Chapter III The Outbreak of the War in France

· CHAPTER III The Outbreak of the War in France This long discussion of French banking before the war has been necessary for an .understanding of the course of events since the war began. And it has been particularly necessary since much of what has been written in America about French banking has been based on an uncritical acceptance of the encomiums which much of French financial literature has for decades been pronouncing upon the French system. As regards the Banque de Fran~e, these encomiums have been deserved. But serious reservations must be made for not a few of the great credit houses. For two years before the war France had been suffering from depression,t growing in no small part out of the general policies which we have been discussing. French industry was languish ing. The bourse was sagging and breaking under the discovery that many of the foreign loans were precarious. The Balkan wars had weakened the market in ,Balkan securities and had led to further apprehensions of war. The state too had had its share in bringing about the depression. The French Government, under the influence of radical parties, had been increasing its budget rapidly, and the public debt was very heavy-well over thirty billion francs-five times that of. Germany and twice that of England. 2 '(This comparison is unduly favorable to Germany, since German municipalities, especially the smaller cities, had much heavier debt burdens than French municipalities.) 3 Fur ther, there was great political instability throughout the first hal f of 1914. Ministries were dissolving frequently. The passage of the,budget was delayed long beyond the normal time. The radical 1 London Econo'l11iist,August 15, 1914, page 321; ibid., Supplement, Decem ber 19, 1914; ibid., June 13, 1914, page 1444; ibid., July 18, 1914, page 125.

Die Bank, June, 1914, page 703. Laughlin, J. L.: Credit of the Nations, New York, 1918, page 156. 2 Laughlin, Ope cit., p. 155. • Vide Die Bank, September, 1914, page 895. 43 44 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING parties were insisting on bringing in the dreaded income tax, and additional ta~es on securities, as a: means of financing new social legislation without further reliance on public loans. It is not easy for an American or English student to understand how dreadful this proposal appeared to the more conservative elements in France. But one who will run through the editorials of Paul Leroy-Beaulieu in the Economiste Fran(ais for the first hal f of 1914 may well get the impression that the end of the world was at hand. At all events, fear of taxes was clearly a great factor in the depression, and it is well to understand this attitude in evaluating French financial policies during the war period which follows.

On July 1, 1914, there were only 116 blast furnaces in opera tion in France,. Fifty furnaces were shut down.! Manufacturing output in many lines was curtailed. The weather in July was causing serious ~pprehensions regarding the crops. The Balkan state securities had fallen on the bourse. The March, 1914, option in coffee in New York fell to a low of $.0579 per pound, while similar prices prevailed at Havre (as against a range of from 8~ to 14 cents in lD13). This, with other difficulties, precipitated a crisis in Brazil, withgreat.weakness in Brazilians on the Paris bourse, and there was weakness in Argentine securi ties as well. Mexican investments were ~eld largely in France, and Mexico was in chaos. Late in May and early in June, largely as a consequence of the weakness of these securities, those banking houses which had been most responsible for them were in serious troubles. Runs were started. The Societe Generale was hardest hit, though some other houses were also affected.

Wild rumors were going about. In this situation, the Societe Generale took the unprecedented step of asking the Banque de France to send its accountants to go over the portfolio of the Societe Generate. This was done, and a reassuring statement was made by the Banque de France, \vhich stopped the runs. 2 German 1 London Economist, August 1, 1914, page 231. 2 Die Bank, June, 1914, page 703; London Econ01nist, June 13. 1914, page 1444. The Societe Generale sent out a circular letter, in June, 1914, stating that by reason of the calumnies which had been spread abroad about them, they had requested the l\1inisters of Finance to ask the Banque de France to examine their accounts. The letter contains the reassuring statement by the Banque de France.

