A Lesson In French Inflation (1959)

A Lesson in French

-Inflatiun By

MELcmoR PALYI

PUBLISHED AND DISTRIBUTED'BY THE

ECONOMISTS' ON

NATIONAL

MONETARY

ONE MADISON AVENUE

•

COMMITTEE

POLICY NEW YORK

10, N.

Y.

AuGUST· 1959 Second Printing, December, 1959

Printed in the United States of America

Preface I wish to express my gratitude to Mr. M. Mogenet, chief economist of the Credit Lyonnais, Paris, and to the members of his staH who have been most helpful in providing me with statistical data and other infonnation used directly or as background material in this study. Also, I am very grateful to Dr. Walter E. Spahr, Executive Vice President of the Economists' National Committee on Monetary Policy, for having read the manuscript and for his useful suggestions. The printing and distribution of this pamphlet has been made possible through the John Lindsley Fund. For this aid I am deeply appreciative as is the office of the Economists' National Committee on Monetary Policy. MELCHIOR PALYI

June 19, 1959

Table of Contents PAGE CHAPTER I

- FORTY-FOUR YEARS OF INFLATION AND SOME ELEVEN DEVALUATIONS • • • •

What Happened to the Franc Creeping Inflation - with Big Jolts. The Roots of the Rot . . . . • CHAPTER II - BUREAUCRACY AND INFLATION

On the Rim of the Abyss . The Intellectual "Climate" . Planning the Economy and Robbing the Citizens. ...... Bureaucracy's Proliferation and Vested Interests . . The New Bureaucracies

9 10

11 13

15 15 16 17 18 19

CHAPTER III - SLIPPING FROM UNDER THE INFLATIONTHE FRENCHMAN'S EXPERIENCE

How to Fool a Nation . . Savers' Self-Protection and National Interest. Capital Flight!. . . . . . . . . . . Perverting the Capitalists . . . . . . . Hedging on Inflation - Hopes and Illusions. Real Estate - a Hedge "From Missouri" . .

21 21 22 23

24 25 27

PAGE CHAPTER IV - POLmCAL HEDGING

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Riding on Escalators Chiseling on the Escalators Redistribution and Retribution Distorted Price Mechanism . At the End of the Inflation Rope .

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36

CHAPTER V - THE BALANCE SHEET OF

38

FRENCH STABILIZATION.

Capitalism with a Crippled Price Mechanism Fiscal Reform: Principles . . . . . . . "Operation Verity" . . . . . . . . . Marrying the Welfare State to Sound Money. APPENDIX A: INFLATION BY TECHNOCRATS

APPENDIX B: STATISTICAL TABLES

SELECTED LITERATURE.

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A Lesson in French-Inflation Chapter I FORTI:.FOUR YEARS OF INFLATION AND SOME ELEVEN DEVALUATIONS GREAT FRENCH (paper money) INFLATION started in August, 1914; it ended - it is supposed to come to an end - in 1959. Chances are better than even that it will. In any case, this was the longest and in many ways the most shocking case of financial paralysis that has ever beset a highly developed, rich, industrial nation. There have been innumerable paper money inflations in the past and in our age; but not one of them is so "educational" for Americans as is the French case. If the American people understood what happened to France and why, they might be spared the otherwise unavoidable result - the breakdown of democracy and the lowering of living standards. But if the dollar should go down the same drain: would we be as lucky as the French in getting a "dictator" with the decency and wisdom of De Gaulle, whose objective is to rescue democracy - one without balance of powers - from a mess of depreciating currency, chronically unbalanced budgets, a jungle of controls, perverted incentives, price and income structures? A most instructive aspect of the 44"-year old French inflation its extraordinary feature - was the fact that at the crucial stage, since World War II, there was little or no resistance to it. When Poincare undertook his famous reform of the franc (1926-1928), the overwhelming majority of the country was behind him. In fact, he had brought up the franc from a low of 16 per cent of its old value to 20 per cent and would have preferred to bring it back to 100 per cent. He was stopped from going further by the resistance of powerful business (debtor!) interests; Emile Moreau, the then

THE

[9]

governor of the Banque de France, actually threatened to resign in protest against the "deflation." Neither he nor any of his successors has ever uttered a similar threat against inHation. Thirty years later, with a vastly advanced inflation, it took a dictator to effect a far more modest reform, involving another devaluation, yet the entire nation grumbles about it. Poincare had the near-unanimous support of Parliament. De Gaulle not only had to abolish the old Parliament but also had to rush through his reforms before the new one convened, one fully controlled by his own followers - who are almost unanimous in .objecting to those reforms.

What Happened to the Franc To UNDERSTAND what forty-four years of inHation and ten devaluations - De Gaulle's was the eleventh l - did to the French mind, let us see first what they did to the French franc. A few salient data, in round figures, speak a clear language. Between mid-19l4 and late 1958, the paper and deposit money supply skyrocketed 632-fold the cost of servicing the national debt went up .. 370-fold the cost of construction in the Paris region zoomed ................................ 320-fold average labor-income (not counting fringe benefits) rose more than ................... 300-fold the national debt (accumulated deficit) increased ............................... 240-fold the index of wholesale prices rose ............. 205-fold the index of retail prices rose ................. 200-fold the official price of gold (bars) rose ........... 190-fold the franc-dollar exchange rate rose. . . . . . . . . . .. 95-fold the stock market index rose. . . . . . . . . . . . . . . . .. 80-fold controlled rents in the Paris region rose. . . . . . .. 60-fold 1 The figure "eleven" is not exact: for a while the franc was unpegged and its (declining) market value was considered as its day-to-day official price as revealed by Table VIII in Appendix B.

[10]

Prices of genuine antiques have in general risen ahead of all others. Of course, price averages do not tell the whole story; we shall discuss some of the discrepancies involved. Incidentally, the reserve of the Bank of France was almost one billion (gold) dollars net on the eve of World War I. It rose to a record $6 billion, the world's greatest, by November, 1932, after the Poincare reform. The Bank's liabilities were covered by gold to the extent of 77 per cent. By mid-1958, nine forma~ devaluations later, the Bank had a reserve of less than one billion (paper) dollars gross; and short-term debts to foreign countries more than offset the amount of gold and foreign exchange on hand. The "coverage" of the currency in fact became a negative figure.

Creeping Inflation - with Big lolts THE FRENCH "CREEPING" INFLATION was kept going - by a.system of exorbitant taxation, with its burden distributed in a highly unjust fashion; - by governmental deficits, with the double effect of preempting the capital market and monetizing huge portions of the national debt; - by the (nationalized) central bank pouring out rediscount credit as well as five-year "construction" credits, the latter totalling 574 billion francs ($1.14 billion), this on top of direct loans to the government; - by squandering the billions of American aid, and their counterpart funds (in francs); - by incurring foreign debts of well over one billion dollars; - by debauching the currency to the tune of several triUion francs; - by a vast expansion of bank credit to industry, commerce, farmers, and the consumer; - by dissipating the $6 billion gold reserve of the Bank of France; [ 11 ]

- by virtually wiping out at least 30 billion gold dollars worth of liquid savings of the French people; - by engendering vicious price-cost.-price circles. At present, the purchasing power of the French franc is less than one-two-hundredth, about 0.4 per cent, of what it was in 1914. At that time, Frenchmen were known for their thriftiness. They saved carefully, preferring to invest in savings deposits and bonds. The national debt of France, the world's largest, amounted to 8.3 billion gold dollars, the bonds being held in private portfolios and in savings institutions. At the en4 of 1958, a 240-times larger debt, mostly of short and medium maturity, was scarcely worth more than 17 billion paper dollars. In the meantime - that is, from 1914 to the end of 1958 - the purchasing power of the dollar, as measured by the index of wholesale prices, had declined by 63 per cent. This French monetary-fiscal debacle was brought about by the process of printing paper money in order to pay for the deficit the govern~ent was running in 38 out of 44 years - or rather, for the part of the deficits that could not be covered by pushing the bonds down the throats of the public and of the savings institutions. Roughly seven-eighths o.f the franc's deterioration occurred in the 1.m years since the liberation follOwing the defeat of France by Germany. In other words, inflation in France progressed seven times faster during this period than in the previous 30 yearsand while America was pouring billions of dollars in gifts and loans into France. There were three major attempts made during this latter period' to stop the vicious process: in 1948, in 1949, and again in 1952, especially. All these attempts failed. They consisted of half-hearted, ineffectual measures which failed to go to the root of the problem. They slowed down the inflation, but could not halt the money flood. Only a dictator could force monetary and fiscal disCipline upon a public almost every sector of which was determined to milk the WeHare State for its own private benefit. And there was always a convenient excuse available for not going to the root of the trouble: first the need for reconstruction; (then the Indo-China war; the cost of the Algerian rebellion since 1954 [ 12]

which, in reality, accounts for scarcely more than 10 per cent of the total of governmental expenditures. 2 (The Indo-China war was paid for largely by the United States taxpayer.) The truth is, as a French economist, Dr. Jacques Rueff, summed it up, that the French were consuming more than producing, investing more than saving, importing more than exporting, and hiding a good portion of their profits in gold at home or in assets abroad. This upSidedown economics was made possible by what is euphemistically called "Managed Money." .

The Roots of the Rot THE SIMPLEST MEASURE of France's prodigality is her budget (in billions of francs; 493.7 frs. are now equal to $1), as shown in the following tabulation, in rounded figures, which omits Social Security and other extra-budgetary items of no mean volume: 1952

1959

per cent

Civilian expenditures ..... 1,960 4,500 + 130 Military expenditures ..... 1,200 1,500 + 25 Total expenditures. . . . . . .. 3,160 6,100 + 90 The lack of resistance to the evils of inflation - the lack of a national will power to rally against the financial rot - was due, in part (in part only!) to the fact that many people profited by the inflation. To be more precise: they thought they profited. Ignorance of the ultimate consequences, promoted by the hysterical fear of another great economic depression, was an important element in the psychological picture. Equally important was the sentiment that America would never let the French down, whatever foolish path France might follow, and the belief that inflation guaranteed for France a rapid industrial growth - an 8 to 10 per cent annual increase, between 1948 and 1957, of the gross national output, whatever that means. 2 Military expenditures constitute 25. per cent of the 1959 budget But France would have an army, navy, and air force without the revolt in Algeria (since late 1954), the cost of which includes such civilian items as expenditures for roads and schools.

[ 13]

The inflationary process in a modem economy is a highly complex financial and psychological interplay of mutually supporting and reinforcing vicious circles. The process comes to an end if the fundamental "mechanism" - the monetization of debt - is stopped, as it has to stop if the currency is redeemable in gold. But the redeemability of the French franc was suspended on August 2, 1914; it has remained suspended, de facto or de jure, to this day (excepting the six-year period of stability, 1928-1934). So, the politicians enjoyed the freedom to please the voters by generosity, the check to be picked up by the taxpayers, the holders of money claims, and other innocent bystanders. A continuously expanding monetary base invited the expansion of bank deposits. 3 This swelling Hood of purchasing power sparked the inflationary expectations which in tum were instrumental in revolutionizing costs, prices, and capital values, and in unbalancing the country's international accounts.

