1

Eleanor Lansing Dulles and James Harvey Rogers’ analysis of the

French inflation during the interwar period (1919 – 1929)

BY

CONSTANCE ANDRÉ--AIGRET

Working paper, please do not quote without permission

Abstract: This paper studies the analysis of two American authors, Eleanor Lansing Dulles

who lived from 1895 to 1996 and James Harvey Rogers who was born in 1886 and died in

1939, concerning the French inflation of the interwar period 1919-1929. During the years fol-

lowing the First World War, constant inflation coupled with speculative attacks against the

germinal franc obliged the government to reinstate Raymond Poincaré as Finance Minister and

President of the Council of Ministers in 1926. A first debate took place concerning the theoret-

ical framework to use in order to explain the French inflation. Our authors were in favor of a

theory which includes qualitative factors such as confidence and speculation and doing so were

criticizing the Quantity Theory of Money and Purchasing Power Parity theory. Then, a second

debate emerged between advocates of a revaluation of the franc to its prewar level (Poincaré,

Aftalion) and those in favor of a devaluation of the franc to its real value (Moreau, Rist,

Keynes). This debate leads to the devaluation of the germinal franc by 80% by Poincaré in

1928. The new “franc Poincaré” was only worth a fifth of the gold equivalent of the franc ger-

minal. The American analysis of this interwar inflation is not well known. Our authors exam-

ined the French inflation and devaluation in order to compare it with the American situation at

that time. The aim of this paper is twofold: to analyze the American contribution to this debate

and to study the effects of foreign exchange fluctuations on the economy.

JEL codes: B22, E52, F31

Keywords: Franc Poincaré, devaluation, Eleanor Lansing Dulles, James Harvey Rogers

“The French fight against monetary collapse in the years 1922 to 1927 is one of

the most dramatic struggles of the post-war period. As in all battles against in-

flation, the issues were not at first clear” (Dulles 1933, p. 5).

1. Introduction

The return to the Gold Standard via the establishment of the franc Poincaré by Raymond

Poincaré in July 1928, led to a huge accumulation of gold by the Bank of France. This increase

of gold reserves and the undervalued currency could have enabled France to hold off the Great

Depression longer than other countries. In 2013, Paul Krugman, on his blog1, compared the

French situation in 1930 with the German one during the debt crisis in Europe which started in

*PhD Student supervised by Rebeca Gomez-Betancourt (University of Lyon 2, France) and Robert W. Dimand

(Brock University, Canada). University of Lyon 2 and member of the Triangle Research Centre. Email: con-

stance.andre-aigret@univ-lyon2.fr.

1http://krugman.blogs.nytimes.com/2013/11/02/france-1930-germany-2013/

2

2010: Germany went into crisis later than other European countries and suffered less from the

shock. Concerning the French economy in 1929-1931, he even wrote in this blog’s article: “No-

tice, by the way, that the French weren’t evil or malicious here — they were just adhering to

their hard-money ideology in an environment where that had terrible adverse effects on other

countries”.

Indeed, after World War I (WWI), the French currency had to face several speculative

attacks which led to fluctuations of the value of the franc. The decrease of inflation at that time

led monetary authorities to think that they could re-institute the gold parity of 19132. As we

know, France will come out victorious of the War on November 11, 1918. At that time, the

economic situation of the belligerent countries was disastrous: they were in debt and in deficit

and had to face an enormous human loss. Then, the Allied Powers, composed of the French

Republic, the British Empire, the Russian Empire and the United States of America (USA)

signed the Treaty of Versailles the 28th of June 1919. This Treaty stated that Germany had to

pay for the reconstruction of the countries which had been destroyed subsequent to the military

conflict. The amount of money owed was of 132 milliards of gold German mark and France

should receive more than the half amount as it was the country which suffered the most. How-

ever, France had to reimburse the British Empire and the USA and, doing so, increased its debt

by 20 milliards of francs thanks to advances from the Bank of France and the issuing of bonds.

But, in 1922, Germany announced its refusal to pay for the war reparations. This event led to a

depreciation of the germinal franc3 on the change market and to an increase of the French public

deficit from 1923. From this date, inflation became cumulative; there was an external devalua-

tion of the franc coupled with an internal devaluation. Moreover, in 1924, this depreciation

became the main force of the inflation via the increase of the price of importations and the

reinforcement of inflationist expectations. In 1926, the germinal franc was largely under-eval-

uated compared to its purchasing power parity value. All these economic events generated a

“franc crisis” in mid July 1926: change crisis, public cash-flow problems and political crisis.

France was at the edge of a crisis, and a potential regime change. The 23rd of July 1926, Poin-

caré, who had been President of the Republic from 1913 to 1920 and President of the Council

2At the dawn of the WWI, the French government decided to give up the gold standard in order to finance the War

and they borrowed a huge amount of money: France moved to a fiat money regime: the franc was unpegged on

the 14th of March, 1914. 3The germinal franc had been instituted by Napoleon Bonaparte in 1803 in the month that, in the French Revolu-

tionary calendar, was called Germinal. One unit of germinal franc contained 290.034 mg of fine gold and it circu-

lated with silver. The ratio between gold and silver were of 1:15.5. In 1865, the germinal franc became the common

currency of the Latin Monetary Union.

3

of Minister in 1913 and from 1922 to 1924, came back to the government as President of the

Council of Ministers as well as Minister of Finance. No sooner had he returned that the value

of the franc stabilized on the market: Poincaré reinstituted confidence concerning the franc and

the French economy. After that event, Poincaré was named “Poincaré la confiance” and the

main question he was concerned with was at which value the franc should be stabilized. A

debate then took place between the advocates of a reevaluation of the franc (such as Poincaré

and Albert Aftalion) and those in favor of a devaluation of it (Emile Moreau, Charles Rist,

Pierre Quesnay, John Maynard Keynes).

This French monetary depreciation of the interwar period had been studied mainly by

French authors (Rist, Rueff, Quesnay, Gide); the American analysis of it is not well known.

We have chosen in this paper to study the analysis of two American authors: Eleanor Lansing

Dulles, who lived from 1895 to 1996 and James Harvey Rogers who was born in 1886 and died

in 1939. The first author, Dulles, compared the French inflation and the American situation in

her book of 1933. That year, the USA faced a situation of inflation; the French case could be

used as a theoretical case in order to highlight the issue of this monetary phenomenon4. Rogers

analyzed the French inflation in order to explain the banking system of that time and the inter-

relation between financial institutions. Both of them knew each other: when Dulles wrote her

Ph. D thesis on the French franc (1929), Rogers was also writing his book about the same sub-

ject and asked her for her work, she refused:

“Professor Robert Murray Haig and Professor Harvey Rogers came to call me in the

little room at Cola Rossi. They were in Paris with a group of their colleagues, under a

large grant to study the French economy. Their reasons for calling on me were astonish-

ing. Haig said, “You are here on a small grant and working alone, studying the nature

of French inflation. Professor Rogers is working with our group and can do a more

searching and complete job. We want you to turn over your notes to us and we’ll carry

on your work as part of our comprehensive project. I’m sure Professor Young will ap-

prove”. These men were years senior to me. Their reputations were established. I found

it hard to believe that they would make such an approach to intimidate a young scholar

and a woman as well” (Dulles 1980, pp. 101-102).

4“Fortunately, concrete evidence and direct testimony with regard to French inflation are available to guide Amer-

ican public opinion in the struggle over monetary policies. By measuring the changes in bond values and stock

prices in France one can gain some idea of what will happen if inflation continues in the United States. By inquiring

into the condition of industry, the situation in agriculture, the role of the treasury and the Bank of France, one can

detect somewhat earlier than would otherwise be the case, profound changes which are bound to affect the life of

the nation. Those individuals who have the power to check the first movement may find in this past experience

emphatic warning that the later stages are worse than the first. In the history of the sudden dramatic reversals of

speculation and value in 1924 and 1926 there may be some clues to the secret of stopping inflation” (Dulles 1933,

p. 3).