FRANCE 45 bankers took a ribald joy in this episode, recalling a similar occa sion in 1911, when the Reichsbank had had to perform a similar service for certain of the German houses! Bank shares in France were very weak during this episode and continued weak, suffer ing heavily in the quasi-collapse that came in the middle of July, when the storm clouds began to threaten. The shares of one great credit house dropped one hundred francs in a single day. Government securities were also very weak, particularly the new 3~ per cents just issued, on which only a small instalment had been paid. These dropped ominously in July, as much as 1.50 francs on the hundred (to 86.62) in one day.1 Throughout July, to the outbreak of the war, the bourse continued to break, and losses were enormous when the moratorium (which we shall later discuss) was finally proclaimed. Such was "the financial situation with which France entered upon the great war. But there was another side. The Banque de France itself had unshakable prestige. The French people~ willing enough to quarrel bitterly over internal problems, and even divided fundamentally over the very foundations of the economic organization of society-for French radicalism goes deep, and the French socialist is often reckoned a conservative by the real radicals in France !----were none the less prepared, despite German intrigue and occasional French traitors, to rally Io'yally to meet the nation's extreme danger. The very crisis and depression meant that France had unusual supplies of hoarded funds, gold and bank notes, ready for the purchase of the short term obligations which the government early began to issue. In times of crisis and depression investors hold off, wait ing for better days, and in France the" woolen sock" was unusu ally full in July and August, 1914. The initial burden of war finance fell chiefly on the Banque de France itself. The great credit houses played a sorry role at the beginning of the war, though they have to some extent redeemed themselves in the later parts of it.

The first shock of the war in Paris, as in London and New York, was felt on the bourse. As long as trading was per1 London Ecollontist, July 25, 1914, page 175.

46 EFFECTS OF THE WAR ON MONEY, CREDIT AND' BANKING mitted, frightened sellers sought to turn their securities into ready money at whatever price they would bring. The phenom enon was worldwide, and it will be more convenient to describe many of the international phases of it in connection with our account of New York. No great stock market can be weak ened without affecting the others. For one thing, many securities are listed on more than one market and some of them on many markets. Selling in these securities, starting in one market, quickly spreads through the action of arbitraging brokers to others where the prices have not 'yet been broken. Brokers in all great markets have a network of credit relations with brokers in other markets, and if a selling wave in any market goes so far as seriously to jeopard margins, weakness manif~sts itself in other markets, and in other securities, as banks, uncer tain as to the solvency of the brokers, call on them for larger margins, which leads them to call on their customers for more margins, which leads their customers to lighten the load of securities they are carrying, with a consequent decline in prices.

Part of the weakness of the Paris bourse through July was due to weakness in Vienna, in Berlin, in Amsterdam and other centers. Vienna appears to have felt the shock of approaching war first, a fall of from 10 to 12 per cent in stocks taking place there on July 13, preceded by four bear days beginning with July 2. Paris had troubles enough of its own before this, but seems not to have taken the assassination of the Austrian Crown Prince at Sarajevo on June 28 very seriously. From the very moment that this occurred, Vienna was disturbed. 1 In France, on the other hand, there appears to have been little more than a recognition that the situation called for tact and decorum. M. Paul Leroy-Beaulieu, in the issue of the Economiste Fran~ais next following the assassination, gives editorial expression of sympathy for Austria and her venerable ruler with a degree of courtesy and diplomacy that makes one feel that he was per1 The assassination occurred on Sunday and the Monday following was a holiday in Austria. By Tuesday a panic had been averted on the bourse.

But between July, 2 and 13 there were four days of very heavy selling. Ct. London Economist, foreign correspondence, Austria-Hungary, Germany and France, for July, 1914.

