The Year in France: French Finance

“ IN the world at large, France has come to a consciousness of her real power.” Written for “ The Year in France ” of 1905 and 1906,1 these words have been more than confirmed ever since. At that time they referred to international episodes in which France’s possession of a great portion of the world’s gold had told decisively for the world’s peace. From the beginning of the year 1907 to the money panic of the year’s end in America, and afterwards all through the financial and industrial crisis provoked by the panic in European countries, this possession of ready gold by France has again been forced on the world’s attention.

Such financial predominance is of far more general interest than the year’s commonplace political or social events, or even than the imbroglio in Morocco from which France is not yet extricated, and which cannot be written of understand - ingly.

It has not only kept unbroken the prosperity of the French people, — it has helped England, which stood in the direct line of commotion, to withstand the rebound of panic and to bring first aid to the wounded in America; it continues enabling Germany to endure an interior crisis as dangerous to the empire and the world as war itself; and it still presents a guarantee of peace against German partisan ambitions. All this has been only to meet the year’s extraordinary demand. The ordinary permeation of the universe by French gold has meantime gone on as before.

A dozen years since, while the particular policy of Crispi was exasperating the general hostility of the Triple Alliance against France, a journalist of Naples wrote belligerently, “We need several milliards to pay our debts. There are two or three in gold or silver in the Bank of France. Let’s go and take them.” At the end of 1907 Signor Luzzatti, who merits the praise of having put Italian finances on their feet, can think of nothing better to secure easy money for the world than international measures for what has been styled “ a more even distribution among other nations of the gold now in the possession of France.”

It is neither to the credit nor to the interest of a great nation like the United States to wait on the flux and reflux in the world of ready money, man’s invention, as if these were unintelligible acts of God like earthquakes or hurricanes, and so beyond human laws of insurance against accidents. That France is the creditor of all nations and debtor of none, that she is far along the way of becoming the world’s banker, is in the line of understandable cause and effect. It is no hazard of new fortune. Neither luck at home nor foolishness abroad has led up to it. It is the natural resultant of a composition of moral forces which may exist in any nation; and they meet the same opposing forces in France as elsewhere.

The financial events of the year centre in certain deliberate operations of the Bank of France, an institution as independent within the limits of its statutory privilege as the Supreme Court of the United States within the limits of the Constitution. The material possibility of such operations, like the riches of France, is due to certain traditional and spontaneous habits of the French people. These again are veering more and more toward international finance under pressure of the great “credit” banks, whose phenomenal growth is one of the most disconcerting factors of French progress for a quarter of a century.

The events of the year have brought into play all these financial peculiarities of France. In the darkness of the American situation they start up many burning questions. Luckily they fall under a few ready formulas.

First, there is a practical separation of Bank and State: the Bank of France controls the movement of gold and the circulation of currency as well. Second, the French people have gold in their possession as a reward of obedience to their century-old precept, “ When you have four cents spend only two ” — the other two going to make up the famous French savings, l’épargne nationale. The same caution is ingrained in French commerce and industry, inconveniently for those who prefer gambling risks on the future, but with final profit made clear in times of panic. Third, the great popular banks, which have the investing of their customers’ savings (not of their deposits, which are dealt with otherwise in France) and so handle a major portion of the country’s liquid capital, are independent of the Bourse — rather, stockexchange operations depend largely on the banks.

Thanks to such elementary principles, French finance has so far successfully withstood all meddling of politicians in power, even when they give legislation a violent trend toward Socialist upturnings of property. Individual speculation, as mad and swindling as anywhere else, has its ravages circumscribed like itself. Disasters of thousands of millions of francs come and go with no diminution of the vital strength of France. The ransom of the Franco-Prussian war and the penalty of Panama were not too heavy a strain; and there is no reason to think now that any possible bankruptcy of Russia, in spite of the dozen milliards she owes to the French people, would shatter the financial energy of France.

At the beginning of the year 1907, banks and stock exchanges the world over were involved in a monetary stringency due to manifold causes near and remote, but directly occasioned by the habitual American demand for more ready capital than exists in the whole world. M. Paul Leroy-Beaulieu, a competent authority, estimates the average amount of capital available in the world each year at 12,000,000,000 francs. In a single year the United States clamored for 16,000,000,000 francs. “ When Mr. Pierpont Morgan talks figures I grow dizzy,” was a remark of the late Baron Alphonse de Rothschild.

