FRANCE: NOTES ON PROSPECTS FOR FINANCIAL STABILITY IN 1952-53

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-01617A003900120005-1
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: December 27, 2016
• Document Release Date: August 19, 2013
• Sequence Number: 5
• Publication Date: June 5, 1950
• Content Type: MISC

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CONFIDENTIAL
FRANCE: NOTES ON PROSPECTS FOR FINANCIAL STABILITY IN 1952-53
There is no marked historical bias for inflation in France.
Since-1920 (and excluding the war years) the number of years of infla-
tion of the middle 20's, the price level of France at the beginning
of the second world war, was not much above that of 1920. It should
not come as a shock, therefore, that France is potentially able to
move swiftly from open inflation to stability or deflation, just as it
did after the first world war.
The Current Situation
After the last war, each of the combattants, except the U. S.
was left with a partially destroyed economy, the loss of foreign
holdings, an overhang of excess money, and unsatisfied demand for
consumer goods. In order to regain their prewar standards of -,
living, these countries undertook to make large internal investments
to make good their matetial losses and restore their .prewar produc-
tivity. In such circumstances; it was not surprising that suppressed
or open inflation developed in all the combattant countries, just as
it had occurred after each major war. Inflation, however, begets
deflation. Five years of reconstruction and rebuilding have tended
to wipe out the inflationary potential in most countries and create
the possibility of deflation. The position of France (along with
other countries ) is now balanced between these opposing forces of
inflation and deflation in this transitional period.
Before examining the probable trends, it would be useful to
review the economic position in which France now finds herself as
revealed by widely used statistical indicators. The existing French
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economic series, however, are not complete enough to permit an analysis
to rest on an examination of the statistics alone. The existing series,
however, indicate that France has now reached a position between inflation
and deflation.
1. Prices - The upward price trend was slowed in 1949 but not
stopped. This can be seen graphically from Chart I. However, while in
past years, almost all types of prices moved together and upward,
indicating a basically inflationary situation, the price changes during
1949 dhow individual patterns based largely on changes in import prices
(viz: textiles) or harvest conditions (viz: potatoes). From Table I
it can be seen that, exclusive of food items, which are affected by the
weather, all other items have risen less or fallen more in the past
year than in the previous year. Thus, price movements lend themselves
to an interpretation of a tendency toward stabilization in the basic
economic forces superimposed on arising cost structure.
2.. Industrial Production - Tndustrial production has not been
able to regain its peak rate attained in May, 1949. Prior to that
month, French industrial production had advanced steadily, with breaks
caused only by strikes, summer vacations, and other external factors.
The summer drop in 1949 can only partly be attributed to vacations.
The failure to regain the May peak indicates that marketing problems
are becoming increasingly important.
3. Money SuDDly. - The changes in money supply show that, as of
February, 1950, the rate of increase at which money was being created.
had slowed down somewhat, and even reversed itself in 1950. Table II,
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CONFIDENTIAL
which shows the change in the money supply, based on Table F-2 in
French Data Book, indicates that the slowing down of the rate of money
creation was marked in September-November 1949 and in December, 1949-
February, 1950. In addition to the slowing down of money creation,
there was apparently a growth in cash balances (analysed.by the French
in CE(50)29/05,6th April 1950), as indicated by bank check circulation
figures. While having little predictive value, the money eupply figures
indicate that France went through a deflationpry period in the last few
months.
4. Unemployment - The rise in-the number of persons seeking jobs
and in the number receiving unemployment relief (see Table 1,6 in French
Data Book) has been frequently remarked on as a forecast of bad times.
The rise in the number of unfilled employment requests, however, can
partly be explained by the rise in the size of the labor force and the
elimination of black markets, which released manpower. The rise in
the numbers of persons receiving unemployment aid may be explained
partly by the growth in the number of eligibles for unemployment relief,
and the rise in the number of unemployables. Part-time unemployment does
not show a strong rise. The absolute level of unemployment iemains very
law (less than 1% of the work force).. Yet, after all the qualifications,
the steady rise in the number of persons seeking work indicates that
the inflationary period is over.
