Indispensable Measures

New tremors shook world, money markets last week, with a flight from the French franc causing the greatest alarm. Forced to perform a major rescue job, the French government announced a series of tight credit restrictions designed to ease the pressures on the country's currency. That done,

President Charles de Gaulle went to the trouble of personally denying rumors that the franc was about to be devalued. Such a move, the General told his Cabinet, "would be the worst possible absurdity."

Absurd or not, the possibility of the franc's devaluation has flared intermittently ever since last spring's general strike. That upheaval led to a wave of staggering wage hikes for French labor, which figure to average at least 15% for the entire year. The wage gains have been followed by soaring price increases, creating an inflationary impact that has strained France's balance-of-payments position and shaken international confidence in the franc.

Major Move. The government's original strategy for avoiding an acute crisis was to tolerate some inflation for the sake of swift economic expansion that would stimulate exports, keep employment high and accelerate an overdue modernization of French industry. Unfortunately, the cost of defending the franc on international exchange markets has run disturbingly high. France's reserves dropped from some $6 billion to $4.2 billion by the end of October, and the decline would have been far worse except for the government's success in arranging foreign credit, notably from the International Monetary Fund, in support of the franc.

More recently, the flight from the franc has been aggravated by persistent rumors that the West German mark would be revalued. West Germany has been fairly successful in keeping its prices stable, which has made the mark strong by comparison not only with the franc but also with the inflation-weakened dollar and pound. Although Bonn flatly denied that it was considering pegging its currency at a higher price, speculators frantically traded francs--and to a lesser extent pounds and dollars--for marks in hopes of making a fast profit. As the monetary jitters mounted, the price of gold on the London market climbed to $40 an ounce, its highest level in seven weeks.

With the franc under siege, Paris was forced to moderate its expansionary policy in an effort to curb inflation and restore confidence abroad. The major move in that direction was an increase to 6% in the Bank of France's discount rate, which had already been raised from 3 1/2% to 5% following the general strike. By making it more expensive for other financial institutions to borrow money from it, the central bank hoped to ease one of the chief pressures on the economy. In other steps to restrict credit, the government ordered banks to limit short-term loans and retain a higher percentage of their deposits as cash reserves.

Excessive Exodus. Additional measures, said De Gaulle, "doubtlessly will have to be taken." One possibility is the reintroduction of restrictions on the flow of currency out of the country that the government abolished just two months ago. If inflation continues unchecked, De Gaulle may even be forced to put a freeze on wages and prices. Meanwhile, the government can only hope that speculation against the franc subsides. Although he insisted that the government would not abandon its expansionist policies, French Premier Couve de Murville admitted that "there have been excesses, notably in the exodus of capital." As a result, he said, "the measures we took were indispensable."

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