FRANCE 47 forming an official duty. But French financial papers continued for a time the discussion of their local problems, particularly the new taxation on securities and incomes, and the causes other than Sarajevo affecting the bourse. On July 20 Vienna had a further heavy decline in stocks. It was July 23 before Paris and Berlin had their real war panic in the stock markets. There had meanwhile been reflexes in the stock exchanges in London and New York. By July 25 selling in both markets, on foreign account, was very heavy. On July 27 the Vienna exchange was closed. The next day Austria declared war on Serbia. Bourses were closed on July 28 in Montreal, Toronto and Madrid. On J u~y 29 the Berlin bourse discontinued quotations. By July 30 the panic had reached London and bourses were closed in St. Petersburg and in all South American countries. The Coulisse (curb market) was closed in Paris on that day. On the same day the Parquet, the .official bourse in Paris, virtually sus pended selling, although ·it was not officially closed till September 3, when the French Government withdrew from Paris to Bor deaux. On July 31 the London stock exchange was closed and a few hours later on the same day, four minutes before time for opening the New York stock exchange, the authorities of that institution announced to the anxious brokers that it would not open. Enormous selling orders from Europe and from fright ened Americans had accumulated in their,hands overnight, selling orders "at the market" (meaning at any price whatever), the " bears" had already covered their short sales, and it was clear that New York alone could not stand the strain of the concen trated selling of a frightened world. On August 1, Germany declared war on Russia, and late at night on August 4, England declared war on Germany.

The decline in prices on the Paris bourse was very great. From July 30 to December 7, when the bourse was reopened, for cash trading only, in Paris, it is very difficult to get quotations that mean much. After the bourse was officially closed on September 3, quotations on the bourse of Bordeaux, and even the Lyons bourse, give some index of conditions, but neither these markets, nor the market at Paris between July 30 and December 48 EFFfCTS OF THE WAR ON MONEY, CREDIT AND BANKING 7, represented a large enough volume of transactions to be reall y significant. The following Paris figures will sho\v the effect of the outbreak of the war on certain leading securities: June 25 Three per cent rentes . . . . . . . . . . ... 83.65 Russian 5's of 1906............... 102.00 Banque de France 1 ••••••••••••••4,640.00 Banque de Paris et des Pays-Bas. 1,520.00 Comptoir d'Escompte ..........• 1,029.00 Credit Lyonnais 1,600.00 Nord Railway 1 •••••••••••••••••1,718.00 July 23 81.30 101.00 4,574.00 1,295.00 994.00 1,480.00 1,270.00 July 30 82.50 95.09 4,400.00 1,160.00 907.00 1,340.00 1,240.00 Dec. 7 72.50 88.20 4,600.00 1,000.00 650.00 1,050.00 1,300.00 Comment may be made on the practically complete recovery by the Banque de France shares, and on the improvement in the shares of the Nord Railway, whose properties were in consider able degree in German hands, over the interval from July 30 to the reopening of the bourse. 2 As will later appear, the railway had relations with the government which served to protect its shareholders from loss. The further great decline in shares of banks other than the Banque de France will be abundantly ex plained by the developments between July and D'ecember, which we have now to give an account of. The decline in the three per cents of the French Government to 72.50 still leaves them selling at a high price, in consideration of the yield. These securities were slow in getting into line with other securities in the relation of yield to price ..

With a bourse demoralized before the war by causes which were not connected with the war, with a two years' period of depression, which had grown progressively worse in the second year, just passed through, with banks weakened, with fiscal derangements of a serious sort, with political turmoil and minis terial instability, France entered the war. In a very short time her most important mining and manufacturing sections in the north and northeast were overrun by the Germans, and Paris 1 Quotations of December 14. No quotations on .December 7. Ct. London EcolloJnist, December 19, 1914, page 1070. 2 There is no significance to be attached to the fact that both of these quotations come on December 14, while the others in this column are as of December 7. Quotations were few on both days and comparison between them reveals no general drift for the \veek. The tnain changes from De cember 7 to December 14 were a rise of fifty points in Comptoir d'Escompte, and a further drop of twenty-five points in Credit Lyonnais.

