Fluctuating Exchange Rates in Countries with Relatively Stable Economies: Some European Experiences After World War I
Publication Date:
01 Jan 1959
eISBN:
9781451979015
Language:
English
Keywords:
SP; rate; sc; interest rate; commercial paper rate; call loan; Norwegian krone; franc exchange rate; market rates of interest; dollar exchange; Exchange rates; Currencies; Discount rates
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IN DISCUSSIONS OF EXCHANGE POLICY in recent years, the point has frequently been made in criticism of freely fluctuating exchange rates that, under such exchange systems, speculation can generally be expected to have a cumulative destabilizing influence, which will exaggerate any movements in the exchange rate and which might readily cause the breakdown of the exchange system. To support this contention, the historical experience of the interwar period, in particular that of the French franc from 1919 to 1926, has frequently been invoked.1

Abstract

IN DISCUSSIONS OF EXCHANGE POLICY in recent years, the point has frequently been made in criticism of freely fluctuating exchange rates that, under such exchange systems, speculation can generally be expected to have a cumulative destabilizing influence, which will exaggerate any movements in the exchange rate and which might readily cause the breakdown of the exchange system. To support this contention, the historical experience of the interwar period, in particular that of the French franc from 1919 to 1926, has frequently been invoked.1

IN DISCUSSIONS OF EXCHANGE POLICY in recent years, the point has frequently been made in criticism of freely fluctuating exchange rates that, under such exchange systems, speculation can generally be expected to have a cumulative destabilizing influence, which will exaggerate any movements in the exchange rate and which might readily cause the breakdown of the exchange system. To support this contention, the historical experience of the interwar period, in particular that of the French franc from 1919 to 1926, has frequently been invoked.1

The case for or against fluctuating exchange rates is, of course, not to be settled merely by an examination of the question whether they are liable to abnormal and exaggerated movements under the pressure of speculative influences. Many other important relevant considerations must be taken into account. Moreover, the point that exchange rate policy is never something to be determined by itself and without reference to other elements of economic policy always deserves to be stressed. The question is, however, of sufficient interest to warrant a re-examination of some of the historical illustrations which have already played a part in the debate on exchange policy. After the conclusion of World War I, several European countries allowed their exchange rates to fluctuate for a period of several years, with little intervention by the monetary authorities. Where there was violent and uncontrolled domestic inflation, e.g., in Austria, Germany, and Poland, the currency rapidly depreciated to an infinitesimal fraction of its original value in terms of gold or dollars. However, in several countries with freely fluctuating rates, the internal economies were not violently unstable. An examination of the experience of these countries suggests that under sound monetary and fiscal conditions a freely fluctuating exchange rate need not necessarily be liable to exaggerated fluctuations. Where violent exchange instability resulting from speculative activities did occur, the underlying condition of the instability can usually be traced to a supply of money and credit which was excessively elastic with respect to the interest rate; this permitted self-aggravating speculation in a cumulative process of general expansion as described by Wicksell.

Notable examples of such countries are the United Kingdom and, with some qualification, France and Norway. The United Kingdom on August 18, 1919 withdrew the exchange restrictions that had been applied in wartime. From that date, it was once more permissible to remit money abroad, to import securities, or to speculate in foreign exchange, although foreign capital issues continued to be subject to Treasury license. In November 1919, this remaining restriction was removed. The Bank of England’s gold reserve remained practically unchanged from the end of 1920 to the restoration of the gold standard in April 1925 (Table 1). The enormous increase during 1920 was due to the concentration in the Bank of England of the gold holdings of the joint stock banks, in accordance with the recommendation of the Cunliffe Committee, rather than to any intervention by the Bank of England on the gold and exchange market. There was practically no official support of the exchange market during 1920–24 except perhaps that the Bank, acting as the agent for the Treasury in buying dollar exchange to service the U.S. and Canadian debts, might have exerted some influence on the exchange rate through the timing of its purchases.

Table 1.

Foreign Exchange Reserves and Trade Balance of the United Kingdom, 1919–251

(In millions of pounds sterling)

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Based on data from League of Nations, Memorandum on Currency and Central Banks and Memorandum on International Trade and Balances of Payments.

In France, the law of April 3, 1918 which prohibited, except by permission of the Commission on Exchange, the export of capital and the import of securities and negotiable instruments was, nominally, not repealed until after the currency stabilization of 1926. However, this law was applied very liberally by the Commission after the war. It was generally admitted that, without the same rigorous control and supervision at the frontiers as was exercised during the war, the law could not be effectively enforced. Thus, for practical purposes, we may regard France as having no effective exchange control after World War I.

The franc was unpegged in March 1919. After that, official support of the exchange rate was said to have ended, except that during 1919 and 1920 certain essential foodstuffs were still imported by the Government. These imports were largely financed by the French Government by drawing on the gold and foreign balances and credits of the Bank of France (including F 518 million which remained from credits granted by the U.S. Treasury to the French Treasury); in fact, during 1920 these balances declined by F 774 million (gold francs). After 1920, and until the stabilization of the franc at the end of 1926, changes in the gold reserve and balances abroad of the Bank of France were insignificant, both in proportion to the existing total gold and foreign exchange reserves and in proportion to current trade balances (Table 2). Thus, apart from three well-known instances of official intervention in the exchange market,2 the external value of the French franc, from its unpegging to its stabilization, might be regarded as determined from day to day by the free play of supply and demand in a market operating without any official intervention.

Table 2.

Foreign Exchange Reserves and Trade Balance of France, 1919–261

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Based on data from League of Nations, Memorandum, on Currency and Central Banks and Memorandum on International Trade and Balances of Payments.

Change from last quarter of preceding year.

The Norwegian krone was cut loose from its gold anchor by the imposition of restrictions on the import and export of gold and by the fact that the conversion of notes into gold was made conditional upon a declaration that the gold so obtained would not be exported. Otherwise, there was no restriction on exchange dealings. The gold reserve of the Bank of Norway was unchanged from 1920 through 1927. There were some minor variations in the Bank’s foreign assets, but the changes were quite small compared with the annual balance of trade. In particular, during the crucial period of renewed krone depreciation in 1923 (owing to resumed internal inflation) and the subsequent reversal of this trend in the first half of 1924, changes in the foreign assets of the Bank of Norway were insignificant (Table 3). Thus, the experience of the Norwegian krone after World War I, in particular during the crucial period mentioned above, provides another illustration of a practically free floating exchange rate at a time when there was a certain amount of stress from internal inflation.3

Table 3.

Foreign Exchange Reserves and Trade Balance of Norway, 1919–271

(In millions of kroner)

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Based on data from League of Nations, Memorandum on Currency and Central Banks and Memorandum on International Trade and Balances of Payments.

