The creditworthiness of France

 --:-:1' No. E-217 CONFIDENTIAL 67146 This report is limited to those members of the staff to whose work it directly relates. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE CREDITWORTHINESS OF FRANCE March 31, 1952 .. Economic Department Prepared by: J. H. Williams B. Rao  CONTEt-lTS Basic Statistics Charts Summary and Conclusions •••••••••••••••••••••••••••••••••• i Introduction ••••••••••••••••••••.•••••••••••••••••••••••• 1 Part I The Main Lines of D~velopment Since 1948 The Interplay of Politics and Economics, ••••• 1 . Economic Development Since 1948 •••••••••••••• 3 stability Regained •••••• , •••••• ~ ••••••••• 3 The Impact of Nat' in Korea •••••••• o • • • • • • 4 Stability Lost ••••••••••••••••••••••••••• 5 The Causes of Renewed Inflation.......... 6 The Balance of Payments •••••••••••••••••• 8 'rransactions with EPU Area •••••••••••• 10 Transactions 1vith the Dollar Area ••••• 10 Exchange Reserves ••••••••••••••••••••••• ~ 11 Money Supply•••••••••••••••• 11 ¥ •••••••••••• Part II Immediate Problems and the Requirements for Future Action The Budget ••••••••••••••••••••••••••••••·••• ~·. 13 Balance of Payments and Exchange Reserves •••• 14 The Level of U.S. Aid •••••••••••••••••••••••• 15 Action I' aken so far........................... 16 aequirements and Prospects for Future Action. 17 Part III 'rhe Creditworthiness of France •••••••••••••••••• 20 i i  BASIC STATISTICS Population: 42.2 million (1951) (estimated) Area: 550986 sq.. Kilometres Currency Unit: Franc - Frs. 349.95 .= 1 u.s. Dollar Gross National Product at market - 1949 8350 - 1950 9$00 -1951 ~ Jan. 52 11700 (Prov.) prices (rn billions of current francs) 1948,:; 100 Industrial Production (excluding building) 110 III 124 130 ~uoors.:GOOds: 113 108 131 (Nov.) Consumers Goods, 99 108 125 II Agricultural Production 102 114 Employment (Manufacturing) 102 103 108 (Oct.) Vfuolesale Prices (Paris) 112 121 155 171 . (Paris) Cost of Living 118 131 154 172 (Billions6f FF.) Money Supply (end of year) 2734 ........-- 3120 ........- 366i -.--.- Currency 1301 1590 1883 Deposit Eoney 1433 1530 1784 Main Sources of i\:oney Supply Credit to Government 1393 1373 1562 Credit to Business 1219 1355 1903 Gold, foreign exchange reserves and advances to Stabilization Fund 287 476 279 1950 1951 1951 b;Z Quarters Treasu;r Accounts i. 2. 3. 4., (Billions of FF.) Expendit urea 2485 28.54 59)' 595 824 Receipts 1896 2340 508 576 6']9 Deficit.s -589 -514 -85 -19 -145 1949 1950 1951 1951 by Quarters Jan.52 1. 2., 3.' 4. 1948 =100 Terms of Trade Av. value exports 123 125 144 133 144 149 153 ,160 Av. value imports 132 146 188 174 192 193 188 187 Terms of Trade 93 85 77 76 75 77 81 85  BASIC STATISTICS Page 2 1950 1951 1951 9l Quarters Jan. 52 1. 2. 3. 4. Volume Indices 1949 = 100 Foreign 103 ;L?8 .13.1 128 ;1.27 141 149 . countries -. ; Imports - Overseas III 110 109 119 96 D1 117 Territories Total 105 123 113 126 119 134 141 ForeiFr 150 178 195 189 159 167 137 coun ries Exports - Overseas 116 139 133 136 13h 151 143 Territories Total 136 161 169 167 148 160 140 External Trade, 1949 - 122Q 1951 1951 bl Quarters Jan. 52 Feb.52 1. 2. 3 . 4 . Month1z Avera~e - Billions of FF. Imports 57 66 106 89 111 108 115 125 148 With Foreign Exports 38 57 78 80 83 71 77 67 70 countries - Balance -19 -9 -28 -9 -28 -37 -38 -58 -78 flith Imports 20 23 28 25 30 26 31 30 30 Overseas - Ex10rts 27 32 45 39 44 45 53 52 57 Territories Ba ance {-7 1-9 I- 17 f 14 t 14 t 19 I- 22 f 2? .;. 27 I.rnports 89 134 115 142 134 ~~ 146 155 178 Overall - ~orts Ba ance -12 89 Nil 123 -11 7K :N Ilt -1 ~lg -3 12~ ~g Trade by Selected Currengy Areas 1949 1950 1951 Monthly Average - Billions of FF_ L'Dports 16.5 13.7 20.2 Dollar Area - Ex~s Ba ce i- - .2 3 5.0 -8.7 9:5 -10 Imports 16.3 20.6 37.4 Sterling Area - Exports 7.9 11.8 17.4 Balance -8.4 -8.8 -20.0 22.4 29.0 gountries mel. ~s D.E.E.C. 46.7 . ~ orts 24.9 38.7 48.1 terling Area "'Be. ce ,t2.5 {-9.7 f1.4 Imports 24.3 31.7 48.4 others - Exports Balance 27.9 f3.6 ~g:g 50.7 ,,2.3  lASIC ST}.?ISTICS Page 3 Balance of Payments of France and the Franc Area (Millions of Dollars) 1937-8 1949 - 1950 1951 (1st half) Exports 655 1567 1880 1304 Imports 1000 ID35 1958 1474 Trade Deficit -345 -468 -78 -l70 Net Invisibles inc.Freight 193 - 71 -37 - 69 Current Account Deficit of France -152 -539 -115 -239 Current Account Deficit of OverSeas , Territories -55 -167 -123 -15 Current Account Deficit of Franc Area -207 -706 -238 -254 Current Account of France, French Overseas Territories and the 'Franc ,Area hi Hajor Currency Areas. France( Dollar Area -715 -311 -120 Sterling Area ... 14 + 15 lI>:"115 Overseas Territories Dollar Area -l08 -62 Sterling Area + 20 +39 Franc Area Dollar Area -858 -419 -182 Sterling Area ... 19 .f. 35 - 76 External Debt Outstanding as of Sept,ember .30 2 1951. , '. Total External Debt (Dollar Equivalent); ~r 2, 775 million of which:. U.S. and Canadian Debt: ~ 2;469 ..3 million U.s. Government Debt: 2,002.7"  BALANCE OF PAYMENTS ON FRANCE CURRENT ACCOUNT OF THE FRANC AREA (BILLIONS OF U. s. DOLLARS) o I 2 3 1948 I INET TOTAL EXPORTS (t.o.b.) INVISIBLES RECEIPTS PAYMENTS U.S. DOLLAR ACCOUNT NET DEFICIT RECEIPTS PAYMENTS OF OVERSEAS TERRITORIES 1949 TOTAL RECEIPTS PAYMENTS U.S.DOLLAR ACCOUNT RECEIPTS PAYMENTS 1950 TOTAL RECEIPTS PAYMENTS U. S. DOLLAR ACCOUNT RECEIPTS PAYMENTS 1951 TOTAL RECEIPTS PAYMENTS U. S.DOLLAR ACCOUNT RECEIPTS PAYMENTS GOLD HOLDINGS FOREIGN EXCHANGE HOLDINGS (BILLIONS OF DOLLARS) (BILLIONS OF FRENCH FRANCS) 4 ~~~~~~~~~~~~~~~~400 LAST THURSDAY OF PERIOD END OF PERIOD ~--------~~~~--~--------~300 ~----~--~------~+-------~200 ~~------+---------~--------~IOO '52 D J D J D J tBeginning 1948 Bonk of France only. 1950 1951 1952 3/27/52 No. 527 LB.R.D. - Economic Dept.  