In June 1928, the French government ran by Raymond Poincaré decided to devalue the country's currency by 4/5. Thus, if I understand correctly, it created a new currency called the "Franc Poincaré" which was 1/5 the value of the previous currency, the "Franc Germinal".

From what I understand, this devaluation meant that with 1 new Franc Poincaré you could have five times less gold that you could previously with 1 old Franc Germinal.

History books will tell you that this devaluation put an end to the financial crisis that France was experiencing at that time.

I really don't understand how this is possible.

As I (probably poorly) understand it, a massive devaluation like this would have the immediate effect of making French people (who have Francs) 5 times poorer than they were before.

How could people ever accept this without overthrowing the government? How could this massive devaluation have the effect of ending the financial crisis?

  • 2
    Currencies get devalued and upvalued every day by Foreign Exchange markets. How is this different? One 1962 Diefendollar May 15 '19 at 9:53
  • 1
    If your debt is denominated in a currency that gets devalued, you owe less debt. May 15 '19 at 10:00
  • @DenisdeBernardy what if it's mainly your own citizens who are your creditors ? First you make them 5 times poorer by devaluating, then you tell them they'll get 5 times less when they'll get reimbursed ? It seems to me even worse. I don't get how people could accept that even though it potentially could "boost" exportations... May 15 '19 at 10:13
  • @PieterGeerkens I don't know if it's the same or different, I dont understand it, that's why I'm asking.... May 15 '19 at 10:15
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    Is this a question specific to Poincaré's handling of the French financial crisis from 1926-1928, or a more general question about how currency devaluation can solve a financial crisis? May 15 '19 at 11:27

Essentially, rob the poor to pay the rich

French franc, like any major currency at that time, was backed by gold. Franc Germinal was valued at 0.3225 g of gold. This was instituted in 1803 and did not change until 1928. Theoretically, your savings in francs were as good as gold, and many poor and middle income citizens held their life savings in government issued bank notes or coins. Of course, in reality Banque de France issued more currency then they had gold, but this system worked because only small amount of franc holders would chose to exchange their currency for real precious metal .

However, when WW1 started France simply did not have enough money to finance the war. Already during the war they started issuing francs without gold backing (and prices of everything, especially food, skyrocketed) but they needed loans also. Bonds for these loans were formally issued in Franc Germinals , but creditors, like famous Rothschilds, knew very well that even if France wins it would be very difficult to pay both principal and interest on these loans. However , they counted on something else.

After the war, France was saddled with debt, quantity of money in circulation was enormous, and to preserve international standing franc continued to be valued at same ratio towards the gold. Despite hefty German war reparations, French economy could not sustain such ratio, especially since creditors could at any time demand to be paid in gold (or some other currency backed by gold) .

Since French gold reserves were getting depleted, Poincaré simply devaluated franc to only 20% of its previous value, namely 0.0655 g of gold. Seemingly, this hit large holders of French debt hardest, but in reality they already charged vast sums of money (i.e. gold) on interests, and had protection clauses in their contracts so their holdings were not wiped out. Essentially, Poincaré put repayment to creditors as No 1 priority.

Hardest hit were common citizens, especially those on fixed income. If someone had 100 franc income (wage or pension) or saving, after the devaluation he would have only 20% of the value . French wages suddenly became low, and French products cheaper in international market, at the expense of working class.

Finally, idea that Poincaré somehow solved economic crisis is blatantly wrong. In fact, it could be argued that Poincaré created moral decline that led to speedy French collapse in 1940. For average French citizen, relative fiscal stability did not mean much in face of overwhelming poverty, Great Depression and general feeling that poor paid the price of WW1, both in blood and treasure. Already in 1934 there was political crisis that heralded deep divisions in French society, and general distrust in state institutions. As WW2 draw nearer, it was becoming clearer that French were no longer unified body ready to confront Germans once more on battlefield.

Clarification of some basic economic facts: War as an activity from economic standpoint is wasteful - valuable resources are either destroyed by enemy, or spent destroying that enemy instead of producing something valuable. During the war French economy contracted, as were economies of other belligerents. French government also increased money supply, therefore value of franc was certainly lower (many more francs chasing lower amount of goods). Banks and big investor perfectly understood this (while general population, same as today, did not). Banks understood they were loosing wealth, but needed a way to limit the loses, and grab larger percent of economy. They also understood that at some point economy will start growing again, and those who control significant percent of it will reap most profits. That is why they started buying war bonds, although they knew perfectly well that they are not going to be payed back in gold as promised. Even during the devaluation bond holders got preferential treatment compared to ordinary citizens. They were not paid back in full, but they didn't expect that to happen. Instead, they got tighter control of economy, by sucking in enormous part of French franc monetary mass.

  • 1
    So if I understand correctly, large holder of french debt (like other states, banks and very rich people I guess) where not affected by the devaluation because of high interest rate and special protection clauses. However from what I can find the interest rate around this period was at 4% which is far from enough to compensate a drop in value of 80%. Also interest rate is the same for large and small holder isnt it ? So it makes me wonder what did those protection clauses stipulated ? May 16 '19 at 7:52
  • "French wages suddenly became low, and French products cheaper in international market, at the expense of working class.". I get that wages suddenly lost 5 times their original value, but so did french products... I guess it didnt make any difference for the working class if they bought french products... it did make a big difference for poor people if they needed international products. To what extent did the working class rely on international products at that time? Im not sure a lot... So is it really possible to say devaluation created moral decline in the working class ? May 16 '19 at 8:03
  • @DavidGeismar Nominally most of them were affected (they didn't get full value in gold). Practically, every bond has a value on the market, which is a fraction of its nominal value. French bonds were selling for as low as 3% of nominal value. Suddenly, value has jumped to 20% after reform . Plus paid interests as you mentioned yourself . Note that large holders didn't get bonds for real gold, and that they were buying bonds from small holders (especially war bonds ) immediately after the war for fraction of nominal cost.
    – rs.29
    May 16 '19 at 22:35
  • @DavidGeismar Price of products was not lowered to 20% of their original value in gold, it actually went up in francs. If you need to import coal from Germany, or grain from US, price of that remained basically the same in gold, or 5 times more in francs. Price of labor was cheaper , but price of imported goods remained the same, therefore price of finished products was somewhat cheaper (in gold), but they were more expensive in francs . Devaluation benefits export but hurts living standard of domestic population .
    – rs.29
    May 16 '19 at 22:42

A few points to note:

  • The devaluation is from 5/5 to 4/5, or 20%, and not from 5/5 to 1/5 (ie by 4/5) as presumed in the original post.

  • The devaluation by 20% is only 3 times that performed in 1962 by the Canadian Government that immortalized the DiefenDollar, after Canada's then Prime Minister George Diefenbaker:

    enter image description here

    Humour notwithstanding, the only real casualty of the devaluation seems to have been Diefenbaker's re-election chances. His record-breaking majority of 1958 would become a short-lived minority that year, followed by a defeat in 1963.

  • The vast majority of debts, transactions, and contracts engaged in by the residents of a country, individual and corporate, are amongst each other and thus unaffected by the devaluation. Imports become more expensive, which encourages domestic consumption, and exports become more attractive to other countries which increases employment. the latter does typically take longer to realize than the former.

  • I still dont get how this would work, if you tell people and businesses that their new money is worth 1/2 of the old one. Wouldnt that have the immediate effect of multiplying by 2 prices ? Which in the end game would make the operation neutral regarding exportations and everyone else ? May 15 '19 at 12:07
  • by the way, you are wrong the devaluation was indeed from 5/5 to 1/5. And I dont think this does really answer the question May 16 '19 at 7:28

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