FRANCE 49 was in serious danger. Industries of all kinds were further demoralized. throughout France by the mobilization throughout of a large portion of the labor force and by the commandeering of railways for troop movements. It was impossible that the ordinary processes of credit should go on under such conditions. The bourse was the weakest point. Next in point of help lessness and timidity were the' great credit houses, such as the Credit Lyonnais, Societe Generale and others whose char acter and operations we have been discussing. The state had c~edit resources, particularly in view of the large sums of hoarded money which were ready for investment in the short term obli gations of the state, and very especially because of its relations with the Banque de France. A pillar of strength in the situation, and, indeed, the one really solid element in it, were the unshaken prestige and courage of the Banque de France. Even that insti tution, however, fell back on extraordinary remedies, and despite its enormous gold reserve it suspended 1 specie payments, and issued its notes, under government authorization under the cours force (legal tender irredeemable notes). This step was taken on August 5, 1914.

Bankruptcy threatened almost everybody. Few indeed among men active in business or finance had the ready cash to liquidate their debts, when so many of their debtors were unable to meet obligations. The bourse had carried through its settlements readily enough in 1870. It seemed wholly unable to do so in 1914. With the cessation of bourse trading, loans on " reports" (stock and bond collateral loans) made in large quantity by the Paris banks, usually counted on as a liquid asset, became frozen. The banks, moreover, with substantial holdings in securities, particularly the Bulgarian, Brazilian, Mexican, Russian and other' inferior securities, which they had been marketing to their depositors in the boom period preceding 1912, and even in the depression following, were faced with heavy losses if they tried in any way to use these assets-for which in fact there was no market at all. Nor was even commercial paper, supposed to be 1 This is a traditional practice of the Banque de France in emergencies as in 1848 and 1870. One wonders, however, why it deems it worth while to accumulate gold reserves, if it does not expect to use them.

50 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING always a liquid asset, in better plight. Industry was demoralized; commerce ·at a standstill. Few merchants indeed-not to mention those in occupied territory-could liquidate their acceptances at maturity. The pressure was most immediately felt at the bourse and next at the banks. To meet this situation, a moratorium was proclaimed, first affecting the bourse and the banks, but shortly extended to cover commercial paper, hou~e rents and a very wide range of debts indeed. The general initial scheme of the government for meeting the emergency is thus summarized by the London Economist of August 15, 1914 : 1 A. Economic measures: I. The suspension of import duties on wheat, barley, oats, maize, hay. II. Free importation for frozen meats and potatoes. III. Embargo on exports of salt. IV. Prohibition to export foodstuffs and contraband of war, including all army and navy materials, live animals, motors, explosives of all kinds, cold storage apparatus, nitrate of soda, lead, provi sions, transport vehicles, etc.

V. The organization of relief for the families of conscripts called to the colors. B. Financial meaS1tres: I. Declaration of a temporary moratorium for bourse and coulisse transactions entered into before August 1, settlement being post poned till August 30. [This settlement was subsequently post poned many times, and remained a vexed and difficult question for a long time.] II. (a) Depositors in banks with deposits under 250 francs are allowed to withdraw the whole sum; (b) above this sum, depositors can withdraw only 5 per cent of the surplus, with a provision that employers of labor may draw what they can show to be necessary for paying the wages of employes on each pay day; (c) the moratorium to extend to insurance contracts; (d) cer tain relaxations of the instalment payments due from the sub scribers to the French 3~~ per cent loan just issued. III. Savings banks.-Withdrawals of deposits are limited to fifty francs per fortnight for each depositor.

IV. The issue, by the government, of twenty franc and five franc tegal tender notes. V. Suspension of specie payments by the Banque de France. To these should be added certain further details: The law of August 5, which authorized suspension of specie payments by the 1 Page 321.

