When war broke out in 1914 and the very survival of the nation was threatened, the Banque, like all the other European central banks, voluntarily subordinated itself to its government, and obligingly printed whatever money was needed to finance the colossal effort. But unlike the Reichsbank, within a few months of the end of the war, it reasserted its independence and refused to go on filling the gap between government spending and tax revenues. In April 1919, the National Assembly fixed a limit on the its advances to the state and in September 1920, imposed a ceiling of 41 billion francs on the Banque’s note circulation. There things stood until the crisis of 1925.
IN 1925, Émile Moreau, now fifty-seven, was in his twentieth year at the Banque d’Algérie and his fourteenth as its director general. He was proud of his achievements: his role in providing credit to the Moroccan economy, in stimulating the development of industry in Algeria after the war, and in launching a campaign against usury in Tunisia. For his services, he had accumulated a large array of decorations, including the czarist Russian Order of Saint Anne, the Spanish Order of Isabella the Catholic, and the Belgian Order of Leopold II, in addition to being a Commandeur de la Légion d’Honneur. But for all of these accolades, he had never been able to shake off the conviction that his assignment remained a form of professional banishment.
For many years, he had harbored the faint hope of one day returning to the mainstream of the civil service, maintaining, for example, his status as a member on leave of absence of the elite Inspectorat des Finances. But as the years had gone by and no new assignment had come his way, he had finally reconciled himself to his lot. In 1922, he had resigned from the higher civil service, though he continued to hold his position as the head of the Banque d’Algérie.
He and his wife had no children, and he was at an age when he could begin to look forward to more time for his other interests—he had assembled an extensive collection of Islamic coins, was an avid bibliophile, and also an active member of the Touring Club France, periodically taking off on long automobile trips through the countryside. And after twenty-two years, he was still a very dedicated mayor of his tiny home commune of Saint Léomer, only two hundred miles from Paris, which allowed him to get back to the old village as often as he wished.
Then suddenly in April 1925, when the Herriot government fell over the scandal at the Banque de France, it seemed that Moreau’s star was about to turn. Paul Painlevé29 formed a new left-wing coalition government and named as his finance minister a man whose four previous tours in the office had gained him a legendary reputation in the field of public finance: Moreau’s old mentor, Joseph Caillaux.
In a country infamous for political instability, few men had had as stormy a career as Caillaux. In 1920, he had been sentenced to three years imprisonment for damaging the security of the state. But having already spent two years at La Santé prison awaiting trial, he had the remainder of his sentence commuted. Legally banished from Paris, Caillaux and his wife, Henriette, retired to the little town of Mamers in the Loire valley. For the next four years they lived quietly. Though he wrote an account of his years in prison that became a best seller, with the shadows of her trial for murder and his conviction for treason hanging over them, they found themselves outcasts, not only shunned in society, but dogged by petty humiliations—turned out of hotels, refused service in restaurants, insulted in cafés and on the streets. Caillaux was even once attacked by a gang armed with clubs and bricks.
But as France headed toward bankruptcy, more and more people could not help remembering Caillaux’s warnings at the height of the war that both victors and vanquished would be ruined and increasingly he came to be seen as a victim of wartime hysteria. What had then been looked down upon as defeatism on his part now began to be viewed as prescience. In December 1924, his supporters in the National Assembly voted to abrogate his sentence. His return to the Ministry of Finance with a reputation, according to one French senator, as “a kind of Treasury magician, capable of turning dry leaves into bank notes,” was the final vindication for this remarkable man.
Not everyone had forgiven or forgotten, however. As he strode into the Chamber of Deputies on April 21, 1925, to take his place on the government bench, his domed bald head gleaming, a monocle fixed firmly in his right eye, there was hissing and booing and shouts of “traitor” and “deserter.” One ardent Nationalist got up and cried, “Have we reached the point where we must chose between bankruptcy and M. Caillaux? Bankruptcy would be better.” An American newsmagazine reported that it was as if Benedict Arnold, instead of being executed, had been barred from Philadelphia, exiled to the country, then pardoned, and appointed secretary of war.
Over the years, even during Caillaux’s long banishment into the political wilderness, Moreau had assiduously maintained his friendship with the brilliant and erratic politician. For all of Caillaux’s many faults—the indiscretions, the abysmal judgment, the disreputable friends with whom he surrounded himself, the terrible thirst for power, his essential “frivolity”—Moreau had never wavered in his belief that Caillaux was one of the best financial brains France had produced and that had he been minister of finance during the war, France would not have been in its present shape.
