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Published by EH.NET (January 2003)
Kenneth Moure, _The Gold Standard Illusion: France, the Bank of France, and
the International Gold Standard, 1914-1939_. New York: Oxford University
Press, 2002. xiv + 297 pp. $72 (hardcover), ISBN: 0-19-92490-4.
Reviewed for EH.NET by Pierre Sicsic, Caisse des dépôts et consignations.
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After a first book on French monetary policy from 1928 to 1936 entitled
_Managing the Franc Poincaré_, published in 1991, Ken Mouré (Department of
History, University of California, Santa Barbara) expands here his analysis
by looking at the whole period from 1914 to 1939. He is the first historian
to make such an extensive use of the archives of the Bank of France. He
provides the reader with a well-balanced, complete and up-to-date review of
the literature. There is, however, a lack of commentary on core economic
variables which would help to set the stage and provide a thread to follow
the drama. The underlying variables up to the stabilization are the public
debt and the advances of the Bank of France. Some discussion of the size of
these variables relative to output is needed. I believe the most important
variable to look at is the real rate of interest which increases in case of
deflation, hence the Great Depression. A successful stabilization, as well
as a successful devaluation, permits a decrease in the long-term real rate
of interest. I know these variables are not easily obtained but they
constitute the necessary information for economic analysis of monetary
policy.
Two very important points are made in the first half of the book. First,
the theory of stabilization and deflation was well understood at the
beginning of the 1920s. Second, delay in stabilization at the end of the
twenties was a powerful weapon in parliamentary politics.
The third chapter explains that the causality running from monetization of
the public debt to the exchange rate and the interplay between repayment of
the advances from the Bank of France by the Treasury, German reparations,
deflation, and finally return to the pre-war parity were already then well
articulated. There was an unsurprising opposition between the Central Bank
and the Treasury because of the scheduled repayments. "Décamps [the chief
economist of the Bank] offered a moderate, informed, and logically
consistent justification for deflation" (p. 60).
By 1924, after German default on reparations and tax increases, the
economic situation was ripe for stabilization. But the Bank of France and
its board of directors (the Régents, private bankers and large
industrialists) were politically opposed to the new left wing government
which followed the elections. The Bank made sure this government entangled
itself in a sham coming from falsified balances sheets that had not been
requested by this government. Later on, the reversal of political alliances
within the elected parliament leading to a government headed by Poincaré,
who had lost the 1924 elections, would not have been possible without the
threat to the franc. This is the story told in chapter 4, and Mouré warns
correctly that any explanation to the last crisis of the franc in 1926
relying on strictly economic grounds (fiscal policy, inadequate rates on
short-term government bills) is going to "understate the importance of the
political crisis" (p. 103). To explain the delay between the de facto
stabilization in December 1926 and the de jure stabilization in June 1928
Moure argues that "Poincaré realized the great political utility of de
facto stabilization. It kept alive the threat of capital flight that bound
the Radicals to his Union Nationale coalition ... at the same time it
offered the determined revalorisateurs of the Right the prospect of further
appreciation" (p. 114).
Mouré is very convincing because he is able to discard the economic
explanations of the 1924-1926 turmoil he had previously reviewed before
turning to political history sources. Following the same political seam he
debunks the possibility of any relevant central bank cooperation by
explaining that the overall international political environment depended
upon issues of reparation and war debt repayment.
The weaker part of the book is the next to last chapter which mixes the
post-1936 period with comments from Bank of France officials about open
market operations made in 1928.
On the first issue the following point should have been made on the 1936
devaluation: while there is now agreement among economic historians that
devaluation had been everywhere else than in France the remedy to the Great
Depression, it did not go well in France.
On the second issue Mouré quotes confidential memos written by Rist arguing
against open market operations supported by Quesnay, also in the Bank,
because only some part of the market (the counterparties) would be served
in these operations. Rist was then deputy-governor; Mouré told us before
that Rist and Quesnay were the leading thinking force pushing for
stabilization in 1926, and Rist had been before quite right about the
exchange rate policy: "Rist soon realized [after the war] that restoring
the franc's pre-war parity would extract too high a cost" (p. 51)
It would take as great a Francophobe as Keynes to believe that Rist could
not have grasped the substance of the money market. (Keynes said in 1930:
"Both in official and academic circles in France it is hardly an
exaggeration to say that economic science is non-existent," quoted p. 39 in
_Managing the Franc Poincaré_.) What matters is that interest rates on the
best paper would be the same for transactions involving or not the Central
Bank. Perhaps Rist was using this traditional argument within the Bank
because he was opposed to open market operations for some other reason, and
he used that argument knowing it was wrong. This is the problem with the
history of ideas and use of archives from large institutions: you never
know whether the argument is sincere.
Fortunately the book ends with a conclusion which does not mention the
weaker parts. One conclusion is that "the stabilization process paid
insufficient attention to currency valuation" (p. 262). This view on the
level of stabilization will settle our debate over deliberate
undervaluation in 1928 (reviewed p. 129). It is worth recalling that from
the end of 1923 to the middle of 1925 the exchange rate in dollars relative
to the pre-war parity was about a third. It crashed to 0.13 in July 1926,
then jumped back and was stabilized to 0.21. After the dollar devaluation
in 1933 this exchange rate was 0.36. The bottom line of the book is that
"French authorities resisted rethinking their battle-hardened faith in
gold, which seemed to have yielded extraordinary benefits in the years 1926
to 1932" (p. 264). Yes, the Gold Standard was an illusion, and it looked so
potent because it was the outcome of the miracle of 1926.
Pierre Sicsic is author of "Threat of a Capital Levy, Expected Devaluation
and Interest Rates in France during the Interwar Period" with
Pierre-Cyrille Hautcoeur, _European Review of Economic History_, 1999.
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Published by EH.Net (January 2003). All EH.Net reviews are archived at
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