FRANCE 51 Banque de France (and the note issuing Banque de l' Algerie) , raised the limit of note issue for the former from 6,800,000,000 francs to 12,000,000~000 and of the latter from 300,000,000 francs to 400,000,000. These legal limits are always kept well .in advance of the actual issue. So far as the Banque de France is concerned, they have never actually restricted issue. 1 During the course of the war they have been raised again and again. For the Banque de France the legal limit was raised to 27 billion francs on February 7, 1918, and on May 3, 1918, it was raised to 30 billions.2 The limit for the Banque de l'Algerie was raised to 700 millions on May 28, 1918.8 In these impressive figures for the Banque de France note issue, largely attained as we shall see by' the actual note issue, most writers see one of the most ominous features in the course of the four years of the war for French finance, and we have at all events clear evidence of the extent to which the government has leaned on the Banque for its war needs. But this will receive later attention.

By August 9, 1914, the moratorium was extended to all nego tiable instruments, except those issued by the public Treasury itself and except checks presented by the drawer. This mora torium, as the moratorium· on bank deposits, expected originally merely to give thirty days' delay, was subsequently extended many times, and there remain large blocks of premoratorium bills in the assets of the Banque de France late in the summer of 1918. The problem of the rent moratorium was being debated by the Chamber of Deputies in the summer of 1918 an-dvarious schemes were being then proposed for bringing it to an end. The bourse moratorium remained a serious problem for a very long time. It is easy to declare a moratorium; France has found it very difficult to get rid of one! There have, however, been gradual steps taken, undoing the initial rigors, and we shall trace these steps in a later chapter.

The great private banks took full advantage of the moratorium 1 Apparently the only reason for retaining a legal limit on the issue of the Banque de France is that the legislature is thereby enabled to wrest concessions from the Banque from time to time, as the limit is raised. 2 Bulletin de Statistique et de Legislation Comparee, May, 1.918, page 853. •Ibid., page 887.

52 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING on deposits. They were weakened and they were frightened. Protected from the public by the moratorium, they still turned for additional safety to the Banque de France and turned their rediscountable assets into cash on a great scale. The following figures will show something of the extent of this: CREDIT LYONNAJS June 30, 1914 May 31, 1915 Cash in hand or with banks. .. . . . . .. . .. Fr. 231,000,000 Fr. 678,000,000 Bills discounted 1,648,000,000 901,000,000 Loans on securities 356,000,000 262,000,000 Current accounts (asset) 714,000,000 401,000,000 All the leading French priv~te banks present similar figures. 1 The deposits and current accounts (liability) of these banks show a great shrinkage also, while their acceptances fall off very heavily indeed. During no small part of the first year of the war, the extra note issue of the Banque de France scarcely made good the. gap left by reduced credit exten~ions by the private banks.

A fatalistic view of the situation will see in this policy of the French private banks merely the necessary consequence of the moratorium and the difficulties of the bourse. It may be almost as well argued, however, that the difficulties of the bourse and the moratorium were due to the policy of the banks. The banks were, as we have seen, in large measure indeed responsible for the flotation of unsound securities at inflated values, whose col lapse placed the bourse in such straits. They may possibly have been so shaken by-this that they w'ere helpless when the crash came. If, however, their balance sheets tell the truth, if their "securities owned" were really all comprised in their figures for this item, then they should have been in a position to meet much better than they did the great emergency. It is the duty of banks to lend freely in panic times. It is their duty to pay their depositors on demand. It is only by these measures that panics can be checked and the credit machinery-on which in dustry and trade today depend-kept going. I f depositors are sure that they can get their deposits on demand, they will not make heavy calls on the banks. I f solvent business men are sure 1 Quarterly Journal of Economics, November, 1915, pages 73-74. Cf. the chapter, infra, on 'the " Private Banks."