Change from last quarter of preceding year.

For each of these countries, direct statistics on speculative capital movements are generally not available for the period concerned. Even if the statistics of the capital accounts of the balances of payments of these countries were better than they actually are, there would be no way of distinguishing speculative from nonspeculative capital movements. Furthermore, speculation in foreign exchange may have taken the form of postponement or anticipation of exports and imports and thus have remained hidden in the trade account of the balance of payments. Therefore, in this study, an indirect measure of speculative activity—the deviation of the fluctuating exchange rate from the purchasing power parity of the currency concerned—is taken as the main indicator of the pressure of abnormal speculative forces. Admittedly, the equilibrium rate of exchange that is established if there is no speculation does not necessarily coincide with the purchasing power parity. Changes in reciprocal supply and demand conditions or in the degree of employment maintained in the countries concerned, differences in the nature of the price indices employed, etc., may prevent the purchasing power parity from being an exact and reliable indicator of the equilibrium rate that would maintain the balance of normal international payments and receipts. Nevertheless, even though the absolute gap between the exchange rate and the purchasing power parity at any particular moment probably does not necessarily signify a divergence of the exchange rate from the equilibrum rate, a tendency for the rate to deviate more and more from the purchasing power parity within a fairly short period may be taken as due largely to speculative pressure unless it can be accounted for by nonspeculative factors, such as sudden changes in supply and demand conditions for exports or imports or in nonspeculative capital movements.4

A Fluctuating Exchange Rate with Declining or Stable Domestic Prices

The experience of the United Kingdom from the middle of 1920 to the return to gold in April 1925 provides an illustration of a freely fluctuating exchange system in a period when domestic prices were declining or were stable. In Chart 1, the fluctuations of the sterling-dollar exchange rate are compared for the years 1919–25 with the fluctuations in the ratio of the wholesale price index in the United Kingdom to that in the United States. The U.S. dollar is taken as the standard of comparison because of its free convertibility into gold and the complete absence of restrictions on foreign exchange dealings in the United States after June 1919.

Chart 1.

Wholesale Prices in the United Kingdom and Exchange Rate and Purchasing Power Parity of Sterling, 1919–25

(Logarithmic vertical scale)

A05ct01

Sources: League of Nations, Memorandum on Currency, Memorandum on Currency and Central Banks, and International Statistical Year-Book.

1 Index computed by the Federal Reserve Board for comparison with the United States (1913=100). 2 Federal Reserve Board index of wholesale prices in the United Kingdom divided by Federal Reserve Board index of wholesale prices in the United States (1913 = 100). 3 Cost of dollar in pounds as percentage of par.

The major fluctuations in the sterling exchange rate, of which there were three, were concentrated in 1920 and 1921, the two turbulent postwar years, when inflation and scarcity were followed by a sharp worldwide recession. After 1921, when internal prices in the United Kingdom were more or less stable, the fluctuations of the exchange rate were mostly minor. If progressive deviation of the fluctuating exchange rate from the purchasing power parity is to be taken as an indication of the pressure of abnormal speculative forces, there are only two likely cases of the destabilizing influence of speculative activity, viz., sterling’s sharp depreciation from November 1919 to February 1920 and its rapid appreciation from December 1920 to May 1921.

After the unpegging of the pound early in 1919, the cost of the U.S. dollar in terms of the pound rose steadily, reflecting the gradual adjustment of the exchange rate to the relative purchasing powers of the two currencies as more normal trade relations were resumed and restrictions on exchange dealings were gradually removed. Toward the end of 1919, the rise in the cost of the dollar (in terms not only of the pound but of practically all European currencies) noticeably increased in speed—and far outstripped the rise in the relative purchasing power of the dollar—until a peak was reached in February 1920.

A progressive deviation of this kind of the actual exchange rate from the purchasing power parity suggests that the destabilizing influence of speculation was probably at work. However, factors other than speculative capital movements contributed strongly to the almost universal sharp depreciation of European currencies toward the end of 1919 and during the opening months of 1920. According to some authorities,5 the sharp depreciation of European currencies at that time was induced to a large extent by the monetary policy of the Federal Reserve Board. Ever since the early months of 1919, U.S. exporters had been exporting on a large scale to Europe and receiving depreciating currencies in return. Such export credits provided strong support for the European currencies despite the fact that the exchange rates of some were probably above their respective purchasing power parities. Such export credits, therefore, really constituted a kind of speculative capital flow in a stabilizing direction. To hold these balances abroad, however, it was necessary for the exporters to obtain advances in dollars from their bankers in the United States. Toward the end of 1919, the Federal Reserve authorities, being concerned about the inflationary tendency in the United States itself, repeatedly exhorted the commercial banks to be cautious in lending. Beginning in November 1919, the authorities successively raised the discount rate from 4 per cent, the rate effective in October, to 6 per cent at the end of January 1920. The market rates of discount for commercial paper quickly responded. From 5¼ per cent in October 1919, the rate in New York rose to 6 per cent in the second half of December, and by the end of February 1920 it was almost 7 per cent. The rise of the interest rate on call loans in New York was even more spectacular. In September 1919, the rate averaged 6.10 per cent; in certain weeks of January and February 1920, the averages were such phenomenally high figures as 16 per cent and 17 per cent.6 Thus, as shown in Table 4, the market rates of interest in the closing months of 1919 and the opening months of 1920 were actually higher in the United States, the currency of which was then freely convertible into gold, than in any of the European countries studied here, although the currencies of these countries had been subjected to a much greater degree of internal inflation and during 1919 had depreciated relative to the dollar.

Table 4.

Rates of Interest in the United States and Selected European Countries, 1919–21

(In per cent)

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Sources: International Conference of Economic Services, International Abstract of Economic Statistics, 1919–1930 (London, 1934), and Board of Governors of the Federal Reserve System, Banking and Monetary Statistics (Washington, November 1943).

Rate prevailing at the end of the month.

Monthly average rate.

Monthly average of maximum and minimum rates.

U.S. banks responded to the Federal Reserve Board’s warning of inflation and to the sharp rise in the discount rate by vigorously calling in their loans, and the flow of export credits to Europe, i.e., the speculative capital that exerted a stabilizing influence upon the European currencies, was suddenly shut off. The exchange markets in Europe were thus struck with something approaching panic. Practically every European currency depreciated sharply.7 Thus, the abrupt stoppage of the outflow of stabilizing speculative capital from the United States rather than a spontaneous and cumulatively growing speculative demand for dollar exchange in European countries appears to have been the principal cause of the sharp depreciation of sterling—and indeed of almost all European currencies at that time.

