Item at Forbes.com:
2014: On the Path To a Better Monetary System: Bretton
Woods Didn't Fail Because of the "Balance of Payments"
The Bank of France, 1915-1940
July 27, 2014
We continue our look at central banks in the 1914-1941
20, 2014: The Bank of England, 1914-1941
18, 2014: Foreign Exchange Rates 1913-1941 #8: A Brief
19, 2014: The Federal Reserve in the 1930s
26, 2014: The Federal Reserve in the 1930s #2: Interest
The source of our data is the Federal Reserve Banking
and Monetary Statistics, 1914-1941
Today, we have the Bank of France. Here's a brief history of
the French franc.
The Bank of France, like most central banks worldwide,
printed money to help finance WWI. This actually continued
after the end of hostilities, as was the case elsewhere as
well. The result was that the value of the franc declined to
about one-fifth of its prewar gold parity. In 1926, the
franc was repegged to gold, which was made official in 1928.
The franc was devalued in 1936, and then slid downward
further into WWII.
The first data series is annual, as of the year-end. The
December 31, 1915 data appears next to the indicator for
1916. When looking at this, remember that gold (and perhaps
foreign exchange) is valued at prewar parity assumptions,
not market prices. We see the large increase in "advances to
goverment" (i.e., loans), due to wartime financing. This
actually continues after the war, especially in 1925-26. The
first datapoint here is 1915-end, so we don't get to see the
expansion during 1914 and 1915.
Base money also grows considerably, mostly in the form of
notes in circulation. Again, this data is from 1915-end. We
can see that there was no particular contraction of base
money with the repegging of the franc to gold in 1926.
Now it gets a little more interesting, with monthly data.
This is a new data series, and doesn't quite correspond with
the older one. Here are some notes to the data:
"Gold revalued in June 1928, October 1936, July 1937,
November 1938, and March 1940." The value of the gold (in
terms of francs) is changed to reflect the new parity value
imposed in 1926.
"[foreign exchange assets and other liabilities] includes
foreign exchange loaned, not previously included in assets
or liabilities." (Borrowing and lending in foreign
currencies seems to have been eliminated by the end of
"In each of the weeks ending April 20 and August 3, 1939, 5
billion francs of gold transferred from Exchange
Stabilization Fund to the Bank of France; in week ending
March 7, 1940, 30 billion francs of gold transferred from
Bank of France to Stabilization Fund."
We see a big decline in foreign exchange assets (foreign
government bonds, mostly British government bonds I expect)
beginning at the end of 1931. With the Bank of England
devaluing the pound (and thus the value of British
government bonds), beginning September 1931, you would
expect that. Several other governments followed, as we
looked into recently. The extent to which this decline in
foreign exchange assets represents a decline in market
value, and what extent it represents selling, is unclear.
However, it is clear that, after 1931, the Bank of France
had no interest in holding the bonds of other governments
that were devaluing their currencies. It appears that the
Bank of France sold their bonds and bought gold bullion.
Nothing in particular wrong with that, and a very sensible
thing to do at the time.
After 1936, France appears to relapse again into
printing-press finance. The Bank of France revives "advances
to government" (loans), along with a big jump in "other
assets" which are probably a similar sort of thing, such as
a special-issue treasury bond or something of that sort.
We see that base money, during this time period, consisted
mostly of notes in circulation. Base money did not expand
all that much immediately before or after the 1936
devaluation. However, afterwards it expands rather
aggressively, related to printing-press finance. Not
surprisingly, the franc's value declined during this period
1936-1940. We see that the decision to change the
composition of reserve assets, removing foreign bonds and
adding more gold bullion, did not lead to any particular
changes in base money as a whole.