4. The Blocking of 5000 Francs Notes

4 The Blocking of 5000 Francs Notes (Letter to Mr. Courtin, editor-in-chief of Le Monde~ January 31, 1948) There is still in the minds of many people a vague idea that the suppression, at any morl1ent, of a large number of bank notes can effectively influence the level of prices and the rate of foreign exchange. Just as inflation, they believe, undoubtedly makes prices rise, so deflation, meaning the reduction of the num ber of bank notes, must lower them. This reasoning seems to possess irrefutable logic. Nonetheless, it has been contradicted by the facts every time that the experiment has been attempted, and among these experiments I include the Belgian experiment, of which more later. There is no example of a direct deflation of paper money which made its value rise. This is true of 68 THE TRIUMPH OF GOLD England after the N~poleonic wars, of the United States after the Civil War, of France in 1871, of the countries of South America, \vhose experiences of this type are so numerous and so instructive, and, closer to us, it is true of Czechoslovakia as well as of England, of France, and of Germany immediately after the last war. In all these cases, the efforts to curtail the quan tity of money used have been futile, the money re moved from circulation having immediately found substitutes in credit, or when the curtailment has been effective the resistance of prices has soon made it necessary to cease the curtailment of money and restore means of payment to the public. The classical example is that of Czechoslovakia after 1918, where prices resisted firmly all the efforts of the courageous minister Raschin, and where the downward trend, moreover under disastrous conditions, did not com mence until the rise in the rate of Czechoslovakian exchange occurred, under outside influences.

What is the basis of this phenomenon, which con tradicts so persistently the ideas of the old economist Ricardo, ideas which are supported unknowingly by reformers who believe themselves well informed, and who would do better to look to an economist like the Frenchman Aftalion, or to an American like Irving Fisher, to modernize their conceptions? There is an essential difference between inflation and deflation of money. When the state issues bank notes to pay for services, it is at one and the same time creat!ng revenue and new means of payment. 69 THE TRIUMPH OF GOLD When it destroys bank notes its action is felt by the treasuries: it suppresses means of payment but it leaves the revenues intact. But, it is the amount of revenue which influences prices. In the present case and supposing that we suppress definitely three hundred billion bank notes, shall we at the same time lower the railroad fares, the price of coal, the price of gas, of electricity, work men's salaries and the price of the raw materials necessary to industry? If all these prices remain stable, do we believe that the prices of consumer goods will decline? Can we believe that the consumers and the treasuries of enterprises, deprived suddenly of three hundred billions, will not immediately find some form of credit to replace the missing means of payment rather than see their enterprises close and idleness everywhere? The modest consumers who had put aside a few five-thou sand-franc notes toward large purchases of clothing or furniture, what will they do? They will postpone their purchases, which will not worry the sellers into reducing their prices, being sure that the buyers will return. On the other hand, the purchases will concentrate on the con sumer goods, the demand for these being the same.

Let us reflect a moment: what is a reduction of two hundred billions from a consumable income of four thousand billions? Hardly one-twentieth. Experience shows that there is never a reduction in price (supposing, of course, that inflation has been stopped) except through an increase in the 70 THE TRIUMPH OF GOLD offer of merchandise. But, you will say: how do you account for the Belgian experience? Here I will refer the reader to the very convincing graphs published last Friday in Une Semaine dans Ie Monde J and to the article which accompanies them. What do these graphs show? During all of 1945, after the partial blocking of cash and deposits, retail prices continued to rise, and very rapidly. During the same year, the means of payment, so suddenly reduced immediately after the Liberation, were restored with astonishing speed and had attained in the course of a year a level scarcely inferior to that at the start. The reduction in prices-and it was very slight-made itself felt only at the end of the year, under the twofold influence of a rapidly increasing stock of merchandise and, particularly, of a really stable exchange rate resulting from important foreign claims accumulated by Bel gium during the war and a financial policy entirely committed to budget equilibrium.

There is more. When the Belgian "amputation" (reduction in means of payment) took place, the inflation provoked by the invader had not exercised its full action on prices. It is this leeway which per mitted the Belgian operation. Everyone knows that the French situation is exactly the opposite. The increase in prices actually precedes inflation instead of following it. The idea that it suffices to curtail the quantity of money in use to lower prices should be abandoned once and for all. Things are somewhat' more com.71 THE TRIUMPH OF GOLD plicated than that. England, where this idea took form, has never applied it for its own account. Lord Keynes, whose competence is now cited by so many people, has always combatted it. Since I have just mentioned the name of Lord Keynes, let me mention a little-known fact. Two years ago, during the course of a debate with an American economist,l a debate which appeared in papers in the United States, Lord Keynes said sub stantially to his opponent: "My dearest wish, at the point where things are now, is to see the Bank of England return to the convertibility of its paper in gold." This is exactly what the present govern mental policy aims at. Starting with balancing the budget, it aims at stabilizing the franc through free dom. in the gold and currency market. This method comes closer to the concepts considered today as most modern than the obsolete methods which pre tend that by a purely mechanical process they can control phenomena whose evolution depends above all upon men and their spontaneous behavior.

1 Mr. Philip Cortney: The exact words used by Lord Keynes in his letter dated June 26, 1945, are the following: "And I can end up by most fully endorsing the last sentence of your preface that 'in order of urgency the main objective to be attained is the free convertibility of the pound sterling.'" To Rist the word "convertibility" had no meaning if it didn't mean convertibility into gold. I happen to agree with him. 72 Gold and Paper (L'Opinion) March 3, 1949) Gold is once again in the foreground of public attention. It had to return there, in spite of all the efforts of the governments to banish its embarrassing presence. The recent decision of South Africa to sell a part of its gold on the free markets has given the problrm a new acuteness. The paradoxical situation may be summarized in the following manner. On the one side, the public-in France, India, China, Libya, and elsewhere-shows its confidence in gold. A sort of immense international plebiscite is taking plac~ today in its favor. This plebiscite IS apparent by the growing importance of gold transac tions in the free markets and the growth of these markets. Let us not say that there is here only a 73 THE TRIUMPH OF GOLD perverse appetite for a metal which, according to the quip made by Edison, is only good for gilding picture frames and filling teeth. If the public seeks gold it is because it is convinced that it is the most stable of the mediums of exchange and that one day or other it will become such again officially. The nume rous authors who have discussed money are all in agreement on at least one point: it is that a currency is a means of exchange that everyone desires. It is this universal consensus that enables an object to become money. That there exists today a universal consensus in favor of gold one would have to be blind to deny.