The abrupt recall of U.S. credit and the sharp depreciation thus caused does not seem to have started a cumulative flight from the pound, however. The depreciation that did occur was soon reversed in March 1920, apparently without any major government intervention in the exchange market or any drastic monetary measures. By April, the pound had recovered to a level above its December quotation although there was no relaxation of the tight money policy in the United States; indeed, that policy was further tightened in May.8

The second major upswing of the dollar exchange rate in the United Kingdom, which started in June 1920, does not appear to have been brought about by destabilizing speculative capital movements, for it followed closely the rise in the purchasing power parity of the dollar in terms of the pound. Furthermore, the purchasing power parity of the dollar did not rise because of any increase in the United Kingdom in domestic prices, which had indeed started to decline by then, but because of the relatively more rapid fall in prices in the United States, where a recession set in after June 1920.

The sharp appreciation of the pound that followed from December 1920 to May 1921 again carried its exchange rate away from its purchasing power parity, leading on this occasion, however, to progressive overvaluation, instead of undervaluation, of the pound in terms of the dollar. This suggests destabilizing speculative capital movements in favor of the pound. There appear to be some reasons for believing that, to a certain extent, this was the case. The decline in world market prices of primary commodities following the U.S. recession put an end to heavy European buying for restocking. The reduced demand from European countries for wheat and cotton from the United States was believed to have intensified agricultural distress in the United States. Increased political pressure was therefore brought to bear on the U.S. Government to establish large export credits as a measure to relieve agricultural depression. In January 1921, the U.S. Secretary of the Treasury was authorized by a joint resolution of both Houses of Congress to revive the activities of the War Finance Corporation in financing U.S. exports. At about the same time, negotiations for refunding the British debt to the United States were started with a visit by Lord Chalmers to New York. Both these developments encouraged substantial speculative purchases of sterling.

This optimistic mood carried the dollar exchange rate of the pound to a peak in May 1921, considerably above its purchasing power parity. In June, the tide again turned and the third major postwar wave of sterling depreciation started. This movement, however, appears to have merely narrowed the gap between the exchange rate of the pound and its purchasing power parity, which had been widened by the preceding wave of optimism. The evaporation of the excessive optimism might be partly accounted for by labor disputes in the United Kingdom. A coal miners’ strike started on April 1 and lasted until July 1; and for several weeks in June (June 6–24), workers in the cotton industry also were on strike. These disputes in the two chief export industries of the United Kingdom were sufficient to dispel the excessive optimism which speculators had entertained about sterling. Moreover, heavy purchases of dollars by the German authorities on reparations account in the last week of May and the first week of June, following a decision of the Reparations Committee that it would accept part of the German reparations payments in dollars in New York, was a direct cause of the sharp rise of the dollar exchange rate in June.

This sharp decline in the dollar value of the pound, however, appears not to have generated any significant cumulative speculative flight from the pound. For in August 1921, when the exchange rate of the pound became more in line with its purchasing power parity, it began to appreciate with the gradual increase in its purchasing power relative to that of the dollar.

After August 1921, the movements in the exchange rate of the pound followed more or less closely the broad movements in its purchasing power parity up to the stabilization of the pound in April 1925. There was another period, viz., March to October 1922, during which the exchange rate again diverged from the purchasing power parity to a considerable extent. At that time, however, the divergence was caused by the relative stickiness of the exchange rate of sterling in face of a continued increase in its relative purchasing power, rather than by any tendency for the exchange rate to fluctuate more than the purchasing power parity. This interruption in the appreciation of sterling was probably induced initially by another round of labor disputes, which led to a lockout in the engineering industry lasting from March 12 to June 13. The situation was further aggravated by the deadlock over German reparations after a proposal to grant a foreign loan to Germany fell through in June. The deadlock over German reparations shut off the supply of U.S. loans to Europe.9

After October 1922, with the further progress and final success of the negotiations for funding the British war debt to the United States, the pound appreciated, the gap between the exchange rate and the purchasing power parity narrowed, and there were no further major divergences between the exchange rate of sterling and its purchasing power parity.

If the immediate postwar years of abnormal scarcity and inflation followed by a sharp recession, i.e., 1919–21, are omitted and only those years when conditions had returned more or less to normal are taken into account, viz., 1922 up to the restoration of the gold standard in the United Kingdom, the record shows that the exchange rate of the pound fluctuated much less than either the domestic price level in the United Kingdom or the purchasing power parity of the pound in terms of the U.S. dollar. This interesting fact is shown by the following comparison of the standard deviation of the exchange rate of the pound, measured from its own 12-month moving average, with the standard deviations first of the domestic wholesale price index in the United Kingdom and then of the purchasing power parity of the pound in terms of the U.S. dollar, similarly computed: exchange rate, 1.6; wholesale price index, 2.5; purchasing power parity, 2.2.10

According to this criterion, once the turmoil of the immediate postwar inflation and recession was over, the exchange rate of the pound was, until the restoration of the gold standard, definitely more stable not only than domestic wholesale prices but also than the purchasing power parity of sterling in terms of the U.S. dollar. The relative stability of the exchange rate implies that, over the periods concerned, speculative activities on the exchange market were mainly in a stabilizing direction.

A Fluctuating Exchange Rate with Moderate Internal Inflation

In France and Norway, the postwar recession of 1920–21 was followed not, as in the United Kingdom, by a persistent deflationary policy with a view to restoring the prewar exchange rate, but by some degree of inflation. A comparative study of the experiences of these two countries is particularly interesting: in France, the resumption of inflation led to repeated exchange crises in which the exchange value of the franc had to be protected by drastic government interventions; but in Norway there was no exchange crisis even though the Government did not intervene in the exchange market.

Norway

In the early postwar years 1920 and 1921, the pattern and the timing of the fluctuations of the exchange rate of the Norwegian krone were similar to those of sterling (compare Charts 1 and 2). This indicates that probably the same international factors were at work in causing the three waves of depreciation of both currencies during 1920 and 1921. In Norway, as in the United Kingdom, there was apparently no indication of a self-aggravating speculative flight of capital during those two years. The first wave of depreciation, induced chiefly by the abrupt tightening of credit in the United States, did not carry the exchange rate of the krone much below its purchasing power parity. The sharp depreciation of the dollar value of the krone from May to November 1920 was no more than parallel to the decline of its purchasing power parity in terms of the dollar, which was the result of a combination of steeply rising prices in Norway up to September 1920 and declining prices in the United States after June 1920. The resumed depreciation of the krone in 1921 was probably also a reaction to the over-optimism generated by the revival of the activities of the U.S. War Finance Corporation in financing U.S. exports and the resumption of normal import demand after a temporary drop following the heavy postwar demand for restocking. Again, as with the pound, depreciation did not go much beyond the purchasing power parity. After the rate had depreciated approximately to the level of the purchasing power parity, the movement stopped, and the rate then appreciated with the gradual increase in the relative purchasing power of the krone in terms of the dollar.

