CAN SHE KEEP IT?

Evening Post, Volume CXVI, Issue 147, 19 December 1933, Page 20

CAN SHE KEEP IT?

FRANCE AND HER GOLD

THE BUDGETARY PROBLEM

FEAR OF INFLATION

What will be the effect on Franco of Mr. Roosevelt's gold-purchasing policy? How will the franc faro? I have just returned from France, where I have been seeking an answer to these questions, so important to France and .to other countries as well.. The answers arc not yet forthcoming with any certainty, writes Leonard Keicl in the London "Daily Telegraph." M. Paul Reynaud, a former Finance Minister of France, scents a real currency war in the air. Official French opinion takes a calmer view. Time will show which view is right. Meanwhile, what is possible is to take Jtock of the main features of the French situation upon which this iiew menace—if, indeed, it is a menace —is superimposed. M. Sarraut ib facing, with his new Cabinet, the same Chamber of Deputies and the same Budget problems which so recently destroyed M. Daladier's Ministry. Few people in Paris believe that M. Sarraut will succeed in grappling with the vital Budget problem. If he doea not, his Ministry must give way to another. There may, perhaps, be several Governments before the peoplo of France and their representatives in Parliament are sufficiently impressed with" the gravity of the financial situation to accept the large economies that arc called for and considerable fresh taxation necessary to restore Budget equilibrium. Officially, the deficit fating the French Budget is estimated at six milliards of -francs. Independent estimates put it as high as eight milliards. Doubts are openly expressed whether tho Budget proposals of the last Government, which the Chamber rejected, were anything like drastic enough. WHAT IS NEEDED. Critical observers are convinced that even more is necessary than cutting down the remuneration of officials, which the Chamber has rejected, or the present taxation, proposals, which are very, unpopular. They believe that wider economies, heavier taxation, and a severe tightening-up of tax-collecting methods are essential. Such a view has been expressed, for instance, by M. Flandiii, who has been Finance Minister, and probably will be again. There is, : agreement also that such measures could'not be put into force by any but a National Government, brought into being through national recognition of the existenco of a real emergency. The big problem in France is how quickly circustanees will compel the country to recognise the emergency and to act accordingly. Similarities exist between the present French position and that of Britain in 1931. France has a badly unblanced Budget, as we had then, and an increasingly unfavourable balance of international payments. But there is this vital difference. ' France possesses vast.gold stocks. We did not. A French banker summarised the problem to me the other day in the following terms: "Two things are necessary if a country is to maintain the gold standard.,. First, a willingness to do so; secondly, the resources to enable it to do so. In 1931 England had the willingness,. but' not the gold resources.1 In 1933 America had the gold resources, but not tho willingness. Today France has both." It is also an undoubted fact that the French nation as a whole keenly remembers the loss of savings occasioned by the currency depreciation of 1926, and is so determined that it shall not occur again that the word "inflation" remains a national bogey of major proportions. '. ■ • - ; : . FOREIGN CAPITAL. " Yet, apart from any special influence caused by Mr. Eoosvelt's new gold-purchasing policy, the withdrawal of gold from France is threatened in two ways. The country's balance of payments with the outside world is increasingly unfavourable. And, with thehigh value of the franc in relation to other currencies continuing French exports can hardly do otherwise than dwindle progressively. It is,' therefore, logical to suppose that gold must 'go out automatically to settle the balance. Secondly, a large amount of fright? ened foreign capital has been transferred to Paris by Americans and others who were nervous of the future of their own currency. Should the franc bo subjected to distrust from a growing recognition of Budget difficulties and probable gold losses, these nervous short-term funds might tend quickly to leave Paris for London. The Bank of France has abundant gold stocks to meet' all such demands, and is perfectly prepared to use its resources to the utmost. Tho only question which .arises is whether public opinion in France would permit heavy losses of gold to continue, or at what point a demand would come from the Chamber of Deputies to place an embargo upon gold export. Another way of regarding the problem is this. There are three influences threatening the stability of the franc. The first is,the influence of economic sufferings duo to high costs and reduced exports. Since unemployment in France is still at a very low level, this influence will operate only slowly. The second influence is tlyj effect of probable gold withdrawals. Such a movement would probably have to persist .for some considerable time before it produced political effects. The third influence, and the one which is capable of acting far more quickly, and effectively, is the actual position of tho, Treasury. THE COUNTRY'S NEEDS. At the -'present time the French Treasury's borrowing needs are very: formidable. It has to borrow, and not merely to cover a serious revenue deficit. .It has to borrow also-to finance i'costly sanctioned projects of publi'6 works. And it has to renew constantly, the vast volume of floating debt. Herein lies: the" crux of the problem. If successive- Governments fail to balance the "Budget, as seems probable, and if, as seems certain, gold will leave tho Bank of France, how long will it remain possible for the Treasury to borrow at tolerable rates the money which it requires? Take one instance of a difficulty that may arise. If foreign opinion is disturbed by such movement, even though Franch opinion remains complacent, foreign banks would probably coase to subscribe to French Treasury bills, for the reason that if speculators are favouring the pound rather than the franc, they would be unable to cover their risk by forward exchange operations. The date when a crisis comes to be recognised by the French people may be determined by the arrival of a position in which regular Treasury borrowing threatens to become steadily dearer and more difficult. Such a situation might arise before very long. Many patriotic French, leaders would welcome it, for, in their view, it is bettor that the.difficulties of the financial situation should bo recognised early rather than late. This leads ua to another crucial point' in the French financial problem. The French Treasury is bearing a load in the shape of the service o£ the public debt, which cannot be horngandefi-l

nitely. Moreover, it has to. provide j next spring for the repayment of a large volume of National Defence Bonds. In the view of French financiers, it is essential that French credit should be rehabilitated quickly. This is because it would enable tho refinancing of these maturing bonds to bo carried out at a low interest rate, and would ensure the conversion of other Government securities. THE BUDGET'S ROLE. But. such conversions and refinancing on a satisfactory basis will only be possible if the Budget problem is sternly and drastically tackled. That it will be tackled can hardly bo doubted. Once tho French people becomo firmly convinced that tho franc is in danger, they will submit to the necessary measures. France is still well sup-' plied with untaxed resources. Throughout tho whole economic life of France, except in Government services, salaries and wages have boon readjusted to present necessities. -M.. Daladicr fell because hu tried to extend the readjustment to Government employees. M. Sarraut may fall in a similar attempt—and even another Premier after him. Eventually a strong French Cabinet will enforco'-tho programme. No one can say whether or not the forco of circumstances will compel France to take special measures to protect her gold stocks. Nor is it possible to prophesy what course events might follow should general restabilisation of international currencies bo indefinitely delayed. But one thing is certain, and that is that tho French peoplo, when convinced that, an emergency exists, will fight almost unanimously to the last ditch to stave off inflation and to save the franc from' substantial depreciation. The essence of the problem of the franc is, therefore, political rather than financial. And for their political crises the French people have the habit of finding an eleventh-hour solution.