FRANCE TOTAL EXTERNAL TRADE: VOLUME (INDEX, 1948 =100) ~OO ~------~ ~--------~--------,----------,---------,300 YEARLY MONTHLY 200 -:3,J---+----------+----------I 200 100 ~~~-r---------+--------~IOO o TOTAL EXTERNAL TRADE: VALUE EXCLUDING TRADE WITH FRENCH OVERSEAS TERRITORIES (BILL IONS OF U. S. DOLLARS) 5 .4 ,,,-,. YEARLY TOTALS IMPORTS~ 4 "" .. .3 / 3 2 , _. "....,- v.l.~' - ~~ ,A" EXPORTS .2 .1 MONTHLY -Scale is 1/12 of annual sc,ale o I I o TRADE BALANCES WITH SELECTED AREAS (BILLIONS OF U. S. DOLLARS) + I. 0 YEA~LY I F========f=======r===========j====== +.080 IFRENCH OVERSEAS +.060 +.5 TERRITORIES I f---------=-"'~~~~F-----+--------+------- 1-.040 EUROPE* .' +.020 ....... ALL OTHERt o .~~~~~----~~~--------r-------~O ~~~~~~~~~~--~~--------+--------~-.020 -.5 ~~~.,--~ ~~~L---~~~~~~~-----------4----------~-.040 ~---------+--~~~~~----------+---------~-.060 ~L-L-~~~ bcMcO~NcTcH~LY~-~S~Co~le~~±I±/±'2±O±f±o±n±n±uo±'~S±CO~1e~~~~~~~~~~~-.080 -1.0 EXTERNAL TRADE WITH U. S. AND CANADA (BILLIONS OF U.S. DOLLARS) 1.0 .080 YEA RLY TOTALS I. 09 .8 , , , ;'.. .060 .6 , , "'-, , IMPORTS~ \,l ",... \ , \ , r''. .4 I \ \/ I • .1 I , ~', ~ ." !\ I I " \.1/ ,. ~/\ " " ... / I ' .040 .2 / .020 / , J I 'EXPORTS , I '- I I '4B '50 '52 D J D J D J D J 1950 1951 1952 1953 2/25/52 *Excl. Sterling Area and Spain. **Excl. French O.T.'s and Sterling Areo. t Incl. Spain. No.528 I.B.R.D. - Economic Dept.  WHOLESALE PRICES, MONEY SUPPLY, FRANCE COST OF LIVING AND INDUSTRIAL PRODUCTION (INDEX, 1948 =100) 200~~~~~~~~~ QUARTERLY MONTHLY WHOLESALE PRICES 1501-------IJc.L-----, ~~--~--+-----~--~---------+--~IOO 'INDUSTRIAL PRODUCTION 50/-----------i ~-------~----------~---------+----~50 o 1...L-J-LJ.....1...I...J...I....L.L.....L..L.J...J.....L....L-.L....L-1...J L-1...JL-L-..LJL..L.l--'---l....1...l....L....L....L.L.....L..L.L....L-.l-I.-1...JL-'-'--'L..L.lL..L.l-I-J.-'---1.-1-I......l.-L....L....I....L-I 0 1948 '49 '50 '51 1952 D J D J D J D J 1950 1951 1952 '53 PRODUCTION (MILLIONS OF METRIC TONS) 10 ~-----~-------~------~------.IO COAL (Extl. lignite) MONTHLY m 5 ~: ~ i'i': :i:- ~~-----4------~5 ~ ~ o 0 I. 2,S-T-rE-E-L-*----.~-; ---'1 ,--------,--------,------.,-------....., 1.2 tllilillllllllt====t===j ~ '.::' f-~-~ ~-+--m-~ .:~.~~ .8 :: -I,::;' FRANCE .4 I.g *lng015 and castings 0 1.0 CEMENT (Artifical 8 natural) .5r--r~~---~ r~----+------~~-----+-----~.5 O~~~~~~~~ ~~~..J...I...J...I...J...I.~~.J...J....~~~L..L.l~..J...I...J...I.".J...J.....J...J....~~~~0 .050 .050 TEXTILES r:- ' . '. '. .025 o '38 '47 '49 f '51 J J J o MONTHLY AVERAGES 1950 1951 1952 1953 2/25/52 No. 529 I. B.R.D. - Economic Dept.  FRANCE EXTERNAL DEBT SERVICE REQUIREMENTS (MILLIONS OF U. S. DOLLARS) 20500~~-';'-':~-":'-:-:-:~\-':;-:~'-"~~"~-::-"'->:- ...-..-.- .. - ... ~ ...-.. - ..-.. -~--------~-.--~TO-T-A-L--~----A-L-L-C-U-R-R~E~--- 2 0 0 1 :::.::., ...... :..... :. .. :: .; .. INTEREST 7: :;:';'1':$:f··~F.S~;:t:;~'~ ";:;;;;;;;:l;.::;::----r-- 150 1~ 101;~10·1~1~1~1·~1~1~1~1~1;~1~:1·: 1:;1· :1·\1· ·1: I~ I·:·I~·I·1~1:~lil~I;II~~~lf:101·~~~jl;101~1~1~1~1~1~1:~:I~·I~I~·I~I··I···I~I~~~~~~~~~ 150 .' 150 100 /:.:.-:.:.:.:.:':'.:::.>:.'. :":':"I'N'TER'EST :::.: :':::-:-'.' '.:::::: ,:::'.: .:::-::.:.:::::::::...:......... :. ····~~TOTA~OLLARS 100 50 //::.::;.::.:.:.:.:. ':...::....;.: .::.:::.:: ... , '........ ::-:.. :::., . .. . ...... . 50 ~~9~I'lfIlqti o o 1951 1955 1960 1965 1970 1975 1977 GOVERNMENT REVENUES AND EXPENDITURES (BILLIONS OF FRENCH FRANCS) RECONSTRUCTION AND EQUIPMENT o 2000 2500 3000 3500 I 1948 EXPENDITURES ~~~~~m~77777?r.~~--:==- OTHER REVENUES 1949 EXPENDITURES REVENUES 1950 EXPENDITURES REVENUES 1951 ( P roy. ) EXPENDITURES REVENUES ~ii~~~~iH1llllli~~i~:3 1952 EXPENDITURES REVENUES FINANCING OF NET INVESTMENT IN FRANCE (PERCENT) 1000/o~~~~~~~~~~~~~~~~~~~-----~-----~ 1000/0 800/0~~;:!!!!!~li~~~[~~;~~~===J 60°/0 80°/0 ------------160 CAPITAL MARKET % PUBLIC CREDIT INSTITUTIONS _ _ _ MEDIUM-TERM BANK CREDIT o o 1948 1949 1950 1951 1952 1953 (Est. ) 2/25/52 No.530 I.B.R.D.- Economic Dept.  -i Summary and Conclusions France is facing an econo,dc and a political crisis which are close- ly interrelated. rh~ measures required to solve the first are liable to aggravate the second" but l;ithout the return of political stability, financial and economic stability is unlikely to be regained. The inherent weakness in the political situation lies in the fact that although the center parties can alone form cabinets in present circumstances, they re- quire the support of Gaullists or Socialists to be assured of an effective majority. To gain the support of one means forfeiting the support of the other. If both are antagonized, and choose to vote vdth the Communists, any government is bound to fall. The stability which France had regained at the end of 1948 v{as lost in the second half 0!'1951. V,ben the war in Korea broke out, France was facing mild recession, vdth idle industrial capacity and heavy stocks, and had. set the stage for economic expansiont.hrough a relaxation of credit control and an increase in public investment. fihen expansion in fact ca."'Ue from the inflationary forces which followed the outbreak of war 1..'1. Korea, the 20vernment failed to reverse its previous policy. As a re- sult, the French econOmy went through most of 1951 vd.th the brakes off. In the SUl"J!l1€r of 1951, v.