Chart 2.

Wholesale Prices in Norway and Exchange Rate and Purchasing Power Parity of Norwegian Krone, 1920–27

(Logarithmic vertical scale)

A05ct02

Sources: League of Nations, Memorandum on Currency, Memorandum on Currency and Central Banks, and International Statistical Year-Book.

1 Økonomisk Revue index (1913 = 100) for period 1920–25; official index (1913 = 100), 1926–27. 2 Index of wholesale prices in Norway (Økonomisk Revue index, 1920–25, official index, 1926–27) divided by Bureau of Labor Statistics index of wholesale prices in the United States (1913 = 100). 3 Cost of dollar in Norwegian kroner as percentage of par.

The movements of the Norwegian exchange rate after the recession of 1921–22 are of greater interest. From the beginning of 1923, Norway again entered a period of rising prices, which lasted until March 1924. Throughout this period of renewed inflation, the exchange rate (expressed in terms of kroner per dollar) tended to rise faster than, and to deviate rather widely from, the purchasing power parity of the dollar in terms of the krone. This seems to indicate a growing speculative demand for foreign exchange in Norway as people began to anticipate further declines in the value of the krone.11 This tendency, however, was arrested by a vigorous tight money policy. In November 1923, the Bank of Norway raised its discount rate to 7 per cent (the discount rate in the United States was then 4½ per cent and in the United Kingdom 4 per cent), after having raised it from 5 per cent to 6 per cent in May. It also vigorously contracted its credit and money supply. The Bank of Norway’s assets in the forms of commercial bills, investments, and loans and advances were reduced from NKr 413.6 million at the end of 1923 to NKr 373.3 million at the end of March and NKr 331.9 million at the end of December 1924. Notes in circulation plus current accounts at the Bank of Norway (other than government deposits) were reduced from NKr 521.4 million at the end of 1923 to NKr 474.8 million at the end of March and NKr 501.3 million at the end of December 1924.12 Such stringent monetary measures soon slowed down the rate of price increase and checked the decline of the purchasing power parity of the krone relative to the dollar. It was also remarkably effective in curbing the speculative demand for foreign exchange; for the krone began to appreciate after the end of February 1924, even before internal prices stopped rising, and the gap between the exchange rate and the price parity was rapidly closed. As pointed out above and as may be seen from Table 3, there were hardly any appreciable changes in the Bank of Norway’s holdings of gold and foreign assets from March 1923 to June 1924, a fact which indicates that there was no direct intervention by the monetary authorities in the exchange market during this crucial period of exchange depreciation and its subsequent reversal. In the third and fourth quarters of 1924, the Bank’s holdings of foreign assets increased a little, indicating that the effectiveness of monetary measures was such that the appreciation of the krone continued in spite of the Bank’s additions to its foreign assets.

From March 1925, wholesale prices in Norway began to decline rapidly. This time the exchange rate of the krone showed a tendency to appreciate faster than the rise in its relative purchasing power, despite the fact that the Bank of Norway continued to add to its foreign assets; this indicated some speculative anticipation of the continuous appreciation of the krone toward its prewar par.13 The case of Norway is, therefore, of particular interest as it includes both an inflationary and a deflationary phase after the postwar recession.

France

Except for some differences in the timing of the turning points, the fluctuations of the French franc during 1920 and 1921 were more or less of the same general pattern as those of sterling and of the Norwegian krone (compare Charts 1, 2, and 3). This indicates that the three waves of depreciation of the franc during 1920 and 1921 were probably due to the same international factors that caused similar movements in the exchange rates of other European currencies. However, the fluctuations of the franc differed from those of the other currencies not merely in intensity; another difference was that each wave of depreciation tended to cause the exchange rate to deviate widely from the purchasing power parity, a fact which suggests that speculative demand played a considerable role in each wave of depreciation. No doubt, an important factor making for this difference in the behavior of the exchange rates was that the rise in prices during 1919 and the early months of 1920 was more severe in France than in the United Kingdom and Norway. It is also significant that, although France had undergone a much greater degree of internal price inflation during 1919 and the early months of 1920 than had the United States, there was a persistent refusal throughout 1920 and in the first half of 1921 to raise the French official discount rate to the same level as the discount rate in the United States (Table 4). In contrast, the official discount rates in the United Kingdom and Norway during 1920 and 1921 were kept either the same as, or higher than, the discount rate in the United States.

Chart 3.

Wholesale Prices in France and Exchange Rate and Purchasing Power Parity of French Franc, 1919–26

(Logarithmic vertical scale)

A05ct03

Sources: League of Nations, Memorandum on Currency, Memorandum on Currency and Central Banks, and International Statistical Year-Book.

1 (a) French official index of wholesale prices (1913 = 100). (b) Federal Reserve Board index of wholesale prices in France (1913 = 100). 2 (a) French official index of wholesale prices in France divided by Federal Reserve Board index of wholesale prices in the United States (1913 = 100). (b) Federal Reserve Board index of wholesale prices in France divided by Federal Reserve Board index of wholesale prices in the United States (1913 = 100). 3 Cost of dollar in French francs as percentage of par.

Furthermore, because of the existence of a large amount of floating debt consisting chiefly of bons de la défense nationale, which were issued constantly on tap at fixed rates of interest and a large proportion of which was continuously maturing, the discount rate of the central bank had become very ineffective in regulating market short-term rates of interest in France.14 For if there was any stringency in the supply of credit, the public and the commercial banks could always obtain additional supplies of money simply by refusing to reinvest the proceeds of maturing short-term Treasury bills. The Government was then forced to borrow from the Bank of France to meet the net withdrawal of funds from government short-term bills by the public or commercial banks.

This in effect implied that the market rates of interest were pegged to a large extent by the Government, and that the Bank of France was quite powerless to regulate the market rates by manipulating its own discount rate. Thus, throughout the turbulent postwar years up to the crash of the franc in 1926, the short-term market rate in France remained extremely unresponsive to the discount rate of the Bank of France. In particular, during 1920 and 1921, the short-term market rate (as represented by the call loan rate) in France stayed considerably below the official discount rate, whereas in the United States the call loan rate was either above or not far below the official discount rate, and not infrequently it rose substantially above it.