FRANCE 53 that they can borrow what they need to meet their obligations, they will not try to borrow in excess of their needs. It is precisely in such situations that more rather than less bank credit is needed. The banks of America in panics, hampered by absurd legal reserve laws and lacking a central bank at which they could rediscount their paper when reserves run low, have more than once had to suspend cash payment of checks and have had to curtail lending in panic times. But London has proved again and again that these things are unnecessary, that panics can be met and stopped, if only the banks will be courageous enough. It is easy to sneer at the cowardice of these private banks in France. It may be urged, and with force, that London found this policy hard to carry out in the great emergency of 1914, and that the London joint stock banks likewise curtailed loans, hoarded gold and rediscounted heavily with the Bank of Eng land. It may be noted, however, that the London banks quickly recovered from their fright and, further, that one great trouble in England at this time came from France itself-many London brokers who had funds due from French brokers were unable to pay their debts because of failure to. get remittances from France. 1 In London as in Paris the stock market was the weak est point, and the English moratorium, which was soon largely dispensed with, came initially from this weakness. Possibly the shock was so great, the disaster so appalling, the loss from Ger man invasion so great, that no amount of courage on the part of the French banks could have averted the moratorium. But surely it is possible that more could have been done.

M. Alfred Neymarck, in his paper on "French Savings" in the National Monetary Commission Report/ makes a compari ~on of the American and French systems very adverse to us, based on our experience in 1907. I f we had had a central bank of issue, he thinks that our crisis could never have occurred. And not a few writers have compared our system with the French system, very much to the advantage of the latter from the stand point of meeting crises. Americans have taken these lessons 1]. M. Keynes; "War and the Financial System," British Economic Journal, September, 1914, page 462. :. Senate Document No. 494, 61st Cong., 2d Sess., pages 180-181.

54 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING humbly and have profited by them. Surely we have little to be proud of -in this matter prior to 1914. But it is exceedingly interesting to see a distinguished French financial authority pro posing as a means of mitigating the absolute tie-up of French deposits the remedy which we have repeatedly made use of in panjc times-the use of clearing house certificates in payments between banks and the use of checks "good only through the clearing house" as a means of mobilizing deposits! This pro posal was made by M. Raphael-Georges Levy in Figaro of August 22, 1914, and was endorsed by the Economiste Fran~ais.l Nothing apparently came of it, but something has since been done in developing further the Paris clearing house (Chambre de Compensation 'des Banquiers de Paris), which under a new name has become a factor of some importance. The use of checks has also been sedulously encouraged, as we shall see.

The Econo111isteFran~ais has from the first been of the opin-' ion that the moratorium went to wholly unnecessary extremes. It thinks that the bourse moratorium could have been avoided and that special arrangements, with an assistance fund, the grant ing of delays in. special cases, with informal cooperation of banks and bourse, would have sufficed. The bourse tie-up involved the whole system and stifled industry generally. But the Economiste denies that even the moratorium on the bourse and the mora torium on commercial paper justified the moratorium on de posits, because the banks could rediscount \vith the Banque de France, which could issue notes under cours force.2 It seems pretty clear that the banks, other than the Banque de France, showed themselves cowardly and helpless, sought only their own safety, refused to take good checks in dollars or sterling, de manded wholly unreasonable margins and other protection in such loans as they made, and even proved a positive burden, rather than an aid, in the difficult situation. They availed them selves of. the rediscount privilege to an exaggerated degree,3 and then hoarded the proceeds.

1 Vol. 2, 1914, pages 276-277. 2 Economiste Fran(ais, August 8, 1914, page 203. I London Economist, September 26, 1914, page 529.

FRANCE 55 One obvious evil growing out of the moratorium, with its complete lock-up of deposits and of the bourse, was the inability of the government to rely on the usual machinery of securing loans. The funds needed for the war came for many months either from the Banque de France directly or else from the notes and gold hoarded by the people, who bought short term notes of the government (bons de la defense na.tionale) partly because there was nothing else they trusted in which to invest. Some sort of moratorium, at all events, some very extraordin·· ary remedies, were demanded by the wholly unprecedented sit uation. But France seems to have overdone the thing at every step, and tied herself up in coils from which she has not yet fought wholly free. The major part of the blame for this may well be placed on the great private banks.