4

The American economist Eleanor Lansing Dulles was born in New York and was the

granddaughter and niece of Secretaries of State (and sister of a future Secretary of State5). In

1921, after her studies at Radcliffe College (Cambridge, Massachusetts) she started a Ph.D. in

economics at the London School of Economics6 and took five courses at Harvard to have a

Radcliffe-Harvard degree. Her thesis topic was the study of the decline of the French franc

which was supervised by Allyn A. Young7 and became the book The French Franc, 1914-1928:

The Facts and Their Interpretation (1929). In her thesis she emphasized the important role of

expectations in the process inflation and this will be recognized by Keynes8. After obtaining

her Ph. D in 1926, Dulles taught at Harvard (1928 to 1930 and 1932 to 1936) and at Bryn Mawr

in 1928 and 1929. In 1930 she went to Germany to work her book The Bank for International

Settlements at Work (1932) in Berlin and Basel and met Joseph Schumpeter in Bonn. She re-

turned to the USA in 1932. She joined the Social Security Board in 1936 in the USA. In 1944

she worked for the government in the development of the system of monetary exchange and

investment usually referred to as the Bretton Woods system. She worked on the Social Security

law in 1936 as an economist; she did her research on this law until 1940. She gave a speech at

the American Economic Association in 1941 at a New York meeting about “War and Invest-

ment Opportunities”. In 1944 she was appointed to the International Secretariat Conference of

44 nations at Bretton Woods. In 1945 she traveled to Austria as a U.S. Financial Attaché9. After

her main career at the Department of State, she returned to teach in 1962 at Duke University

and subsequently at Georgetown University.

James Harvey Rogers was Sterling Professor of Economics at Yale University. He stud-

ied, during his Ph.D., with Vilfredo Pareto in Geneva and Irving Fisher at Yale University. He

taught at the University of Missouri from 1916 to 1919 and from 1923 to 1930. Between 1920

and 1926 he was Professor of Economics at Cornell University. In 1930 he received the Ster-

ling10 Professorship in the field of Political Economy at Yale University, mainly through his

book on the French franc. He became a member of President Hoover's Committee on Recent

Economic Changes, and in 1933 he was named by Dr. Nicholas Murray Butler as one member

5John Foster Dulles who will be Secretary of State from 1953 to 1959. 6At that time the LSE had begun teaching a combination of classical and theoretical economics (Hatdeen 2000, p.

146). 7Allyn Abott Young (1876-1929) was an American Economist. He was Professor of Economics at Harvard from

1920 to 1927 then at the London School of Economics until his death. He is known for his article on “Increasing

Returns and Economic Progress” (1928) and was the supervisor of the Ph. D. dissertation of Edward Chamberlin

(1899-1967). 8See Dulles (1980). 9For more details concerning Dulles life see Hatdeen (2000) and Dulles (1980). 10The Sterling professorship had been created in 1918. Rogers was one of the first to obtain it.

5

of a committee of seventeen to investigate the economic crisis. Rogers was a financial advisor

to Franklin D. Roosevelt11 until Rogers died in an airplane crash in 1939.

They both studied the French inflation of interwar period and the new franc established

by Poincaré. Poincaré’s work as Finance Minister has been studied in depth, especially by Sar-

gent (1986) and Dornbusch (1989). These authors, like Keiger, agree on the fact that Poincaré

did bring confidence to the market by fixing expectations. Keiger wrote:

“As the Chamber finance commission [sic.] rather grudgingly put it, Poincaré’s

measures were nothing more than ‘the translation into legislative texts, apart from a few

changes in detail, of the fiscal part of the experts’ plan’. But he did bring two things to

their plan: rapidity of execution (albeit tinged with hesitation) and confidence. The con-

fidence he brought to financial affairs was the essential psychological gel which allowed

policies to stick” (Keiger 1997, p. 323).

Moreover, other studies, especially made by Irwin (2010), Kindleberger (1985), Mouré

(1996, 1998, 2002, 2003) focus on the role played by the Bank of France and the accumulation

of gold in its reserves, which enabled France to hold off the Great Depression longer than other

countries. This hypothesis had been put into perspective by Asselain et al (2001): for them the

inflation allowed the concordance between the real value of the public debt and a return to a

gold convertibility; the starting point of the French economic problems of the interwar period

was the increase of the public debt generated by the expenditures of reconstruction and repara-

tions. Furthermore, other authors focused on the role played by fiscal and/or monetary policies

in this delay: Eichgreen and Wyplosz (1986), Kemp (1971), Prati (1991), Makinen and Wood-

ward (1989). Barbaroux (2013) studied this case in order to emphasize the “rules versus discre-

tion” debate.

The aim of the paper is to explain the American analysis of the French inflation of the

interwar period (1919-1929), particularly through the work of Dulles and Rogers: how they

took position, indirectly, in the French debate and what were their theoretical backgrounds.

First (2) we highlight the position of our authors concerning the monetary theory to use to ex-

plain the French inflation of the interwar period. Then (3) we compare their analysis of the

different phases of the franc’s depreciation from 1919 to 1926. In the following section (4), we

examine the position of our American authors concerning the institution of Poincaré as finance

Minister and President of the Council of Ministers in July 1926 and the stabilization period.

Finally, we conclude (5).

11For more details about Rogers’ biography see Wolfer (1940).

6

2. The French inflation of the interwar period: theoretical analyze

French authors such as Aftalion (1927)12 or Bertrand Nogaro (1924)13 took a position in

the debate concerning the explanation of the French inflation in the interwar period in opposi-

tion the Quantity Theory of Money (QTM) and Purchasing Power Parity (PPP) theory. They

stressed the inability of these theories to provide a correct explanation of the phenomena and

highlighted the role of psychological and speculative factors in the inflation process.

2.1. The incapacity of the QTM to explain this case

In 1922, at the Genoa conference, Keynes, supported by Gustav Cassel, proposed a

“monetary plan which was based on a stabilization policy for the main European countries”

(Barbaroux 2013, p. 102). Cassel, at the same conference suggested implementing fixed ex-

change rates which are adjustable according to the purchasing power parity, so he wanted a

gold exchange standard, which will be implemented after the conference with the pound as

reference’s currency14. At that time the classical view of monetary theory dominated the poli-

cies.

Both Dulles and Rogers criticized this view of monetary theory as it could not give a

consistent explanation of the French inflation. They analyzed the interwar period in France and

notably inflation, in order to improve monetary theory of the time, particularly the explanation

of cases of depreciation. The theoretical framework of the QTM and, by extension, the PPP

theory, are in the line of a “problem-solving” approach: it searches the right model to follow

which lead to the rights practices. Both Rogers and Dulles are searching for the origins of the

phenomena; they are more in a “problem-setting” approach, in other words, they built a theo-

retical framework to explain a real problem. For example, Rogers wrote:

“It is further hoped that the study will throw light likewise upon the more general prob-

lems of monetary theory. In periods of great disturbance, happenings which might at

other times pass unobserved are often greatly magnified and may even occupy tempo-

rarily the center of the stage. Moreover, it is frequently the abnormal rather than the

12“The history of the franc since 1927 has confirmed what its history taught in 1914 and 1926. The one and the

other make it necessary to rule out any theory of change based exclusively on the balance of trade or on purchasing

power parity or even having this dual foundation” (Aftalion 1927, p. 466, translation by the author). 13“Furthermore, the analysis of the more recent monetary phenomena shows that even the internal depreciation of

a currency, as it is measured by the general rise in prices, is not always the effect of an exceptional increase in the

amount of this currency, and that this increase may be, on the contrary, the effect of a rise in prices caused by a

currency crisis. It also highlights that an increase, even a large one, of the quantity of money issued does not always

lead to a corresponding increase of prices. Thus, even in a case where the old quantitative notion seemed to be

enough to give the key to the phenomenon, we have to look for causes and effects relationships, which are some-

times much more complex” (Nogaro 1924, p. 138, translation by the author). 14See Daniel 2012, p. 203.

7

usual functioning of a system which gives the greater insight to its inner workings”

(Rogers 1929, p. viii).

He went further in saying that the QTM was insufficient to highlight the real mechanisms and

causes behind this monetary phenomenon. According to him, this theory could not be used at

that time to explain the French inflation because of the role of the development of credit and

banking institutions all over the world. The identity between saving and investment, or the fact

that the amount borrowed by a person is loaned by another did not match at that time.