The Bank of France, warned by the experience of preceding years, had already taken measures to prevent the draining away of its gold. Notably, it ruled out from its discounts all merely financial paper, — the notorious American “ finance bills,” — no matter what their personal or company endorsement. For some time, in strict conformity with its statutes, it had been limiting its discounts to short-term and quickly realizable commercial values, such as drafts in payment of purchases actually effected, or bona-fide commodity bills. The terms of the national privilege of the Bank of England do not enable it to protect itself so well; and it bore the brunt of the American demand with difficulty.

The Bank of France had every reason for coming to the help of the Bank of England. Gold, like any other exchangeable article, finally goes to the highest bidder; and the successive rise in discount rates paid in London was sure to draw gold from Paris. If the Bank of France were forced to raise its own rates in selfdefense, money would grow dear at home, and French commerce and industry would suffer. To prevent this is the main reason of the exclusive privilege conferred by the State on the Bank of France.

After some difficulties of technical negotiation—for the world’s great banks, like individual capitalists, have their selflove — it was agreed that the Bank of France should apply an unused privilege of its statutes, and open, for the Bank of England alone, a “ foreign portfolio,” This meant that the Bank of France would release gold to the Bank of England by discounting three-months’ sterling bills drawn on London, instead of limiting its discounts to the commercial paper drawn on Paris which makes up its ordinary portfolio. The Bank of England used this gold to meet the demands of the American situation; and in this way some $15,000,000 in gold soon found its way from Paris through London to New York. The stringency relaxed, but not till the Bank of France, in pursuance of a deliberate policy, had notified the world by an unexpected, though slight, increase in its discount rate, that it too was ready to act in self-defense. By the 1st of July, 1907, the Bank of England had completely reimbursed the Bank of France, either as the sterling bills fell due or after renewal.

The American demand for more money than the world contains had not ceased. In spite of all the measures of self-preservation which the banks of Europe had everywhere taken, nothing was able to withstand the universal recoil from the explosion of American financial dynamite set off in October. The Bank of France again opened a foreign portfolio for the Bank of England. The $16,000,000 in gold which thus promptly passed from its vaults in Paris through London to New York, was indeed first aid to the wounded both of England and America.

It soon became evident that the pouring of foreign gold into New York was little more than “ throwing snowballs into a blast furnace.” The crisis affected credit; but credit depends on something more than the material possession of money or of goods exchangeable for money. Credit presupposes confidence; and Americans were devoid of all mental security where money was at stake.

The Bank of England with difficulty protected its own interests by raising steadily its discount rates. In Germany the rise was by jumps more sudden and higher still. Americans, taken up with their domestic troubles, do not realize that the German danger was comparable to their own. There, too, over-industrialization has been accomplished by inflation of capital. In a way, the German inflation seems justified by results; it has been based, for the most part, on valid applications of the laws of supply and demand. It is certainly far removed from the sheer watering of stocks known in American speculation. This did not lessen the immediate danger of the crisis which, through the open market, forced the transfer of large sums of gold from Germany, where they were needed, to America, where the bidding was higher. It is claimed that $40,000,000 of the gold finally sent from London to New York was thus drawn from Germany. Such a situation involved French capitalists and banks far more directly than did the American crisis. The Bank of France had to take account of it in all its decisions, although its own position was independent enough to allow it to choose its measures.

The Bank of England declared itself unwilling, for the sake of America, further to increase the burden of its liabilities to the Bank of France. American bankers and the American government still held that gold, more gold, was the only, the sufficient remedy for present need. The United States government made known officially that it would see with pleasure the Bank of France release its gold to American banks directly, just as it had been releasing gold for America, with added expense, by the roundabout way of London. The answer of the Bank of France has been misunderstood and misstated.

First, the negotiations in which the American government appeared had naturally to pass through the hands of the French government. They were taken by

Finance Minister Caillaux as an occasion to insist that certain concessions should be made in American customs tariffs. A year earlier the same finance minister is understood to have opposed, as a matter of national policy, the opening of a foreign portfolio by the Bank of France for the Bank of England. In neither case was the bank’s decision dictated by this attitude of the government in power. In neither case did the executive pretend to dictate the decision of the Bank of France. For the entire duration of its privilege, once it has been voted by Parliament, the Bank of France is autonomous, limited in its decisions by its statutes alone.