3 Bank and savings bank deposits constitute only about 60 per cent of the total money supply (masses monetaires) in French francs.

[ 14 ]

Chapter II BUREAUCRACY AND INFLATION

On the Rim of the Abyss FRANCE ENTERED THE POST-LmERATION ERA with an official gold and dollar reserve of $600 million; in thirteen years, America provided her with $10,500 million in gifts and loans, plus billions of dollars through the spending of American troops. In addition, she had borrowed "minor" amounts right and left and ran up a $400odd million debt in the European Payments Union. All these billions evaporated, largely into private hoards. Having dissipated its hard money reserves with which to pay for the chronic surplus of imports over exports - balance of payments deficits are another backwash of the inHation - the Gaillard government had to restart borrowing abroad: $1,000 million or so in 1957-1958, all to no avail. (Besides moratoria on her dollar debts, France was granted a "package aid" of $655 million in late 1957, plus $250 million from Germany.) Within six months, these funds were exhausted in the attempt to cover the hole in her balance of payments. A short respite was gained, but under the humiliating condition that France's budget deficit would not exceed 600 billion francs a year.

The Intellectual "Climate" How WAS IT possmLE that a rich and self-respecting nation let her finances deteriorate to the point of literal bankruptcy? Why let the hard money reserves go down the drain? Why permit herself to sink to the level of an international beggar? Why risk the breakdown of her most highly valued political institutions for which bloody revolutions and wars had been fought? An inHation-ridden France had lost her international position as a major power. Unfortunately for France, the Poincare-stabilization of 1928 was [ 15 ]

barely more than a year old when the global depression came along. It caused less suffering in France than in any other country; the number of. unemployed never reached beyond a very moderate 400,000. But prices, working hours, take-home wages, profits, and capital values fell. It was simple to blame it all on the return to gold. With the automatic gold standard abandoned in 1936the manipulated variety of monetary standard was subjected to devaluations and restrictions, to be replaced in 1939 by a "closed" paper money system - the belief in saving and economy, in the free market, and in the welfare-creating incentives of the price mechanism fell into disrepute. A popular front of communists and socialists, followed by Petain's fascist State, was Ii natural breeding ground for bureaucratism - and for legalized robbery, as Premier Reynaud branded, in 1939, the inHationary practices. But socialists and fascists were mere pikers ininHation compared with the full-Hedged Welfare State that emerged from France's liberation in 1944. A decisive influence was the Keynesian philosophy that became dominant in France, under Anglo-American inHuence, after World War II. Its basic tenet was that due to its inherent propensity for saving (hoarding?), a free enterprise economy is hell-bent for depression - mass unemployment - in perpetuity. The Keynesian answer was: perpetual inflation, with the government planning and directing investments, if not prices, wages, and many other functions as well. Distributing "purchasing power" was to provide stable employment, and let such "antiquated" concepts as monetary stability (and all economic freedoms, for that matter) hang. This crude revival of the crackpot doctrines current in the 17th Century suited the communist and socialist doctrinaires; it was a godsend for the power~minded politician (like Mendes-France, a leading self-styled "liberal") and the job-conscious bureaucrat. Both groups, and their intellectual fellow-travellers, found a most convenient rationalization, or alibi, in favor of ever-more inflation: compassion for the fellow citizen's sufferiDgs due to the inflationthat was eagerly promoted by the same humanitarian bureaucrats and politicians. [ 16]

Planning the Economy and Robbing the Citizens THE FOURTH REPUBLIC was ruled by a Parliament that voted out nineteen governments in fourteen years and stymied all of them. New or reorganized cabinets took over apprOXimately twice a year, on the average. But most of the time the actual administration was in the hands of the top-level bureaucrats, highly trained and carefully selected men of unusual scholarship and fervent devotion to their tasks, with a reputation for incorruptibility. They have a totally admirable record of administrative accomplishmentswhich brought France to the verge of catastrophe. In fact, they are world-champion dirigists (busybodies, in plain English) whose taste and ambitions fitted perfectly into the collectivist and equalitarian ideologies predominant in post-World War II France. Their grand concept, in the best French bureaucratic tradition, that dates back to Colbert in the 17th Century, is that they know best what is for the best interest of the citizen. "The sovereign is always beset by a swarm of clients, courtiers, panhandlers ... [who] allege the public welfare in the nurture of their own self-interest," to quote Malcolm Bryan, President of the Atlanta Federal Reserve Bank. He might have been referring to the French National Assembly as well as to the American Congress. The French sovereign was beset not only by pressure-group politicians but also by a permanent and entrenched bureaucracy. The latter's meddling propensity was unlimited; inflation provided the means for itS satisfaction. Almost any ideology would do: income redistribution, social security provision, prouuctivity enhancement. The chief argument was, however, the alleged threat of an impending depression; it was "impending" throughout twelve years of an unparalleled boom. And if all economic arguments were punctured, the French inflationists (like our Foreign Aid propagandists) took shelter behind the spurious threat that any, even temporary, slowing-down of the "rate of growth" would land the nation in the arms of bolshevism. [ 17]

This highly respectable bureaucracy was punch-drunk on the power to plan, govern, manage, direct, and manipulate the economy. All of which was possible only by constant recourse to the money engraver's bench. The dirigists and their intellectual following - the candidates for the jobs - were the chief intellectual source from which the French people's constant fear of "deflation" and the rabid opposition to stable money emanated.

Bureaucracy'8 Proliferation and Vested Interests THE BUDGETARY COST of a growing bureaucracy was a factor of no small import in the Fourth Republic's household and deHcit. Its social cost - the direct burden of interventions on business and the impediments to productivity - contributed to the inflation of prices. On the other hand, the French bureaucracy soon understood its own vested interest in inflation. Every upward tum of the price-screw called for fresh "physical" controls that had to be adminiStered; and the administrators supervised, thus creating new jobs and opportunities for promotion. The more people were distressed by the inflation, the more welfare measures were put through - more jobs for newcomers in the bureaucracy and further promotions for the seniors. Small wonder that they were not anxious to have the money-printing stopped, or even slowed down. The salaries of the rank and HIe - and the cadres of the officialdom were themselves among the victims of inflation - constantly lagged behind living costs. (For one thing, they were very hard pressed by the extra-legal and exorbitant "key-money" needed to acquire a reasonably decent dwelling. This amounted in general to as much as three-to-Hve years' salary of an official in the middlesalary bracket.) In fact, it became increasingly difficult to recruit qualified manpower for government. 1 1 For 240 civil service jobs offered to holders of a master's degree (licence), there were: in 1954 ............ "............... 380 candidates in 1955 ... " " .. " " .................. 277 candidates in 1956 .......".................... 262 candidates in 1957 ..... " ......... : ........... 140 candidates

[ 18]

The top salary for senior civil servants of this category reached a monthly 136,999 francs (less than $320) in January, 1958, while the "key-money" for a single desirable room in Paris was approximately 1,000,000 francs. Yet, the more deprivation the bureaucrats suffered through the currency muddle, the more belligerent were their socialist unions in striving for higher pay and accelerated promotions. Fanning the Harne of inflation was the easiest way to get both - and the most deceptive.

The New Bureaucracies THE ADMINISTRATIVE CONFUSION was confounded by the fact that the Fourth Republic imposed on France two new major bureaucratic setups.2 One grew out of the 1946 reorganization, by a communist member of the cabinet, of the social security system. The compulsory securite makzdie panels, especially, were staffed by representatives of the trade unions only, all communist or socialist, bent on honoring their members' claims for medical services. Lax administration of these claims was the prime cause of the sickness security's substantial deficit and of much of labor absenteeism. Far more important, however, was the emergence of a new officialdom in the framework of the nationalizations - a special chapter in the story of how France went broke "in a ballroom dress." It cannot be discussed here. It may suffice to point out one reason why the wholesale expropriations, undertaken promptly after the liberation, became a relevant factor in the French inflation. A business enterprise, whoever owns or manages it, cannot be run like a police station or a school, and vice versa. In the former, pecuniary incentives are mandatory; they are not necessarily called for in the latter. But within a governmental setup, the personnel is interchangeable. Why, then, should the management earn higher 2 A third one, the local administration, was of pre-war vintage; but it, too, expanded and became entangled in constant conflicts with the central bureaucracy. Despite a thorough centralization of the French administration, the local authorities cost the taxpayer an amount equal to approximately 20 per cent of the national budget.

[ 191

pay in the one than in the other if both have the same status in the bureaucratic hierarchy? As wages and salaries tended to be higher in the state-owned industries than in the state's regular civil service, constant frictions and all-round dissatisfaction were created with resulting vicious frog-leaps: one type of pay rate tending to drive up the other.s In any case, the huge bureaucratic apparatus of the Fourth Republic was a prime source of the latter's labor troubles. That apparatus set the pace for labor absenteeism, make-work, strikes, and excessive fringe benefits. If employees of the nationalized railroads could retire on half-pay at the age of 54, why not let others do the same - and take other jobs at full pay, too? If the nationalized industries provide 60 per cent and more of the wage bills in fringe benefits, why should the rest of labor be satisfied with a bare 41 per cent, 6 per cent only at the employees' expense?

S

Appendix A provides additional discussion of this state of affairs.

[20 ]

Chapter III SLIPPING FROM UNDER THE INFLATIONTHE FRENCHMAN'S EXPERIENCE

By TIlE TIME De Gaulle came into power, almost all of France appeared to be intoxicated with the spirit of inflation. In Paris, only one newspaper, a minor one representing the views of small businessmen, seriously advocated currency stabilization. The General had to rush through his fiscal and monetary reform in 250-odd ordinances before the new Parliament convened. Even the De Gaullist majority was opposed to the bitter medicine. Inflation, supposedly of the slow or creeping kind -less than 5 per cent a year in good years, but "exploding" in bad ones - had become ingrained in the national way of life. The chief culprit was the top bureaucracy ,that had remunerative jobs to lose and an immense power to hold. But why did the country at large tolerate the systematic despoiling of its wealth? Or did people protect themselves and, if so, how?

How to Fool a Nation THE LONG-WINDED FRENCH INFLATION was a glaring case of almost all the people being fooled for a very long time. It was solemnly promised that every devaluation of the franc was to be the very last one. Every French government, and there were many, assured the public solemnly that it would stop the inflation. Some were actually sincere. Every one of them tried some cure against the insidious process: price controls, credit controls, foreign exchange controls, even budgetary controls. These "selective" controls aided in boosting the budget deficit, the cost of living, or the costs of imported goods, as the case may have been. Half-hearted attempts

[21 ]

at currency stabilization were undertaken in 1939, 1949, 1952, 1957-1958. Year after year, taxes were raised, only to be outraced by bigger deficits in the nationalized sector (about 30 per cent of the national economy) and by the outpour of more subsidies. At each abortive attempt at stabilization, the average Frenchman - not the peasants or the big operators - hastened to accept the solemn word of the duly elected government. Each time, he unloaded some gold and began to invest his francs in "stabilization loans" or in savings accounts, forgetting or forgiving his past disappointments, only to see his money's purchasing power fade again. As long as the people's patience did not run out, the incipient run-away inflation could be deflected each time into the creeping kind. And as long as inflation could be held to the slow pace, parliament had a free hand in tinkering with the budget.