For Dulles, the French inflation could be used as a theoretical case in order to stress the

issue of this monetary phenomenon15. She stated that:

“French inflation, therefore, may be taken as a specific example of a monetary dilemma

which recurs frequently. Granted a number of distinguishing characteristics, peculiari-

ties of institutions, unique difficulties and special resources, the sequence of events fol-

lowed the usual course from the first gradual rise in prices, through the more rapid in-

crease, panic, and collapse” (Dulles 1933, pp. 9-10).

Neither author considered that the French inflation of the interwar period could be suit-

ably explained by the QTM. Dulles was particularly critical of the QTM, the PPP theory and

the balance of trade theory as they could not take into account psychological (such as agents

expectations of the value of the currency) or political factors (as the instability concerning the

policies which will be implemented, the turnover of ministers):

“The failure of these theories to explain the French case of depreciation during this short

and troubled period could not have been anticipated before the fact. It is not so much

the validity of the general contentions which has been called to question as it is their

applicability to particular situations. […] The reason for this inapplicability must be

sought not in the logical inaccuracy of the doctrines but in the extensive qualifications

which are necessary to make them applicable to severe depreciation” (Dulles 1929, p.

16).

According to her, too many complex factors, not only purely economic ones, were at

work behind the French inflation. To her, the QTM could not satisfactorily explain French in-

flation because it examined only economic indicators such as the velocity of money. It is not

surprising to find the same criticism of the PPP theory as, according to her, both theories assume

15“Fortunately, concrete evidence and direct testimony with regard to French inflation are available to guide Amer-

ican public opinion in the struggle over monetary policies. By measuring the changes in bond values and stock

prices in France one can gain some idea of what will happen if inflation continues in the United States. By inquiring

into the condition of industry, the situation in agriculture, the role of the treasury and the Bank of France, one can

detect somewhat earlier than would otherwise be the case, profound changes which are bound to affect the life of

the nation. Those individuals who have the power to check the first movement may find in this past experience

emphatic warning that the later stages are worse than the first. In the history of the sudden dramatic reversals of

speculation and value in 1924 and 1926 there may be some clues to the secret of stopping inflation” (Dulles 1933,

p. 3).

8

that the volume of money determines its own purchasing power and the general level of prices.

Furthermore, this general level or price acts on the exchange rate of national currency:

“The purchasing power parities doctrine was not useful in explaining the value of the

depreciated franc. This doctrine, a natural extension of the quantity theory, emphasizes

the significance of the relative price levels of different countries” (Dulles 1929, p. 20).

Dulles referred, in her book, mainly to the analysis of Aftalion (1927) who analyzed the

French inflation of inter-war period and explained it with his “positive theory of money”. This

theory takes into account quantitative and qualitative factors, such as expectations on the future

value of the currency or on the revenue that an agent will earn, previsions, confidence etc., in

the explanation of monetary phenomena. Dulles based her analysis on this theory and took into

account two psychological factors: speculation (as general forecasts as to the future value of

money) and confidence in the general economic and financial situation (Dulles 1929, p. 41).

As for Rogers, in his work, he tested the validity of Fisher equation of exchange (under

its form: MV + M’V’ = PT16, 1911) and the Keynesian equation of exchange (N = p(k +rk’))

17. He built a dataset and calculated logarithms. Concerning Fisher equation, he stressed that

movements of prices compared to those of monetary circulation were proportionally greater

(whereas the Fisher equation of exchange states that, in the long-run, the movements of the two

sides of the equation are strictly proportional). That is, Rogers confused levels and rates of

change: velocity depends on the opportunity cost of holding money as, of course, Keynes had

shown in his Tract on Monetary Reform (1923): M/P fell by 92% in the German hyperinflation.

“In fact, it may be said in general – at least for the recent years in France and probably for

all modern countries- that, when prices rise substantially and continue rising over a con-

siderable period their rise will be proportionately greater than the increase in monetary

circulation and that, when prices fall materially and keep falling over any considerable

period, their fall will be proportionately greater than the reduction in the quantity of money

in circulation” (Rogers 1929, p. 301, italics from Rogers).

He did the same econometric calculations with the same set of data to test the validity

of the Keynesian equation of exchange. He discovered that the causality was corroborated for

a majority of the data but with exceptions and “[…] since it is the exception rather than the rule

which often yields more interesting story, they will be investigated with care” (Rogers 1929, p.

16M stands for the volume of currency, M’ for the demand of deposit money, V and V’ respectively their velocity

of circulation, P is the price level and T the volume of transactions. 17“Keynesian” here refers to Keynes’s A Tract on Monetary Reform (1923). N represents the total amount of money

in circulation, p is the price index (inverse of the purchasing power of money), k is the number of purchasing

power units carried by the population and organizations in form of cash, k’ is the number of purchasing power

units carried by the population and organizations in form of deposit accounts, r is the ratio of reserves.

9

320). To explain these exceptions, he highlighted the hoarding habits of French people which

changed over time as a psychological or cultural factor not taken into account by the two equa-

tions of exchange he studied:

“Hence the divergences can be explained by the hoarding habits of the French public

and by the peculiar character of deposits –already described at length in Chapter XI –

which kept them from decreasing” (Rogers 1929, p. 325).

Finally, Rogers and Dulles agreed on the fact that the QTM did not take into account

conditions of public finance, the weight of banks in the process or cultural and psychological

factors.

“Such a combination of movements is certainly most extraordinary and seems to fit al-

most equally badly all the existing theories of money. A study of the movements of the

velocity of circulation of deposits (V’) seems to bring the explanation no nearer. […]

The solution of the riddle, however, must be sought elsewhere. As for so many other

problems of this study, it is to be found in government finance and in the extraordinary

relations between the Treasury, the banks and the Bank of France” (Rogers 1929, p.

293).

Here, Rogers explained that studying the movements of the volume of currency, those

of the demand deposits and the movements of their velocity of circulation does not give a rele-

vant answer to the causes of the French inflation. According to him, the causes of inflation are

mainly political: in the relation between the Treasury and the Bank of France and the way the

government financed its needs.

2.2. A broader definition of “inflation”

As both authors studied the same phenomena, an explanation of their definitions of in-

flation and what, according to them, were the main causes behind it, is needed. Both authors

defined inflation in a broader sense that the QTM did18: for Fisher, for example, inflation is a

rise in prices consequent to a change of quantity of money in circulation or in the velocity of

circulation money or in the volume of good exchanged19.

For Dulles inflation is caused by more factors. Moreover, “inflation” meant “[…] delib-

erate increases of the means of payment, made mainly by the government. The stress on the

conscious act involved is in line with that made by Keynes, though we differ with his further

18As did also Rist for example (Autier 2012, p. 131). 19“Finally, if there is a simultaneous change in two or all of the three influences, i.e. quantity of money, velocity

of circulation, and quantities of goods exchanged, the price level will be a compound or resultant of these various

influences” (Fisher assisted by Harry G. Brown 1911, p. 21).

10

conclusions; and by Pigou in his article in the Economic Journal” (Dulles 1929, p. 91). Accord-

ing to Dulles, the French inflation was caused by an increase of the means of payment made by

the government. She pointed out the role of the French government in the process of inflation

during the interwar period.

For Rogers, “inflation” meant:

“[…] an increase in the general level of prices growing out of an increase in expendi-

tures while goods available for purchase are not correspondingly increased in amount.

By the terms of this definition a rise in prices, however great, unaccompanied by an

increase in expenditures – as in the case of famine conditions for example- would not

constitute inflation. […] On the other hand, larger expenditures by the Government, by

business firms, or by private individuals or by any of their organizations, so long as the

enlargement leads to a general increase in prices, will be regarded as inflation” (Rogers

1929, p. 337, italics of Rogers).

For him, however, the French inflation was characterized by an increase in expenditure

not matched by an increase in the production of goods. So there was an imbalance between the

two sides of the mechanism which provoked an increase in the general level of prices. He did

not specify the agent which is at the root of the process. However, he focused his analysis on

the role played by banks and financial institutions in it.