Second, in obedience to these statutes of its privilege, the Bank of France asked that any direct loan of its gold to American private banks should have an American official guarantee corresponding to that of the Bank of England for the direct loan made in 1890 during the Baring difficulties, and, twice within the past few months, for the discounting by the Bank of France of sterling bills drawn on London. In an international matter of this kind, and in default of an official central bank for the purpose, only the American Treasury could act for the United States as the Bank of England did for London.

The government at Washington answered that such an official guarantee on its part would be unconstitutional. The Bank of France could only reply that, without such a guarantee, any loan on its part would be unstatutory — illegal.

Criticism and recrimination, both in America and in France, attended the failure of these negotiations. A heavy issue of short-term treasury notes was made by the American government, to procure facilities for American banks. In Paris it was not understood why similar short-term notes could not have been used as a government guarantee for the Bank of France, taking the place of the sterling bills of the Bank of England.

In America, a special envoy of La Vie Financière of Paris reported that Mr. Pierpont Morgan considered the decision of the Bank of France to have been “ an unfriendly act.” This drew from the financial world a rejoinder in words of M. Arthur Raffalovich: “The great American financier may be very much at home in American business matters . . . but he is ignorant of the organization of central issue banks and of their very strict duties. There was no ‘ unfriendly act ’ on the part of the Bank of France, which was quite ready to discount either American treasury notes or commercial paper.”

In point of fact, the Bank of France shortly after discounted over five million dollars worth of American commercial paper — all that was presented. In the irritation of the moment, this gold and the sixteen million dollars first aid seem to have been quite forgotten. M. Raffalovich concludes: —

“ With such ideas (in the United States), there is no dodging the question whether a ‘ Central Bank ’ — even supposing they should ever succeed in founding one, which is not likely — would offer guarantees of stability and observance of statutes.”

During all this period of extreme financial tension in the rest of the world, the Bank of France was able to secure easy and safe money for the French people in their domestic commerce and industry. The highest discount rate which it was forced to adopt was three and four per cent lower than the rates imposed in England and Germany.

Most instructive of all was the handling of the country’s currency by the Bank of France. It alone issues and controls all circulating media, by virtue of powers directly delegated to it by Parliament when voting its legal privilege. In the exercise of such power, for the entire duration of the privilege, it is independent of passing holders of the executive and legislative power. In one week of the monetary stringency the Bank of

France was able to throw 250,000,000 francs in banknotes into the general circulation; and it still had the right to issue 500,000,000 francs more before reaching the limit prescribed to it in its privilege.

Elasticity of currency was thus secured without publicity or debate. It drew no attention from politicians, who were left free to occupy themselves with topics less dangerous and more within their competence. It passed unnoticed by the people who profited by it. Supposing the financial condition had been critical, there was nothing in such handling of the currency to destroy confidence or provoke panic. Moreover, such measures are taken by the Bank of France in accordance with the best judgment of lifelong experts placed at the centre of information from home and abroad, separated from politics by their position, and independent of the stock exchange and all its manoeuvres.

These movements of currency involve no danger of inflation. The banknotes are not guaranteed by any amount of private deposits which the Bank of France may have received, nor by any deposit or possession of public funds or securities. Their sole gauge is the bank’s metal reserve (of which the gold without the silver is at all times sufficient) together with the quickly realizable assets of its portfolio (discounted commercial paper).

In June, 1871, from the tribune of the Parliament of the brand-new German empire, Prince Bismarck boasted that he had refused the banknotes of France in payment of the war indemnity. He demanded gold or drafts on other nations, good as gold. “ We know to-day’s rate of these banknotes,” he said; “ but what they are going to be worth to-morrow is a thing unknown.”

At the beginning of 1908, in spite of all the pressure brought to bear through Moroccan difficulties between the two countries, German securities have once more been refused admission to the Paris Bourse; the year’s issue of loans by Prussia and the German empire has been little better than a moderate failure; German Funds in the market are ten francs lower than the French Rentes, depressed as the latter are by Socialist politics; Germany, to ballast her finances, must increase her public debt within the next five years by a milliard of marks, not francs; and meanwhile German banks are bolstered up, and German industries saved from financial disaster, only by help of French money — in gold or in banknotes of France, good as gold.

A Socialist journal formulates the situation : “ France sells 1,200,000,000 francs’ worth of goods to England each year and lends 1,600,000,000 francs in money to Germany.”