The maintenance of relatively cheap and easy money conditions in France, in spite of a rather strong internal price inflation, probably accounted for the more violent fluctuations in the exchange rate and the apparently greater role played by speculative demand on the exchange market. Such a cheap money policy, in face of a tight money policy in the United States and elsewhere, implied that whenever speculators on the foreign exchange market expected a further appreciation of foreign exchange assets in terms of domestic currency, they could readily convert their holdings of domestic short-term assets into appreciating foreign exchange assets not only at no loss of interest, but actually with a gain in interest differential. Nevertheless, despite such favorable conditions for speculation, the French franc did not plunge into a vicious cycle of depreciation and speculation each time a sharp depreciation was engendered by some unfavorable exogenous development, such as the abrupt tightening of U.S. credit at the beginning of 1919, the onset of recession in the United States and the sharp decline of prices there after June 1920, and the sudden large transfers, mentioned above, of reparation payments to New York via Paris, as well as via London, in May and June 1921. Instead, each time after a sharp depreciation, the exchange rate of the franc still managed to recover to the neighborhood of its purchasing power parity, apparently without any large-scale government intervention. This fact indicates that speculators still retained their confidence in the value of the franc, and that their speculative demands for foreign exchange, if they had indeed played a part in aggravating the depreciation, were not cumulatively self-inflammatory, but were rather self-correcting in the end.

From the second quarter of 1922, French prices began to rise again. Soon after, the exchange rate of the franc began to depreciate more than its purchasing power parity, and the gap between the exchange rate and the purchasing power parity began to widen. After a few ups and downs, it widened progressively until the exchange crisis of early 1924. This seems to indicate the influence of a kind of self-inflammatory speculative demand for foreign exchange. It must be added, however, that during this period speculation against the French franc was started to a great extent by the political disturbances of the time rather than by purely economic factors. For instance, the first spurt of depreciation, which started in May 1922 while the relative purchasing power of the franc in terms of the dollar was still rising, was no doubt caused by the reparation deadlock that impeded the flow of U.S. credit to Europe, a factor which, as pointed out above, also influenced to a greater or less extent the exchange rates of sterling and other European currencies. The reparation crisis was followed by the international tension caused by the French occupation of the Ruhr in January 1923, which led to another wave of depreciation of the franc. These successive shocks, superimposed upon a basic inflationary trend and continuous budget deficits, weakened confidence in the franc. Finally, in November 1923, after the revelation of the French Government’s inability to face the obligation to reduce its advances from the Bank of France in accordance with the 1920 Convention, a wave of speculative selling of the franc started.15 The exchange rate of the franc plummeted from approximately F 17 per U.S. dollar at the end of October 1923 to more than F 27 on March 11, 1924. The decline was finally checked by large-scale government intervention on the exchange market with a loan of $100 million from J. P. Morgan and Co. of New York and another of £4 million from Lazard Frères of London. At the same time, a 20 per cent tax increase was voted during the emergency.

The Government’s strong counterspeculative intervention with its large newly acquired foreign exchange resources, and the stiff tax increase that promised to eliminate a budget deficit, restored confidence in the franc. The upward recovery was so quick that the dollar exchange rate fell from the high point of F 27.20 per dollar on March 11 to a low of F 15.32 on April 22. The speculative demand reversed its direction during this recovery, so that by the latter date the Government was able to recoup all the dollars and pounds sold previously in support of the franc.16

This franc crisis should be compared with the somewhat similar fluctuations of the Norwegian krone at approximately the same time, as described above. It has already been pointed out that the resumption of price inflation in Norway after the end of 1922 also led to a progressive widening of the gap between the exchange rate of the krone and its purchasing power parity (i.e., to a progressive undervaluation of the krone). This tendency, however, was not allowed to develop into a full-scale speculative exchange crisis, because the Norwegian monetary authorities took firm deflationary measures. The discount rate of the Bank of Norway, which was raised from 5 per cent to 6 per cent in May 1923, was raised again, to 7 per cent, in November of that year, and the bills discounted, investments, loans, and advances of the Bank of Norway were curtailed. Such monetary measures were sufficient to turn the tide of depreciation and to close the gap between the exchange rate and the purchasing power parity.

Ostensibly, the French monetary authorities also tried the traditional instrument, the discount rate. The discount rate of the Bank of France was raised from 5 per cent (the rate that had prevailed since February 1922) to only 5½ per cent on January 10 and to 6 per cent on January 17, 1924, although the speculative attack on the franc had started in November 1923. Furthermore, as pointed out above, the effectiveness of changes in the discount rate was destroyed by the presence of a large floating debt; money was always readily available to the public and commercial banks simply through not reinvesting the proceeds received for the redemption of maturing bons. Thus, although the discount rate was raised to 6 per cent in January and there was already a feverish speculative scramble for foreign exchange, the call loan rate in Paris was 4.31 per cent in January, 4.56 per cent in February, and 3.81 per cent in March 1924, compared with 5.50 per cent in October, 4.69 percent in November, and 4.31 per cent in December 1923, prior to raising the official discount rate.17

Because of the government policy of maintaining fixed interest rates on the bons, the Bank of France was forced to expand enormously its supply of credit in response to the increased demand for funds directly or indirectly engendered by the speculative demand for foreign assets. This is shown by the movements of the assets and liabilities of the Bank of France during this crucial period (Table 5). Commercial bills discounted by the Bank of France increased by F 2,115.0 million during the first quarter of 1924, in contrast to an increase of only F 1,254.3 million for the whole year 1923. Mainly as a consequence of this, notes in circulation expanded by F 2,186.6 million during the first quarter of 1924, compared with an increase of F 1,810.0 million during the whole preceding year; and nongovernment current accounts at the Bank of France increased by F 989.0 million, compared with a decrease of F 99.8 million during the preceding year. The total money supply from the Bank of France (i.e., note circulation plus nongovernment demand deposits) therefore increased by F 3,175.6 million during the quarter, compared with an increase of F 1,710.2 million for the whole year 1923.

Table 5.

Assets and Liabilities of the Bank of France Prior to and During the Exchange Crisis of Early 1924

(In millions of French francs)

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Source: League of Nations, Memorandum on Currency and Central Banks, 1913–1924 (Geneva, 1925), Vol. II, p. 59.

Chiefly government deposits in the “Amortization Account.”

