensive and more abundant means or in a financial market where the State itself has not borrowed heavily.

In the international sphere, the evolution has been favorable to France. Taking into account freight and insurance charges, the results for the early months of 1959 show a tendency towards an equilibrium.

Incidentally, there has been quite a striking awakening of an export mentality among French producers. Industrialists and traders have begun to understand that success in foreign markets is not only a question of price, but also depends on organization, prospecting for customers and establishing commercial connections. For the first time since the war, the level of imports is no longer being controlled by artificial means. Import controls have been reduced to a minimum and purchases of raw materials and finished goods now correspond to the demand.

In the financial sphere, finally, the inflow of foreign exchange has continued without interruption, proving that a climate of confidence has been reëstablished. It has been possible for France to decline the aid offered by large foreign banks and to restore the allocation of foreign exchange to French tourists wishing to travel abroad.

The sacrifice required from our people to put these reforms into operation has been very great, and it must continue for some time yet if the country is to audit its accounts with the past and make a definite recovery. What is particularly comforting is that Frenchmen have really grasped the meaning of the effort they are asked to make.

Above and beyond the inevitable adjustments which necessarily are part of the transition from an inflationary situation to durable monetary stabilization, the French economy has demonstrated that it remains healthy and that it intends to occupy the position which becomes it in the European Common Market.

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  • ANTOINE PINAY, Minister of Finance of France; former Prime Minister and Minister of Foreign Affairs
  • More By Antoine Pinay