-orld inflationary pressure seemed to be slacken- ing. lviost of the countri es where events had paralleled those in France regained stability at a higher level of costs and prices. In France in- flationary pressure developed again, this time ;'{holly from 't'd.thin. r;1hen credit controls were applied in the autumn, too late and too li~;htly, the momentum of inflation was reinforced by substantial increases in wages and government controlled prices. The loss of stability was due to an increase in investment, defense expenditure and consumption greater in total than the increase in French output. The consequences were a rise in prices at home and a rapid deterioration in the foreign balance. Alt.hough public expenditure on in.. vestment for 1951 ha.d been reduced some1fhat to make room for hi[;her defense expenditure, boom conditions and the absence of adequate credit and other controls encouraged an increase in private investment 'which was larger in money terms than the increase in expenditure on defense. Savings on the other hand did not increase. Private savings declined and only part of the budget deficit Vias financed by long and medimll term borrori'ing. The resources which t.he French economy could not itself supply came L~ ~he form of a riSing inport surplus; the trade deficit alone had risen to ~164 million in February. Unsatisfied internal denand encouraged imports and held bad::: exports; -the relatively greater rise in French prices than e18el..here gave imports a price advantage in France and (nade exports less competitive in foreign markets. By the end of the year, French ex- ports had lost nearly all the conpetitive advantages they had gained from the devaluation of 1919.  - ii The greater part of the French deficit has been in transactions with EPU countries. France carries on the l;:ajor part of her trade vlith these countries and had cut l:ovm restrictions on imports from them in accordance vvith t.he O.E.E.C. policy of liberalising inU'a:- European trac.e. The effect of th~ trade deficit was n12.de 1':orse by capital fli6ht. Since l.arch 1951, when f.rance had built up a creditor position in EPU of ~27l r~llion, an unbroken series of month- ly deficits had led to a cUlrulative deficit at the end of February of ~4l7 million. To ster:J. the drain of t~old to EPU 'lIhich settlement of these deficits involved, restrictions were reimposed in February on a wide range of imports from EFU countries. They had to be extend- ed vrhen seen to be inadequate and their effect cannot yet be judged. Exchanze controls have also been tightened at various times since October and have appare~'ltly slowed dovm but not stopped the flight of capital. The r-:rench trade deficit "with the dollar area in the last quarter of 1951 had reverted to 1949 proportions. In the first quarter of 1951, it was only $16 million a lilonth; in the last quarter ~~47 willian a IT',onth. The total value of expotts has declined. and the value of imports has sharply increased c:ue, in ,great part, to t.he resumption of coal imports from the U. S. For the whole year 1951/1952, France had been allotted U. s. aid of ~;)600 million in one form or another. By the end of February, she had in fact received less than ":200 million. The gap bet"ween dollar receipts and payments, inclEding gold payments of nearly ~",65 million to EPU l1as had. to be filled f:com exchange reserves. By the end of February,they had fallen to a point \","here recourse to the gold stock of the Bank of France to meet the no:;...-t, ~:old payment due to EPU was avoided on~ by the receipt of cxceptior.al assistance in the form of a ~100 million 3-month credit from EPU. Resolute action to relievtl the excessive pressure on the french econor:w has not yet been taken, while the pressure it.self >:iill tend to be increased since a substantial import surplus has now to be large- ly dispensed T.-it,h. Steps taken in October and November to ti:;hten credit do not appear so far to have proved effective in restraining the rapid expansion of business credit. Standing in the way of effective action has been the failure to resolve the budi;;et crisis. Civil expenditure has risen because of higher' prices and the military budget has been increased by Frs. Loa billion, but agreement has not yet been reached on how to finance tne deficit. Both a substantial increase in revenue and hea\7 cuts in expenditUre would be required to eliTI'inate the need for inflationaljr finance, while to make the bud- get a..'1 effective instrument of economic policy would require an ex-" tensive reform of the tax system. In the immediate future, however, the best that tan be hoped :for is sufficient agreement on administra..