This difference leads us directly to analyze the causes of inflation. It is clear, through

her definition that for Dulles inflation had been caused by the huge amount of debt contracted

by the French government. She compared this situation to that of the USA at the beginning of

the thirties:

“The new element in the French situation was the intricate way in which the public debt

was linked with reconstruction on one side and reparation on the other. The new element

in the American situation in 1933 was the deliberate use of the more sophisticated eco-

nomic terms, statistical devices, and instruments to justify a policy of debt reduction

through monetary means. In both cases the direction chosen, for a while at least, was

the substitution of new debts for old, the avoidance as far as possible of taxation, debt

con version, or a more direct attack on the basic problem. In both cases, a period of

subterfuge and delay permitted growing uncertainty and distrust of the future to under-

mine values, and thus to begin a depreciation which made later inflation almost inevita-

ble” (Dulles 1933, p. 14).

At the end of the war, France spent a huge amount of money on the reparations and

reconstruction of the country, approximately 129 billion francs up to 1924. These expenditures

led the government into debt, requiring loans from the Bank of France.

Concerning the amount of the French debt, we reproduce here a table from Mouré

(1998):

11

Year GNP (in-

dex num-

ber)

National

income

Budget (deficit-sur-

plus, millions of

francs)

Reconstruction

(millions of

francs)

Public Debt

(millions of

francs)

1913 100 49 24,8 -- 39,274

1920 85,5 143 -17 139 13 084 217,747

1921 84,2 114 - 9 275 17 774 244,455

1922 97,4 137 - 9 762 14 181 271,077

1923 102,6 162 -11 804 12 461 274,408

1924 113 213 -7 121 8 032 284,896

1925 114,5 230 - 1 507 5 272 289,143

1926 115,6 315 -1 088 4 938 293,143

1927 114,5 318 217 4 779 286,465

1928 121 337 3 929 3 122 295,670

1929 131,6 393 4 933 3 300 298,536

1930 127,6 395 -4 918 2 083 291,937

Chart 1, Principaux indicateurs économiques, 1920-1930 (Mouré 1998, p. 36).

Except for the year 1927, public debt continued to increase; costs of reparations and

reconstruction after WW1 weighed heavily upon the French accounts. French debt, both inter-

nal and external, is the main starting point for the French inflation and financial problems of

the interwar period.

It was more the way France dealt with it that caused inflation than the debt itself. Dulles

wrote, “In one way or another the cost of the public borrowing, accumulated during the war,

had to be met. If instead of inflation more constructive methods of cutting debts had been used,

the ruthless destruction of values might have been avoided” (Dulles 1933, p. 12).

For Rogers, the process of inflation also began with the French government’s expendi-

tures. He wrote:

“Moreover, in spite of the widespread war propaganda to the contrary, it has become an

open secret to students of the history of the period that these extraordinary economic

phenomena had their genesis in excessive government spending and large treasury def-

icits” (Rogers, 1929, p. 1).

According to Rogers, the way banks and financial institutions managed the debt was,

in part, responsible for the inflation: “In their roles above enumerated – as lender of credit, as a

provider of cash, and as receivers of surplus cash – the various types of banks play very different

parts in advancing and in retarding the inflation process” (Rogers 1929, p. 12). For a better view

of the evolution of the public debt, we add here a chart from Rogers (1929, p. 49). From this

12

chart we can see that the borrowings and debt increased between 1919 and 1924-26. This in-

crease of public debt is due to reparations of the country. The chart shows the link between the

deficits and the borrowings: they have the same trend. From this chart, we can also emphasize

the rapid increase of the amount of the floating debt after 1918: in order to finance the costs of

reparation, the Treasury made some advances to the government. This increase of floating debt

could have been a problem for the French government if the Treasury had wanted a massive

reimbursement. Moreover, this floating debt is an inflationary component of the public account.

Finally, from the chart we can highlight that the trends of the note circulation of the Bank of

France and the one of the wholesale prices seem to have the same trend for the period 1919-

1926. This led him to explain that the form of advances of the bank of France was the type of

borrowing which has the most connection with inflation.

13

Chart 2, Public debt and inflation, Rogers (1929, p. 49). Circulation corresponds to the note circulation

of the Bank of France, prices to wholesale prices, exchange to the dollar exchange and advances for

the advances of the Bank of France to the government.

14

3. From 1919 to 1926: analyze of the causes of inflation and depreciation

We will divide the interwar period into three sub-periods. Our authors themselves disa-

greed on the periods’ division. As stated earlier, Rogers focused on the changes of purchasing

power in the prices movement: “And, since it is purchasing power which is of primary im-

portance for present purposes, the quantities of circulating media must be discarded and an

inaccurate measure” (Rogers 1929, p. 16). By this fact, he divided the period into four sub-

periods: 1914-1919; 1920-1921; 1922-1924 and 1925-1926. As for Dulles, she analyzed the

depreciation of the franc more globally; consequently she divided the period of franc deprecia-

tion as follows: 1919-1922; 1922-1923, 1924-1926 and 1926-1928, she did not use the division

made by Aftalion (1927)20.

So, in this paper, we have chosen to divide the interwar period into three sub-periods:

1919 to 1922, 1922 to 1924 and 1924 to 1926. For clearer understanding of the question, we

have included a chart showing the value of the franc and bank notes in circulation, from Dulles

(1929, p. 3). We have added a legend corresponding to our division, to a better understanding.

Chart 3, The value of the franc and Bank note circulation, 1914-1927 (Dulles 1929, p. 3).

20He distinguished the period 1914-1919 (concordance between circulation and prices), 1919-1920 (mi-concord-

ance between circulation and prices), 1920-1921, 1922-1924, periods where exchange rate commended which

commanded circulation; and 1925 to 1926.

15

3.1.Sub-period 1919-1922: debt’s growth

Dulles called this sub-period “monetary chaos”: in 1919, the franc went from “mild

depreciation” to “severe depreciation21”. Rogers qualified the years of 1920 and 1921 as years

of “financial readjustment to peace conditions after the extremely expensive war years” (Rogers

1929, p. 56). This sub-period is the beginning point of the monetary problems of France during

the interwar period.

At the end of the war France had to engage in reparations and reconstruction. However,

according to both authors, the French government did not go about this process correctly: “In

France, too, there was a considerable relaxation of price control and a strong movement to end

inflationary methods of government finance” (Dulles 1929, p. 114). The French government

did not control prices and tried to stop financing itself by an increase of the monetary base.

The tensions at the Peace Conference held in Paris in 1919, the return of President Wil-

son to Paris, and the unpegging of the franc on the 14th of March sank the currency into depre-

ciation. With the franc unpegged, government could act on the exchange rate in order to contain

inflation and to return to the prewar parity of the currency. At this time, the policies were based

on the PPP theory: “As emphasized by exponents of the purchasing power parity doctrine,

prices had risen less quickly in the United States than in Britain, and less quickly in Britain than

in many parts of Europe. This divergence of price levels had to be reversed to allow the resto-

ration of prewar parities” (Eichengreen 1995, p. 104).

Moreover, as said earlier, Cassel, in 1922 was in favor of a gold exchange standard

system in which currencies’ values were determined in accordance to their purchasing power

parity. The economic policies were built on the basis of the QTM.

The attitude of the French government (the Bloc National) had been, first not to act on

the exchange rate, and secondly to let the franc depreciate. The government did not expect the

depreciation of the franc. As Dulles noted: “The potential ill effects of the large note circulation,

high prices, and heavy external debts, individual and governmental, was not realized. The sur-

prising calm with which the announcement and the first decline of the franc were received is

sufficient evidence of the lack of understanding” (Dulles 1929, p. 120).

In the beginning of 1919 the franc was subjected to a “severe depreciation”. French

government, in not acting against the depreciation finally aggravated the crisis and provoked a

21Mild depreciation is defined as a situation of external depreciation, in which the return to par is desirable or at

least possible and engaged an interrelation of economic factors. The passage to a “severe depreciation” is sudden.

This defines a situation where “money breaks away from its former limits and decline with lightning rapidity”

(Dulles 1929, p. 113).