With this question of banknote currency there is sometimes mixed up the subordinate use of silver coin in France. It has to be noticed here, if only for the reason that undying bimetallism exaggerates its play in the money movement.

The lowest limit of paper money issued by the Bank of France is the 50franc banknote. For all sums under that amount, a circulating medium is found in 20-franc and 10-franc gold pieces, while small change is supplied by 5-franc ($1), 2 and 1-franc, and 50-centime silver coins. By virtue of the Latin Union, this silver coinage is current and interchangeable among France, Belgium, Switzerland, Greece, and, for 5-franc pieces, Italy.

We have here, within a close circle and in low denominations, an international bimetallism. Its working exemplifies the same laws as the international movement of gold. When Paris ’change on Brussels goes down, Belgian silver flows into France; but with ’change low on London it is gold that comes. This flux and reflux of silver is of corresponding use to the Bank of France in its relations with neighbors of the Latin Union.

At home, also, the Bank of France has the right to pay out, at its discretion, silver instead of gold; and this, in a measure, helps it to safeguard the gold reserve on which its international predominance depends.

From October, 1906, to the end of January, 1907, — a period of monetary stringency, through which the Bank of France had to protect its gold reserve, while releasing gold to London and New York, — its silver reserve was diminished by 50.000,000 francs. By the end of January, 1908, — after a further season of American panic and international crisis, — it was reduced by 80,000,000 francs more.

It is not easy to know how much of this round loss of $25,000,000 in its silver reserve was deliberately incurred by the Bank of France; but its discretionary use of silver, quite apart from its elastic banknote limit, must have increased its ability to meet the international financial crisis, and, in particular, to keep money easy for people at home. Let it be understood that the Gold Cure is best, unique, for the healing of the nations; but silver, in France at least, is an effective suceedaneum.

With the turn of the financial tide gold, obedient to the laws of its motion, flows steadily back to the Bank of France. In the first week of May, 1908, the bank increased its gold reserve by 20,000,000 francs in bars bought in the open market of London, and by 30,000,000 francs in gold exports from America. The following week had a further increase of 33,000,000 francs, mainly from America; and the influx was not yet over. The Bank of England had already discharged its indebtedness, and the foreign portfolio was closed. To draw all this gold to its vaults the Bank of France offered no special facilities. The natural working of the rates of exchange among the nations was sufficient.

With no national envy of its “ honest broker’s commission,” we may take passing note of the prosperity of the Bank of France as a business enterprise, its assured profits in transactions multiplied by the year’s disturbances and the steady rise of its shares. The new financial year (May 29, 1908) sees the bank in possession of three milliards — $600,000,000 — of gold. This has long been the aim of its deliberate policy; it is the one means of preserving that monetary primacy which the virtues of her people have so laboriously won for France in the world. The other central banks of the nations of Europe have taken this leaf from the policy of the Bank of France — to strengthen and safeguard to the utmost their gold reserves over against the time of need.

The Bank of France controlling the nation’s money is one thing. Government’s administration of the national receipts and expenditures is another. Upholding both is the French people, thrifty to a degree which Americans with their loose money habits can ill appreciate. A simple comparison of the situation of France in 1908 with the ruin left behind by war thirty-seven years ago will show what a sound financial organization can do for an industrious people that husbands and does not squander its resources.2

In February, 1871, when war was over, the proper functionary said to the Finance Minister of the Government of National Defence, “My hat will hold all the funds we have to go on with; we have 500,000 francs.”

One bank in the world was willing to treat with France for a loan; and Frenchmen are not likely now, merely for a criticism of the Bank of France, to forget what they owe to the house of Morgan — “ the only foreign bankers to hold out a hand to us.” The Emprunt Morgan was negotiated at the London branch of the great American bank, for 250,000.000 francs. At first it was demanded that France should pledge her state forests and domains. The government, which was as yet scarcely more than provisional, had the strength to refuse: “ You must trust the signature of France.”

Bonds at 6 per cent, with a face value of 500 francs, were put on the market at 400, 415, and 425; they were to be reimbursed in thirty-four years. Within four years they were paid up in full. France in her need had been able to profit only by the sum of 208,000,000 francs. Interest and other charges had amounted to more than 8 per cent yearly.

Within the same short time the whole war indemnity of 5,000,000,000 francs was also paid in full to Germany. Domestic loans had successfully appealed to the savings of Frenchmen in the name of the principle which binds them in their private as well as in their public life,— respect for their signature.