- tive econon~es, cuts in expenditure and perhaps sorrE increase in taxa- tion to give the budget enough of a balanced appearance to allow attention to be focussed on how to deal with the basic economic dis-  - iii - orders.. Su.f'ficient agreement to settle the immediate budget cr1S1S does not, however, guarantee adequate agreement on what to do thereafter. If only political stability can be achieved, it is conceivable that steps could be taken which would bring a rapid change in the internal financial position of France, such as happened at the end of 1948. France is normally capable of feeding herself almost entirely and the heavy investment program since the war has greatly strengthened her productive capacity. But if and when stability were regained, French costs and prices might well be too high for France to compete effectively in world and, particularly, dollar markets unless the franc were again devalued .. The French external debt, the equivalent of $2,775 million at the end of September 1951, is almost entirely postwar, almost entirely governmental and almost entirely repayable in dollars,. About -.,J2000 million is ovved to the U. S. Government or its agencies.. Total sernce payments in 1951 amounted to over ~14l million and do not decline signi- ficantly before 1912. In the first half of 1951, when the French dollar position was far more favorable than it has been since,. gross dollar receipts, excluding U. S. aid, were running at the rate of about ~540 II'.illion a year a..'1d gross payments at about $780 million.. T.his left a current deficit of some ~240 million a year to which must be added the net dollar deficit of the overseas territories of ~120 million. The current dollar deficit for the franc area as a whole was consequently at the rate of,;l,360 million a year. The actual current deficit for 1951 will certainly prove higher. dhen the creditworthiness of France was examined a year ago, it was decided that France appeared to be creditworthy for loans in moderate amounts for projects in overseas territories if &1.y one of three condi- tions were fulfilled: (i) currency convertibility and possibly an inflow of capital; (ii) a continuation of extraordinarjt assistance that would, in effect, perrrdt the refinancing of a large part of the dollar debt; or (iii) some \vriting-off of existing debt. Although extraordinary U.. S •. assistance has continued and some repayment of dollar debt has t~en place, exchange reserves have declined by substantially more than the amount of debt repaid, because of the large current account deficit. In the light or present circumstances, the existing dollar debt burden of France must be considered too high already. Even the service of a loan made in currencies other than dollars would be liable to reduce to some extent the ability of France to earn dollars. The conclusion follows that the creditworthiness of France in present circunlstances does not further lending in dollars or other currencies at this time.  -1- Introduction The need to reassess the creditworthiness of France has come at a particularJ¥ inauspicious time, 1'lhen the "(,hole stability of the French economy is once more in question. l\~oreover, the economic crisis is close- ly linked i":ith a political crisis. Some of the measures needed to solve the first are liable to aggravate the second and may inhibit any effective action at all. Hov{ the situation va.ll evolve even in the next feyr months depends on so many factors that no attempt at prediction can at present be useful. This study consists of three parts. The first outlines the main . lines of development since 1948, to serve as a background. It be::;ins vd.th a section on the political situation in france. This is so closely linked to the present economic problems of France and to her ability to face up to them that rather more attention has been devoted to politics than would othend.se be justified in a report of this nature. The secol'ld part deals Trith the" problems 1'[hic11 immediately face a French government, public finances, the balance of payments and exchange reserves, the action 'Khich has been taken so far '(,0 cope with the economic crisis and the factors in- volved in further action of the kind required. The last discusses the specific issue of creditYiorthiness. tart I The Main Lines of J.jevelopment since 1948 The Interplay of Politics and Econowics. W1th all her great potentialities, France has long failed to re- concile progress with stability. As a result" of the heavy effort put into reconstruction and re-equipment since the war, the potentialities are greater than ever, yet the economy is closer to collapse. The economic problem stems from a political failure to reconcile the policies of recon- struction and social progress conceived during the last war 'with the policies imposed by the requirenents of defence and the mounting cost of open war in Indo-China. The load placed on the limited resources avaib.ble has been greater than could be borne without upsetting the ba~ance of costs and prices \!ithin France and the balance of payments 'with foreign countries. The economic problems have thf3mselves contributed to political 'wealmess. Inflation over a. long period, ag'-ravated by occupation and the dislocations of the early post;rrar years, has tended to v;eaken :::lOst the classes on ,{hich political stability most depends. It has strengthened" the extrernist forces ~;hich find their roots in the history of France and, spurred on by present discontent,press for widespread constitutional change. The COl'!lillent is often made not only that France lacks stable government but ~ Frenchmen the desire to be Governed. This is at once true a..'1cl nisleading, since it obscures the underl~ring elements of continuity.  -2- For example, the adrninistrative ,;:lachine still bears the stamp of its Napoleonic oriGin in spite of the radical changes TJ"hich have taken place in constitutional forms. There has often been greater continuity of aims than of governments, of cabinet ministers than of cabinets. The bala.Ylce of political forces iS'indeed little different from before the war. Extreme Right and Left, it is true, have gained in strength but a vvide gulf has opened betvreen the Socialists and Communists who had formed a government, together in 1936. The main divisions of opinion represented by French parties before the 1rar are still represented and if it takes at least six parties to do so, that is primarily because Frenchmen like to keep their divisions distinct and the nature of coalition public. It is not so much the number of parties ,:hich causes weakness as the lack of a sense of responsibility of party members for the fate of cabinets, since their own fate is not involved. The elections Of June 1951 showed that the Conmunists have the largest single follovving, with five out of the nineteen million votes cast, followed by the Gaullists vdth just over four million. Nevertheless, their strength in the country was less than in earlier postwar years and the effect of the new law under which the elections were held was to re- duce their relative strength in the National Assembly. With little less than half the total votes cast, Co:r.nnunists and Gaullists hold between them little more than a third of the seats in the Assembly. Out of a total of 627 seats, the Gaullists , with l18, form the largest single party, followed by the Socialists 1,"ith 104 and the Cott,mnists 103. The rest are divided between the three gTOUpS of roughly equal size which make up the "Centerll • The parliamentary scene is broadly (.ivided between those parties which are prepared to operate witJ:!.in the fra~LieVlork of f3xisting institutions, and these include the Socialists of the Blum tradition, and those which are not, the Gaullists and Cornrrrunists. No sin~le party can form a government and, given the present strength of parties, there appears no lasting alternative to a series of center coalitions, leaning a little to the Right or Left and relying on the absence of active Socialist hostility i f active Socialist support is not forthcoming. The Socialist party holds a pivotal position but is faced With a dilemma.. Its leadership., as elsmvhere, shov[s greater responsibility than some of its members. It can often ensure the continuity of a cabinet or bring its d01.mfall. It has no long term interest in political chaos which would bring gains only to its chief enemies, the Gaullists and Cmmnunists. But it is wedded to the Welfare State, which a nu:riber of Radicals and Independents do not support, and has quarrelled severely 1.rith the Popular (Catholic) Republicans on religious issues. It is, on the other hanel, most aru:ious to make clear its independence and acute dislike of the Communists, but has frequently not only to agree with, but even to outbid, them if it is not to lose all claim to 1mrking class leadership. It is improbable that any lasting coalition could include the Gaullists. The Gaullists themselves may revise their tactics of refusing to associate with other parties and trying to avoid responsibility in the  -3- public eye for anything that has happened. They might be included in a party truce 1':hich specifically ruled out major points of disagreement in the interest of a narrOl'f solution of the budget crisis. But unless they are prepared to revise drastically their kn~1n demands fot a revision of the constitution and the bitterly contested electoral law J no more than thirty or forty radicals and independents are likely to go alonG Yfith them for any length of time .. Until very recent~ there had been vdder agreenent on foreign and colonial than on domestic policy_ The cost of backing foreign policy is nOVi such that what agreement there has been on domestic policy is in danger of being further r!;,"<luced as. the claims of defence and real incomes increasingly come into conflict. These conflicts 2.rise immediately in the question of the budget; on what shall economies fall and on uhom nev{ taxes. They arise in the longer run problem of devising a ney]" recovery program without heavy external aid by cutting claims d011n to the level of available resources. The deep-seated Susp~cJ.on and hatred of German military power has been revived ":Jy recent German gambits t,o barter military support for increased independence and has weakened the support for ],i. Schuman's foreign polic;r. Gaullists and COlmnunists, on the one hand, see no reason to accept German rearmament under any pretext, vrhile a neutralism, bred of despair and. lack of self-confidence, looks like regaining stren~h in the Center and among Socialists v:ho do not - know which to fear more, the possibility of yet another