Chapter VI The Effects of the War on the Medium of Exchange in France: Coin, Bank Notes, and Checks

CHAPTER VI The Effects of the War on the Medium of Exchange in France: Coin, Bank Notes and Checks At the outbreak of the war, gold money in France quickly disappeared from circulation. France had had a large circula tion of .gold coin and also a large volume of silver. The silver franc and five franc pieces, though no longer issued under free coinage, had unlimited legal tender privilege, not only in France, but also through the other countries of the Latin Monetary Union: Switzerland, Belgium, Italy and Greece, while the silver coins of these countries had the same privilege in France. How much gold was in circulation before the war is difficult to say. Widely varying estimates are given by French writers. Gide thinks that 6,000,000,000 francs in gold were in circulation. 1 This seems incredible. The Governor of the Banque de France estimated in 1908 that France had from 5,000,000,000 francs to 6,000,000,000 in gold, of which the Banque held about 3,200,000,000,2 leaving only about 1,800,000,000 to 2,800,000,000 for general circulation. The gold holdings of the Banque in creased su,bstantially after 1908, and presumably also the gold in circulation. Edmond Thery 3 estimates the total gold money (coin and bullion) in France at 7,487,000,000 francs in 1912.

Raphael-Georges Levy estimates the gold in France at the out break of the war at about seven billions, of which four billions were in the hands of the Banque, and three billions in the hands 1 Gide, Charles: •• I ssues of Paper Money in France, and Prices," in Kirkaldy's volume on Labour, Finance and the War, published by authority of the British Association for the Advancement of Science, London, undated (date in preface, August. 1916), pages 251-252. It seems clear that Gide can not be t::tlking about the total anlount of gold money in France. including the holdings ot the Banque dt France, first, because the six billions is too small for that, and, second, becau!'c he states explicitly that he is estimating the money in circulation. in the effort to determine whether from a quantity theoxy viewpoint there is "inflation." 2 Laughlin. op. cit., page 171. 8 London Economist,- March 2, 1918, page 387.

82 FRANCE 83 of the people.1 Levy is undoubtedly one of the very best authori ties on French money and banking. Giving no estimate for the amount of silver in circulation, Levy points out that the Banque had about 700 million francs in silver at the beginning of the war, of which it had let half, or 350 millions, go into general circulation. This by the summer of 1915. Very early, silver as well as gold began to be hoarded by the people. Die Bank, a German financial journal of high standing, estimates that by the end of 1914 there were four billion francs of " hard money" hoarded in France, of which two and one-half billions were gold, and the rest, one and one-half billions, silver.2 As to the general fact, namely that there was a great stock of gold in cir<;:ulationin France when the war began, anyhow over two billions, and that it wholly disappeared from general circulation, there can be no doubt. The extent to which silver disappeared is a little less certain, but there seems little doubt that at present there is little silver in current circulation in France, despite a great deal of new coinage 3 by the government during the war, and despite the release by the Banque de France of a large part of the silver it had held in its reserve. (The Reichsbank early released all its silver in Germany, recognizing that a silver reserve was an anom aly from the standpoint of the gold standard.) 4 -The hoarding of silver may at first appear to indicate a very great depreciation of the bank notes indeed. To the strict " metallist" theory of money, which sees the sale source of the value of paper money in its prospect of redemption in full weight coin and which would explain the hoarding of coin in a period of restriction as merely due to the operation of Gresham's Law (that only the cheapest money continues to circulate, when there are several kinds, of unequal value, any of which may be used to pay debts, etc.), it would seem to follow from this phenomenon 1 "French Money, Banking and Finance during the Great War," Quarterly Journal of Econol1zics, November, 1915, pages 67-68.

2 Die Bank, February, 1915, page 179. It One hundred and fifty-four million francs in silver were issued in 1916 no gold coin at all was minted in that year. London Economist, August 11, 1917, page 209. •Levy, loco cit. Cf. also Levy's article in the Economiste Fran(ais of November 28, 1914, pages 543-544, on money in France, England and Germany.

84 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING that the bank notes fell in value below the value' of the bullion content of the silver coins, which at this time were worth as bullion much less than their nominal gold equivalent. During the maintenance of the gold standard, the silver in France had been sustained at its nominal value by its legal relation with gold, but after the suspension of gold payments by the Banque, the silver coins were in no better plight than the bank notes from this standpoint, they had no more legal tender quality than the bank notes had, and if they were hoarded and disappeared from circulation, it must have been, from the standpoint of the strict " metallist" theory, because their· bullion content made them more valuable than the bank notes, which would indicate that the depreciation of the bank notes was very great indeed. Such a phenomenon did indeed occur in the northern States during the Civil War. In 1862, as soon as the depreciation of the greenbacks exceeded three or four per cent, it became profit able to take silver out of circulation and send it out of the country.l When the greenbacks reached their lower levels, even the coppe.r coins tended to disappear. This was due not only to the depreciation of the greenbacks, but also to unusual demands for copper. This phenomenon, the disappearance of copper/ has also occurred to some extent in France.