The situation confronting the new minister was grave. The franc was the only major currency still “off gold” and fluctuating on the exchanges, its ups and downs serving as a barometer of confidence in French financial management. In the spring of 1924, during the Dawes negotiations, it had briefly sunk to 25 to the dollar. Thereafter it had recovered somewhat, remaining reasonably stable for a year at about 18 to 19 to the dollar, 25 percent of its prewar level. But the affair of the faux bilans damaged that fragile equilibrium, and by the end of June, it was wavering at around 22 to the dollar.
Caillaux threw himself into the task of saving France from insolvency with characteristic energy. Immediately upon assuming office, he tried to fire Governor Robineau from the Banque de France and replace him with his old friend Émile Moreau. A housecleaning at the Banque would have helped to reestablish its credibility abroad. But fearing such a move would irretrievably compromise the Banque’s reputation, the president of the republic killed the idea. Moreau saw his hopes of redemption dashed yet again.
Caillaux succeeded on some fronts. He managed to negotiate a budget deal that, for the first time since 1913, promised to balance the government’s accounts. At the same time, he squashed the proposal for a capital levy, a form of wealth tax much enamored by the Socialists, the threat of which was provoking a flight of capital. In July, he went to London and struck a bargain with Winston Churchill to restructure the French war debt to the British at 40 cents on the dollar, effectively cutting it from $3 billion to $1.2 billion.
But the combination of France’s financial problems and its political logjam were too great even for a man of Caillaux’s abilities as financier and politician. He traveled to Washington to
negotiate a similar write-down of the $4 billion debt owed to America but came back empty-handed. And while his appointment may have inspired confidence “in elegant social circles and the higher reaches of the Ministry of Finance,” he was less successful in generating the same enthusiasm among those average French investors who held short-term government bonds. He became embroiled in a confrontation with the regents of the Banque de France, who, finding the government unable to meet all of its short-term obligations, tried to push Caillaux to impose some sort of debt moratorium—in effect for the government to admit that it was insolvent. So frustrated was Caillaux by the Banque’s attitude that at one point he burst out how much he “regretted not having thrown the management of the Banque out of the window the minute he had assumed power.”
In November, Caillaux was ousted, one more victim of the vendettas and personal intrigue that pervaded French political life. As he left, the franc touched 25 to the dollar. In his seven months in office, the cost of living had risen by 10 percent. During the following eight months, France had five different finance ministers, each with his own pet solution—a wealth tax, a moratorium on certain maturing debts, more vigorous collection of taxes, an increase in the turnover tax. Each failed to stem the collapse in confidence. French investors continued to pull their money out of the country.
In April 1926, France and the United States finally negotiated a war-debt settlement at 40 cents on the dollar. The budget was at last fully balanced. Still the franc kept falling. By May, the exchange rate stood at over 30 to the dollar.
With a currency in free fall, prices now rising at 2 percent a month, over 25 percent a year, and the government apparently impotent, everyone made the obvious comparison with the situation in Germany four years earlier. In fact, there was no real parallel. Germany in 1922 had lost all control of its budget deficit and in that single year expanded the money supply tenfold. By contrast, the French had largely solved their fiscal problems and its money supply was under control.
The main trouble was the fear that the deep divisions between the right and the left had made France ungovernable. The specter of chronic political chaos associated with revolving-door governments and finance ministers was exacerbated by the uncertainty over the government’s ability to fund itself, given the overhang of more than $10 billion in short-term debt.
It was this psychology of fear—a generalized loss of nerve—that seemed to have gripped French investors and was driving the downward spiral of the franc. The risk was that international speculators, those traditional bugaboos of the left, would create a self-fulfilling meltdown as they shorted the currency in the hope of repurchasing it later at a lower price, thereby compounding the very downward trend that they were trying to exploit. It was the obverse of a bubble, where excessive optimism translates into rising prices, which then induces even more buying. Now excessive pessimism was translating into falling prices, which were inducing even more selling.
In the face of this all-embracing miasma of gloom, neither the politicians nor the financial establishment seemed to have any clue what to do. In early 1926, the budget minister, Georges Bonnet, invited the regents of the Banque de France to his office to seek their advice. He was struck by how extremely old they seemed to be—one of them could only walk leaning on two canes; another entered on the arm of his valet, who had to assist him into his chair. During the meeting, the panel, which represented the collective financial wisdom of France, seemed only to be able to offer one platitude after another about the need to restore confidence. When asked how to achieve this, they fell back on the usual military metaphors that were de rigueur at times of French financial crisis. One of the regents proclaimed vehemently that “we are the soldiers of the franc and we will die in the trenches for the franc.” That winter and spring, there was much in the press about the “battle of the franc,” “monetary Marnes,” and the “Verdun of the currency.”
