Battle of the Franc

The French franc, par value until a fortnight ago the most stable currency of the Continental Allies, has recovered from a dramatic dip towards bankruptcy and is now canvalescing at a stable value of 4.65-c-.

Cause of Decline. Using the military phraseology so appealing to Frenchmen, Premier Poincare, backed by diplomatic despatches and official documents, declared that the cause of the fall of the franc was a German "offensive," operating from Amsterdam. Poincare asserted that German business houses, using 13 billions of French notes held outside of France as "a means of maneuver," had stimulated an artificial fall by false quotations. He said that "bear" gamblers had fallen into the trap and that the franc was persecuted on exchange in London, New York, Amsterdam, Vienna, Milan. In time the movement was reflected in Paris, by wide dumping of National Defense Bonds and "short" selling by importers to protect themselves from the falling exchange.

Conservative opinion outside of France is not satisfied with this easy method of blaming it on the Germans, holds that Poincare's policy was primarily responsible. With an unbalanced French budget, an intransigent attitude towards a reparations settle-ment and a general distrust of the implications of French foreign policy, ample reason existed for distrust, leading to a general fall of exchange rates and a stampede similar to the American free silver scare of 1895, to the gambling in 1919 on Russian rubles, in 1922 on the German mark, in 1923 on the sterling exchange under Baldwin's protectionist campaign.

Cause of Recovery. This theory, rather than M. Poincare's sensational views which are presumably designed for campaign purposes, is borne out by the conditions that led to the franc's recovery.

The only way in which "short" gambling can be met and broken is by "long" gambling. To gamble requires money. The only way the Bank of France could get money on a falling market was to sell francs (thus contributing to the stampede), or to borrow on the strength of its gold reserve. Large loans were accordingly negotiated on this security in London and New York, and credits placed at the disposal of the Bank of France in all gambling centres. The result was immediate; the "bears" were quickly routed. This definitely showed that the movement was not materially backed by the suspected German "exported" capital.

But the money raised (-L-5,000,000 from a 'London syndicate and $100,000,000 from J. P. Morgan), was not advanced without security, and the security demanded was potential rather than actual.

Conditions of Loan. The conditions under which J. P. Morgan & Co. loaned $100,000,000 were forecast by a cabled statement from the Governor of the Bank of France, pledging the French Government:

P: 1) to insist on Senate ratification of the new fiscal policy, balancing the budget and reducing expenditure;

P: 2) to float no new loans until the situation had improved;

P: 3) after improvement to float no new loans unless the service of these loans was covered by the French budget.

In addition to these purely internal measures, J. P. Morgan & Co. is reported to have insisted that the French Government accept the Dawes Plan for Reparations.

The Battle. Amid much talk of "trench-warfare," "counteroffensive" with other picturesque terms, the franc began to rise in value. The manifest pleasure of the Germans in the French discomfiture was turned to dismay, as the actuality of the Morgan loan which had been discounted in Berlin as "propaganda talk" had its effect.

March 11. Loan rumors sent the franc from 3.42-c- to 3.75-c-. The Chamber of Deputies voted, 425 to 135, to exempt National Defense Bonds from the income tax, halting their sale. Orders by the Bank of France to buy francs in London and Amsterdam were followed by the same policy on the Paris Bourse. "The tide has turned!" trumpeted the French press.

March 12. The Bank of France announced positively that the legal limit of 41 billions would not be exceeded. One small French bank failed for 20,000,000 francs. The franc rose to 4.11-c-.

March 13. The Morgan loan was officially announced, together with the conditions demanded by the British and American financiers. A 50% increase in railway rates, 40% on tobacco monopoly, became effective. Americans were popular in France once more, and the franc stood at 4.39-c-.

March 14. The intervention of Mr. Morgan appeared to have come at the psychological moment. The franc seemed stable at 4.65-c-. The Bank of France had reduced its note circulation 336,000,000 in a week, its advance 100,000,000. French banks turned over their British and American securities to the Bank of France, which announced its intention of consolidating the present floating debt of 70 billion francs. Paris "bears" were later shown to have been caught 500,000,000 francs short, but were outdone at Vienna where the "bears" had promised to sell ten times the number of francs in circulation. In order not to disorder exchange, the franc is to be kept stable at 4.65-c-, with a slight appreciation.

The Present Situation. The franc is stable. France owes J. P. Morgan & Co. $100,000,000 at 5 1/2%, Great Britain -L-5,000,000 at the same rate, for six months, and has pledged its gold reserve as security. French internal policy is pledged to retrenchment and France's foreign policy is pledged to the Dawes plan.