Savers' Self-Protection and National Interest ROBBING THE SAVER of the fruits of his thrift robs the country of its capital supply. In the long run, it could be, literally, incapacitated. Fortunately for the future of France, the French capitalist did protect himself as best as he could, thereby protecting the national wealth from total destruction. As much as possible, he hid his fortune in gold or abroad. But by so doing, he reduced the currently available supply of funds on the domestic capital market and contributed to the exorbitant level of interest rates. Long experience with inflation - and deep memories of arbitrary rule by bureaucracies - taught the Frenchman to tum paper money into gold coins before the value of the former goes down the drain. By latest estimates the French public was hoarding gold, mostly coins, at the end of 1958 to an amount of approximately $3.9 billion. But that is only part of the story. The official Rueff Committee, which worked out De Gaulle's reform plans, stated that the French funds hidden at home or abroad, in gold, foreign securities, foreign real estate, and so on, totaled $10 billionl All available evidence supports this estimate; and that figure comes remarkably [22 ]

close to the $11.5 billion of total (direct) American aid and loans to France. In other words, foreign aid and foreign loans substituted for much of the capital France was losing temporarily or pennanently by inflation, and pennitted her to proceed with inflation. But in the process, France lost her international credit and was approaching the end of the inflationary road.

Capital Flight! No POLICE MEASURES short of the totalitarian variety can stop the flight of capital out of a country which has a sick currency, once people are aware of this sickness. The French government was forced in 1948 to legalize the "parallel market" in gold coins and foreign monies; as an illegal black market, it had added attraction. Restrictions on foreign exchange dealings are to some extent still maintained (now in the process of being scrapped) for residents only. They are, however, either ineffective or tend to undennine the confidence in the domestic currency, inciting the owners of liquid funds to expatriate them, and to leave them abroad, unless the early end of the restrictions is expected. Incidentally, the capital flight was even "morally" encouraged by successive French governments: at each stabilization attempt, past violations of tax laws and foreign exchange rules were forgiven on repatriated funds. The absence of any tax on capital gains was another invitation to speculation - and to income tax evasion. Tucking away gold coins and bars and foreign currenciesdollar notes, in particular - was only one fonn of the flight of French capital. Whenever the franc appeared in danger of a new devaluation, importers hastened to pay their bills in order to avoid paying more francs later for the same sum of foreign money. French exporters, in tum, postponed collecting their bills and left as much as possible of their export proceeds (in foreign currency) abroad. Much of the money spent by foreign tourists, sold on the illegal black market, or on the legalized "parallel" market, vanished in French private hoards. (Tourists' spending is a vital item in [ 23 ]

France's balance of payments.) Capitalists, who could afford it, walked out on France altogether, following their capital into Switzerland and elsewhere. The thing for a rich Frenchman to do was to have in Switzerland, Uruguay, or Belgium, if not in New York, a safe deposit box filled with dollar securities, real estate on the Lake of Geneva and in Tangier, ships under Panamanian or Liberian Bags, farms in Canada and in Argentina, plantations in Brazil. Not all of the money that stayed at home remained "idle" either. The wealthy attempted to hedge against three evils: (1) a nearconfiscatory progressive surtax - 70 per cent in the highest bracket, on top of a 20 per cent fixed ("proportional") income tax -; (2) inheritance levies; (3) appreciable property taxes; and (4) the deterioration of the currency. He did not need to be satisfied by hoarding gold coins and foreign notes, the refuge of the little fellow. He bought farms endowed with virtual tax exemption and protected by guaranteed prices; antiques, some of which skyrocketed in price; diamonds, which rose in price slightly faster than did shares of common stocks; and common stocks. The last, however, offered no tax haven and a somewhat less than perfect safeguard against commodity price inflation.

Perverting the Capitalists FRANCE USED TO BE a nation of solid, cautious, safety-minded capitalists. Sound money was a prime interest of millions of bondholders, landlords, insurance policy and savings account owners, big and small. Decades of inflation created new thrift habits, perverting the saving mentality of the population. It drove millions of people into an economic comer where the security of their "rainy day" depended, or seemed to depend, on continued inBation. Its termination appeared as a threat to their reserves and investments - built up on the expectation of indefinitely rising prices. As the inflation continued, or rebounded, with no end in sight, more and more people acquired ever-more interest in its further continuation. They not only failed to resist inflation; they did what they could to promote it.

[24 ]

Hedging on Inflation - Hopes and Illusions LIFE HAS TWO LEVERS, a skeptical French friend of ours said: hope and illusion. He was thinking perhaps of his own experience in hedging against the French inflation. France's official statistical office made an attempt at measuring the different ways of investing through forty-four years of monetary instability. Suppose 100,000 gold francs were invested in each of three ways: in gold, in the best bonds, and in 'blue chip" (French) common stocks. What happened to each account? Hopes and illusions worked out as follows: (Table A, page 26.) Money in the bond portfolio depreciated as did the purchasing power of cash. A more favorable, but by no means fully satisfactory, result was obtained by the investors in post-World War II "escalator" bonds. In common stocks, which skyrocketed, "only" a little more than half of the capital was lost. If, however, the security owner could aHord to reinvest all the interest and dividends earned -minus the heavy income, estate, and transaction taxes, but none on capital gains ~ he fared better; but he still was not spared a very substantial loss in purchasing power. In fact, some of his best stocks became stagnant after 1944 when the nationalization wave hit France. Shares of individual firms, or groups of firms, showed of course widely varying results. 1 Even the price of gold bars did not rise quite as much as the cost of living; and the owner lost more on them than on his shares, haVing had no return whatsoever on them for forty-four years I Was there any way in which the average French capitalist could really protect himseH? Gold coins appreciated some 50 per cent more than bars; but again, they brought no return. And how many people are smart enough to buy gold coins just before their price rises, or not to sell them after their price rose? The same question applies to ''hedges'' in common stocks. In an inflation that runs a Zig-zag course, the net result for a calculating hoarder was in 1

Additional infonnation on this development is provided in Appendix B.

[25 ]

TABLE

Year

1914 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958

A

Index of Commodity Prices·

Index of Gold Price in Francs

Index of Bond Values

100 (246)b (283) 364 297 314 361 391 451 569 544 571 584 596 528 505 497 459 443 529 647 715 774

100 (l05) (225) 304 235 288 414 357 514 486 492.5 492.5 492.5 492.5 492.5 492.5 492.5 492.5 492.5 700 960 1,230 1,420

100 82.7 80.8 72.3 72.0 75.2 69.1 59.0 53.4 61.9 75.7 82.3 91.6 94.1 90.8 87.8 79.9 85.8 79.1 78.4 75.5 88.3 85.4

139 198 202 206 232 315 483 463 349 221 243 222 174 180 221 204 244 271

(98.5)

(438)

109.6 108.4 106.9 111.0 110.2 104.0 89.1 80.2 80.1 79.8 83.3 92.4 92.2 97.1 105.1 102.3 104.1

786 1,220 1,094 1,011 1,146 2,053 1,997 2,254 1,791 1,618 2,465 2,677 3,139 4,872 5,392 5,604 7,010

(Controlled prices, no open marketoccupation and post-occupation period)

5,239 8,349 11,265 11,611 12,927 15,590 15,743 15,571 15,667 16,136 16,477 18,408

(17,166) (13,8201 23,509 16,904 15,479 16,788 15,013 12,715 12,395 12,947 13,500 16,031

Index of Share Values

100 117 137 126

112

• Arithmetic averages of the year-end indices of French wholesale prices and of the cost of living in Paris. b Data in parentheses indicate that the respective prices were either unofficial or controlled. Source: Etudes Statistiques (Institut National de la Statistique et des Etudes Economiques, Paris, July-September, 1958).

[ 26]

general disappointing. In ultimate reckoning, his choice was between bigger or smaller losses - short of smuggling his funds out of the country.

Real Estate -A Hedge "From Missouri" IN

French real estate. should have risen as much as commodities. In theory it should be a <'hedge"; but in practice, there are questions of site and nature of the property, taxes, and other factors. Rental property, excepting the luxury type, deteriorated physically as well as in value as a consequence of forty years of rent control. It required a dictator to raise rents effectively. on the bulk of apartments by 5 per cent each half-year, beginning January 1, 1959, but for the next five years only. By 1965, they will have caught up, maybe, with 50 per cent of the money's depreciation, if in the meantime prices do not rise further. Given the decay of the dwellings, most landlords cannot be expected to recover as much as half their investment, exclusive of the income they should have earned and did not, while some twelve million tenants "en_ joyed" ridiculously cheap but distressingly inadequate hOUSing. And neither side can ever be compensated for the neuroses acquired in the process of mutually harasSing each other for decades, to say nothing of the demoralizing effect of the "refined" chiseling practices developed by both sides. Farm land? For example, accordirig to the latest survey of the French Ministry of Agriculture, increases in estimated land value in 1956-1957 averaged 10 per cent per year -little more than the rise of commodity prices. But the increase was 7.5 per cent or less in most departments, while a few lucky ones experienced an increase of 25 per cent and 30 per cent. However, those farms are heavily overvalued, both as inBation hedges and because they carried much less than their proper share of the tax burden. Also, the major farm commodities were either heavily subsidized or protected by "escalators," the French version of our mischievous parity prices, and by governmental stockpiling (of wheat and alcohol, in particular). GENERAL,

[ 271

Since December, 1958, De Gaulle has eliminated many fann subsidies, raised the tax liability of the fann, and abolished all escalators, while the cost of living has risen by several percentage points. No more automatic adjustment either of wages or of fann product prices to the cost of living index! With exceptions few and far between, he who speculated in fann real estate emerges as a loser. From 1914 to the end of 1957, the average value of fann real estate, in units of stable money, declined by 37 per cent! Small wonder that the speculator in this area has joined l:l. majority of Frenchmen who cynically prayed for more inflation and further devaluation of the franc - in order to protect their "hedges."

[28 ]

Chapter IV POLITICAL HEDGING

THE SuREsT WAY for the Frenchman to protect himself against a "creeping" inHation was by talking to his deputy in the French Parliament. If the constituent is a major contributor to the campaign of his deputy in the Assembly or represents a substantial number of votes, his deputy is likely to extend help. In fact, the French bureaucracy itself was constantly on the alert to beat the deputies to measures by which regional, professional, or class interests were to be safeguarded against the ill-effects of the inflation. Each of those procedures tended to relight the inflation's Harne. The welfarist medicines to repress the symptoms drove the ailment ever-deeper into the economic and moral fibre of society. They were the chief factors in unbalancing the budget and the international accounts. They demoralized the consumer and begot vicious social conflicts.

