France Public Finance Part I

France Public Finance 1

While the favorable repercussions of the financial consolidation policy, initiated by the government at the end of 1938, had led, among other things, to a significant repatriation of French capital from abroad (the gold reserves of the Bank of France and the Exchange Stabilization Fund had increased in just over a year of 37 billion francs), the control of exchange rates and the prohibition of the gold and foreign exchange trade, introduced on 10 September 1939, prevented the expatriation of capital. The liquidity of the money market was accentuated, interest rates declined and the state was able to benefit from large subscriptions to treasury bills and newly created armament bills. The large liquidity, the substantial recourse of the state to short-term credit,

According to, the enemy occupation weighed heavily on the French economy; the financial burden borne by the state for it can be estimated at about 950 billion francs and of these at least the amount of advances from the Bank of France to the state for employment expenses (426 billion) was financed by direct inflation (the circulation of notes increased, from the end of May 1940 to August 17, 1944, by 435 billion). The policy of the monetary circuit, implemented by the government, was favored by the inability of the productive organization, which worked at a reduced rate, to absorb the funds formed on the market as a result of inflation; despite this, for the years of occupation the total state expenditure was covered only for 40% with loans and 32% with taxes while for the rest it was necessary to resort to inflation. The main instrument of this policy were short-term bills (treasury bills and savings bills) and treasury bills, mandatorily remitted to state suppliers in settlement of their credits. Instead, the state’s recourse to long-term credit was less intense; the proportion of the floating debt to the total debt consequently rose from 25% in 1939 to 58% at the end of the war. The war damages attributable to Germany and Italy were estimated, for the purposes of reparations, at about 1299 billion francs 1938.

In 1941 the reform of the credit system was implemented which was subjected to the control of the Banking Control Commission, the Permanent Banking Organization Committee and the Bank of France; in 1942 the stock exchanges were reorganized and submitted to the Stock Exchange Control Committee; from October 1940 the futures market was banned. Since its liberation (1944), the country’s economic and financial situation was characterized by the appearance of some fundamental imbalances, including the general economic one between the demand for goods and production (inflationary gap), and the financial ones between expenditure and income of the state, between demand and supply of capital, between positive and negative balance of payments items. State expenditure increased partly due to factual circumstances (depreciation of the franc, consequences of the war, etc.), partly due to the emergence of new economic policies (extension of the functions of the state, economic subsidies, coverage of the deficits of public and nationalized enterprises, assistance and social insurance). After the first brief phase of acute disorganization, already in the last months of 1944 the government was able, taking advantage of the liquidity of the market, to launch the liberation loan, which gave a revenue of 165 billion; the situation continued unchanged in the first months of 1945, during which the new liberation vouchers could be easily placed. The franc had meanwhile been devalued again (November 2, 1944) and its exchange rate against the US dollar had been fixed at 49.625.

On May 30 the exchange at par of the tickets in circulation was decided; in connection with this operation, bank deposits and underwriting of Treasury bills recorded a significant increase. The circulation of notes thus contracted from 589 billion on 17 May to 444 billion on 2 August. In the following months, however, economic activity, in the recovery phase, began to exert pressure on the market: at the end of 1945 the credit balance of the resoro’s current account at the Bank of France, which on 2 August amounted to 102 billion, had fallen. to 11 billion and note circulation had risen to 570 billion; in December the franc was again devalued (119.10 francs = 1 dollar). Since the beginning of 1946 the new trend has been accentuating, as the sources of voluntary savings began to run out; the banks, under the growing pressure of the demands of the economy, were forced to resort to the issuing institute and to liquidate expiring treasury bills. Inflation on behalf of the state (which had already had to resort to an increase in the tax burden, introducing, among other things, an extraordinary tax on assets in August 1945) was added, starting in 1946, to inflation in favor of of the economy. The nationalizations of the coal, gas and electricity industries, decided in April-May 1946, made it the responsibility of the Treasury to increasingly provide for the investments of nationalized companies and to cover their operating deficits.

As for financial relations with foreign countries, the sharp reduction in invisible revenues, the contraction in exports (due to both decreased production and the high cost of French goods), the increase in import needs, due to the internal deficiency of foodstuffs (the harvest was very poor, particularly in 1947) and the increased demand for raw materials and capital goods, caused large deficits in the balance of payments, especially vis-à-vis the dollar area. The stop of essential imports was only averted with the liquidation of French foreign assets required by the state (between January 1945 and May 1948 the divestment is valued at approximately $ 970 million), with substantial exports of gold (the reserves of the Bank of France alone fell from 1777 tons of gold up to August 1944 to 411.7 tons in November 1947) and with foreign debt (between January 1945 and May 1948 about $ 2,800 million in loans and $ 530 million in advances under payment agreements). Due to the simultaneous operation of the imbalances mentioned above, prices recorded, up to the end of 1947, a strongly upward movement and wages were increased several times; however, their level remained well below that of prices.

France Public Finance 1