5, Bankruutcies - The level of bankruptcies has risen steadily
and now exceeds the 1938 level. (See Table F-7 in French Data Book).
The comparison is not completely apt, however, since the number of
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enterprises now i far greater than in 1938, and the present period was
preceded by a rash of new business startings by inexperienced persons.
It is apparent, however, that some small enterprises (which are the ones
almost entirely involved) are finding it profitable to close up and for
the proprietor to find w6rk elsewhere. 'While at present the number of
bankruptices is not too useful an economic indicator, it does indicate
an end to the postwar inflation.
These five indicators, while they do not completely describe the
economic situation, do reveal the ending of one period of inflation.
The French economy apparently began to drag in some sectors and has
certainly lost vigor in others. However, statistical series have a
way of reversing themselves without notice. An examination of future
trends must be made by looking at the basic factors.
FACTORS AFFECTING FUTURE FINANCIAL STABILITY
The French government now has suffici?nt powers to cope with
almost any inflationary or deflationary movements arising from domestic
causes. It could not, of course, offset a world-wide depression or an
inflation caused by very heavy military expenditures accompanied by a
threat. of war. Furthermore, there are political and economic institu-
tions which may inhibit the full use of the government's powers. Yet,
the government's powers to relieve the symptoms of a domestic depression
or to restrict a domestic inflation are no longer in doubt.
The major factors which,will affect financial stability in France
in the forseeable future are discussed briefly below. Together they
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indicate that aggressive and intelligent government action will be
necessary to maintain financial stability (and economic growth) and
that, in the absence of powerful external forces acting adversely on
the Fi-ench economy, the government action can be successful.
1. Investments - Although the propensity to Save and to invest
now appear to be in balance there are signs that planned savings will
continue to increase while investments fail to keep pace with planned
savings or even fall off. If either develops a deflation will result.
Up to .now the government has financed about half of gross invest-
ment in France. With most of the Monnet Plan programs nearing comple-
tion, government investment is tending to decrease. Whether private
financing will fill this gap remains to be seen. The French entrepreneur
is conservative in his investment policies and private investment insti-
tutions are not well developed. The uncertainty of 'trade liberalization
program may also have depressive effect on investment until the program
is completed.
The government, however, very sensitive to unemployment and demands
for houMmg, could certainly increase the tempo of building in France
if deflation developed, as there is a tremendous need for new housing
and schools. Other outlets of deficit financing, some of which could
be made through the nationalized industries, are available. Some deficit
financing will probably be necessary to offset the increased planned
savings which results when a country's economic and political position
is improved.
2, Capital Flight - In the early postwar years, the flight of
capital May have deprived France of as much as a half-billion dollnrs
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of goods yearly. It accelerated the inflation. The potential for such
demoralizing capital flight exists whenever war, or political or economic
crises threaten. In the present state of econ.mic and political condi-
tions, however, the probability of a renewed capital flight is not great,
though a drastic change in world conditions could rapidly induce one in
France.
3. Fiscal and Monetary Administrative Efficiency - Although budget
deficits and unlimited powers of money creation by the banking system ;
plagued French financial stability in the early postwar years, these
forces no longer are an inflationary threat.
(a) Fiscal Efficiency - The traditional weakness of the French
fiscal machinery is well known. During 1949, however, the tax laws
were simplified and the staff of inspectors and the quality of their
work were improved, so that tax.revenue is expected to increase by over
300 billion francs in 1950 over 1949.
Despite these improvements in collections, the fiscal machinery is
still deficient. Very important is the fact that tax yields are largely
proportional to the level of income, since the tax system is heavily
dependent on sales taxes; hence the tax system has a neutral instead of
a counter-cyclical effect on the level of national income. In addition,
the borrowing power of the French treasury is limited by statute and by
p+hological'resistance. Hence, if deflationary tendencies develop,
the fiscal system may be too sluggish to respond by creating a large
enough deficit. Up to 1952/53, however, during which time substantial
government investment will continue, the fiscal system will probably be
biased toward deficit financing, particularly, as the amount of counterpart
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CONFIDENTIAL .7
funds released to the french treasury declines.. This should help
counterbalance deflationary dangers.'
