France and the International Economy

From Vichy to the Treaty of Rome

Frances Lynch

• Publisher: Taylor & Francis
• Year: 2006
• eBook ISBN: 9781134766741
• Edition: 1
• Topic: Languages & Linguistics
• Subtopic: Languages
• Index: Languages & Linguistics

This is a comprehensive history of a critically formative period in French economic history. Frances Lynch covers topics such as the post-war negotiations for American aid, the reconstruction of a capital market, the modernization of French agriculture, the liberalization of trade in the 1950s and subsequent economic growth.

1
OUT OF THE ABYSS

At the moment of liberation France was without a legitimate government. The Vichy state to which the majority of the National Assembly had voted full powers in June 1940 had collapsed in the wake of the Allied victory. De Gaulle’s claim to legitimacy in forming his provisional government in June 1944 rested on him being the sole leader of the French Resistance—a movement to which he argued the majority of the French people subscribed. The composition of his government was without precedent in French history. It included communists for the first time ever as well as socialists, radicals, independents and representatives from a new centre-left Catholic party, the Mouvement Républicain Populaire (MRP).

The economic situation facing de Gaulle’s provisional government was grim. Although much of France’s industrial capacity had remained intact during the first phase of hostilities in 1939/40, integration into the German war economy had led to a major reorientation of French trade and structure of production. The general level of production in both industry and agriculture had declined under the occupation due to shortages of supplies and of labour, although not all branches of activity were affected in the same way. Thus, for example, the textile industry, which had been deprived of its normal raw material imports, suffered a severe contraction, whereas the production of aluminium and of oils and sugar actually increased to meet the demand from Germany.¹

The economic situation deteriorated still further in 1944 when, in the face of Allied bombing and the collapse of the German occupation, industrial production fell to about 40 per cent of the 1938 level.

THE LEGACY OF THE PAST

Exactly how much damage was caused by the entire war and occupation will no doubt always remain in dispute, but on any interpretation the account was grim. Budget deficits increased 3.5 times between 1939 and 1945. Public debt increased over fourfold. The money in circulation increased from 101,000 million francs in 1938 to 625,000 million francs in September 1944. Foreign indebtedness totalled 1282.7 million dollars in December 1945 compared with 261.8 million dollars at the end of 1939, whereas reserves of gold and foreign currencies fell from 3185.1 million dollars to 1817.8 million dollars over the same period, although most of the loss was in 1944 and 1945.

Table 1.1 Index of industrial production in France, 1941–44 (1938=100)

This damage to the country’s financial position was mirrored by the physical damage. The number of buildings destroyed, 1,997,000, represented 20 per cent of the building stock and was over twice as many as in the First World War. The number of railway lines in working order in 1945 was just over 40 per cent of the prewar total. Two-thirds of the merchant fleet was lost. Agriculture suffered from the absence of 1 million men and the slaughter of 26 per cent of the livestock. As a result of a shortage of fertilizer and a reduction of imports average food rations in France at the end of the war were well below those in Britain–35 per cent for meat, 65 per cent for fats and 62 per cent for sugar. The situation in industry was even worse. It was calculated that 12,500 million hours of work had been lost between 1940 and 1945 as a result of 765,952 workers being deported to Germany and 85,000 working for the German war economy in France.

This of course was a highly subjective calculation. Other aspects of the damage to French industry were easier to measure. The reduction in the stocks of raw materials ranged from 80 per cent of petroleum and 74 per cent of iron ore to 53 per cent of cotton and 29 per cent of coal. The loss of finished products was over half the output of steel, 100 per cent of the output of precision engineering industries and of heavy metalworking, and 77 per cent of the production of automobiles. Although only 7 per cent of machine tools were taken because they represented the newest and most sophisticated, the French were left with those whose average age was 29 in 1945.²

To such a catalogue of damage caused by war and occupation had to be added the damage caused to the economy in the interwar period. One measure of France’s economic decline in that period was that by 1938 the level of industrial production was no higher than it had been in 1913. In other words the gains made in reconstructing the economy after the First World War had been completely reversed by the prolonged depression of the 1930s. Another measure was that there had been no net investment in the French economy during the 1930s. Thus, recovery in 1945 was not only from war and occupation but from fifteen years of economic decline. France and the international economy 2

THE FRENCH ECONOMY BETWEEN THE WARS

Reconstruction after the First World had been rapid with GDP regaining its 1913 level by 1923 and rising to 34 per cent above it by 1929. While, in the absence of reparations from Germany on the scale intended, this had been financed through domestic inflation, the consequent fall in the external value of the franc was mild in comparison with the currency collapses elsewhere in Europe. When the French franc was finally stabilized de jure, by Prime Minister Poincaré in 1928, it had lost 80 per cent of its prewar value. Since the stabilized franc was judged to be relatively undervalued it gave French exports a competitive edge in international markets. Although the importance of these exports to the growth of the economy in the period 1926–30 has recently been challenged in favour of an explanation based on domestic fiscal policy,³ what is not disputed is that when France’s competitors moved rapidly into depression in 1929 the French economy was enjoying boom conditions. It continued to do so for another year before the contraction of exports made its impact on levels of production, prices and investment in France.