In 1869, just before the Franco-Prussian war, the national debt of France reached 13,000,000,000 francs, with an annual charge on the consolidated debt of 320,000,000 francs. War, the war indemnity with the heavy interest it bore, and the expenses of departments suffering from the invasion, cost France 15,000,000,000 francs. War material, arsenals, forts, navy and colonial defenses, all had to be made anew; and this, to the end of 1906, has amounted to 41,850,000,000 francs according to the calculations, year for year, submitted to Parliament by exFinance Minister Poincaré in a Budget report for 1908. Ex-Finance Minister Cochery, in his critical examination of the report, brings up the sum to 53,000,000,000 francs. Moreover, from 1870 to 1906, France paid 4,719,018,253 francs in military pensions, and 2,122,338,549 francs in civil pensions.

For railroads, from 1871 to 1905, the French Parliament appropriated more than 11,000,000,000 francs; for canals 2,000,000,000 francs. In 1869 the public school expenses of France amounted to 51,000,000 francs; the yearly appropriation has increased steadily to 270,000,000 francs for 1908. In 1871 posts and telegraphs, both government services, expended 83,000,000 francs; in 1905, with telephones added, the appropriation was 240,000,000 francs (the receipts more than pay this item). For state subsidies of agriculture, commerce, industry, public assistance and insurance, it is enough to say that the leaps and bounds of late years have often been 100,000,000 francs annually. The tremendous acquisitions of colonial territory have entailed, since 1895, a yearly expense, beyond receipts, of more than 80,000,000 francs.

The French National Debt (January 1, 1907) in exact francs showed the following figures: consolidated 22,406,362,811.85; amortizable by annuities 6,727,426,119.07; total debt, 29,133,788,930.92 francs, reduced January 1, 1908, by 74,964,226.54 francs. To meet the charges of this debt, the finance minister asks Frenchmen in 1909 to pay 655,841,611 francs of interest on the consolidated debt (3 per cent Rentes), and 316,036,220 francs in annuities and interest on shortterm treasury notes; to wThich he adds 291,662,950 francs in pensions also owed by the nation, three-fifths of them being military ($34,000,000) and the rest for retired civil functionaries.

In 1906 the actual receipts of the government were 3,837,000,186.87 francs (over $767,400,000), representing 99.50 francs per head of the whole population. That is, the French people are able and willing to pay yearly something like $20 per man, woman, and child for their public expenditure as an organized civil society. Their per capita proportion of the national debt — $148 — is approximated only by Portugal; but the average French taxation per head is exceeded in both Germany (over $27) and England (about $22).

By themselves, such figures do not show the financial efficiency of the country. Turkey nominally taxes its inhabitants little over 17 francs per head, and the portion of each in the national debt is less than $25, while each citizen of the Republic of Liberia shares in its national debt to the tune of 1 franc. Taken with other signs of private and public wealth, such state expenditures and liabilities do show that France pays much because her individual citizens have much. “ The riches of France are inexhaustible,” said Thiers, to comfort his colleagues against Bismarck,

International finance considers the earning power of France only in relation to actual gold saved up for use and investment abroad. Certain officially established facts for a single year, with others approximately known, show the general earnings of French production, from which, with the interest on savings already invested, new yearly savings come to increase the gold possession and investments of the French people.

France has long held the third place among the wheat-growing countries of the world. In 1905 the intensive cultivation of her soil, which has been made possible by tariff protection, gave a yield of 338,785,000 bushels as against 692,979,000 bushels grown in the United States with immensely greater fields and population. This is but one instance of the successful effort of French agriculture to make itself sufficient to the needs of the French people.

The gold-earning power of French industry must be estimated from the progress of French commerce. Confusion is apt to arise here from a too obvious comparison with new Germany. In 1869 the general foreign commerce of France amounted to 8,000,000,000 francs; in 1906 it had risen to 14,000,000,000 francs — an increase of 75 per cent. The French population had meantime increased less than 4 per cent, while Germany has augmented her population 50 per cent, with consequent industrial and commercial dealings of 20,000,000 more people than France.

This does not mean that along these lines France is keeping up, even proportionally, with the lead of Germany. The French people, after providing for their own wants, do little, in comparison with Germany and America or even England, to create new business. They do use their money savings to lend out to others, willing to run into debt for such a purpose. Any valid estimate of French progress has to strike the balance among such national equivalences.