16

misunderstanding in French policy concerning the value of the franc and, in so doing, sent the

wrong signal to investors and consumers; they could not foresee the value which increased risks

of a bad investment. This loss of the franc’s external value led, in turn, to a loss of its internal

value. So, exchange rates determined the internal value of the franc, so affecting national prices:

“In this later stage, moreover, when depreciation was severe, the external decline of money

dominated the internal decline; the exchange rates conditioned price changes” (Dulles 1929, p.

123). Here the causality is the opposite to that shown in the QTM.

Moreover, the last sentence of the quote above states that fluctuations of the exchange

rate occurred prior to those of prices. Rogers compared the movements of dollar exchange rates

and those of wholesale prices and concluded that prices changed prior to those of exchange

rates: “By proceeding in this way it was discovered that for the first sub-period [1919-1922] a

comparison of simultaneous items yielded almost exactly the same index as when prices were

displaced one month to the right (indicating their precedence of dollar exchange by that inter-

val)” (Rogers 1929, p. 108). Then, he compared the movement of wholesale prices and those

of the Bank of France notes in circulation: “For the period 1920-1921 the lag of circulation

behind prices was apparently five months” (Roger 1929, p. 123). Once prices moved, it took

five months to have an effect on the circulation of notes. He explained this:

“What seems to have been happening was this: When the artificial control of ex-

change rates was relinquished in March 1919, these rates naturally adjusted them-

selves gradually to prices. Having been kept depressed by artificial means, they re-

covered gradually as soon as the control was lifted. And, since the chief force oper-

ating to bring about the recovery was the purchase of foreign goods made unnatu-

rally cheaper than domestic one by the artificially low rates on foreign exchange, it

was altogether normal that the movements of exchange rates during that period of

adjustment should follow those of prices. If domestic prices increased, foreign goods

serving the same needs would be purchased in larger quantities. Foreign exchange

rates would in turn rise as soon as the new demands for means of payment began to

be felt. If domestic goods fell in price, the demand for foreign goods would be ex-

pected to fall in consequence, but only after the reduced demand for means of for-

eign payment (or perhaps an increased supply of bills drawn on foreign buyers to

pay for purchases in France) made itself felt” (Rogers 1929, pp. 124-25).

Both authors agree on the phenomenon but not on the causality. Moreover, Rogers ex-

plained that for the period studied, the long-term movement of total circulation of money(M)

and prices (P) are similar. The difference of causality relies on the short-term movements; the

explanation should stand on the movements of M’ (deposits) but he found no explanation here,

nor in the movement of V’: “Such a combination of movements is certainly most extraordinary

17

and seems to fit almost equally badly all the existing theories of money. A study of the move-

ments of the velocity of circulation of deposits (V’) seems to bring the explanation no nearer”

(Rogers 1929, p. 293).

In this period, it was not confidence which acts mainly on the movements of the value

of the franc, but rather economic factors as the increase in production to reconstruction and the

burst of some speculative bubbles on the world market. Rogers also agreed: the rise of prices

in 1919 was due, in part, to an increase in the value of imports which exceeded exports and the

fall in prices in late 1920 and 1921 was due to a decrease in national production.

3.2.Sub-period 1922-1924: “The battle of the franc”

For this second sub-period Rogers stated that there was “no pronounced tendency either

upward or downward”. Dulles wrote that the beginning of the period was one of recovery. In

the year 1922, French current account was in surplus, while the exchange rate of the franc was

deteriorating22, the government could anticipate an appreciation of the currency. However, in

1922, as said in Blancheton (2001, p. 200), the Treasury had to tradeoff between the preserva-

tion of the franc’s value and its financial needs. This tradeoff made people doubt about the

capacity of the institution to restore a stable value for the French currency.

Dulles noted that political problems in France (strike of workers who wanted a pay rise,

political disagreements in the Parliament) became persistent during this period and misled eco-

nomic indicators and they led to a new depreciation of the franc in 1923 of about ten per cent.

Uncertainty concerning political decisions concerning the pay back of Germany led to another

fall in the franc’s value. This incapacity of the French government to maintain a stable value of

the franc accentuated foreign investors’ apprehension. Here again, the French government did

not take sufficient steps to contain the depreciation. Moreover, the Treasury disagreed with the

Bank of France on the policy to follow: the first wanted to stop the monetary orthodoxy, the

deflation’s policy (Rist will be a supporter of this view) while the last wanted to stay in this line

(Blancheton 2001, p. 220). According to Blancheton, this opposition is more a social class op-

position between investors and savers than a theoretical opposition in terms of monetary theory.

This in turn aggravated speculative attacks against the franc and so the fluctuations of its value:

“It is regrettable that the improvement in international relations which seemed probable

at the end of 1923 was not able to save France from a disastrous exchange crisis. This

22See Debeir 1980, p. 632.

18

was because the situation had become highly unstable during these months and specu-

lation had been increased by the collapse of the mark and by the great uncertainty re-

garding French policy” (Dulles 1929, p. 168).

The depreciation of the franc during the years 1922-1923, the political uncertainty and

the Ruhr occupation of 1923 and early 1924 degraded expectations on the markets and the

possibility for France to avoid another crisis. This sank the country into a severe exchange crisis

in early 1924, and a monetary crisis. To prevent the crisis Poincaré, at that time President of the

Council of Ministers, decided to raise income taxes and “cédulaire” taxes by 20% (Law of the

“double décime”).

Moreover, on Dulles’s chart (Chart 3, p. 10), we can see that in 1924 wholesale prices

decreased and exchange rates were also affected. Both authors highlighted the effect of specu-

lation on the loss of value of the franc but they disagreed concerning the influence of the gov-

ernment’s response to this depreciation. According to Rogers, French government did not suc-

ceed in stopping the depreciation: “Certainly, however, had it been politically, sentimentally,

and otherwise possible in March 1924 for the French Government to use the accumulated re-

serves of the Bank of France, the depreciation of the franc could have been quickly arrested”

(Rogers 1929, p. 243). As for Dulles, she stated that the French government took several

measures, some of which were ineffectual (raising the discount rate of the Bank of France

twice), while others functioned (legislation against capital export, tax increase). The end of

1923 and the year 1924 correspond to the “battle of the franc”. During this period the main

cause of the franc fluctuation was speculation23.

3.3.Sub-period 1924-1926: “The flight from the franc”

This “battle of the franc” was followed by the period named “the flight from the franc”.

This period was composed of different elements. The severe exchange crisis of early 1924 and

speculative attacks on the bond market exacerbated the loss of confidence in the franc and also

in the political government.

In April 1924, the Dawes Plan was accepted: it diminished the reparation payments,

from Germany to France and, in exchange for resumption of payments, France evacuated the

23“The "battle of the franc" is a descriptive term which has been applied to the intense struggle in 1924, The drive

of outside speculation against the franc, which finally struck at the roots of French confidence in their own cur-

rency, brought the franc very near to destruction. It was, indeed a hard-fought battle which began towards the end

of 1923 and continued until the complete rout of speculators in March 1924 left the government in temporary

command of the field. It is best to review the general condition of production and finance at the end of 1923, in

order to understand the significance of this crisis” (Dulles 1929, p. 169).

19

Ruhr. In May 1924, the Cartel des Gauches24 won control of the French Parliament.

A second monetary crisis emerged in June 1924 because of speculative attacks from a

coalition of German’s Bankers located in Amsterdam, New York and London, against the cur-

rency. The Cartel increased its demand for advances from the Bank of France. This new coali-

tion decided to increase taxes in order to diminish the debt and the Bank of France diminished

its discount rate without any effect. Faced with this situation, the value of the franc started to

decrease in early 1925. The loss of confidence intensified, adding to the loss in value.