The writer does not think that the hoarding of silver In France is adequately explained by the "metallist" theory, or 1 At the mint ratio of 16: 1, silver in the United States was undervalued, the world market ratio (dominated by the mint ratio in France) being a little above 15Y2 to 1. No silver dollars were thus in circulation at all. But silver half dollars, quarters and dimes were in circulation. By the act of 1853 their weight had been reduced seven per cent below the weight of silver dollars of equivalent amount (i.e., ten silver dimes weighed seven per cent less than one silver dollar). They thus remained in circulation. as ten dimes would have been worth only about ninety-seven cents in gold if the dimes were melted down, so long as the gold standard was maintained. (A silver dollar would have been worth about $1.04 in gold.) When. how ever, the greenbacks became worth less than ninety-seven cents in gold, ten dimes or four quarters or two hal f dollars in silver were worth more than a greenback dollar, and they disappeared under Gresham's Law. The paper fractional currency devised to replace the disappearing-silver is one of the interesting monetary features of the Civil War period. For a detailed· ac count of this episode, see W. C. Mitchell's History of the Greenbacks.

2 London Economist, November 20, 1915. page 856. The expl~nation of this is not, apparently, to be found in the high value of copner, but in the desire of the peasant for "hard money," to which tater reference witt be made.

FRANCE 85 that the bank notes depreciated ,at the beginning of the war below the value of the bullion content of the silver coins. The " metallist" theory probably gives a virtually correct account of the greenback episode, though there are complications even there. The" metallist" theory can account for the disappear ance of gold coin in France. But for the hoarding of the silver somewhat more is necessary. And first let us note that bank notes also were hoarded to the extent of billions. Gide estimates that perhaps three billions of notes were hoarded in 1916.1 The hoarding of notes in the ear lier period may well have exceeded this substantially. The hoarding of silver, therefore, may be viewed merely as part of a general hoarding of money and need not represent a distrust of the notes. That all kinds of money should be hoarded, gold, silver and bank notes, represents in large degree a phenomenon 'of a very different character from that involved in Gresham's Law, as commonly stated, though there is still an element of Gresham's Law in it. It represented in part distrust of bank deposits in the private banks and a preference for money of any kind actually in hand over ba~k deposits.2 This distrust, as we have seen, was justified in the early part of the war. The banks except for the Banque de France took advantage to the full of the moratorium and depositors were able to get only very limited amounts fro~ them. Naturally, they were not willing to make further deposits with them and hoarded what money they had rather than redeposit it. . But, further, money ceased to circulate freely, ·because in the time of danger and uncertainty people were afraid to spend freely. The future for individuals, whatever the future of the state and the Banque, looked very dark, and men who had resources preferred to keep them in hand. The hoarding represented the use of money as a " store of value," and as a "bearer of options "-men needed liquid 1 Gide, Ope cit., p~ge 252. This may not be meant by Gide as a real esti mate, since he puts it in hypothetical form.

J I.e., in terms of Gresham's Law, the" cheap money" was deposit credit, and it tended to drive the "dear money" (gold, silver and bank notes) out of circulation. But this is only a minor element in the explanation, because of the great difficulties in using deposit credits at all.

86 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING resources to enable them to sleep at night. They needed some thing which was instantly convertible in the market into any thing which they might happen to need-food, railway tickets if flight should be called for, or, if they chose, unusual bar gains which others, harder pressed than they, might throw upon the market. In ordinary times these functions are shared with money by many other things, especially deposit credits at the banks and securities with a ready market. But now there was no market for securities that could be depended on, and the banks were not attractive depositories. When the short term Treasury notes (bons de la defense nationalc) of the French Government began to come out, this hoarded money was ready in adequate quantity, since the people had confidence that the state would really pay them and that they could market these Treasury notes, even if nothing else, at need.

The hoarding of silver was in no small part due to the fact that many of the hoarders had comparatively little in any case. Gold and bank notes were in denominations that were too large. The fact that some people hoarded silver, moreover, making a scarcity of silver in the daily routine of life, made others accum ulate a reserve of small change in order to enable them to make daily purchases. After the people began to give up their gold to the Banque de France, their hoarding of silver increased. 1 Silver did not wholly disappear. It simply became exceedingly scarce and merchants were unwilling to break bills of large denomination for the same r~ason that merchants in America after banking hours often refuse to do so. . But there is a further point of significance. "Hard money" has a reality to the minds of most people in France which Ameri cans perhaps do not share. Little trained in monetary theory, the French peasant and workman are nearer in feeling on this point to;-1:he attitude of the Hindu than to that of the American banker. Hard money, whether gold or silver, seems to them more truly money than paper does. That the silver had in con siderable part a fiduciary character was not a matter of common 1 London Economist, October 9, 1915, page 541.

