Saturday, July 2, 2011

Lords of Finance - On the origins of French aversion to speculation

I recently finished Lords of Finance, by Liaquat Ahmed. The book is quite interesting, though unnecessarily detailed, and looks at the impact of the 4 Central Bankers of Great Britain, France, Germany, and the US, on the economy during this period. The message is not that positive: the subtitle is "The Bankers Who Broke The World".

I won't make a summary, but I wanted to underline some interesting tidbits from the book. The first one is on French aversion to speculation.

The first thing that caught my eye was Ahmed's discussion on where French awareness of speculators comes from. Every now and then, Nicolas Sarkozy blames speculators for the rise of commodity prices of for the Greek crisis. Interestingly, Ahmed links this French spirit on the post-war crisis of the Franc in the early 1920's. He argues that after the war, France had to spend $4 billion on reconstruction, but refused to raise revenues under the assumption that the Germans would eventually repay their debt and contribute to the effort. Moreover, France had spend $30billion on the war effort, and because the French were(at the time), extremely tax-averse, revenues contributed for only 5% of this sum, the rest coming from borrowing from French middle classes($15billion), foreign governments, and printing money. Eventually, the amount of currency in circulation tripled during the war, while it only doubled in the UK.

This meant that after the war, the French franc lost a lot of its value against the dollar: before the war, the ratio was 5 Francs for $1, stabilized at 15 to 1 in the early 20's, but reached 20 to 1 at the beginning of 1924 because of the failure of the invasion of the Ruhr, casting pessimism on the possibility to finance the reconstruction spending through German reparations.

The negotiations over the Dawes plan, - a plan supposed to restart the European recovery, hurt by the recent bout of German hyperinflation, the subsequent default of $12billion of reparations and the occupation of the Ruhr by France and Belgium -, made the Franc fall 27 francs to the dollar on March 8th, because, as I understand it, the plan would reduce the amount of reparations the Germans would have to pay in the short term thus reducing France's ability to pay for reconstruction other than by printing money. Ahmed argues that at this point, Prime Minister Poincare and other officials started evoking a great conspiracy theory headed by the German government to attack the franc through the holding by German business houses of 13 billion francs in reserves.
The French were then, and would remain for many decades, obsessed with the specter of foreign speculators. Keynes described their attitude in the preface(...) for the french edition of the Tract on Monetary Reform: "Each time the franc loses value, the Minister of Finance is convinced that the fact arises from everything but economic causes. He attributes it to the presence of a foreigner in the neighborhood of the Bourse or to the mysterious and malignant influences of speculation"

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