The enormous increase in commercial bills was really a disguise for the expansion of advances to the Government by the Bank. From 1921, the Government had been nominally trying to carry out the 1920 Convention, which prescribed that the Treasury should repay F 2 billion annually to the Bank of France to reduce the outstanding advances from the Bank to the Treasury, and the legal limit of the Bank’s advances to the Treasury had been reduced year by year up to April 1925. However, as the budget continued to be in deficit, the Government was forced to borrow from other sources to maintain itself in the false position of paying off these advances. In the first year after the Convention, i.e., 1921, the rapid increase in the sales of bons de la defense nationale provided sufficient funds to repay the advances according to the Convention. In 1922, however, the amount of bons outstanding started to decline,18 and the Government was forced to resort to such subterfuges as borrowing from private banks and then compelling the Bank of France to provide the funds to those banks from which it borrowed. For example, while provisional advances to the Government by the Bank of France decreased from F 23,800.0 million at the end of 192219 to F 23,100.0 million at the end of March 1923, there was at the same time an almost exactly corresponding increase, from F 1,990.8 million to F 2,684.9 million, in the so-called commercial bills held by the Bank.20

It is therefore highly probable that the abnormal increase of F 2,115.0 million in bills discounted with the Bank of France, in the midst of a speculative attack on the franc (this time without a corresponding decrease in loans and advances to the Government or in government securities, which together decreased by only F 453 million), was largely the result of government borrowings from private banks in order to cope with the increased net demand for redemption of short-term bons issued at fixed interest rates at a time when foreign exchange assets were generally expected to appreciate in terms of the franc and hence became a more attractive object of investment than domestic bills and bonds.

After the cumulative speculative demand for foreign exchange had been reversed on March 12 by massive government intervention with the proceeds of two loans from abroad and by the passage of the so-called double-décime tax measure which restored confidence, commercial bills discounted with the Bank of France declined. At the end of June 1924, the amount of commercial bills shown in the Bank’s return was F 3,697.0 million, that is, F 1,663.1 million lower than at the end of March. The money supply from the Bank of France also declined, from F 43,172.8 million at the end of March to F 41,801.9 million at the end of June. This decline cannot be attributed to the sales of foreign exchange by the Government at the peak of the crisis, for, as has been pointed out, the French Government had already recouped by the end of April all the exchange previously sold and had reconstituted all the original loans. This decline was obviously the result of the same mechanism, now operating in reverse, that brought about the previous sharp increase in the money supply. With foreign exchange assets no longer expected to appreciate and domestic prices starting to decline, it once more became attractive to hold domestic securities with fixed yields. As the public bought more bons from the Government, the Government was able to reduce its borrowings from the private banks, and the latter in turn were able to reduce their discounts with the Bank of France.

The demand deposits of the commercial banks in France showed a similar pattern of rapid increase during the speculative attack on the franc after November 14, 1923 and then a decline after the speculative tide had turned (on March 12, 1924). The demand deposits of the four big French commercial banks that published monthly statements21 showed an increase of F 1,335 million (or 9.4 per cent) from the end of November 1923 to the end of February 1924, compared with an increase of only F 277 million from the end of 1922 to the end of November 1923. By the end of March, when the franc had started to recover sharply, the amount of demand deposits was already slightly lower than at the end of February. At the end of May, it had declined to approximately the same level as at the end of December 1923 (Table 6).

Table 6.

Money Supply Before and After the 1924 Exchange Crisis in France

(Columns 1–4 in billions of French francs)

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Sources: International Conference of Economic Services, International Abstract of Economic Statistics, 1919–1930 (London, 1934), and Eleanor Lansing Dulles, The French Franc, 1914–1928 (New York, 1929), statistical appendix.

It is not difficult to see why speculation on the French foreign exchange market during the crisis of 1924 tended to be self-aggravating. The basic reason was the extremely high elasticity of the supply of money and credit in France resulting from the presence of a large amount of floating government debt redeemable at fixed rates of interest. Whenever the expected rate of appreciation of foreign exchange exceeded the fixed interest yield of domestic short-term bills (bons), speculators would demand redemption of their bons by the Government, and the latter would have to force the banking system to create more money to fulfill its obligations. The new money and credit would pass into circulation through the exporting industries or other suppliers of foreign exchange and would drive up prices. The rise in domestic prices would create an expectation of further appreciation of foreign exchange and lead to further flight of capital from domestic fixed interest securities to foreign exchange assets, which in turn would automatically call forth further creation of money and credit. Thus, the vicious cycle of speculation, inflation, and depreciation would be set in motion. This is only a particular case of the process of cumulative expansion as described by Wicksell: according to him, such an expansion would occur whenever the natural rate of interest might rise, for any reason whatsoever, above the money rate of interest that is pegged by the banking system with an elastic supply of credit.

The second and even more violent franc exchange crisis from 1925 to 1926 was essentially a repetition of the same story. The stiff increase in taxes voted during the early 1924 crisis brought about a considerable improvement in the government budget. Whereas in 1922 and 1923 the budget deficits were F 7.2 billion and F 5.6 billion, respectively, the deficits in 1924 and 1925 were F 3.3 billion and F 1.5 billion, respectively.22 Wholesale prices remained fairly stable from April 1924 to May 1925. The franc exchange rate was also relatively stable from June 1924 to May 1925.

In April 1925, however, certain incidents occurred which profoundly shook the public’s confidence in the soundness of the Government’s finances. France was then involved in hostilities in Morocco which constituted a financial drain. Attempts by various ministries to increase revenue were repeatedly defeated in the legislature. The Government was forced to continue the subterfuge described above of obtaining concealed advances from the Bank of France. As a result of these advances, the note circulation of the Bank of France rose in excess of its legal limit. The weekly statement of the Bank published on April 9 showed a note circulation of more than F 43 billion, F 2 billion in excess of the limit which had been set on September 28, 1920 and which had not been changed. This scandal caused the downfall of the Herriot Ministry and made known to the general public that the French Treasury was practically without funds. This, added to the proposal of a 10 per cent capital levy by the Herriot Ministry, could not but shake the confidence of the public in government securities. The decline in the amount of short-term bons outstanding, which had started in March 1925, was greatly speeded in April (during that month alone the decline was F 1.7 billion) and continued all through 1925. For the year as a whole, the decline was nearly F 9 billion. To meet the enormous demand for redemption and to avoid default on these bons, the Government had to request the legislature repeatedly to raise the legal limit of the Bank of France’s advances to the Government, and the Bank of France had to increase its note circulation correspondingly. The relations between the bons outstanding, the advances to the Government, and the note circulation of the Bank of France and other related data are shown in Table 7. The F 8.8 billion excess of redemption over new issues of bons in 1925, plus a moderate budget deficit of F 1.5 billion and a F 3 billion reduction in the government long-term debt,23 led to an almost exactly corresponding increase in provisional advances to the Government by the Bank of France. The Bank of France’s note circulation increased by F 10.5 billion (or 26 per cent), and nongovernment current accounts at the Bank increased by F 1.3 billion during the same year.

Table 7.

