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 d?p?ts et consignations.
After a first book on French monetary policy from 1928 to 1936 entitled
Managing the Franc Poincar?, published in 1991, Ken Mour? (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. “D?camps [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 R?gents, 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 Poincar?, 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 Mour? 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 “Poincar? 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).
Mour? 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 Mour? 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; Mour? 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
Poincar?.) 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.
|Subject(s):||Financial Markets, Financial Institutions, and Monetary History|
|Time Period(s):||20th Century: Pre WWII|