Riding on Escalators WHEN A GOVERNMENT defrauds its citizens - inflating the currency means in effect to defraud them - it invariably tries to forestall the. substitution, by the public, of a stable standard in the place of the one subject to tinkering. Already in the 'twenties, the French government had prohibited the use of the gold clause. But as inflation became ingrained in the FreRch way of life, this rule was freely violated. Mter ·World War II, the government itself decided to abandon it; bonds became almost unsalable, even with tax-exempt features, unless payment in money of stable value or its equivalent was promised. Hence the gold-clause loans of finance minister Pinay in 1952 and again in 1958. Hence, also, the nationalized industries' (state guaranteed) bonds serviceable in [29 ]

paper money, with payments to vary in proportion to the price of a ton of coal, or a kilowatt of electricity (sometimes combined with an index of electricity output), or the unit price of rail transport, or a cubic-meter of gas. The French treasury went so far as to issue obligations redeemable in as many more francs as warranted by an intervening rise of the index of stock quotations on the Paris bourse. Escalator-protected loans of corporations sold on a 5-6 per cent yield base; but the issuers were burdened also with transaction taxes, etc., costing another 3 per cent. . Once the government embarked on the slippery road of escalators, it could not help but slip further, virtually abandoning its own monetary standard. To appease the strike-disposed employees in public service, it put all salaries and pensions on a cost-of-living scale. Within a short period of time, an escalator had to be injected into all wage contracts, such as a cost-of-living index, or a combination of several such indices, or a Single "parameter": the price of cement in one industry, or of timber or steel in others. The currency remained the franc, but index numbers became the ultimate standard of value - a characteristic feature of "slow inflation" at an advanced stage. Escalator clauses spread like a contagious disease. Physicians insisted on the automatic revision of their official "tariffs" as prices rose. (In 1914, the actual fee for a Simple visit to an "industrial" doctor's office in Paris was 5 francs, the same as the market price of a chicken; in 1958, it was approximately 1,000 francs - again roughly the same as the price of a chicken.) One could not any longer lease office or shop space anywhere in France without making the rent contingent on the index of wholesale prices or on the price of a specific commodity. In farm leases, money sums were replaced by quantities of wheat, butter, eggs, milk, beef, or chickens. Premiums and reimbursements in automobile insurance were calculated on the basis of metallurgical prices. The (nationalized) life insurance companies could not apply escalators; instead, they put their poliCies on a year-to-year base. Business, big and small, was successful in protecting itseH, after a fashion. There were manipulations with export proceeds and im-

[30 ]

port liabilities. Expense accounts as a tax-"hedge" are of course not confined to France, but scarcely anywhere else had they been developed with equal sophistication, thanks to the connivance of some revenue authorities. Similarly, business "got away with" depreciation allowances which took into account future price increases, thereby contributing effectively to the rise of prices. Altogether, tax "defrauding" by business was estimated in the mid-1950's at 22 per cent of the tax liability in manufacturing, 25 per cent in commerce. And the political influence of business, again big and small, was strong enough to permit far-reaching cartelization and to guarantee monopoly profits by high tariffs and sharp import restrictions. Coming back to the escalators: as a widespread system of indexed obligations, it is a self-defeating device. Inflation, unaccompanied by escalator adjustments, "pays" in high degree to the debtor, public and private, as long as the creditor can be robbed and provided the debtor himself does not get into trouble. Once the creditor is generally protected by escalator devices against the . evisceration of loan obligations, the burden of the debts tends to become unbearable to debtors. The alternative then is either outright default, or run-away inflation - if not stabilization of the gold value of the currency.

Chiseling on the Escalators THE GOVERNMENT did not shy away from defrauding the creditors or from deceiving the entire citizenry. The cost-of-living index was manipulated time and again in order to postpone wage and salary boosts. It was easy to do; the government's statistical office simply changed the method of calculation by taking more items into the index, or leaving out some, or varying the weight attached to each. Another Simple way of manipulating indexes was to declare a price stop on individual commodities or whole groups of commodities. This was one source from which subsidies and duplicate price structures originated. The consumer paid a price lower than the cost for butter, rice, chocolate, eggs, "common" wine, pure alcohol, milk, and other things; the farmer received his full price, the differ[ 31 ]

ence being paid by the taxpayer - or through the use of the printing press. And the price index, in which the prices of subsidized commodities predominated, was "stabilized." The gold escalator on the Pinay loan of 1952 provides an example of government manipulation. In addition to being exempt from income and estate taxes, and embellished with a lottery feature, it was to be serviced according to the market price of the 20-franc gold coin, called the "Napoleon," approximately equal to four gold dollars. Whenever that price would rise over 4,000 francs in the Paris open market - the world's greatest market for gold coins and (smuggled) ''kilobars'' - the creditor would receive proportionately more francs. Ever since, the price of a Napoleon has stayed just slightly above 3,600 francs. The French Treasury mints them and throws them on the market in order to keep down the price even when the prices of other gold coins go up. Incidentally, indices of the price level have a life span of approximately 5 to 10 years; after that they become worthless because of changes in the "basket" of goods which enter into the calculation. And it is worth noting that the bourse of Paris flourished most at times when the inflation slowed down. What happened to the escalators on S- (Stabilization) Day, December 27, 1958? One short ordinance forbade all such practice. While they lasted, the escalators amounted to a "built-in" inflationary contrivance; each time an index figure became operative, the whole price-wage structure received an upward boost. But great damage had been done by the time their use was terminated - damage to the "morale" of the people who, relying on their respective escalators and subsidies, resented every attempt at stabilizing the purchaSing power of the currency.

Redistribution and Retribution POLmCAL PULL became the Frenchman's instrument, used individually or via pressure groups, to obtain private monopoly positions; to take advantage of special loopholes in the snarled administrative framework of regulations, controls, and restrictions; to [32 ]

obtain governmental siriecures and pensions, or partial or full tax exemptions, cheap credits, low rates for the products of nationalized industries, cheap medical treatment, nominal rents, and a multitude of other subsidies. The poor drew subsidies for "social" reasons, and the not-so-poor for improving "productivity."1 In the scramble for inflation hedges, tax havens, and governmental favors, a system of wealth redistribution evolved, a basic rule of which was retribution: punishing those who obeyed and trusted the laws, who did not or could not cheat on social security levies (the business corporations) or on taxes, or on foreign exchange restrictions, and the landlords who could not hide their properties. With its right hand, the Fourth Republic spent literally billions of dollars to foster the nation's industrial apparatus; with its left hand, it protected miniature business units by exempting them from income and production taxes and license fees - under the condition (until 1955) that they use no motorized equipment! These procedures provided a breeding ground for an economic mentality, best described as "existentialist:' They undermined more than the'public's respect for government and law. They thwarted belief in the virtue of sa~gz - hence the reckless French consumer spending that created the mirage of rising living standards - and in the virtues of the free, competitive market. All that mattered waS survival in an economic jungle in which the sly and the unscrupulous had the best opportunities for success. 1 The French butter price support may serve as an example of this system's operation. In order to please agrarian voters, the Fourth Republic placed a 19.5 per cent "added value" (esseritially payroll) tax on the oleomargarine producers. The more expensive butter was exempt. The low-Income consumers would have been deprived of fats without a butter price subsidy. The case illustrates, also, the well-known fact that each subsidy, or direct control, tends to germinate others. 2 In mid-1914, deposits In French savings banks were estimated at 13 billion gold francs. By mid-1958 they should have grown to 260 billion francs, given the infIation-coefficient of 200, even if no new deposits had been added. But the total amount at the latter date was barely 190 billion 'francs. At that, the original savers have lost the 3 per cent annual (cumulative) interest for forty-four years. While the demand for savings - for Investment - skyrocketed; their supply In "real" terms declined to a fraction.

[33 ]

Distorted Price Mechanism .AN UNFEl"lERED, competitive price structure automatically tends to adjust supply and demand. InHation, on the other hand, sparks excessive demand and an artificial scarcity, which generate the cost-price spirals. The bureaucrats' answer is price control and its twin brother, rationing. They "organize the scarcity," at best, but do not defeat the sellers' markets. In fact, they increase the trouble by discouraging production - unless subsidies make up the difference between the real costs and the fictitious prices. Moreover, the attempt to freeze prices, be it of commodities, services, or foreign moneys, runs afoul of the natural dynamism of an industrial society, generating inHexibility, inefficiency, and escape mechanisms. A long-stretched inHation threw the price system of France out of gear. The "mess" continued to grow as the policies were prolonged until price-making and income-distributing became largely a function of arbitrary decisions by the authorities - or of guesses as to their prospective decisions. In the morass of inflation, the parasite flourished - the shrewd "operator," the political chiseler, the lucky possessor who had managed to hang on to a comfortable niche in the devious recesses of the Welfare State. For a decade, France was a statistician's dreamland of over-full employment. Gross national product, which is the higher the more the government spends and the less the people save, rose by 8 per cent and 10 per cent each year, the highest rate of growth in Western Europe (except in Germany). All figures skyrocketed including prices and foreign exchange rates, the deficits in France's budget and her foreign trade, and the volume of outstanding credit. The Frenchman's living standards rose, if one does not count the miserable housing situation - "definitely remedied" once a year on the average -, and forgets that his savings in francs evaporated, that his tax burden continuously increased, and that his debts, even consumer debts, zoomed. The latter were taboo to the French as recently as five years ago. There was over-full employment at less than $100 a month for a 44-hour week's work, plus cradle-to-grave "security," low rents [ 34 ]

and almost no income tax (only 5 per cent, usually paid by the employers on monthly wage incomes of less than $100) but extravagant excises that accounted for 70-odd per cent of total tax revenues. One out of every five families could afford a small car. But relatively few could use them because of a gasoline price 300 per cent of the American price and the average of family incomes barely 25 per cent of that in the United States. French mining, utilities, and large-scale manufacturing expanded with relative rapidity, particularly the nationalized industries which skimmed off the cream of American aid and of the domestic capital market. But the official commission des comptes de la nation reported that between 1949 and 1955 more than twothirds of the new investment in fixed capital served unproductive purposes. At that,· the total of annual construction, in percentage of national income, was smaller in France than in almost any other industrial country. And 1.8 million small farms and over one million small retailing· and handicraft units - with less than one employee each, on the average - were literally stagnating, with their ability to evade taxes serving as the French equivalent of "good will." The pattern of income distribution became thoroughly distorted. For example, a haircut in Paris rose twice as fast as the general level of prices, but teachers' remuneration lagged behind prices, this in the face of a surplus of barbers and a shortage of teachers. Another example is found in a typical case of relative prices: 1913-1914

1953

1 quintal (100 kilograms) of wheat

27.73 francs

3,570 francs

1 Renault automobile

8,200 francs

790,000 francs

In other words, a Renault car bought 295 quintals of wheat before the inflation and only 221 quintals in the midst of it. But the car has grown bigger and much better while the wheat has

[35 J

remained as it was - except that its market price has been kept below cost (at the taxpayers' expense). 2 Since prices are costs to the buyer and incomes to the seller, distorted proportions between them mean unfairness to the fonner or the latter. The French tax system, a multitudinous hodge-podge of ad hoc imposed and highly discriminatory levies, designed in good part for the purpose of combating the inflation, with a strong bias against business, carried no small responsibility for price distortion and injustices. Subsidies and other collectivist interventions also provided a share of distortions and injusti<:;es. The monetary factor was decisive. The tremendous volume of new money poured out over a period of many years or decades was by no means equally or proportionately distributed. Whole sectors of the economy, geographical and professional, thought themselves discriminated against, as they often were. The worst of it all was the uncertainty created by the fluctuations of the currency's domestic purchasing power and foreign exchange value. No one could foresee from one week to another whether the price level would jump again, or how much, or how he or she would be affected. Rational housekeeping became extremely difficult, rational calculation in business almost impossible. Necessarily, wasteful mal-allocation of productive resources was the outcome.