At one point, the government decided it had to do more than just rely on a lot of military-sounding talk. Marshal Joffre, the “Hero of the Marne,” was summoned out of retirement and placed in charge of the “Save the Franc Fund.” It managed to raise all of 19 million francs, rather less than $1 million, including 1 million francs from Sir Basil Zaharoff, the noted European arms merchant, and 100,000 francs from the New York Herald, the precursor of today’s International Herald Tribune.
The authorities still had one weapon in reserve to break the downward spiral—the more than $1 billion in gold holdings of the Banque de France, some $700 million parked in its vaults on the Rue de la Vrillière, and a further $300 million held abroad with the Bank of England.
For much of modern history, including well into the latter half of the twentieth century, gold has occupied a hallowed place in the French psyche. So revered was it that during these years of financial turmoil, the regents could never quite bring themselves to actually draw upon their reserves. At one point during the war, the British had tried to persuade the Banque de France to utilize some of its gold for the war effort. What was the point, they asked, of building up a reserve if not to use at times of crisis? But the Banque had insisted that its reserves had to be preserved so that when the troubles were all over, and France was in a position to resume its rightful place in the economic order, the gold would be there to back its currency. The French gold reserves were like family heirlooms or jewels, “which must never be brought out and never be touched; to lie idle, as it were, under a glass case.”
In early 1926, the government, its finances now restored but its currency still inexorably and inexplicably falling, tried to persuade the Banque that now was the time to redeem its pledge by supporting the franc with foreign currencies borrowed against the security of the gold. The Banque refused. Its behavior during the whole crisis—its reluctance to help and its lack of cooperation with the government—would later give rise to the accusation that the plutocrats at the apex of the French banking system had been determined from the very start to bring the left-wing coalition to its knees. Le mur d’argent—the wall of money—it was called, joining les deux cents familles as the twin rallying cries of the left in France.
In May 1926, the government, spurned by its own central bank, sought frantically to obtain credit abroad. But the scandal of les faux bilans had confirmed the universal prejudice among British and American bankers that French institutions—government, politicians, press, and now even the central bank—were decadent, corrupt, and dysfunctional. A French delegation came to see Benjamin Strong, then in London, to beg for a $100 million loan from the New York Fed and was firmly turned down—he could not lend to the French government by statute and would not lend to the Banque de France until all the groups involved—government, opposition, the Banque itself, and the most important French bankers—“[laid] down their squabbles” and agreed to cooperate. At a further meeting in Paris later in May, when French officials again pressed for a loan, Strong told them that when, as he quite expected, they would be unable to pay, the Americans would have to physically take the pledged gold reserves from the vaults of the Banque, for which they would be “excoriated from one end of France to another.” Rejected by the Federal Reserve, the French approached every investment house they could—Morgans, Kuhn Loeb, and Dillon Read. Every house demurred.
On June 15, the “Ballet of Ministries” came around full circle, and Joseph Caillaux returned as minister of finance, his fifth time in that position. This time he finally succeeded in firing Robineau, and Émile Moreau was invited to take over from him. Caillaux was set on making a clean sweep of the Banque’s entire upper management, replacing it with men who were more pragmatic and less ideologically opposed to the government. The deputy governor, Ernest Picard, was packed off to the Banque d’Algérie, a convenient and proven place of exile for unwanted civil servants, and replaced by Charles Rist, a professor of law at the Sorbonne, a well-known specialist in monetary economics. Albert Aupetit, as secretary general of the Banque the primary architect of les faux bi
lans, was also shunted aside. When a group of regents threatened to resign en masse in outrage at the government interference in their internal affairs, Caillaux and Moreau called their bluff. All of them stayed.
On June 24, Moreau, fifty-eight years old, vindicated at last, assumed the governorship. That day, the currency stood at 35 francs to the dollar, having bounced modestly from its low of 37 to the dollar. A friend to whom he confided of his elevation to the new position told him that he pitied him. In his diary that evening, Moreau wrote, “Am I to become the liquidator of the national bankruptcy? This has to be feared or at least expected. . . . My wife is very unhappy.”
COINCIDENTALLY, As THE financial crisis in France was reaching a sort of crescendo, Norman and Strong were enjoying their annual vacation together, this year on the French Riviera. They had developed the practice of meeting twice a year, combining business and pleasure—in New York during the winter and in Europe during the summer.
The previous summer, Strong had spent a full three months in Europe. After going to London, Strong, who was accompanied by his eldest daughter, Katherine, had gone on to Berlin with Norman to meet with Schacht, then to Paris and then for a month to the Palace Hotel at Biarritz.