FRANCE 87 knowledge in France. Indeed, it is not strictly a'matter of legal theory in France. The silver is not redeemable by law in gold. Indeed the notes of the Banque are legally redeemable in silver or gold at the option 'of the Banque and the Banque does even in ordinary times sometimes protect its gold supply by proffering silver and charging a slight premium for paying gold instead. The value of silver is upheld by the value of gold in France in ordinary times. The two are tied together. But they are not tied together by the simple direct process of immediate redemp tion of the silver in gold. It is more a matter of indirection. In no small part it is the fact that a limited supply of silver is available for uses where gold would otherwise be re quired, which constitutes the linkage between the two metals. From the fact that small change is in some measure a necessity, from the fact that the silver coins are legal tender, from popular usage and social convention, from various indirect measures employed where necessary by the Banque, and from the fact that the silver, limited in amount, may be used where gold would otherwise be required, the silver coins have attained, and still retain, a valu~ well above the value which they would have if melted down into bullion. The bullion value itself, moreover, has risen during the period of the war. The hoarding of silver, therefore, is not by itself significant of any great depreciation of the bank notes in France.

Various substitutes for coin in circulation were devised in France. The first extraordinary remedy was the issue of legal tender currency notes in small denominations. These had been prepared before the war-a forethought in which F.rance was more fortunate than England-and were immediately sent out. These were in denominations of twenty francs and five francs. They are said to have been readily accepted by the people, although they were slow in reaching small towns. 1 Bons de la defense ,nationalewere issued in denominations of 100 francs, 500 francs and 1000 francs. The smaller denomina tions passed at once into circulation to some extent as part of the normal currency. Military requisitions were paid partly in these 1 London Economist, August 15, 1914, page 321.

88 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING and partly in legal tender currency notes. The chambers of com merce in various parts of France issued early paper currency in denominations of fifty centimes and one franc, which took the place of small silver. These chamber of commerce notes were secured by notes of the Banque de France deposited with the Banque de France. They were supposed to circulate only locally and one had difficulties with them outside their neighborhood. Proposals were made in 1917 that these be replaced by notes of the same value to be issued by the Banque de France, the reasons for the proposals being that: (1) the monopoly of the Banque would thereby be preserved, and (2) the notes would thereby have a ,vide currency. The Minister of Finance objected to this. He preferred that the Banque should not issue small notes. He pointed out that the Banque had already given instructions to its branches to accept and call in such notes when current outside the home areas. These notes are cleared at the Banque in Paris and sent back to the area of their origin. The British army has also made arrangements through its Paymaster General to exchange such notes in the hands of British soldiers for notes locally current. 1 In an earlier section we have discussed the view that checks have been little used in France and that the bank note has been the chief medium of exchange. This view we saw to be in large part erroneous. Checks have been used and are used in France for large transactions on a great scale. The masses of the people are not familiar with them, small tradesmen object to them, rents, taxes, and many other payments which would ordi narily be made in this country by check have been in France made by bank notes or coin, but the large transactions on the stock exchange, in wholesale trade, etc., have been handled by means of deposit credit, frequently employing checks, though, to a much greater extent than in America, making use of the bank transfer as a means of payment.

During the war an effort has been made by many agencies to increase the use of checks in payments in France. Reference has 1 London Economist, January 16, 1915, page 107; September 2, 1916, page 405; December 15, 1917, page 950.

FRANCE 89 already been made to the proposal of Raphael-Georges Levy in 1914 shortly after the outbreak of the war that bank deposits be mobolized by means of checks" good only through the clear ing house" accompanied by the use of clearing house certificates to be used in payments between the banks. Levy has been inter ested in this matter throughout the war. There was an interest ing symposium participated in by Levy, Picot, Guyot and others on the check and deposit system in May, 1916, of which an account is given in the Economiste Fran,ais of May 29, 1916. Arrangements were made permitting payment of taxes by check under orders from Ribot, in 1916, when he was Minister of Finance, and to some extent payments have been made by the state by " crossed "checks. (Crossed checks are common enough in London. A check marked by two diagonal lines across the face will be paid by the bank on which it is drawn only if presented through some other bank. This is a safeguard against fraudulent identifications.) The theory of the crossed check in France appears to be that if the state pays by crossed checks and these checks are deposited by their recipient, the transaction constitutes a payment into the banks; whereas, if the state pays by bank notes, which the recipient uses for general purposes, this constitutes a payment out of the banks.

