Down Goes the Franc

The Abbot of Bazinham once computed that in the first thousand years after Charlemagne, French currency was devalued 40 times. In the 19th century, the gold franc was such a rock that the currencies of half Europe were pegged to it. Lately, though officially pegged since 1949 at 350 to the dollar, the franc has fallen almost as often as French governments. Last week at long last the French government took notice of the franc's real worth and, without using the horrid word devaluation, in fact devalued it.

The man who brought it off was the brilliant young (37) technocrat Finance Minister Felix Gaillard, who made it clear that either France would live closer to its means or that he would quit. He first demanded that his fellow ministers slash 600 billion francs ($1.7 billion) from their next year's spending plans (TIME, Aug. 12). The Defense Minister spoke reassuringly of sticking "to my best estimates." Retorted Gaillard: "I cannot accept any estimates, I need guarantees." Sighed the Labor Minister: "He must settle-this crisis at any cost. If we allow Felix Gaillard to walk out, he will become the most popular man in France." In the end, Gaillard got his way. But by then, with France's reserves depleted and its credit exhausted, the franc had fallen to 436 to the dollar on the free market, the lowest in five years.

At this point, and after all banks had closed for the weekend, Gaillard was ready for his big step. It was devaluation, but with a difference. The franc was devalued to 420 to the dollar in all tourist transactions. Imports in effect would cost 20% more, except on those imports deemed vital to the continuing expansion of French industry. On these "exceptions," such as fuel and key raw materials (wool, cotton and steel products), accounting for about 60% of French imports, the rate would remain 350 to the dollar. The calculated effect: a cut in import spending. Next, to give France a chance to recoup its reserves by selling more in world markets. Gaillard granted a 20% premium to French businesses that direct 50% of their products into foreign markets, thereby permitting them to lower their prices to make them more world competitive.

If Gaillard's maneuvers succeed in closing France's foreign trade gap, he still has the problem of France's inflation-tilted economy. Since his domestic austerity program calls for ending costly commodity subsidies, many prices--starting with the price of bread--are headed up. Steelmakers have announced plans to raise prices 4.5%, government employees are pressing for a 10% pay boost. Taking to the radio, Economist Gaillard called for more civic spirit and warned that "if labor and management insist" on such demands, "they will be defeating all our efforts. Our defeat will be theirs."

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