Bons de la Défense Nationale Outstanding, Assets of the Bank of France, and Money Supply in France Before and After the 1926 Exchange Crisis

(Columns 1–7 in billions of francs)

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Sources: Eleanor Lansing Dulles, The French Franc, 1914–1928 (New York, 1929), p. 186 and statistical appendix, and International Conference of Economic Services, International Abstract of Economic Statistics, 1919–19S0 (London, 1934).

The expansion of money supply and credit continued in 1926, as successive short-lived ministries failed to produce any solution for the financial difficulties of the Government, and especially for the problem of the floating debt and of restoring the public’s confidence. From the end of 1925 to the end of July 1926 (the cost of dollar exchange reached a peak on July 20), the bons de la défense nationale outstanding declined by another F 1.5 billion; provisional advances to the Government increased by F 1.5 billion, bills discounted by the Bank of France by F 2.5 billion, and note circulation by F 4.9 billion.

This time, the Bank of France did not even try to use the traditional instrument of the discount rate. In fact, it lowered its rate from 7 per cent (which had been established in December 1924) to 6 per cent in July 1925 and held it at that level until July 1926, when the exchange market had already reached the stage of panic. The market rates of interest (the call rate and the discount rate for prime commercial paper) did not change substantially during this period (Table 8). To meet, at more or less stable rates of interest, the rising demand for funds stimulated by the rapidly rising internal prices and the prices of foreign exchange assets, the commercial banks rapidly expanded their credit. Thus the deposits of the four leading commercial banks increased by F 5.0 billion during 1925 and by another F 3.4 billion during the first seven months of 1926—in all, an increase of 57 per cent over deposits at the end of 1924.

Table 8.

Rates of Interest in France Before and After the 1926 Exchange Crisis

(In per cent)

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Source: International Conference of Economic Services, International Abstract of Economic Statistics, 1919–1930 (London, 1934), p. 70.

The franc plummeted with the downfall of the Briand Ministry (on July 17) and the accession to the premiership of Herriot, whose renewed proposal of a capital levy was again defeated on July 21. The tide was turned with the call of Poincaré to power. The residue of the dollar loan obtained from J. P. Morgan and Co. during the 1924 crisis was given at once to the Treasury to meet its day-to-day needs.24 This no doubt had an immediate stabilizing effect on the exchange rate. On July 27, a stabilization plan embodying the recommendations of the Committee of Experts—a three-stage stabilization plan consisting of (1) elimination of the budget deficit by increasing indirect taxation, (2) de facto stabilization by pegging, and (3) de jure stabilization—was pushed through a chastened legislature. Confidence in the future of the franc and in government securities returned. The public once more became willing to hold fixed interest government securities and began to liquidate their excessive speculative holdings of foreign exchange assets, which were now expected to depreciate. Money started to flow out of circulation and back to the banks, and bank credits created during the preceding speculative fever were being paid off. From the end of July 1926 to the end of the year, bons de la defense nationale outstanding increased by F 4.9 billion; advances to the Government by the Bank of France decreased by F 1.5 billion; bills discounted with the Bank of France fell by F 2.3 billion; notes in circulation decreased by F 3.1 billion; and demand deposits of the four commercial banks decreased by F 0.8 billion. The franc recovered rapidly from the low point of F 49.22 per U.S. dollar, quoted on the Paris Bourse on July 20, to around F 25 in mid-December. When the Bank of France then decided to peg the rate at around F 25.25, it was obliged to buy the surplus supply of foreign exchange with an additional note issue.

The lesson to be learned from the French experience of 1924 and 1926 is the inevitable instability of a monetary system with rigid interest rates maintained by an almost infinitely elastic supply of money and credit. The violent depreciation of the franc from 1925 to 1926 and the preceding one from 1923 to 1924 are illustrations par excellence of the cumulative expansion shown by Wicksell to be inevitable under such a monetary system. Even if the French exchange system had then been a fixed rate system with strict and effective exchange controls (but not supported by unlimited reserves), the monetary and fiscal practices that were followed would still have been likely to generate a cumulative expansion involving ever-rising internal prices. Even if dealings in foreign exchange had been under the strictest possible control, the political disturbances that had shaken public confidence in government securities in the early part of 1925 would still have been able to induce the French public to shift their capital from short-term bons to such assets as real estate, commodities, or industrial shares. The public’s refusal to renew their holdings of short-term bons at constant interest rates would have automatically drawn additional money into circulation, and prices of all commodities and all assets, whose values and yield could be expected to rise with the general price level, would have been driven up. The general rise in prices would have provided a further incentive to shift capital from fixed interest securities, which in turn would have drawn more money into circulation. Thus, the instability of the French franc from 1923 to 1926 was the result of an extremely elastic money supply, which would have caused great instability in the economy whether the exchange rate was freely fluctuating or controlled. It therefore should not be regarded as evidence that a freely fluctuating exchange rate can, as a general rule, be expected to lead to cumulative depreciation through self-aggravating speculative capital movements regardless of the elasticity of the money supply and the flexibility of the interest rate.

As shown in Chart 4, the correlations between the money supply25 and the exchange rate and between the money supply and wholesale prices are both very striking. For the period September 1923-November 1926, which includes the two exchange crises up to the commencement of stabilizing operations by the Bank of France in December 1926, the coefficient of correlation between the money supply and the exchange rate of the franc is 0.94, and that between the money supply and the wholesale price index is 0.93. Although statistical correlation does not definitely prove the existence of causal relationship one way or the other, such clearly observable parallel movements cannot but emphasize the important role played by the elastic money supply during the two French exchange crises.

Chart 4.

Wholesale Prices and Money Supply in France and Exchange Rate of French Franc Before and After 1924 and 1926 Exchange Crises

A05ct04

Sources: League of Nations, Memorandum on Currency, Memorandum on Currency and Central Banks, and International Statistical Year-Book.

1 Federal Reserve Board index of wholesale prices in France (1913 = 100). 2 Cost of dollar in French francs as percentage of par. 3 Note circulation plus demand deposits in four leading commercial banks.
*

Mr. Tsiang, economist in the Special Studies Division, is a graduate of the London School of Economics, and was formerly Professor of Economics in the National Peking University and the National Taiwan University. He is the author of The Variations of Real Wages and Profit Margins in Relation to Trade Cycles and of several articles in economic journals.

1

See especially R. Nurske, International Currency Experience: Lessons of the Inter-War Period (Geneva, 1944), pp. 117–22. For a theoretical analysis of the issues raised by this question, see S. C. Tsiang, “A Theory of Foreign Exchange Speculation Under a Floating Exchange System,” Journal of Political Economy, Vol. LXVI, No. 5 (October 1958), pp. 399–18.

