French Revival

October 27, 1958

PARIS—The overwhelming popular endorsement of the new Constitution, which meant the overwhelming popular endorsement of the leadership of de Gaulle, has given a great lift to the French spirit and to French hopes. This increased confidence is, of course, primarily political and military. If de Gaulle is able to unify France, if he is able to bring peace in Algeria, if he is able to make France once more a bastion of NATO, the whole outlook for the West will become brighter.

This surge of confidence has had its immediate economic effect in encouraging a return of capital to France. It improves the long-term economic outlook. But the immediate problems are still grave, and above all the problems of the budget and of inflation. The officially estimated deficit for the present calendar year is 600 billion francs (about $1.4 billion), but most observers think it will run higher. And the budget for 1959, though it has not yet been presented, is widely expected to run to still larger expenditures and a still larger deficit. This is because increased authorizations have been voted or promised in the past. De Gaulle himself has promised increased spending for his Algerian development program.

MOUNTAIN OF SUBSIDIES

Among those who are concerned by this situation, however, there is widespread hope that de Gaulle and Finance Minister Pinay may make a thorough re-examination of the budget to find economies that will offset the promised new expenditures in Algeria. These economies, of course, will be tremendously difficult politically. For what unbalances the French budget is truly a mountain of welfare programs and subsidies—for “investment,” for social security, for the railroads, for coal, for wheat, for gasoline, for milk, for beet sugar, for chocolate.

Moreover, some authorities who have analyzed the French inflation point out that even the budget deficit, great as it is, has not been the chief cause of the inflation of the last six years. They blame the policy of the Bank of France. Between December of 1952 and September of this year, for example, the bank’s advances to the government increased by 464 billion francs. But the bank’s extension of “medium-term” credits increased by 1,004 billion francs. In other words, only about a third of the inflation (i.e., of the resulting increase in the money supply) was the consequence of the budget deficit, whereas about two-thirds came from the increase in medium-term credits. These credits are chiefly for housing; others are for the purchase of machinery by French industry. They are actually twenty-year loans; but they are called medium-term (moyen terme) because the government has agreed to take them off the bank’s hands at the end of five years.

TIGHTENED CREDIT

Critics of this policy contend that it is a gross violation of all central bank principles to discount loans running for twenty or even for five years. They argue that it is absurd to discount three-month bills at 5 percent, and to discount twenty-year paper at an effective rate of only 4 percent.

In the last year or so credit has been considerably tightened, but through quantitative controls rather than through a flat increase of the discount rate. Ceilings are now placed both on the borrowing of each commercial bank from the Bank of France and on the loans that the commercial banks may make. There are a series of such ceilings. The first amounts to 65 percent of the ceiling on a bank’s borrowings as of July 1, 1957. On such borrowings the commercial bank paid a 5 percent (now reduced to 4½ percent) discount rate. On any borrowing above this of 10 percent or less it paid in addition a penalty rate of 2 percent. If it broke through this second ceiling it paid a penalty rate of 4 percent up to a third ceiling.

These quantitative controls and penalty rates have slowed down the inflation considerably. But they take nearly all the flexibility out of the money market. They favor established borrowers at the cost of new enterprises. They lead to an uneconomic allocation of credit and production.

But the new government seems more determined than its predecessors to make courageous reforms.