“The decline of the franc in the fall of 1925 has been called by some the confidence

crisis. This term might well be applied to the whole year. Indeed, the pressure which

pushed upward the cost of foreign exchanges in Paris was mainly from within the coun-

try, and was due to a widespread realization in France, and to a lesser extent in other

countries, that the French government was facing an almost insoluble problem. There

was at this time a growing realization that the budget must be balanced by increased

taxation, that the internal debt was so large that it constituted a menace, that debt ma-

turities for the current year were extremely heavy and that, in addition to all these things,

something had to be done about large sums owed to the United States. Thus there was a

gradual disappearance of the blind optimism that had been held by many. Moreover,

this fear of confiscatory taxation, of repudiation of a part of the internal debt, and of the

complete collapse of the franc, led many of the French to buy credits in pounds, dollars,

or Swiss francs” (Dulles 1929, p. 181).

This last sentence embodies the “flight from the franc”. As it had lost some of its value,

investors favored investments in other currencies. There was a total loss of confidence in the

franc and in the French political government. Rogers noted that accounts with foreign corre-

spondents of the Bank of France increased notably during this period. He also noted that there

was a big slump in bond emissions in 1925.

Concerning movements of prices and exchange rates, Dulles noticed that exchange rate

fluctuations acted on those of prices: “The fourth period, as we have divided depreciation, was

the time when the influence of the exchange rates over wholesale prices was most complete”

(Dulles 1929, p. 286).

For this period, both authors agreed on the causality; Rogers wrote: “The second sub-

period, on the other hand, covering the years 1923-1926, in which a well-defined lag of prices

behind exchange rates was discovered, was one of frequent, if not continuous speculation in

French exchange” (Rogers 1929, p. 125). So for this period, internal value adapted to the exter-

nal value. The main causes of the franc’s depreciation were, during this period, psychological

24This Cartel was a governmental alliance between the Radical-Socialist Party and the French Socialist Section of

the Workers’ International and regrouped the independent radicals (the right-wing of the Radicals); the Radical-

Socialist, the Socialist Republicans and independent socialists and the SFIO. The leader was Edouard Herriot, the

Radical-Socialist mayor of Lyon from 1905 to 1940 then from 1945 until his death in 1957.

20

factors: the lack of confidence from the investor in the stability of the French currency and

speculation notably from foreign bankers who wanted a devaluation of the money, explanations

which are not taken into account by either the QTM or the PPP theory.

The coup de grâce to the Cartel des Gauches came from the revelation of a falsification

of the Bank of France accounts25: in 1925 the Bank of France had extended its indirect advances

to the State and, in doing so had increased its note circulation beyond its legal maximum. Once

this affair was revealed the government was forced to change its composition in April 1925.

The Cartel stayed in majority in the Parliament; however, its composition changed five times

from mid-1925 to July 1926. However, the discovery of the falsification did not decrease the

amount of advances granted by the Bank of France to the State: “During the turbulent period of

1925 and the first half of 1926, however, advances showed a rapid rise which ended only with

the coming of the now justly famous Poincaré Government” (Rogers 1929, p. 60).

4. The debate concerning stabilization and the “franc Poincaré”

In July 1926, the Cartel des Gauches faced another severe depreciation of the franc and

a capital flight. This led to the establishment of Poincaré as President of the Council of Ministers

and Finance Minister who constituted a right-wing government. Dulles noted:

“This July panic was to be the final fall of the franc. It led to a complete realization of

the difficulties of the government. It brought to the surface the grim determination of

the nation to end the meaningless struggles of the deputies and set out on the difficult

road of tax payment and debt amortization” (Dulles 1929, pp. 195-196).

Both authors agree on the fact that Poincaré was a man of strong convictions and had a

great “aura”: “His [Poincaré] reputation for irreproachable honesty and his scrupulous regard

of the Constitution and of the law seemed to stimulate sufficiently wide-spread confidence to

afford the much need period of respite during which constructive legislation could be passed

and but put into operation” (Rogers 1929, p. 328).

4.1.The “miracle Poincaré”

The French President of the Republic, from 1924 to 1931, Gaston Doumergue instituted

Poincaré as President of the Council of Ministers and Finance Minister in order to bring more

stability in the value of the franc. For that reason alone the value of the franc stabilized and

confidence returned. Most contemporary economists analyzed the institutionalization of Poin-

caré as the most significant turning point in the fluctuations of the value of the franc. The role

25On this point see Blancheton (2005).

21

of Poincaré in the stabilization of the value of the franc was established as early as the late

twenties by authors including Rogers and Dulles.

As Dulles noted, the stabilization of the franc was a good thing in the very short term.

In the mid-term, the government could protect the franc by accumulating foreign loans; the

counterpart of this action was an unlimited possibility for the Bank of France to increase the

amount of notes in circulation. Poincaré succeeded in bringing the public account back to a

surplus which increased investment and production; and to some authors postponed France’s

entry into the Great Depression26 and to others, contributed to the Depression by undervaluing

the franc relative to the pound sterling, so that the Federal Reserve held down interest rates

(stimulating an unsustainable Wall Street boom) to uphold the exchange rate of sterling27.

According to Mouré (1998, pp. 70-71), the stabilization of the French currency required

three steps in theory. The first was the “prestabilization”: the Bank of France had to maintain

the value of the franc between two bands of value. The second was a de facto stabilization: the

Bank of France had to sell and buy gold and currencies at a fixed rate. Third, the stabilization

de jure in which all the legislative measures had to be organized to stabilize the value at the rate

fixed during the second phase28.

In practice, the second phase lasted longer than anticipated. Poincaré wanted to revalue

the franc whereas Moreau (then Governor of the Bank of France), Rist and Pierre Quesnay

(members of the Bank of France)29 desired stabilization at a lower level. The debate between

the “re-evaluator” and the “stabilizer” lasted until the elections of 1928. The postponement of

the last step of stabilization (the stabilization de jure) was caused by Poincaré’s determination

to avoid the franc’s depreciation.

Dulles remarked on this delay; when a government has to choose a new par for its

money, several groups are in opposition: politicians want to choose a value which balanced the

power between different social groups with different interests (1929, p. 345). Economists con-

sider the value with its purchasing power parity, relations with other countries, the gold value,

26See Mouré (1996, 1998, 2002, 2003), Irwin (2010). 27See Kindleberger. 28Concerning the stabilization of the franc also see Becker (1927a, 1927b). 29See Dal Pont and Torre (2014): “When Poincaré rapidly succeeds both Briand as Président du Conseil and Cail-

laux as Finance Minister, the trio [Moreau, Rist and Quesnay] want to convince Poincaré about the necessity to

adopt the plan of stabilization proposed by le Comité des Experts. Rapidly, a second debate starts concerning the

question of the determination of an exchange rate for stabilization, the main and the more innovative initiatives of

the trio are from Quesnay” (pp. 9-10).

22

in short with economic indicators (1929, p. 346)30. She highlighted the lack of consensus among

economists concerning the measure to adopt concerning the French franc (revaluation or stabi-

lization):

“In the case of France in particular, Keynes, in 1926, urged further depreciation in order

that the internal debt might ultimately sink to a value equivalent in gold to that of prewar

days. Professor Moulton [Harold Moulton of the Brookings Institution], on the other

hand, also with the debt in mind, in 1925, urged appreciation and chose the figure 6.43

cents a franc. This would have made it difficult to export to most countries. It would,

however, have helped creditors as compared with debtors. Still others, viewing the mat-

ter from different angles, looked mainly to the advances of the Bank of France to the

state and the note circulation” (Dulles 1929, p. 346)31.

According to Dulles, the French government, especially Poincaré, should have chosen

a new par in September or October 1926. She agreed with Moreau who wanted a faster revalu-

ation:

“It is unfortunate that stabilization of the franc had to wait so long. If it could have been

done sooner, a higher exchange value could have been chosen and this would have less-

ened the hardship which fell on the rente holders. If the situation had been in hand ear-

lier, much ill-feeling and several distressing panics could have been avoided. The good

and ill effects of a laissez-faire policy are here seen. In the course of the struggle the

strong came out fairly well, but the weak suffered many hardships” (Dulles 1929, p.

442).