At the End of the Inflation Rope FRENCH INDUSTRIES were greatly expanded and partly modernized, but often loaded with over-capacity and almost always burdened with- relatively high interest and labor costs, and with excessive tax and social security burdens. High unit costs impaired their capacity to compete for foreign outlets. The scramble for political privileges was engulfing the national budget; the franc was on its last leg. Parliament would not stop the decay; the more it tried to protect people against the evil effects of inflation, the more inflation was the result, and the greater the need for further protection. 2 From Divisia, Dupin and Roy, A la Recherche du Franc Perdu (In Search of the Lost Franc), (11 bis avenue KIeber, Paris, 1954), Vol. I. p. 23,

[36 ]

French democracy, too, was at the end of its financial and "moral" rope. It could not go on gorging itseH on paper money and economic controls; nor could it desist because stable money and liberated markets implied the destruction of the politicoeconomic fortresses, illusory as they were, which each individual or group managed to cut out of the WeHare State. 3 By 1958, the inBation showed definite signs of tiredness. Interest rates were approaching prohibitive levels: 9 per cent and higher for "secured" short-term commercial credit, up from less than 2 per cent in 1946. These high rates were the creditors' seH-defense which threatened to stymie the industrial expansion. Investment in capital goods fell from a 10 per cent annual rate of increase to 2 per cent in 1956. Nothing short of an accelerated money-printing could have saved inflation's day - and that only by landing the country in a debacle.

3 According to Professor J. M. Jeanneney, Forces et Faiblesses de l'Economie Frafl{:aise (Strength and Weaknesses of the French Economy), (Colin, Paris, 1956),

Chapter I, the underlying cause of the post-World War II increase in the French. birth rate was inflation. Having "destroyed" the savings instinct of the Frenchman, he ceased to calculate the number of children he could afford. In fact, given rent control, free education, free or cheap medical services, food and other subsidies, aDd tax exemptions, a French workman's family with four children could live on the children's allowances provided by the Social Security.

[31 ]

Chapter V THE BALANCE SHEET OF FRENCH STABILIZATION

Capitalism with a Crippled Price Mechanism THE TRUE SCOPE of the recent French monetary and fiscal reform has been little understood in Europe, still less in America. For Poincare, in 1928, all that mattered was to balance the budget, to stop monetization of the public debt, and to return to gold convertibility of the currency. (The budget was actually overbalanced for the four years, 1927-1931.) For De Gaulle, convertibility is a remote goal, genuine budget balanCing perhaps even more so. Stabilizing the budget deficit and the external value of the franc are the prime agenda. At the same time they are means to an overriding objective. What is now a chief objective, was scarcely even problematiC thirty-odd years ago: the restoration of the price mechanism. By a myriad of devious techniques, the French price system and income distributiqn had been effectively distorted, until even the semblance of competitive markets had almost vanished. The semi-autarchic Welfare State has nowhere been more fully, more "scientifically," and more disastrously, developed than in France before De Gaulle came into power. As a result, French prices had lost contact, more or less, with the world markets and with domestic costs. Costs, labor costs in particular, had lost contact with labor efficiency, even with the cost of living. Between 1950 and 1957, Parisian wage incomes went up 2~-fold while the cost of living index rose by 80 per cent. Wage rates rose by 105 per cent. Distortion of 'incentives and mal-allocation of resources into protective ''hedges'' in lieu of productive investments (characteristic of noninHationary times) became rampant. The combination of [ 38]

over-expansion in some sectors and under-development in others was one of the earmarks of France's great "recovery." Legitimate profits ceased to bear a rational relation to risk incurred or value produced; with costs, prices, and profits divorced from the supplydemand equations, the survival of unfit business and farms became an unwritten imperative of national policy. An intellectual setback went hand in hand with the economic disruption, brought about by the cumulative psychological impact of economic immobilities, frictions, lags, and disequilibria. Within a generation's lifetime, French economists and businessmen, to say nothing of the bureaucrats, have seemingly forgotten the principles of the market place. They have lost their sense for the ability of the free market to prOvide the optimum of output, of consumer satisfaction, and of distributive justice. Among intellectuals, the Keynesian gobbledygook reigned supreme. Here was a prime re(J$on for lack of resistance against inflation: fear of the "free" market if the shackles of bureaucracy were thrown off. Nor was the popularity of free enterprise enhanced by being identified in the public's mind with the profiteers of inflation, war, black markets, governmental favors, and tax frauds - the stratum of irresponsible "newly rich." The chief cause of the trouble, though by no means its sole cause, was the national budget - the irrepressible flood of "social" subsidies and "economic interventions" (another name for subsidies), begetting deficits and inflation. After the liberation in 1944, the Fourth Republic's money supply rose by 540 million francs on a daily average - an amount larger than the total forced upon the country during four years of German occupation.

Fiscal Reform: Principles IN 1958, France's budget deficit amounted to 600 billion francs, roughly $1.2 billion. This may not be dramatic by American standards; but in tenns of the respective per capita national incomes it was equivalent to $14 billion, or more. And that was neither the

[39 J

beginning nor the end of it as is revealed by Table IV in Appendix B. Huge de~cits were piling up year after year. By October, 1958, when the Minister of Finance had his 1959 budget put together, he was confronted with a prospective hole of almost $2.4 billion (1,200 billion francs). Such was the delayed eHect of the 1951 devaluation, reinforced by the impact of the all-pervading escalators. The mere announcement of the prospective deficit might have sufficed to send the franc into a tailspin. More than one-half of this deficit could not have been raised except with the- aid of the printing press. With the vicious price- and wage-escalators coming automatically into operation and a fresh wave of capital Hight setting in, the complete debacle of the franc was to be expected in· a matter of months. The Common Market - a political "must" on De Gaulle's agenda - would have been reduced to a farce. The Fifth Republic would have shared the inglorious fate of the defunct Fourth. Thorough house cleaning was mandatory. It had to follow prinCiples which negate, more or less, basic tenets of the Welfare State. From here on, generally speaking: 1. Public revenues are to pay for public spending - not for redistributing incomes or manipulating the economic process. Thereby, France returned to the classic rule of fiscal policy according to which taxes are raised for one purpose only: to cover expenditures. Literally overnight, a fundamental postulate of all socialist taxation was thrown into the wastebasket. Accordingly, taxes were raised whenever higher rates promised improved returns - on articles of mass consumption such as cigarettes and gasoline; and they were lowered, by approximately 2 per cent, on perfumes and caviar, in order to increase revenues. While tax loopholes are being closed, "exceptional levies" on business corporations and onerous real estate transfer dues are being eliminated. The slap in the face of the Welfarist philosophy is more resented by the "liberals" than is the moderate shift in the incidence of the tax burden.

[40 ]

2. Similarly, budgetary expenditures are to serve essential functions of the government, not to "direct" the economy, or to control the business cycle, or to reform mankind, or to falsify the price mechanism. Nationalized industries in chronic financial trouble and the very sick socialized medicine have to pay their way by increasing their charges and/or redUCing their services. Subsidies to consumers, veterans, and farmers, hitherto the most favored beneficiaries, are to an appreciable extent eliminated.

3. No more hidden subsidiesl If subsidies there must be, they should appear in 'the budget. Especially, the (nationalized) Bank of France should not be used as a vehicle to pour out funds that do not figure as public expenditures as had been done for several years. For example, the central bank had been forced to provide intermediate credit ("mobilization" bills) for home construction. In 1958 alone, this inflationary malpractice stretched the French money base by 274 billion francs, despite severe credit restrictions which were among the last attempts of the outgOing Fourth Republic to save the franc and itself. 4. No tax priVileges are to be granted, or in exceptional cases only, and no tax evasion is to be tolerated. The French farmer, for one, had been de facto, though not de fure, exempt from paying the progressive income tax. He will soon begin carrying his share (also, in social security levies). So will people whose consumption conspicuously exceeds their declared incomes. As to small business, not even a dictator dares to propose to the French that they make their income declarations under oath. But 2,100 inspectors are engaged to weed out the tax chiselers. 5. The extremely complicated structure of the tax system is being greatly simplified, with incident relief from excessive bureaucratism as well as from unnecessary administrative costs. For example, the variety of tax rates on "added value" - a sales levy on the manufacturing level, in effect - has been reduced from 20 to 4 per cent. "Nuisance taxes:' were replaced by raising the corporate income tax from 46.5 to 50 per cent. The basic [41 ]

tax rate on the income of the sell-employed was raised from 19.8 to 22 per cent. But the reform of the tax system can be expected to take time. In fact, the major task is to reduce the total load of levies. Notwithstanding appearances to the contrary, the French are one of the western world's most cruelly over-taxed people. 1 6. All expenditures other than for "productive" capital investment are to be covered by current revenues. 7. The deficit (for productive investment) is to be limited to the amount the government can borrow from domestic savers. The distinction between "genuine" and "artificial" savings is far from being as clear-cut as the theorists, who wrote De Gaulle's reform plan, take for granted. The subscriber to a bond issue may proceed to use the securities as collateral to borrow from a bank, thus finanCing the public deficit by credit inflation. In any case, the implied rule is that there is to be no more debt monetization by direct recourse on the central bank or the commercial banks. The practice of the Fourth Republic, to spend first then look for means to fill the hole in the budget, is abandoned. . 8. A key feature of fiscal reform is, or will be, the simplification and decimation of the overgrown bureaucracy. Whenever a problem arose, the French Welfare State's answer was a new official agency, usually overlapping and conflicting with older ones. The consequent inflation of the bureaucratic apparatus cannot be cured overnight. It can be expected to take years before the full benefit of administrative deflation will accrue to the harassed public and the Treasury. Raising the bureaucrats' retirement age -lowest in the nationalized industries ~ is another item on the same agenda. 1 A "fundamental recasting" of the French tax system was proposed on May 15, 1959, by the Minister of Finance who recommended replacement of the two personal income taxes by a single tax, to be levied at the source; reduction of the (confiscatory) estate duties for inheritance in direct line; and so on.