2

The three instances of intervention are the massive counterspeculative selling of dollars and sterling with loans obtained from New York and London to support the franc during the February 1924 crisis; a short-lived attempt to peg the exchange rate from July to September 1925; and the use of the balance of the U.S. loan to tide the Government over the crisis of July 1926.

3

In the same postwar period, several other countries with fairly stable internal economies allowed their exchange rates to fluctuate, e.g., Canada, the Netherlands, and Sweden. However, in these countries the changes in gold and foreign exchange reserves, which were not negligible, suggest that the interventions of the monetary authorities in the exchange markets were more significant than in the United Kingdom, France, and Norway. The fluctuations of their exchange rates, therefore, reflected less fully the free play of supply and demand (including speculation) on the exchange markets.

4

This indirect indicator is adequate as a rough index of speculative pressure in countries with fairly stable internal economies, such as those selected for examination here. For, as long as the wholesale price index of the country concerned includes prices of some domestic goods, a rise in the cost of foreign exchange caused by speculative purchases would leave the domestic wholesale price index lagging behind the cost of foreign exchange.

This index is no longer useful when domestic inflation becomes so violent that the public simply adopts foreign exchange as the ultimate standard of value, and merchants and manufacturers automatically adjust the prices of their goods in proportion to any change in the exchange rate, as indeed happened in the late stage of hyperinflation in Germany, Austria, and Poland. But these cases of hyperinflation are not dealt with here because it is pointless to discuss the stability of any exchange system in such situations.

5

See, for example, R. G. Hawtrey, Essay No. V, “The Federal Reserve System of the United States,” in his Monetary Reconstruction (London, 1923), pp. 93–130.

6

See Board of Governors of the Federal Reserve System, Banking and Monetary Statistics (Washington, November 1943), p. 452.

7

The guilder was an outstanding exception. From August to November 1919, it had been appreciating slightly in terms of the dollar, because prices in the Netherlands were more stable than U.S. prices. When the exchange crisis occurred in early 1920, the guilder was affected to only a minor extent.

8

The timing of the quick recovery of sterling and other European currencies that followed it as the leader might have been influenced by some favorable incidents, such as the announcement on March 6 by Sir Austen Chamberlain, the Chancellor of the Exchequer, that the British Government was ready to pay its half of the Anglo-French loan on the due date, October 15, 1920, without having to resort to reborrowing outside the United Kingdom. This indicated that the British Government had been in the market for dollars for some time and that it had probably largely satisfied its needs and would not have to purchase additional dollars for this purpose. It strengthened confidence in the soundness of the pound and relieved the pressure upon the exchange rate which was the result of government purchases of dollars and gold on the Anglo-French Loan Account. This, however, was probably not the only cause for the recovery of the pound from its greatly undervalued rate of exchange during February. The basic underlying reason was the confidence of the public, which was encouraged by the Government’s acceptance of the deflationary policy and the return to the gold standard at the prewar parity recommended by the Cunliffe Committee, and by the Government’s announcement on December 15, 1919 that it would establish as a maximum for the currency note issue in any year the maximum amount actually outstanding in the previous year.

9

According to the estimates of the U.S. Department of Commerce, there was a net inflow of $375 million of short-term capital into the United States in 1922, against a net outflow of $435 million in the preceding year, and the net total capital outflow, including both short-term and long-term capital, declined by $850 million, from $1,192 million in 1921 to $342 million in 1922. See The Balance of International Payments of the United States in 1936 (Washington, 1937), pp. 93–95.

10

Computations are based on the period July 1922-April 1925.

11

The speculative demand for foreign exchange might have been stimulated by the failure of two large Oslo banks, Central banken and Foreningsbanken, in March 1923.

12

League of Nations, Memorandum on Currency and Central Banks, 1913–1924, Vol. II (Geneva, 1925), Table 17, pp. 118–19.

13

Such speculative anticipation persisted despite the fact that a special commission appointed by the Norwegian Government in 1925 reported in January 1926 in favor of stabilization at the existing rate.

14

Most of the French Government’s floating debt consisted of bons de la defense nationale which ran for a year or less. The rates of interest of the bons of different maturities from 1920 to 1926 (as given in Ministère des Finances de la Republique Franchise, Inventaire de la situation financiere, Paris, 1946, p. 547) were as follows:

article image

Bons outstanding at the end of 1919 amounted to F 46.14 billion, and at the end of 1920 to F 48.94 billion, compared with F 37.28 billion for 1919 and F 37.90 billion for 1920 of Bank of France notes in circulation (Eleanor Lansing Dulles, The French Franc, 1914–1928, New York, 1929, pp. 94 and 482–83).

15

The speculative assault of the franc was said to have first started in Amsterdam and London (see E. L. Dulles, op. cit., p. 170).

16

League of Nations, op. cit., p. 61.

17

International Conference of Economic Services, International Abstract of Economic Statistics, 1919–1980 (London, 1934), p. 70.

18

For figures indicating the amount of the decline, see E. L. Dulles, op. cit., Table IV, p. 94, and Table XII, p. 186. Data on the net excesses of new issues over redemptions of all short-term bons, 1920–26, are given in Ministère des Finances de la Republique Francaise, op. cit., p. 572. From these sets of data, it is clear that after 1922 the net amount of short-term bons outstanding declined everyyear until 1926, and that the decline in 1925 was particularly heavy.

19

The figure of F 28,355.0 million for loans and advances to the Government in Table 5 covers F 23,800.0 million of provisional advances to the Government, F 200.0 million of statutory advances to the Government, and F 4,355.0 million of Treasury bills discounted for advances by the State to foreign governments.

20

League of Nations, Memorandum on Central Banks, 1918 and 1918–1923 (Geneva, 1924), pp. 180–83.

21

The four banks were the Société Générale, Crédit Lyonnais, Comptoire d’Escompte de Paris, and Société Générate de Crédit Industriel et Commercial.

22

According to Ministère des Finances de la République Francaise, op. cit., p. 230, the budget deficits of the French Government for the years 1923–25 were as follows: 1922, F 7.2 billion; 1923, F 5.6 billion; 1924, F 3.3 billion; 1925, F 1.5 billion. In 1926, there was a surplus of F 1.1 billion.

23

Ibid., p. 572.

24

Part of this loan was used to peg the rate from July to September 1925.

25

Notes in circulation plus demand deposits in four leading commercial banks.

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Cover IMF Staff Papers
IMF Staff papers: Volume 7 No. 2
Author:
International Monetary Fund. Research Dept.
Volume/Issue:
Volume 1959: Issue 002
Publisher:
International Monetary Fund
ISBN:
9781451979015
ISSN:
1020-7635
Pages:
165
DOI:
https://doi.org/10.5089/9781451979015.024