For many years the official explanation of the international depression, which was held by the political Right in France and elsewhere, attributed its severity to an overexpansion of credit in the 1920s encouraged under the rules of the Gold Exchange Standard. Since the result was that supply outstripped demand the remedy proposed by the Right was to allow production to fall and to restore the Gold Standard as the mechanism for determining the correct value of exchange rates.⁴ In France where budget deficits after 1930–31 were seen to be raising the level of demand artificially, and hence interfering with the necessary decline in prices, the primary objective of government policy became that of balancing the budget through deflation.

But it was a policy which governments in Britain, the United States and Germany could not follow with impunity. Unemployment rates, which at their worst reached onethird of the labour force in Germany, forced these governments to adopt policies based on credit expansion in order to promote economic recovery This necessitated the devaluation of the currency as in Britain and the United States or the imposition of draconian controls as in Nazi Germany.

In France widespread underemployment, particularly in the agricultural sector, shielded French governments initially from the worst effects of the depression. However, following the devaluations of sterling and the dollar, the government, both for balance of payments reasons and in response to pressure from sectional interests, stepped up the levels of protection in the economy. As well as increasing tariffs the government introduced quantitative restrictions on imports in 1931, thereby setting an example for other governments to follow. But protection and other forms of price support blocked the downward pressure on prices, making a nonsense of the government’s deflationary policy.

Table 1.2 Movement in GDP, 1913–44 (1913=100.0)

The interpretation of the causes of the depression held by parties on the Left was that it was essentially a crisis of underconsumption of the sort which was endemic to the capitalist system. Where the communists differed from the socialists and radicals was over whether it was possible, or indeed desirable, for a government of the Left to promote recovery within the capitalist system. The failure of the Popular Front government’s experiment in 1936–37, which was based on increasing the level of demand through a public works programme, a reduction in indirect taxation and the introduction of a 40- hour week without loss of pay, seemed to vindicate the communist party’s rejection of reformist policies. Instead of promoting recovery the ‘Blum experiment’, as it was known, led to inflation, a foreign exchange crisis which precipitated the devaluation of the franc, and the downfall of the government after little more than one year in office.

The consequence of the failure of both right-and left-wing policies to produce a lasting recovery in the 1930s was that on the eve of the Second World War France, unlike any other developed country except the United States, had an economy which was weaker than that of 1929. The experience of the war years only widened the gap between France and the other industrialized powers, making the problem of France’s economic decline a relative as well as an absolute one. No other major economy had fallen so far behind in such a relatively short period of time and it is this which makes the postwar transformation of the French economy a story of such exceptional and universal interest.

Paradoxically though this economic decline was not matched by a financial one. Indeed by 1939 the stock of gold accumulated in the official reserves was greater than in 1928, as Table 1.3 indicates. Even though France had run a deficit on current account throughout the 1930s, the strict monetary policies pursued in defence of the Poincaré franc until 1935 had attracted foreign capital fleeing from the effects of less orthodox policies elsewhere.

But in 1935 not even Laval’s stringent deflationary policies could stem the growing conviction that the Poincaré franc would have to be devalued. The persistence of the deficit on current account together with the election of a left-wing coalition government in 1936 caused confidence in the franc to evaporate. It did not return even after Blum’s reluctant devaluation of the franc in September 1936. France and the international economy 4

Table 1.3 Evolution of gold reserves of the Bank of France, 1928–39 (in tons of fine gold)

One of the apparent benefits from accepting defeat in 1940 was that France conserved its gold reserves intact until 1944, having judiciously shipped them to more remote parts of the empire before signing the armistice. The gold which Germany seized in Paris in fact belonged to the Belgian government. But in view of the scale of the economic problems facing France these reserves were soon to be depleted.

PLANNING FOR THE POSTWAR

How France’s economic decline was to be reversed depended in part on how it was analysed and in part on the political, economic and financial constraints operating in the postwar world. One of the consequences of accepting defeat in 1940 was that France was excluded from all Allied planning for the postwar world. In both the United States and Britain attention had focused primarily on reconstructing an international monetary system in the belief that it was the inadequacy of the Gold Exchange Standard as set up after World War One which had been responsible for the Great International Depression of 1929–32. But contrary to the right-wing view which had blamed the crisis on an overexpansion of credit, both Harry White and J.M.Keynes, the American and British authors of what was to become the Bretton Woods system, blamed the crisis on a shortage of credit. Thus their proposed postwar monetary system was designed to allow countries with balance of payments difficulties to borrow from an international fund rather than be forced either to devalue, deflate or increase levels of protection. The fund which was to become known as the International Monetary Fund (IMF) was to provide credit on a short-term basis only. Longer-term credit needed to promote economic development or structural adjustment was to come from a separate fund which was to become known as the International Bank for Reconstruction and Development (IBRD).