[42 ]

«Operation Verity" SUBJECTING FRENCH PIDCES and incomes to the acid test of the law of supply and demand - is the general idea of De Gaulle's budget reform. However, more than the budget has to be reformed in order to accomplish this aim. Terminating the monetization of the public debt and stabilizing the currency herald the end of paper money inHation and the restoration of competitive markets. Lacking the automatism of the gold standard, commercial credit inflation was checked, since February, 1958, by strict ceilings set over bank borrOwing at the Banque de France. Import licensing has been very substantially relaxed. On January 1, 1959, the Common Market went into operation, reducing by 10 per cent the tariff against the other member countries and increasing quota-free imports from them at least to an amount equal to 3 per cent of each product's output in France. Lesser concessions have also been granted to nonmembers,. and French trade liberalization proceeds apace. (Something akin to free trade is to be established by 1972 within the six nations' European Community.) Foreign exchange restrictions are being lifted at a fairly rapid rate. The economy is being progressively exposed to international competition, and thousands of parasitic organisms, are deprived of arti6cial nourishment. Also, the cost of imports is being reduced; scrapping some quotas imposed in dollar trade saves, as an example, 5 per cent on the cost of imported cotton. Although all these reforms are in some respects far from genuinely free markets, they are much more than a mere beginning. The French Welfare State has not been scrapped. Of the projected 1,268 billion francs in direct subsidies and "interventions," not less than 1,032 billions survive the budget purging. Social Security (actually expanded by broadening the range of the «insured,'? though the medical kind is trimmed) is expected to take a 4,845 billion-franc bite of people's incomes in 1959, 179 billions and 591 billions more than in 1958 and 1957, respectively: The government retains full control of the capital market. Arid there remain Significant residuals of dirigims: some prices in the

[43 ]

fann sector (and beyond) are still being fixed; the national industries stay nationalized; and a major fraction of the nation's investments is still planned and financed by the authorities. 2 The 1959 budget estimates carry 619.4 billion francs ($1.22 billion) for new investment in the nationalized industries. For example, Electricite de France, by fat the largest single nationalized unit in the generation and distribution of electricity, leads with 274 billion francs 85.4 billion francs more than in the previous year. 3 True, most of the governmentally-owned enterprises are to become self-supporting, and are to save the taxpayer an annual 100 billion francs, by boosting their rates. But a major portion of the capital needed for their huge expansion, commandeered by the official Plan Commission, still has to be borrowed or guaranteed by the Treasury. The latter also provides funds for the expansion of private industrial capacity as well as for schools and the corruptionridden public housing. The projected 1959 deficit of 587 billion francs, approximately 8 per cent of the budget, is the fiscal expression of the Keynesian misconception, still prevalent in France, that the growth of basic production cannot be left to the "vagaries" of the profit motive . .As a matter of fact, capital investments (constructions of all sorts) appear in the current budget with a hefty 1,470 billion francs, 26 per cent above last year; they constitute almost one-fourth of total expenditures.

Marrying the Welfare State to Sound Money SEVERAL ASPECI'S of the French monetary and fiscal reform are open to criticism, espeCially the rate of 17.5 per cent at which the 2 The Fourth Republic nationalized all public utilities, coal mining, the large deposit banks and life insurance companies, trans-Atlantic passenger shipping, a substantial number of individual firms such as the leading automobile producer, and so on, all these on top of the previously nationalized tobacco and match'industries, post, telephone, and raUroads. Presently, the Fifth Republic is considering whether to divest itself gradually of some of its direct and indirect holdings in nonnationalized plants. The nominal value of such participations is given as 160 billion francs ($320 million). The real value may be a multiple of that amount. 3 Table III in Appendix B contains additional information.

[44 ]

franc was devalued. Devaluation was necessary, allegedly, in order to give French exporters an initial opportunity in the Common Market because of the fact that their wage rates and social security burdens are higher than in the other five member countries' and because 60 billion francs of export subsidies have been eliminated from the budget. Their burden has been shifted, in effect, from the shoulders of the French taxpayer onto those of France's commercial competitors. And huge profits were thrown into the laps of the speculators who had sold the franc short. The significant thing is the abandonment of managed money. Even though the full automatism of the gold standard - the goal of Minister Pinay and his top economist, Dr. Jacques Rueff - has not yet been restored, a vicious inflationary automatism, the escalators, has been jettisoned. In effect, real wages are cut by 5 per cent or more in the private sector; to a lesser extent also in the public sector. This is a real blow to the concept of the Welfare State, accompanied as it is· by some unemployment and a good measure of short hours. But the workers are not the only class that "pays" by months of austerity for the years of prodigality. Virtually all classes of French society have to accept some measure of "punishment" in the interests of their own longer-run benefit and security. The overhauling of the French economy is well under way. With costs held within reasonable bounds and the competitive incentives unleashed, business enterprise should gain a sound impetus. Most important is the fact that confidence in the currency be restored. Since January 1, 1959,the country's gold and foreign exchange reserve has been increasing. Presently, for the first time in years, these reserves outstrip the government's foreign obligations. By late May, 1959, the surplus of reserve was $200 million as against a $650 million excess of liabilities barely five months earlier. There is no more ratissage (window dressing) in the central bank reports. A spectacular improvement of the trade balance and, most Significantly, of the How of funds into the savings instif

Supporting data in Appendix B.

[45 ]

tutions goes hand in hand with a remarkable (dailyl) rate of . "repatriation" of hidden wealth. All of these manifestations are the auspicious opening up of a reform rather than the final reform itself. The shotgun-wedding of Sound Money with the Welfare State was a compromise - apparently the best the De Gaulle regime considered enforceable without recourse to violence. Its hopes are set on the regenerating power of the liberalized market economy, the return of Hight capital, the influx of foreign funds (German funds, in particular), the rehabilitation of the French saving propensity, the budgetary "discipline" and austerity established by a stable monetary standard, the development of the vast oil-gas resources of metropolitan France and the Sahara, and, last but not least, the stimulus of the European Common Market - perhaps a stepping stone toward freer trade in the whole of Europe.

[ 46 ]

Appendix A INFLATION BY TECHNOCRATS

The following is taken from the author's pamphlet Nationalizations - Ten Years Later, reprinted by the National Research Bureau, Inc., 415 North Dearborn Street, Chicago, Illinois (1958), by permission of the Chicago Tribune where the material appeared originally between January 5 and March 2, 1958.

ON

EITHER SIDE of the Atlantic, the average citizen does not distinguish one bureaucrat from another. But ask a member of the elite that runs a nationalized industry and he will tell you that he does not belong in the bureaucracy. In fact, more often than not, he is at loggerheads with the officials of the parent ministry (who in tum try hard to penetrate the nationalized organizations). Of course, he is very different from an entrepreneur too. And he is not, or need not be, a professional politician either. He may be de-

scribed as a cross-breed between a national policy maker, an administrative agent, and a normal business man, a species sui generis, with a strong tinge of political acumen added to his make-

up. He may not like to be called a technocrat, but from the functional point of view that is the way to define him. A technocrat is no bureaucrat in the conventional sense. He is not subject to the rules which regulate career, pay, work, and promotion in governmental service. He enjoys more "freedom" of action, a higher income (plus much more generous expense allowances) and often also a greater prestige than does his equivalent in officialdom. As a rule, the major nationalized industries are organized as "public corporations," no different in legal form from private ones. The difference is in the substance: the government owns all, or almost all, of the shares of

[47 ]

stock. It appoints the top managers, or has a veto power over their appointment by a board of directors that fronts for the government, usually with some representatives of the trade unions and other groups thrown in for window dreSSing, more or less. In each of the socialized units a comparatively small clique wields extraordinary power, combining the political inHuence of an administrative authOrity with the financial power of big business, some of them among the world's biggest. (Note, in passing, the similarity with the position of "trust" managers in charge of entire industries in Soviet Russia. ) Top-level technocrats are not hamstrung by the customary red tapes, nor inhibited by budget controls. They run businesses which are under no obligation to pay dividends or to earn annual profits. It does not matter much whether they accumulate reserves for depreciation and obsolescence of plant and equipment. A nationalized unit, whether an. entire industry or a single plant, does not even need to have equity capital. Its capital account consists of whatever debt it has incurred; if interest and amortization are not earned, that is just too bad for the taxpayer who is stuck with the deficit. Fresh capital is no problem either: The government's credit can be tapped, and on easier terms than those business has to accept. In fact, the collectivized sector has the first call on the respective country's capital resources. And it enjoys favorable tax treatment; in many cases it pays no taxes at all. . Technocracy is the better off the less competition it faces. Its natural breeding ground is the mammoth organization that embraces an industry: coal, electricity, gas, aviation in Britain and France; railroad and telephone all over Europe, to mention the largest ones. Their near-monopolistic position and the centralization of their managements provide rich scope for grand scale planning and expansion. The functional significance of the technocrat comes to light in the framework of these monopolistic and centralized Leviathans. He may be a competent technician who thinks in terms of kilowatts of electricity, thermal units of energy, ton miles of transport, rather than in such petty terms as pounds sterling, francs, or lira.

[ 48]

His economic catechism is the national income statistics on which the long tenn projections and plans are based. An enthusiastic planner is he, who can predict "scientifically" the growth of demand for his product or service in the next ten, twenty, or more years. The growth he predicts is invariably grandiose and gigantic. Not being inhibited by either bureaucratic red tape or by ordinary risk considerations (the money he spends and invests belongs to no one, unless to the anonymous taxpayer with no voting rights, and he derives pride and reputation, but no pecuniary rewards from the money the enterprise earns), the sky is the limit of his imaginative vistas. The result is what might be expected. In countries short of capital, fantastic expenditures are being incurred in the nationalized sectQr for expansion, improvement, and rationalization, witho.ut regard to actual demand, Co.st, o.r inflatio.nary co.nsequences. Inflationary they are, in more than Qne way. While not subject to. control by the profit motive, the technocrat is nQt even under budgetary control in the sense in which the governmental departments usually are. A parliament can determine in advance hQW much sho.uld be spent o.n education o.r Qn justice. But it canno.t decide ho.W much it costs to run a railrQad or to. produce a kilowatt of elecbicity. Nor does it know how many new generators Qr freight cars may be needed and what price should be allowed for each, what kind of salaries would attract the best talents, and so on. It has not the time to discuss the infinite details involved. Customarily, it devQtes half a day, or maybe a full day, to. the budget Qf each major nationalized industry (also. of socialized medicine). The minor Qnes are scarcely discussed at all, and the discussions are Io.aded with Qrato.ry fQr the benefit o.f the orato.rs' public relations. There are special Parliamentary co.mmittees at wo.rk; but they have to. rely Qn the info.nnation and co.mmentaries supplied by superviso.ry agencies Qf the same go.vernment, the policies Qf which are under fire. No impartial efficiency expert is pennitted to enter tho.se privileged eco.no.mic sanctuaries, the natiQnalized industries.