Germffil'invasion, of being dragged at the heels of a new German drive to the East, or of the Russians over-running both of them. It is possible that acceptance of a lOl;er level of defence expenditure or an end to the war Indo-China vrould make possible agree- ment on budgetary policy by relieving the pressure on the particular economy and tax issues 'I':hich have brought dovID trro cabinets. At the moment, attenti6n is focussed on the budget _ If the budget problem were nominally removed, there ,muld remain the general economic problem of I'Thieh the bud- get problem is only in part an expression. The present sit'b.ation demands not merely for a few TIonths, but probably for several years, a govl3rnment strong enough t,o hurt the parties from 'd1.ich it, is dralID. So put, the likelihood is seen to be srnall. Lconomic Developments since 1948. Stability Regained At the begi~~L~; of 1950, it could be hoped that France had reach- ed a point fro~,1 'which steady progress could be made towards attaining effective budget~- stability, solving her dollar problem 2~d consolidating the very real progress 'I':hich had been made since the end of the vrar. Acute inflation had. come to 2.!l end in the Fall of 1948. An abundant harv~st and increased domestic production, reinforced by a heavy import surplus, caught up v;ith current demand vlhich a return to some measure of credit restriction had brought more under control. The change 1[hich came over the economic  -4- scene is stril<ingly illustrated by th~ course of pr1ces. L"l 1947, 1';hole- sale prices had risen by 45%;-in 1948, still faster, by 62%. From November 1948 until June 1950, they rose by only 3%. Agricultural production in 1949 was some 20% .higher than in 1946 a.l1d little below the average for 1934-38. Since 1946, industrial production had risen qy 54% to attain a level not only substantially (15%) above that for 1937-38, but probably above the highest ever re- corded, in 1929. With the single serious exception of housing, all major shortages seemed to have been largely overcome. The gross nation- al product probably regained its prewar level in real terms in 1948 and surpassed it by about 8;b in 1949. This expansion, which had required the devotion t6 investment of a higher proportion of resources than before the war, allowed some im.provement in living standards for a popu- lation Which had not quite regained its prewar numbers. Good harvests made exceptional food imports unnecessary and slackening demand at home-forced producers to look for markets abroad. Tiith the end of inflation, and later under the L'1fluence of devaluation, the foreign balance rapidly improved. The current deficit of the franc area in 1949 was cut by tl'le equivalent of ~)l billion to about ~!;700 million and then to :;;;1.68 miILion in the first half of 1950. The dollar deficit also improved, but at only half the rate. In two respects the situation was unsatisfactory. On the one hand, industrial products rose in price almost continuously, since the prices of imported L1'ldustrial raw l:aterials had risen after devalllation and wages had increased in the :Jpring of 1950. On the other hand, industrial production ro(;e no longer. From January to June 1950, the general index fell by 2%, a fall shar~d only by Belgil.L'11 and Nol'Vyay in '.:estern Europe. In the Spring of 1950, there arose i'Jidely expressed fears of recession. Stability had been achieved at the expense of pro- gress. The Government planned to increase appropriations under the I'lonn~t Pla.'1 and to stimulate housebuilding. Farmers were granted higher prices, notably for wheat. It was thought safe to relax controls over vrages and the supply of bank credit was eased and cheapened. The Impact of liar in Korea. It was in these conditions and v:hen these expansionist steps had been taken that the repercussions of Vfar in Korea hit Fran.ce. They were to lift her out of stagnation and e,ive the impetus to a full el:lploy- ment boom 'which, once under YJay and. virtually uncontrolled, generated its ov:.n L'1flation. The first effect was a rise in proc;uction in response to a heightened demand for exports and a rise in disposable incomes as a result of the rapid elimination of an import surplus. It was followed at the end of the year by the direct impact on e}omestic prices of the sharp rise in the prices of it"1lported ra:r:- ;:1atel~ials.  - 5- wnen war broke out, France had idle capacity and heavy stocks. Fi~st from stocks and then from increased output, exports expanded rapid- ly, particularly to those countries where employment was already high and stocks were low. The increased value of exports was at first due almo~t entirely to the increase of their volume; in the last quarter of 1950, it was 70% higher than in the last quarter of 1949. As stocks de- clined and home demand increased, the volume of exports fell back some- vrhat but their value was maintained by riSing prices. The expansion was largely' concentrated on materials needed by industry in other countries. In turn, it was in the corresponding French industries that output expand- ed most rapidly ~ The rise in the value and volume of French imports 'Has delayed. There had been surprisingly little scare buying and industrial demand for imports did not increase si::;nificantly until the last quarter of the year. France accordingly ran a small surplus on current account in the second half of 1950 and the franc area as a 'Vlhole a deficit of only ~70 million. By the time that ~uch of the slack in the economy had been taken up, the second impact, the n8"VT and rapid rise in import prices, began to rr~ke itself felt through its direct influence on domestic prices. In this respect, France was in the sarne situation as othe~ '~iestern' European countries. The subsequent rise in French prices, however, was due in large measure to factors peculiar to l~ance. From Jun(; 1950 to June 1951, the index of' wholesale prices in France rose by 34%, a rate exceeded only in Austria, iJeruna.