(b) Monetary Efficiency - french monetary contras have
been greatly improved since the imposition of quantitative and other
controls on credit in September, 1.948. The monetary controls operated
in a flexible but logical manner. Monetary controls, however, are of
little value in getting a country out of deflation. For the next few
years, hawever, monetary controls strengthened through ECA's control
of counterpart, should definitely be of value in forestalling inflation.
4. Costs ? In addition to the basic forces already Considered,
there are several elements of the financial stability picture which
operate through their effects on costs.
(a) Devaluation - The effects of the recent french revalua-
tion of it currency have thus far worked themselves out without
notably disturbing the french cost structure. With a smaller percentage
of its national production directly related to world tradeofrance is in
a more protected position than the U.K.
(b) Wage Changes - A new minimum wage of under 15,000 francs
for the Paris area, and lesser minima for other areas, now being con-
sidered, may raise the average wage level by 5 percent. Since the recent
wage rises have not satisfied the workers, additional demands will be
made for wage increases, but these- will probably be kept to moderate
dimensions. Some slight price rise, as a result of these, and the
previous 1950 wage rises, should be expected, but an inflationary spiral
should not result under present business conditions. While workers will
continue to demand wage increases in the following year, the relatively
weak bargaining power of the workers compared to the power of the
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CONFIDENTIAL .8
employers, and the desire of the government to maintain 'price stability
will probably keep wages in line with advancing productivity.
5. Military Expenditures -? Probable increases in military expendi-
tures for Indo-China and more certain forseeable increases under MDAP
are not likely to be significantly large? However, French stabilization
will remain provisional and capable of being upset by linforseen increases
in military expenditures.
DRE/WEER - AReifman:MBurk:sy
June 2, 1950
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3,00
2,00
1,000
900
800
700
600
?
-
FRANCE
WHOLESALE PRICES
Semi-logari
1938
????.
hmic Scale
100
wassige
..... ......._ ...............00
Food -...--.....
cs
I 1
14\ I I
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I
%.0.
1
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1
1
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1 1 1 I I
I 1 I
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Pi III
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1
I I
I I I I
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1
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1
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I
1948
1949
1950
3,000
2S 00
2
.2.1 co
/
2,000
1000
900
800
700
600
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CONFIDENTIAL
Table 1
WHOLESALE PRICES BY COMMODITY GROUP
Index 1938 = 100
March
1948
March
1949
March
1950
Percent
1948 - 1949
Change
1949 - 1950
All CoMmodities
1,536
1,872
2,101
/ 21.9
/ 12.2
General Food
1,554
1,616
1,950
/ 4.0
20.7
Cereals
1,014
1,271
1,338
74 20.0
74 5.3
Meat and Fats
1,925
1,925
-1,695
- 12.0
Dairy
1,603
1,891
2,295
/ 18.0
/ 21.4
Other Food
1,853
1,569
2,666
- 15.3
/ 70.0
General Raw Materials
1,533
2,127
2,315
/ 38.7
'/ 8.8
Coal
1,585
1,989
2,035
/ 25.5
/ 2.3
Metals
1,780
2,069
1,975
/ 16.2
- 4.5
Textiles
1,580
2,660
3,538
/ 68.3
/ 33.0
Chemicals
1,736
2,817
2,818
/ 62.3
Building
1,284
1,514
1,516
/ 17.9
General Semi
1,503
2,127
2,189
/ 41.5
/ 2.9
Metals
1,739
2,083
2,070
it 19.8
1.6
Textiles
1,667
2,950
3,301
/ 77.0
/ 11.9
Chemicals
938
1,157
1,198
/ 23.3
/ 3.5
LuMber
1,750
1,847
1,847
71 5.5
1111?111111.111
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Table II
QUARTERLY CHANGE IN TOTAL MONEY SUPPLY
1946
1947
1948
(billions of francs)
83
80
126
2nd
35
3rd
/
204
4th
/
219
1949
/
134
1st
17
2nd
/
128
3rd
/
239
Sept-Nov
/
23
4th
/
185
Dec.1949-Feb.1950
19
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