For Rogers, Poincaré had to avoid the depreciation of the franc, especially during the

first month of his term as Finance Minister. He explained that after Poincaré’s reinstatement,

the value of the franc started to rise and with it the quantity of issues. Here he saw the good and

ill effects of Poincaré’s institution as seen by Dulles in the first paragraph of this section. He

notes that the issuing decreased only for one month of this period. For him, this “exception”

30“To the politician, the value chosen is apt to signify the ba.1ance of power between different social groups, the

producer and the consumer, the capitalist and the wage earner, those who live on profits and those who have fixed

income. The interests of these groups are normally different and it is only after a threat of catastrophe that they

become temporarily harmonized in the desire for stability. Even at such a time they do not subordinate their nar-

rower interests completely, and tend to disagree when the problem of the final value is under discussion. For this

reason, it is regrettable that the value of the franc could not have been fixed definitely in September or October of

1926, when the general wish was for calm and security” (Dulles 1929, p. 345).

“The economist, in contrast to the politician, views the value chosen in respect to its purchasing power relations

with other countries, the future of international commerce, the gold value of the budget burden and the quantity of

paper money. It is never possible to harmonize all these factors completely, though a reasonable adjustment may

be reached. There are some, Keynes, Cassel and Gregory, for instance, who chose for special emphasis the pur-

chasing power aspect of the new value of the currency. They advise, in particular cases, keeping any slight ad-

vantage for commerce by setting the exchange value of the money low, rather than high, to encourage production”

(Dulles 1929, p. 346). 31Keynes, in July 1926, wrote: “The first truth is that the franc will never regain its former parity and must be

devalued. The second truth is that the new value of the franc should be fixed, not at the end, but in the phase of

early financial reform plan. The third truth, that is still officially unmentionable, is that the gold of the Bank of

France is the appropriate way to keep the franc at its new value” (Keynes 1926, p. 20, translation by the author).

23

emphasized the importance of the effects of exchange movements on government finances and

the necessity to avoid a further depreciation (Rogers 1929, p. 329).

In December 1926, faced with the rise in value, the government had to take measures to

“prevent a further damaging rise” (Rogers 1929, p. 330). To this end, the Bank of France was

allowed to enter into the foreign exchange market as a purchaser of foreigner currencies: “The

desired effect of arresting the upward movement of the franc was immediately attained and

since that time dollar exchange has fluctuated within very narrow limits around the value of

25.50 francs to the dollar” (Rogers 1929, p. 331). This measure enabled the stabilization of the

value of the franc around the ratio of 25.50 francs to the dollar.

4.2 The “franc Poincaré”

Poincaré waited until the legislative elections of April 1928 before taking a decision

concerning the value of the franc. His final verdict was given in June 1928 and established a

new franc, the “franc Poincaré”, which was devalued to 80% of its value; the “franc Poincaré”

was only worth a fifth of the gold equivalent of the franc germinal32.

This decision was well regarded by Dulles as it fixed the optimistic expectations con-

cerning the French economy. Furthermore, she saw the last decision as only a compliance up-

grade of the practices. She concluded that the “new” prices, evaluated with the franc Poincaré,

showed a similar movement of prices to those of other countries, such as the USA, since 1914

(Dulles 1929, p. 437). She went further by explaining that this final stabilization highlighted

four points of monetary theory: first, France, with its new franc, came back to a gold standard

regime. Secondly, this re-adoption of the gold standard enabled the substitution of the legal

amount of notes issued by the Bank of France to a ratio of the gold reserve. Third, France did

the stabilization without using many foreign loans, in order to avoid speculative attacks on the

new money. In stabilizing the value in national loans, the French government could avoid a

return of a “flight” from the franc. Finally, she noted that this decision was well received by the

rest of the world.

As for Rogers, he finished writing his book on the French franc (published in 1929) in

January 1928. He drew two scenarios. The first was qualified as “the most obviously likely to

happen”: thanks to the easy money an increase in business would appear. This should lead to

an increase in the advances of the Bank of France to the State and should provoke a considerable

increase of prices. With this increase, the volume of notes in circulation would also increase

32See Mouré (1999, 2003).

24

and would reach its legal maximum.

Secondly, if the value of the franc was maintained on the foreign exchange market at

the value of the period, an increase in the note circulation without an increase in prices should

have no effect: “It is to be hoped and expected that the volume of business will continue to

expand in the future as in the past, and the attendant increased needs for funds must naturally

be taken care of with increased amounts of money and of bank credit” (Rogers 1929, p. 335).

He was optimistic concerning the French situation on the condition that the French government

reduced its debt and returned to the gold standard:

“The great improvements in the financial situation in France since July 1926 are real,

and there is no apparent reason why they should not be lasting. In fact, as soon as it is

clear that the budget can be kept in equilibrium and that foreign payments large enough

to upset the international balance of payments are not going to be required, there is no

reason why the gold standard should not be reëstablished [sic] at approximately the pre-

sent value of the franc” (Rogers 1929, p. 352)

In 1929, it is also interesting to note that Dulles was also optimistic concerning the future

of France. She concludes her book by writing: “It is astonishing to find the power of recovery

so great, and there is reason to hope that the constructive forces now evident in some parts of

French industrial life have created a sound basis for enduring financial stability” (Dulles 1929,

p. 452).

To conclude, both authors had seen the huge accumulation of gold of the Bank of

France33. For Rogers, the huge amount of gold was a sort of “guarantee” to contain a possible

depreciation of the franc. He was not worried about this accumulation and the world repartition

of gold between central banks:

“True, the existing large gold and foreign exchange holdings of the Bank of France are

sufficient to check any temporary tendency toward further depreciation of the franc whether

arising from unfavorable balances of payments or from budgetary deficits. In fact, so large

are these holdings that, provided they could be used for the purpose, combined they are

sufficient to discharge immediately substantially half of the total debt to both the English

and American government” (Rogers 1929, p. 353).

However, in his book of 1931 and his article of 1932, Rogers wrote that the shortage of

gold started to be problematic for countries under the gold standard because it leads to a fall in

prices and economic contractions. The huge amount held by the Federal Reserve and the Bank

of France played a great role in the depression of the thirties: “The evils of a gold shortage,

therefore, while often unnoticed until some jolt to international confidence appears, are thus

33For this point see Davidson (1932).

25

ever-present in the form of a threat to economic, to political, and even to diplomatic security”

(Rogers 1932, p. 240).

At that time gold demand increased but not the supply; countries in need had to face a

rise in the prices of gold and a decline of other prices, they could not maintain the value of their

currency into gold, or they could not maintain the par of the gold standard.

For Dulles, on the contrary, the accumulation of gold could send a signal of a shortage

of gold on the world market and so, a crisis:

“The flow of gold to France in the early months of 1928 led to fears that further purchases

might bring a general scramble for the world's gold supply. The purchases of metal had

been occasioned more by efforts of the Bank of France to keep the franc steady in face of

speculation for a rise than by the desire to increase reserves” (Dulles 1929, p. 439).

Dulles was right in 1929, the Bank of France and the Fed accumulate approximately two third

of the gold’s stock in the beginning of the thirties.

5. Conclusion

This paper emphasizes the analysis of two American authors concerning the French in-

flation of the interwar period. Dulles wrote her PhD thesis (1929) meanwhile Rogers was wring-

ing his book on the French franc (1929). This only work will enable Rogers to be offered a

Sterling Professorship at Yale University in 1930 whereas Dulles will not receive a lot of con-

sideration for her work. Even though her work emphasized the role of expectations in the mon-

etary process of inflation as affecting the velocity of circulation and that Keynes himself will

recognize her important contribution34 to the monetary theory at that time, she will not receive

the recognition of her other colleagues, recognition that could have enabled her to have an ac-

ademic career instead of having a career at the State Department.

Concerning the analysis of the French inflation of the interwar period our authors took

position, first, in the debate concerning the theoretical framework to use to explain the French

inflation consistently of the interwar period. They proposed a theory which took into account

more qualitative factors. According to them, the QTM or PPP theory could not satisfactorily

explain this inflation: these theories do not take into account psychological factors, such as

confidence and speculation and political problems (instability, relation between the Treasury

and the Bank of France). As a result, they both used a broader definition of inflation than the

one of the QTM or PPP theory. They took into consideration more causal factors, such as gov-

ernment debt or expenditures or the role of financial institutions. One point of disagreement

34Dulles 1980.

