----------------- HES POSTING ----------------- 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. <[log in to unmask]> 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. Copyright (c) 2003 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ([log in to unmask]; Telephone: 513-529-2850; Fax: 513-529-3308). Published by EH.Net (January 2003). All EH.Net reviews are archived at http://www.eh.net/BookReview ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]