[ 49 ]

These colossal organizations tend to grow into independent centers of social power, states within the state, functioning largely under their own rules or whims. Outside control of day-to-day operations is made illusory by the mere fact, or trick, that they publish reports once a year only, and then six to nine months late. Scrambled eggs cannot be unscrambled; commibnents cannot be reversed. Even if the Parliament would know what to do, and would care to do it, too many vested interests would be hurt. In any event, the technocra~ can sabotage managerial policies imposed on them. Politically, it would be absurd to try to unseat them; it might cause a cabinet crisis, since the ultimate responsibility is that of a cabinet member. They are protected by the unions, too, which are violently opposed to every move that might give impetus to denationalization. (For the same reason, the unions fight against every attempt to break up the ludicrous overcentralization.) There is one thing the government and/or Parliament might do to trim the technocrats' delusion of grandeur: limit the funds for expansion. But that is the politicians' last resort. Whenever credit restraints are applied in order to combat inflation and dollar shortage, business is first to take the rap; nationalized industries come last, if at all. Nor is any public criticism of their utterly wasteful management of any avail. Even the recurrent accusations of outright corruption, which is rife in Italy and to lesser extent in France, have no effect. But political .influence is by no means absentwhen it comes to putting over policies which serve to win votes or to appease pressure groups. The ultimate subterfuge of the nationalized "organisms," as a 1957 French official report pointed out, consists in - incurring debts. They manage to cover up much of their operating deficits by charging them to capital investments. Thereby, the last shred of parliamentary control is in danger of disappearing.

[50 ]

AppendixB (Compiled from oflicial sources) TABLE

I

Index of Yearly Average of Month's End Averages of Stock Quotations on the Paris Bourse

TABLE

II Annual Indices of Common Stock Quotations on the Paris -Bourse, 1938-1958

TABLE

III Annual Budgetary Expenditures of France on Industrial Investments

TABLE

IV French Money Supply, Budget Defi"cit, and Gold Price (In Paper Francs)

TABLE

V

TABLE

VI Hourly Wage Costs and Real Wages in the European Common Market Countries

TABLE

VII Index of Hourly Wage Rates (All Workers) in the Metallurgical Indus,. tries of the Paris Region

TABLE

VIII French Official Devaluations: Gold Purchase Price of the Bank of France

French National Debt

[51 ]

TABLE

I-

INDEX OF YEARLY AVERAGE OF MONTH'S E (IN PAPER FRAN'

.

Number and type of firm:

S

3 In· sur· ance Cos.

3 Coal Mines, Center Areas

5 Coal Mines North

Misc. Mines

6

10 5 Forges Metals and & Found· Ma· chines ries

5 Constr. 3 Ship. Mater· yards ials

Year

Banks

1913

100

100

100

100

100

100

100

100

100

1919

94

93

130

90

134

128

151

119

194

1920

106

104

177

137

168

163

192

127

218

1921

92

105

138

107

118

108

152

78

180

1922

94

131

129

108

129

92

157

52

197

1923

114

186

178

166

190

118

221

60

334

1924

119

245

231

183

244

105

247

58

352

1925

107

157

258

168

290

76

203

38

300

142

173

315

207

384

95

215

34

370

~g 1927

196

292

331

249

392

110

251

39

432

~o 1928

323

650

408

342

435

197

369

52

540

Ir~

365

995

425

534

499

290

456

57

668

1930 1931

324

965

345

510· 379

243

416

52

582

244

733

226

312

213

126

317

44

424

1932

190

610

162

230

158

85

254

33

308

1933

186

598

149

220

146

75

237

38

197

1934

159

571

117

165

103

53

18l

44

124

1935

136

554

119

165

118

61

170

55

102

1936

120

392

110

133

138

61

158

51

112

1937

129

383

107

144

230

93

185

54

157

z

0

~

!:

~c {1926 , ....... -z

z 0 ;;;;

...... ...

." A.

co

[52 ]

&:RAGES OF STOCK QUOTATIONS ON TIlE PARIS BOURSE.

H3 = 100) Number and type of firm: 7

Year

6 5 Chem· Texicals tiles

13

11

Nay·

4

3 Transit iga· Rails Cos. tion

Gas Cos.

Mer- Colo- French Misc. chan· nial Indus· 9 Elec· Indus- dis· Enter· tries tric tries ing prises Abroad 10

3

5

100

100

98

182

107

57

99

216

126

233

59

85

182

87

84

201

72

96

186

89

84

101

282

109

143

284

136

482

76

94

286

142

186

345

215

169

442

61

79

193

134

182

344

266

1926

213

442

72

97

217

157

208

229

235

525

332

1927

257 424

105 123

124 151

352 411

213 332

313 524

262 342

240 281

574

1928

480 861

321 392

1929 1930

523

986

169

1931

125

159 137

693 673 535

295

706 369

366 618 285 617 169 . 525

392

412 260

133 141

357 284

1932

200

234

94

121

102

484

457

1933

208

217

81

112

84

543

1934

180

158

78

106

60

1935

176

133

74

105

1936

191

157

62

1937

262

236

65

1913

100

100

100

100

100

100

100

1919

144

119

73

81

361

60

1920

121

135

63

79

490

1921

144

81

60

72

1922

132

108

71

1923

174 201

232

1924 1925

100

100

683

274 221

680 460 264

405 272

248

170

202

126

452

256

135

186

134

510

366

230

101

166

118

53

514

323

217

84

173

122

94

70

393

249

186

84

211

140

99

137

390

269

194

109

316

224

153

[53 ]

TABLE

II ANNUAL INDICES

QUOTATIONS ON THE PARIS· BOURSE 1938-11 1940

1941

No. (Ma, (Mar. Cos. 1939' 3D) 28)' 1.41' General Index 275 stocks of overseas and domestic companies 275 General Index-90 stocks of overseas companies __ 90 Farmland _________________________________ 12 Rubber Plantations ________________________ 10 Metal Mines ______________________________ 11 Diverse Mining Properties __________________ 7 Diverse Industries _________________________ 13 Public Utilities ____________________________ 12 Merchandising ____________________________ 12 Banks & Mortgage Credit ___________________ 7 Holding Companies ________________________ 6

128 146 130 143 156 150 125 137 172 137 160

134 149 136 131 159 143 158 151 191 135 205

250 257 220 189 272 254 311 286 307 198 293

1940

1941

376 372 299 251 354 399 439 346 513 249 524

(Ma, (Mlr. No. Cos. 1939' 30) 28)2 1941' General Index 275 stocks of overseas and domestic companies 275 General Index-18S stocks of domestic companies 185 Oil and Gas _____ .________ . __ . _________ .. ___ 7 Mines ____________________________________ 6 Metallurgy ----- --- ----- ------ ------------ 15 Machine Tools, Electric and Naval Equlpment. __ 22 Automotive and Accessories ___ ._______________ 8 Construction Materials, Public Works _________ 9 Chemicals ______________________ .. _________ 19 Food Manufacturing & Marketing _______ .. _____ 25 Textiles _______________________________ ~ __ 11 Transportation ____________________________ 7 Department Stores _________________________ 6 Diverse Industries and Stores ________________ 22 Banks 7 - -- - - - - -Mortgage Credit __________________________ 7 Insurance ________________________________ 6 Holding Companies ______________ "--------. 8

----------------- ------ -

-

128 110 95 132 122 138 111 113 119 102 143 116 77 96 95 81 89 115

134 115 100 140 108 156 114 121 129 107 148 131 81 102 95 70 86 116

250 234 165 284 203 318 177 376 237 192 365 265 138 180 173 165 126 331

376 375 269 463 288 490 292 608 355 298 708 453 264 324 277 226 205 543

1942'

1943'

1944'

613 627 651 382 541 584 802 598 884 453 935

588 565 599 325 460 520 794 544 849 385 748

613 673 733 414 473 611 1,080 555 1,061 420 782

1942'

1943'

1944'

613 623 368 750 497 741 481 913 545 588 1,172 917 517 538 481 426 341 937

588 587 398 690 429 746 450 953 452 656 1,019 694 584 535 423 390 372 755

613 603 471 622 402 767 499 1,064 466 817 926 667 670 584 411 440 292 630

11

1, 1,

11

1,

Year.end Indices. Companies nationalized since 1944 (French coal mines, major banks and life Insurance compan public utilities, etc.) omitted. , March 28, 1941, date of re·openlng of the Bourse of Paris closed since June, 1940.

I

[54 ]

End of December, 1938 = 100 MMON STOCK

lithout Companies Nationalized since 1944} ilERSEAS COMPANIES 18'

1947'

1945'

1949'

1950'

1951'

175 '26 12 ,18 182 140 ;23 ,19 '37 63 61

1,149 1.158 1,111 399 636 1,264 1,736 506 1,938 502 1,569

1,256 1,308 1,020 367 878 1,267 1,811 538 2,292 713 2,030

1,129 1,174 797 263 836 939 1,412 530 2,274 946 1,947

1,030 1,018 722 224 695 725 1,184 528 2,126 800 1,685

1,259 1,246 926 484 865 764 1,648 729 2,553 870 2,097

1955 1958' (Dec. 31)

1953'

1954'

1955' 1955'

1957'

1,630 1,543 1,079 445 1,039 815 2,367 970 3,239 1,135 2,316

1,813 1,698 1,079 315 1,280 722 3,208 1,380 2,703 1,345 2,377

2,440 1,830 1,187 299 1,477 732 3,151 1,615 2,936 1,584 2,397

3,443 2,033 1,187 411 1,847 870 3,137 1,913 2,703 1,669 2,679

3,511 1,666 824 379 1,709 741 2,652 1,428 1,794 1,288 1,954

4,446 1,880 775 469 2,070 815 2,852 1,599 1,538 1,317 2,215

3,990 1,999 832 511 2,105 787 3,337 1,700 1,584 1,469 2,598

1955'

1955'

1957'

1958 1958' (Dec. 31)

1952'

lMESTlC COMPANIES 16'

1847'

1948'

1949'

1950'

1951'

1952'

1953'

1954'

75 SO 43 74 32 66 07 89 99 '51 ;01 00 28 19 07 73 43 45

1,149 1,070 1,606 839 643 1,304 985 1,178 761 1,286 1,947 1,079 1,029 1,113 411 573 225 766

1,256 1,129 1,097 1,017 1,965 ' 1,912 1,298 1,367 826 896 1,262 1,251 911 847 1,058 1,007 583 704 1,053 820 2,169 2,014 1,292 1,195 763 594 1,039 935 420 447 512 449 193 199 654 576

1,030 1,004 1,747 1,230 876 1,353 963 1,089 481 802 1,968 1,104 579 1,025 574 442 238 579

1,259 1,241 1,993 1,478 977 1,784 1,296 1,165 557 954 2,701 1,385 103 1,339 702

1,630 1,584 2,871 1,737 1,527 2,275 1,442 1,446 695 1,083 2,825 1,989 854 1,590 910 717 844 1,064

1,813 1,788 2,852 1,889 1,796 2,465 1,433 1,830 707 1,083 2,482 2,420 1,122 1,938 1,208 1,192 1,279 1,299

2,440 4,446 3,443 3,511 2,535 3,720 3,832 4,895 6,012 11,774 13,894 21,100 2,027 2,468 2,634 3,061 2,110 3,242 3,664 5,639 3,602 4,424 3,678 3,577 2,374 4,198 3,562 3,350 2,285 2,689 2,518 2,598 995 1,626 1,908 2,415 1,249 1,555 1,619 1,811 2,104 2,845 2,684 3,289 2,191 3,965 4,391 4,445 1,749 2,889 3,863 4,770 2,625 3,105 3,350 3,698 2,060 2,855 2,739 3,059 1,707 2,383 2,816 2,979 2,504 4,202 3,428 3,609 1,828 2,616 2,777 3,323

504 363 715

3,990 4,364 4,172 16,823 2,910 5,235 3,198 3,053 2,891 2,385 1,960 3,047 3,558 4,161 3,717 3,241 3,866, 4,079 3,180

Iverl,e of 12 end of month Indices. ,verage of weekly Indices.