26

concerned the institution which aggravated the process: for Dulles it was the French govern-

ment while for Rogers it was banks and financial institutions.

Secondly, their studies emphasized the role of these qualitative factors in the movement

of the franc’s value. For the first sub-period (1919-1922), they agreed on the fact that the value

was still determined by economic factors such as an increase of production due to the cost of

reparation after the WWI. However, they disagreed on the causality between movement of ex-

change rates and those of prices. For Rogers, the latter acted on the former, and vice versa for

Dulles. Then, concerning the period of the “Battle of the franc”, the main causes behind the

fluctuations in value were speculation and instability of the political government. Finally, for

the last period, the “battle of the franc”, they agreed that the value of the franc was determined

by psychological factors such as a loss of confidence in the government.

Third, both authors saw the accession of Poincaré as Finance Minister as the event which

enabled confidence to return. The time taken by Poincaré to devaluate the “franc Germinal”

and replace it with the “franc Poincaré” (and so returning to a gold standard system) was too

long according to Dulles, she was in favor of a stabilization in 1926, as was Moreau, the gov-

ernor of the Bank of France, Rist, Quesnay and Keynes. However, the new par was well re-

garded by Dulles, as it fixed expectations and was more in accordance with other currencies

such as the dollar or the pound sterling. Rogers finished writing his book on the French franc

in January 1928; he then envisaged an optimistic scenario for the franc and the French economy.

Both authors remarked on the Bank of France’s huge accumulation of gold. Dulles, however,

saw the danger concerning the global demand of gold. Rogers thought it was a good thing as

gold could act as a “guarantee” against a further depreciation, he changed his mind in 1932,

seeing the gold accumulation as a factor which could lead to a fall in prices for the countries

under the gold standard.

6. Bibliography

Aftalion, Albert. Monnaie, prix et change: expériences récentes et théorie. Paris, France: Li-

brairie du Recueil Sirey, 1927.

Aftalion, A., 1927. Monnaie, prix et change: expériences récentes et théorie. Paris, France:

Librairie du Recueil Sirey.

Asselain, J.-C., Blancheton, B., Bordes, C., and Sénégas, M.-A. “L’inflation française de

1922-1926, hasards et coïncidences d’un policy-mix: les enseignements de la FTPL”.

Actes du colloque Du franc à l’euro : changements et continuité de la monnaie, Poi-

tiers.

Autier, A., 2012. Charles Rist et la question de la dévaluation en France (1919-1937) : un

‘complexe monétaire’ à l’épreuve des faits. PhD Thesis, Paris 8.

27

Barbaroux, N., 2013. Monetary Policy Rule in Theory and Practice: Facing the Internal Vs

External Stability Dilemma. Routledge.

Becker, C., 1927a. “France’s Plans for Government Reform”. Current History, 26 (1), 111–

112.

Becker, C., 1927b. “Poincaré’s Prestige Continues Despite Opposition”. Current History, 26

(5), 813–815.

Blancheton, B., 2001. Le pape et l’empereur: la Banque de France, la direction du Trésor et

la politique monétaire de la France (1914-1928). Paris, France: Albin Michel.

Blancheton, B., 2005. “Les faux bilans de la Banque de France dans les années 1920. L’entre-

prise, le chiffre et le droit. Itinéraires parallèles, itinéraires croisés, CRECCI-IAE,

73–89.

Dal-Pont Legrand, M. and Torre, D., 2014. Pierre Quesnay (1897-1937) from the League of

Nations to the Franc Poincaré: Financial Discipline and Monetary Pragmatism.

Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of

Nice Sophia Antipolis, GREDEG Working Paper No. 2014–43.

Daniel, J.-M., 2012. 8 leçons d’histoire économique: croissance, crise financière, réforme fis-

cale, dépenses publiques. Paris, France: O. Jacob.

Davidson, D., 1932. “The Rationalization of the Gold Standard”. Ekonomisk Tidskrift, 34

(3/4), 69–142.

Debeir, J.-C., 1980. “Inflation et stabilisation en France (1919-1928)”. Revue économique, 31

(4), 622–647.

Dornbusch, R., Danthine, J.-P., and Honohan, P., 1989. “Credibility, Debt and Unemploy-

ment: Ireland’s Failed Stabilization”. Economic Policy, 4 (8), 174–209.

Dulles, E.L., 1929. The French franc, 1914-1928: the facts and their interpretation. New

York, USA: The Macmillan company.

Dulles, E.L., 1932. The bank for international settlements at work. New York, USA: The

Macmillan Company.

Dulles, E.L., 1933. The dollar, the franc and inflation. New York, USA: The Macmillan

Company.

Dulles, E.L., 1980. Chances of a lifetime: a memoir. Englewood Cliffs (N.J.), USA: Prentice-

Hall.

Eichengreen, B. and Wyplosz, C., 1986. The Economic Consequences of the Franc Poincare.

National Bureau of Economic Research, Working Paper No. 2064.

Eichengreen, B.J., 1992. Golden fetters: the gold standard and the Great Depression, 1919-

1939. Oxford, UK: Oxford University Press.

Fisher, I., 1963. The purchasing power of money: its determination and relation to credit in-

terest and crises. New York, USA: A. M. Kelley.

Hatdeen, I., 2000. Eleanor Lansing Dulles. In: Robert W. Dimand, M.A. Dimand, and E.L.

Forget, eds. A Biographical Dictionary of Women Economists. Cheltenham and North-

ampton.

Irwin, D.A., 2010. Did France Cause the Great Depression? National Bureau of Economic

Research, Working Paper No. 16350.

Keiger, J.F.V., 2002. Raymond Poincaré. Cambridge, UK: Cambridge University Press.

Kemp, T., 1971. “The French Economy under the Franc Poincaré”. The Economic History Re-

view, 24 (1), 82–99.

Keynes, J.M., 1923. A Tract on a Monetary Reform. The collected writings of John Maynard

Keynes. Volume IV, London: Macmillan, St Martin's Press, cop. 1971.

Keynes, J.M., 1928. Réflexions sur le franc et sur quelques autres sujets. Paris, France: S.

Kra.

28

Kindleberger, C.P., 1985. Keynesianism vs. monetarism, and other essays in financial history.

London; Boston: G. Allen and Unwin.

Krugman, P., 2014. “Currency Regimes, Capital Flows, and Crises”. IMF Economic Review,

62 (4), 470–493.

Makinen, G.E. and Woodward, G.T., 1989. “A Monetary Interpretation of the Poincaré Stabi-

lization of 1926”. Southern Economic Journal, 56 (1), 191–211.

Mouré, K., 1991. Managing the franc Poincaré: economic understanding and political con-

straint in French monetary policy, 1928-1936. Cambridge, UK: Cambridge University

Press.

Mouré, K., 1996. “Undervaluing the franc Poincaré”. The Economic History Review, 49 (1),

137–153.

Mouré, K., 2003. “The Bank of France and the Gold Standard 1914-1918”. In: International

Financial History in the Twentieth Century: System and Anarchy. Cambridge: Cam-

bridge University Press.

Mouré, K. and Asselain, J.-C., 1998. La politique du franc Poincaré: perception de l’écono-

mie et contraintes politiques dans la stratégie monétaire de la France, 1926-1936. Pa-

ris, France: A. Michel.

Nogaro, B., 1924. La monnaie et les phénomènes monétaires contemporains. Paris, France:

M. Giard.

Prati, A., 1991. “Poincaré’s stabilization: Stoppping a run on government debt”. Journal of

Monetary Economics“, 27 (2), 213–239.

R.C.J., 1939. James Harvey Rogers, 1886-1939. The American Economic Review, 29 (4),

913–914.

Rogers, J.H., 1932. “Gold, International Credits and Depression”. Journal of the American

Statistical Association, 27 (179), 237–250.

Rogers, J.H., 1931. America weighs her gold. New Haven, USA: Yale University Press.

Rogers, J.H., Maffry, A., and Landman, R.E., 1929. The process of inflation in France: 1914-

1927. New York, USA: Columbia University Press.

Wolfers, A., 1940. James Harvey Rogers, 1886-1939; in memoriam. Stamford, Conn.: The

Overbrook Press.