The Gold Standard Illusion: France, the Bank of France, and the International Gold Standard, 1914-1939

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.