Table 1.4 Balance of payments for France, 1920–37 (in thousand million 1928 francs)

But for the financial experts who had rallied to de Gaulle in London, the inadequacies of the Gold Exchange Standard were far greater than either Keynes or White acknowledged. For Hervé Alphand and André Istel, the authors of a French monetary plan, ⁵ the collapse of the system between 1929 and 1931 was not due to a shortage of international credit but rather to the absence of any international institutional machinery to regulate structural problems in the international economy. What they advocated was some machinery which would regulate both production and trade across capitalist and communist countries, developed and underdeveloped countries, to prevent the sort of overproduction which had occurred in the 1920s, and which had in their view destabilized the international economy. While this strategy reflected, in part, de Gaulle’s vision of postwar France as a bridge-builder between East and West and caretaker of the Third World, it also drew upon the plans of the French minister of commerce, Etienne Clémentel, for world-wide controls over raw material supplies and prices after 1918.⁶

Unlike the Keynes and White plans which called for the creation of a central fund but differed over the size of the overdraft facilities provided by it, the French plan did not consider large capital contributions to be essential to the operation of postwar financial settlements. It envisaged that each country would register an agreed exchange rate for its currency and guarantee its value to all countries holding it. This guarantee would take the form of providing collateral such as gold, foreign exchange, approved securities or raw materials of between 10 and 30 per cent of the value of its currency held by other monetary authorities. To guard against the inflationary implications of such a scheme the French plan suggested that the foreign exchange holdings of a country experiencing inflation should be sterilized rather than be used to support domestic credit expansion. The French plan was thus intended to provide the liquidity necessary for higher levels of trade and to guard against the risk of currency depreciation. The operation of the system was to be supervised by an international clearing office, although this was not considered essential. The rules of the system would enable countries such as the Soviet Union, where trade and exchange movements were state-controlled, to participate without having to abandon these controls. However, such was the reality of de Gaulle’s position that, apart from a brief mention in the New York Times, the Alphand-Istel plan, like the earlier Clémentel plan, was ignored entirely.⁷

PLANNING UNDER VICHY

For the technocrats drafted into the planning body, the Délégation Générale à l’Equipement National (DGEN) set up by Vichy in 1941, the causes of the international depression were not essentially monetary but were to be found in the excessive specialization within the international economy. Such specialization had worked in their view for a brief period in the nineteenth century when the gap between developed and underdeveloped economies had been greatest. But the process of economic development in the rest of the world, accelerated by import substitution during the First World War, had narrowed this gap, leading to over-production in the 1920s. From this interpretation it followed that the future for France lay in restructuring its economy in order to reduce its dependence on international trade. This was to be achieved not through an increase in protection as in the 1930s but through a planned investment programme designed to promote the competitiveness of the economy of the entire French Union. Under this programme industry was to be restructured in order to increase the production of energy and finished manufactures so that France would occupy both ends of the production chain in international trade. Agriculture was to be expanded in order to reduce food imports and expand exports.⁸

Over the course of 1943 the planners compiled a crude industrial balance sheet to assess the state of French industry and the targets for investment. It emerged from this that one of the most fundamental weaknesses of the French economy was considered to be its relatively low provision of energy. As far as the planners were concerned the fact that France was the largest importer of coal in the world did not in itself explain why other forms of energy, particularly electricity and oil, had not been more developed. The Vichy planners aimed to expand the production of all forms of energy in France as a means of improving the competitiveness of manufacturing industry. Thus coal production was to be increased from 47.5 million tonnes in 1938 to 60 million tons over a ten-year period. Almost half of the electricity produced in 1938 had come from coal-fired power stations. The plan was to expand the production of hydroelectricity since the marginal cost of this form of electricity was less than that derived from coal. Over the ten years of the plan the consumption of electricity was estimated to rise 45 per cent above the 1939 level. This was to be accounted for mainly in electrifying the railways, expanding the provision of trolleybus...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• TABLES
• PREFACE
• ABBREVIATIONS
• ARCHIVAL REFERENCES
• INTRODUCTION
• 1: OUT OF THE ABYSS
• 2: NEGOTIATING AMERICAN AID
• 3: FRANCE AND THE MARSHALL PLAN
• 4: FINANCING INVESTMENT UNDER THE MONNET PLAN
• 5: FRANCE AND THE RECONSTRUCTION OF WESTERN EUROPE
• 6: TRADE LIBERALIZATION OR PROTECTION?
• 7: MODERNIZING FRENCH AGRICULTURE
• 8: TOWARDS THE COMMON MARKET
• 9: THE RETREAT FROM EMPIRE
• CONCLUSION
• BIBLIOGRAPHY