An extra channel by which the outside world’s gold, more and more each year, pours into France is the day-by-day expenditure of travelers in the country. This is something quite apart from the general commerce of importation and exportation, and it appears in no government statistics. The sale, on the spot, of art objects and articles of luxury, in particular of female attire, has become an ever-increasing source of wealth to Paris. This coincides with the recent growth of tourist habits among the middle classes of Europe and America, for rich people had been in the habit of spending their money in Paris since the Second Empire.

This sumptuary impost is accepted, invited even, by foreigners. It is reasonable and legitimate. It is not made so by French taste alone, to which, as to a sort of gift of God, the envious of other nations like to attribute it. French superiority in such matters is due to long and intelligent training, to willing application to details and patience in combining, with insistence on a routine standard of excellence. The French artisan is worthy of his hire. His work, as a rule, is neither ready-made nor standardized, nor yet cheap and nasty. He will lose his preeminence, as John Stuart Mill observed of Lombardy and Flanders in the Middle Ages, only “as other countries successively attain an equal degree of civilization.”

The gayety of French resorts, the attraction of scenery and historic sites, the facilities of automobiling furnished by the mere excellence of roads through every part of the country, — another notch up in civilization, — have more than doubled this revenue from tourists within a few years.

Annual income of this kind is, of course, not all profit; labor, material, and the means of using both, cost heavily and have to be employed freely on the part of the French. Still, the direct profits are greater than in other industries. And the payments made by foreign travelers are practically always in gold brought by them into the country.

A reasonable estimate, for the single year 1907, of the gold thus imported into France by travelers, to be spent in hotels, transportation, amusements, and purchases, is three milliards of francs ($600,000,000), a sum equal to the highest gold reserve of the Bank of France. Americans commonly exaggerate both their numbers and their expenditures in France; but one-fifth of this sum ($120,000,000) may safely be set down as their share.

This state of things in 1908 is a curious commentary on the conclusion drawn in 1830 from reasonings of political economy by John Stuart Mill: “ The great trading towns of France would undoubtedly be more flourishing, if France were not frequented by foreigners.”

A good part of the gold earned by the thrifty French people goes into their “ savings in the house, savings in land, savings in the family, savings in stocks and bonds.” The old unproductive hoarding of such money — the peasant’s has de laine — has given way in France to the habit of handing it over to banks for investment in foreign securities or for lending out otherwise. This, far more than the regulating influence of the Bank of France and its gold reserve, secures the financial predominance of France in the world. In such a matter figures can approximate to the reality only within limits of hundreds of millions; but even so they form a valid basis of judgment. M. Alfred Neymarck has calculated these yearly savings of French citizens at from 1,500,000,000 to 2,000,000,000 francs — $400,000,000 added to the liquid money capital of the French people each year that God gives them.

It is evident that only a portion of this money directly enters international finance. Not to speak of the steady development, however slow in comparison with other nations, of French industry and commerce by new capital, out of 12,000,000 householders 9,000,000 own their homes, which supposes a large employment of savings in real estate. In 1905 there was a total of 4,655,000,000 francs of deposits in the French savings banks; the surplus has been used of late by government to keep up the French Rentes in the open market, whenever the threat of Socialist legislation by Parliament sends them down.

At the end of 1907, the sight deposits of five Paris credit banks amounted to 3,424,000,000 francs, and those of the Bank of France to 489,000,000 francs. Such deposits are made exclusively in specie or banknotes, or in cheques or drafts to be cashed by the banks. In no case can deposited securities be entered to a depositor’s account current, although the credit banks would undertake their sale and afterwards add the proceeds to the account as a sight deposit. If the depositor wishes the bank to use a portion of his money deposits in the purchase of securities, these again cannot be credited to him as a sight deposit, although the bank will advance money on them as a loan on security; but in this case they migrate to the other (asset) side of the bank’s balance-sheet and enter into a different account of the customer.

This watch kept over the genuineness of bank deposits is extended to the use of them by the banks. Only short-term operations are allowed, in which quick realization is possible. The discounting of commercial paper, short-term loans on securities, and carry-overs at the stock exchange are the chief uses in present practice. During the past year such short-term loans constituted a good part of the underground aid rendered by the credit banks of Paris to German banks. Offers of 9 per cent interest on direct long loans to German industries were refused.

The year also saw a clash between Paris credit banks and the official stockexchange agents of the Paris Bourse.