[55 ]

TABLE

III

ANNUAL BUDGETARY EXPENDITURES OF FRANCE ON INDUSTRIAL INVESTMENTS& (IN Bn.LIONS OF FRANCS )

1954

1955

1956

1957

1958

1959 b

Coal mining

61.0

52.0

54.0

55.0

60.0

63.5

Electricity

155.3

172.3

182.2

200.5

246.0

294.5

31.7

31.6

29.3

23.2

33.5

37.5

9.0

63.5

54.0

55.6

Gas Natural Gas Atomic industrY"

7.8

9.0

9.4

3.5

12.0

15.6

Railroads

72.2

86.1

86.8

87.8

102.0

113.5

Airlines and airports

12.4

17.0

15.1

25.5

26.5

39;2

5.0

5.0

5.0

5.0

345.4

373.0

390.8

426.5

535.0

627.4

Medium·term credits for the "rational utilization of energy" Total

• Not included are the budgetary costs of public housing, of minor industrial investments, of the nationalized industries' operating deficits and of other "economic subsidies," nor the investments in Algiers and in the rest of the French Union. b

Budgeted.

C

Non-military.

[56 ]

TABLE

IV

FRENCH MONEY SUPPLY, BUDGET DEFICIT, AND GOLD PRICE (IN PAPER FRANCS)

End of

Balliet Surplus (+) or Deficit (-) (billions of francs'"

Mone, Suppl,. (billions of francs)b

1913 1938 1946

18 195 1,349

1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 (Nov.) 1958 (Dec.) 1959 (Dec., estimated)

1,676 2,185 2,742 3,189 3,775 4,286 4,794 5,465 6,169 6,817 7,535 8,024 8,000

+

-

0.025 27.7 33.3 275. 386. 318~

359. 326. 707. 612. 482. 768. -1,053. -1,046. -

600.

-

587.

Open Market Price of Fine Gold Per Kg.d tODD francs)

3,437 42,417 ("Black"market prices varying widely) 807,500 581,000 531,000 576,000 516,000 437,000 426,000 445,000 464,000 551,000 546,000 555,555

• Bank notes, minor coins, sight- and term-deposits - without savings bank deposits. b

In gold francs, not including gold coins in circulation.

C

In gold francs.

d

Open market price = official price.

[57]

TABLE

End of

Perpetual and Long·Term

1815 1830 1850 1870 1900 1913

1,272 4,627 4,886 11,516 29,128 31,452

1919 1920 1921 1922 1923 1924 1928 1938 1952 1953 1954 1955 1956 1957 1958

103 133 148 161 183 193 287 1,349 1,302 1,322 1,746 2,265 2,303

V-

FRENCH NATIONAL DEBT

Total Short·Term Internal (floating) Debt.. (in millions of gold francs)

263 540 794 1,055 1,524

External Debth

1,272 4,890 5,426 12,310 30,183 .32,976

(in billions of paper francs)

79 82 89 89 87 87

182 215 237 250 270 280

127 2,186 2,874 3,197 2,981 3,344 4,678

414 3,535 4,176 4,529 4,727 5,609 7,041 6,851

7 1,296 1,241 1,120 1,027 954 997 1,481

.. Omitting commitments of the nationalized industries not officially "guaranteed," and similar items, since 1944. Non-budgeted debt in 1958 was 200 billion francs. b Inter-Allied Debt omitted - cancelled in 1932. Foreign currencies valued at exchange rates obtaining on respective dates. COMMENT ON TABLE

VI

The experts of the De Gaulle government claimed that the 17~ per cent devaluation of the franc at the end of 1958 was necessary in order to compensate French expoit industries for the cancellation of their 57 billion francs export subsidies and for the relatively high French wage costs. Table VI indicates that the latter claim was not justified in so far as France's competition with the other members of the European Common Market was concerned. French real wages at mid-1958 were in line with those of most other members, in some cases even lower. There was no appreciable change in wage costs in the second half of 1958; wage rate and fringe benefit increases of that year in Germany substantially out-paced those in France.

[58 ]

TABLE

VI

HOURLY WAGE COSTS AND REAL WAGES IN THE EUROPEAN COMMON MARKET COUNTRIES CONVERTED INTO DUTCH GUILDERS

Nether· lands

Earned wages in manufac· turing industry in October, 1957 (in national currency) 1.64 Rise in wages between Octo· ber, 1957 and June, 1958__ 4% Calculated earned wages in manufacturing industry in June, 1958 (in national cur· rency) ________________ 1.71 Exch. rates, June, 1958 (in guilders per 100 currency· units) _________________ Hourly wages in manuf. in· dustry, June, 1958 (in guild· ers) __________________ 1.71 Ditto, index Netherlands = 100 __________________ 100 Social charges 1956 as a per· centage of wages________ 28.6 Hourly wages plus social charges, June, 1958· (Neth. = 100) __________ 100 Purchasing power paritiesb for steelworkers, 1954 (in guilders per 100 currency units) _________________ Rise in cost of living between 1954 and June, 1958_____ 14% Calculated purch. power pari· ties, 1958 (in guilders per 100 curro units)_________ Real wages, June, 1958 (in guilders) ______________ 1.71 Ditto, index Netherlands = 100 ____________________ 100

Beilium

France

Germany

Italy

29.33

202

2.168

209.46

4%

30.40

10%

222

6%

4%

2.298

217.84

7.60

0.90

90.50

60.73

2.31

2.0

2.08

1.32

135 29.4 136

117 41.9 129

122

77

41.0

63.5

134

98

6.26

0.86

0.76

0.49

8%

22%

10%

11 %

6.61

0.80

0.79

0.50

2.01

1.78

1.82

1.09

118

104

106

64

• Social charges 1956. On the basis of an average European selection of goods and services.

b

[59 ]

TABLE

VII

INDEX OF HOURLY WAGE RATES (ALL WORKERS) IN THE METALLURGICAL INDUSTRIES OF THE PARIS REGION

1938 = 100

1920 1921

28

1922 1923

25

1924

30

1925

32

1926

1939 1940

105 105

1941 1942

115

1943 lc}44

133

39 42

1945

277 375

45

1947 1948 1949 1950 1951

1,257

1952

1,524

1934

53 53

1953

1,585

1935

53

1954

1,667

1936

61

1955

1,807

1937

91

1956

1,995

1938

100

1957

2,165

1927 1928 1929 .1930 1931 1932 1933

[60 ]

25 27

51 55 54 52

1946

118 168

550 798 907 1,008

TABLE

VIII

FRENCH OFFICIAL DEVALUATIONS: GOLD PURCHASE PRICE OF THE BANK OF FRANCE (PER XC. OF GOLD BAlIS)

1. Fixed price: previous to 1928 _____________________________________ 3,437 francs from June 25, 1928 to 1936____________________________ 16,919 francs

2. Variable prices: October 1, 1936 to September 12, 1939: 1936 average October ______________________________ 23,285 francs average December ___________________________ ~_ 23,874 francs 1937 average March ________________________________ 24,341 francs average June ________________ _________________ 25,016 francs average September _______________ ------------average December _____________________________ 1938 average March _____________________ ~__________ average June _________________________________

31,604 francs 33,065 francs 35,889 francs 40,291 francs

average September ____________________________ average December _____________________________ 1939 average March __________ -'_____________________ average June _________________________________

41,466 francs 42,417 francs 42,187 francs 42,163 francs

September (first 12 days)_________________ 3. Fixed price since September, 1939: 1939--September 13 _________________________________ 1945-January 1 _____________________________________ 1945-December 26 __________________________________ 1948-January 26 ______ , _____________________________ 195O-August 15 ____________________________________ 1957-August 11 ____________________________________ 1958-December 29 __________________________________

46,394 francs 47,608 francs 53,600 francs 131,900 francs 237,500 francs 393,000 francs 473,000 francs 555,555 francs

[61 ]

Selected Literature Berl, Emmanuel, La France Irreelle (The Unreal France), (Grasset, Paris, 1957). Dunlop, J. T., ed., The Theory of Wage Determination (St; Martin's Press, New York, 1957). Chapter on French wages by F. Perroux. Franck, Louis, Les Prix (Prices), (Presses Universitaires de France, Paris, 1958). Guerard, Albert, France: A Modern History (University of Michigan Press, Ann Arbor, 1959). Hinshaw, Randall, Toward European Convertibility (Essays in International Finance, No. 31, International Finance Section, Princeton University, Princeton, N. J., Nov., 1958). Jeanneney, Jean-Marcel, Forces et Faiblesses de Z'Economie Franfaise, 1948-1956 (Strength and Weaknesses of the French Economy ), (Librairie Armand Colin, Paris, 1956). - - - Tableaux Statistiques Relatifs a Z'Economie Franfaise et Z'Economie Mondiale (Statistical Tables Relative to the French Economy and World Economy), (Librairie Armand Colin, Paris, 1957).

Luthy, Herbert, France Against Herself (Praeger, New York, 1955). Moreau-Neret, 0., Les Valeurs Franfaises Depuis 1940 (French Stocks Since 1940), (Sirey, Paris, 1957). - - - Valeurs Etrangeres - Mouvements de Capitaux Entre la France et l'Etranger Depuis 1940 (Foreign Stocks - Capital

[ 62]

Movements between France and Foreign Countries Since 1940), (Sirey, Paris, 1956). Palyi, Melchior, The Dollar Dilemma: Perpetual Aid to Europe? (Regnery, Chicago, 1954). - - - Managed Money at the Crossroads: The European Experience (University of Notre Dame Press, Notre Dame, Ind., 1958).

Patel, I. G., "Monetary Policy in Postwar Years," International Monetary. Fund Staff Papers (International Monetary Fund, Washington, D.C., April, 1953). Rueff, Jacques (Introduction by), Report on the Financial Situation of France, Submitted to the Minister of Finance and Economic Affaks (Distributed by U. S. Council of the International Chamber .of Commerce, New York, 1959). Sedillot, Rene, A. B. C. de !'inflation (Tribune Libre, 24, PIon, Paris, 1958). - - - Le Franc - Histoire d'une monnaie, des origines a nos fours (History of the Franc from the origins to our days), (Sirey, Paris, 1953). Sherwin, Stephen F., Monetary Policy in Continental Western Europe, 1944-1952 (Wisconsin Commerce Studies, Vol. II, No.

2, University of Wisconsin, Madison, 1956). Sevennilson, Ingvar, Growth and Stagnation in the European Economy (Economic Commission for Europe, Geneva, 1954). WoHe, Martin, The French Franc between the Wars, 1919-1939 (Columbia University Press, New York, 1951).

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