1 The view seems to be that this will prevent" inflation." This view is an illustration of a number of misconceptions which seem to be current in France, regarding the difference between bank note issue and the deposit and check system. It is a common place among American and English writers on money and bank ing that the difference between bank notes and deposits subject to check, when the bank notes are issued under the "assets" system, is largely a difference in form rather than in substance. Notes and deposits alike constitute a medium of exchange. Notes and deposits alike tend to grow out of the lending operations of the banks. Notes and deposits alike, so long as instant redemp tion in gold is assured, tend automatically to expand and contract with the needs of trade and finance, and deposits may expand 1 London Economist, April 15, 1916, page 711. Cf. Bellom, Le Paiement des depenses d'Etat et des departments par des virements de banque.

Economiste Fran,ais, August, 1916.

90 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING quite as dangerously as notes when banks cease to meet their gold obligations and when they surrender their lending policy to the fiscal needs of the state. There is no magic in the check and deposit system. It is not a substitute for sound finance. The Bank of France, through its director, M. Pallain, in 1916, issued a booklet containing pictures of check forms and a circular to all of its branc'hes encouraging the use of checks. It sup pressed the commission charge on letters of credit and issued crossed checks without charge except for the twenty centime stamp. 1 The Orleans R. R. agreed late in 1916 to accept certain kinds of checks at the stations for freight charges for amounts over two thousand francs and it agreed that responsible customers might pay every ten days instead of daily so that the amounts might reach two thousand francs. 2 Payments of interest, where the bondholder is willing, are being made by book transfers by the banks and with postal orders for small bondholders. The postal orders and postal checks have been developed in France during the war and about the end of 1917 a law was passed allowing current accounts at the post office with arrangements for checking and for transferring credits from one account to another by orders presented to the post office.3 This process has not gone on without friction. Deposits and checks were discredited in the autumn of 1914. Moreover, the French law regarding checks was very little developed at the outbreak of the war. It was necessary in the summer of 1916 to pass new legislation making it a criminal offense to issue checks when the drawer knows he has no funds or to. withdraw funds after issuing checks. In August, 1916, Le Temps gravely discussed the question of stopping the payment on checks. There had been a court decision in March to the effect that this might be done. Le Temps contended that if this is permitted it will make all the agitation to extend checks useless and discredit the 1 London Economist, May 6, 1916, page 821.

:I Ibid., December 30, .1916, page 1221. . 8 Ibid.~ January 19, 1918, page 83. BeIlom, Le cheque postale, Journal des Economistes, July, 1916.

'FRANCE 91 instrument. Le Temps proposed to ext~nd the law against withdrawing funds after giving a check to cover the case of stopping payment on checks, making stopping payment a fraud.! There is sufficient evidence in this new legislation and in this naive attitude of Le Temps that the check is not a familiar thing to the masses of people in France. More recently still the Banque de France has seemed to change its attitude toward extending the use of checks. In the summer of 1918 the Banque laid down the rule that .checks will not be accepted in payment of dues to any department of the French Government unless presented on the day they are drawn. This would seem to be an ingenious device to make the use of checks impossible in payments to the govern ment. The use of checks has also met a snag in the new tax on payments of all kinds. The tax amounts to two francs per thou sand on receipts for money payments and is of course easily col lected when checks are cashed or deposited at banks, since the check is a receipt. An evasion of this' tax has been devised by creditors drawing checks on individual debtors instead of Qn the banks and using these checks as a means of paying their own debts-virtually a substitute of the old private draft or bill of exchange for the bank check. A bill was introduced in August, 1918, backed by the Ministers of Justice, Finance and Commerce, prohibiting the drawing of checks except on bankers, Agents de Change and official representatives of the French Treasury. This is designed to prevent this tax evasion. 2 It is not clear, however, that this may not prove an effective blow at the widely used bill of exchange, whic~ when drawn" on sight" is legally identical with a check drawn on a private individual. .

Mention should also be made of the extension of the clearing house system during the war. Before the war, the Chambre de Compensation des Banquiers de Paris was an unimporta.nt affair, most of the actual clearing operations being made by transfers on the books of the Banque de France. D'uring the war, a new Caisse de Compensation was formed, to meet the needs of 1 London Economist, August 11, 1917, page 209; September 1, 1917, page 322. 2 Ibid., August 17, 1918, page 210.

92 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING English and American banks, and in July, 1917, this was consoli dated with the old organization in the new Chambre de Compen sation, which includes all the important banking houses in' Paris. Its operations are limited, however, and the overwhelming bulk of bank settlements continue to be made by transfers through the Banque de France.