In the marasmus of speculation, the latter began using in carry-overs the large sums originally left in their hands by customers for investments. This explains the excessively low rates which prevailed in Paris while other money markets were still suffering from monetary stringency. But it also deprived the banks of the profitable use of their deposits in a field which they had come to consider as their own. As a consequence, the credit banks ceased their Bourse operations almost entirely, leaving the Paris stock exchange in the state of neurasthenia which so puzzled foreign experts. This passing assertion by French banks of their power in the stock exchange is a sign of the financial times, and possibly of a new departure.

During the year 1907 the Bank of France and the five credit banks discounted 75,000,000 different pieces of commercial paper, representing an effective capital of 50,000,000,000 francs. The total amount of loans on securities and money used in carry-overs by the six banks was 20,000,000,000 francs. This short-term use of their depositors’ money ($14,000,000,000 in all) resulted in two inestimable advantages for the French people — ease in specie payments and constant circulation of ready money.

To show the safety as well as the utility of this method of handling bank deposits, the situation of December 31, 1907, is sufficient. At that date the banknote circulation not covered by the metal reserve of the Bank of France — the sole issue bank — was 1,186,000,000 francs. This, added to the figures already given of its sight deposits and those of the five credit banks, makes up a grand total of 5,099,000,000 francs. To face this, the Bank of France had 1,216,000,000 francs of short-term commercial paper which it had discounted; and the five credit banks held 2,414,000,000 francs more. In outstanding short-term loans on securities and in carry-overs at the Bourse the Bank of France had 580,000,000 francs, and the credit banks 883,000,000 francs. This makes another grand total of 5,093,000,000 francs given out by the banks in ready money for the every-day uses of the French people, while remaining quickly realizable assets against the banks’ liabilities of 5,099,000,000 francs received as deposits or issued as uncovered banknotes.

From the point of view of international finance the most interesting thing in the flow of the liquid capital of France has been its deliberate “ canalization ” in the direction of foreign investment by a dozen great banks, of which the Credit Lyonnais was the first and is still the chief. From 1880 to 1906, the officially assessed holding of foreign securities by Frenchmen more than doubled. At the latter date, M. Neymarck considers that stocks and bonds and national funds to the total amount of 100,000,000,000 francs were held in France; and of these 35,000,000,000 francs ($7,000,000,000) are debts of foreigners to Frenchmen. Even this does not include the securities — certainly several milliards — which the French bourgeois have been hiding of late years in foreign banks to escape threatened Socialist taxes at home.

It would be too long to give the list of government, railway, and industrial loans which the various countries of Europe and America (and Africa) have entirely or in large part placed in France. At the end of April, 1908, even the slice of the Russian loan of 1905 which had nominally been taken by Vienna bankers came over to the Paris Bourse; and the London slice seemed likely to follow suit. The Spanish Exterior debt is held and a great part of the Spanish railways owned in France. So are the national debts and industries of Greece, Portugal, Bulgaria, Egypt, and of many South American states, Mexican banks — and the bank of Morocco. To this would still have to be added the Italian national debt if Italy had not copied French methods of selfsufficiency, thanks to the cooperation of great Paris banks.

There have been many reasons — legal restrictions rather than distrust of financial methods — which have limited the investment of French gold in the railways and industries of the United States. Here too, however, underground French finance plays a greater part than is commonly supposed, escaping government statistics and taxation.

The past year has seen a renewal of violent attacks on the great French banks for their policy in foreign investments: first, they are accused of risking disaster, — for example, in lending to Russia, — and, next, of hindering the development of home industry by drawing needed new capital out of the country. The risks of the banks are certainly not speculative, as was the case with Law in old France and with some of the trust companies of the present United States. And any sudden catastrophe would seem impossible from the immense variety of investments — eggs in widely diverse baskets—and from the permanent gold resources of the customers whose money the banks invest.

Such attacks for the most part look toward social revolution. The banking practice of France, like her riches and French financial predominance, rests on individual property-holding and the competition of the nations. They cannot be other than bourgeois, capitalist, reactionary as regards Socialism.

  1. By the present writer; published in The Atlantic for August, 1906.
  2. For the following figures I am indebted to M. Alfred Neymarck, La Situation financière de la France (October, 1907) ; to L’Economists Européen of M. Edmond Théry ; and to the Budget estimates presented to Parliament by Finance Minister Caillaux (19 May, 1908).