+k and Sweden. On the average, it wM about 10% higher than in any of its principal European competitors, Belgium, Italy, Svdtzerland and the United Kingdom, all countries where the proportion of imports to gross national product is higher than in France. The rise in the cost of living by 21% over the same period was exceeded only in Austria. A calculation based on the rise in prices of imported industrial materials suggests that less than half the increase in the price of French manufactures between the end of 1949 and February 1951 could. be attributed directly to higher raw material prices. The rest must be attributed to domestic factors such as increased profits and higher wages. Stability Lost. The importance of domestic factors was decisively demonstrated after April 1951, when import prices' began to fall vdth the fall in price of many world primary products, whereas domestic prices, except for ~ pause from June to August, have continued. to rise. In December 1951, When raw material import prices were back to the level of a year before, wholesale prices were 26% higher. A number of other countries in ~!estern Europe 'Vrhere the course of events had hitherto been similar regained stability in the summer at a high level of activity and a higher level of prices. France developed an overemployment boom, no longer und.er the stimulus of expanding exports  - 6 - but due to the fact that claims on the economy were allowed to increase beyond the point at (',-hieh they could be satisfied from French production at eXisting prices. The consequences have been renewed inflationary pressure. Prices have continued to rise. Shortages of raw materials and labor have held up the expansion of production. Exports have fallen off and imports increased. There has consequently been a decline in reserves, aggravated by the flight of capital 1',;hich folloyted renewed loss of con- fidence in the franc. In April, the price of imported industrial raw materials had risen to 71% above the average for 1950. By June there had been a fall of 15% and'a further 19% by the end of Jafiuary 1952. The ~eneral whole- sale index, 'Hhich includes imported items, rose until June, when higher import prices could still be said to affectt,he prices of manufactures directly. In June, July and 1111gust, ~'i-ho1esa1e prices dipped slightly and the rise in the" cost of living slowed dO'l"!Il.· But from August to the end of January 1952, the general ji[holesa1e index had risen by 14% and the cost of living in Paris by 11%. These figures may appear le:;,s serious than perhaps they are: there has been a sharp rise in a number of key prices lihich affect either the cost of living, and hence directly the pressure for higher wages, or future industrial costs. These were principally the ladmitlistrative 1 or controlled prices of, for exanple wheat, dairy products, coal and electricity, which yrere raised in September and October by from 16% to 33%. In January 1952, electricity and rail rates for both private individuals and industry were raised again. The Causes of Renewed Inflation. ReneT;-ed inflation has been brought about by a number of factors. A major element has been the substantial rise in net investment in the face of a rise in defence expenditure. Total net investment in France is estimated to have incr~ased fro:::t Frs. 1200 billion in 1950 to about Frs. 1650 billion in 1951, or by 38% in value and perhaps 6-1% in real terms, slightly faster than the real ir:creaSE'J in gross national product. The real level of publ~c and private investment in the rest of the franc area appears to have remained unchanged. The volume of public invest- ment in F'rance in 1951 had been reduced somevlhat to :T.ake room for defence, but the reduction made no allowance for the rise in private net invest- ment. it part of this mcrease wa!!; indeed the direct result of government action to stimulate house building, in itself very necessary. ' The rest was primarily the consequence of boom conditions and the execution in 1951 of investment decisions postponed by the uncertainties of 1950. The increase in the absolute amount and share of available re- sources taken by investment occurred over a period ,,-{hen defence expendi- ture rtas beginninr:; to mount. In 1950, it had totalled about Frs. 450 billion. In 1951, it had risen by about Frs. 400 billion, that is, by just about the same nominal amount as total net investment.  -7- Had higher defence expenditure and increa$ed net investment been offset by a reduction in consumers'expenditure, internal and external equilibrium might yet have been preserved~ But incomes have risen 'uhere- as private savings, so far as can be seen, have declined below the already u..'1satisfactory level of 1950. The vmy in lumch the budget deficit has been financed has served to aggravate the situation. A deficit of about the same amount as in 19.50 has been financed to a far greater extent b'J credit from the banking system. {luring most of 1950 there vms idle capacity and manpower. Foreign aid was taking care of the balance of pay- ments deficit. The budget deficit was no inherer;,t danger to stability and could reasonably be regarded as doing no more than offsetting hoard- ing by the general public. In the very different conditions of 19.51, any deficit financed by other than long term borrowing constituted a danger- ous addition to the pressure on resources. Personal consumption in 1951, it has been estimated, rose by perhaps 2Jb above 19.50 in real terr.1S. Tiage rates, for example, have in- creased atld so has the number of wage earners. Betv{een June 1950 and June 1951, hourly wage rates had riSen by 29%, to a level of 39% above the average for 19!~9. In September, one of the first acts of the P1etren government was to authorize another wage increase ranging from 12-18%, intended not only to compensate for the cost of_living increase since Harch, which by then amounted in fact only to 8;;, but also for the rise which v:6u.ld take place after the adjustments then intended :in the prices of coal, steel, electricity and transport. For the Y:hole period betv:een the first half of 1950 . and the .' end of 1951 French officials have estimated the increase in real y(a~es to have been as much as 10%. Other incomes have risen in money ter~~ and some perhaps also in real terms. Prices received by farmers have increased and many business and trading incomes have at least not fallen. One of the reasons for the rapid resFonse of prices to increases in wages, other costs and taxation, is the habit, long en grained in self-defence against inflation, of marl:inb prices up immed.iately to preserve capital intact. In fact, the degree of mark-up seems often to go beyond this: even nationalised industries no1;'[ include in their prices an element to finance neVi investment. Hucn of the finance for the upswing in private invest- ment in 1951 presumably came frOlil the consumer. To the French rentier euthanaSia must seem like murder. Industrial"production in 1951 was on the average 12% above 1950 but much of the rise had taken place in the first and second quarters and after the seasonal decline in the summer months production recovered to a point little higher than in the second quarter. Since, however, production in many sectors vms running at a very high level, it is not surprising that the rate of increase slovled down. Further progress appears to have been made since the end of the year. The increase in production has been concentrated on the fuel and power, metal products and capital goods industries. Prod~ction for cons~~ption in general rose very little. The shortages of nickel, cOPFer and molybdenum are critical and the  -8- supply of sulphur reJTI.ains d.ifficu1t. A severe limit to higher engineer- ing production is set by the tif)lt steel situation, v;p.ich prevails in spite of record output. But the steel industry has been at only 85% of capacity because of the shorta:.;e of colee and coking fines. This prevails in spite of ~ecord coal production.. To help meet ri~ing dorJestic requirenlSnts, recourse I'vas had to higher net imports, with the United States as marginal supplier. It\J.ports of U. S. coal, of which there iJrere none in 1950,' rose from 236,000 metric tons in the first quarter of 1951 to 1,729,000 in the last quarter. This vras serious on two counts. Not only c.id imports of U. S. coal add'~;50 million to the dollar import bill in the first nine months of 1951, but the higher average landed price of U. S. coal yms a major element in forcing the rise in French coal prices which took place in October. The grain harvest in 1951 Y!as disappointing afld generally below' the levels of both 1950 and before the war. Feed crops, meat and dairy production increased, but there was a serious drop of some 10% in wheat production which y:i11 ;{lake it impossible to meet export commitments and has made necessa1"lJ an um!elcome expenditure on wheat from dollar sources. In 1950, there had been a reserve of manpower and part of the increase in output in 1951 had com.e from an il1crease in e:lployment. This reserve no'longer exists. On October 1, 1951, Fr6nch employment reached a new peate, 2% higher than on April 1 and nearly 4% higher than on " October 1, 1950. The avetage ,-';orking week was also at a hi:;h level, 45.3 hours. "Unemployment, as measured by the numbers receiving" State compensatio1'l, is in general ver;! loy;. Although. in SOlne sectors, parti6ular- ly textiles, labor is being laid off, there is tant of labor shortages, particularly in building and rrining, Tl~lich are said to prevent any great expansion in output. The Balance 0 f Payments. The resources which the French econorqy could not supply itself came in the .form of a rising import surplus. The deficit in the balance of payments reduced inflationary pressure in France and, in large measure, was itself the result of inflation. Unsatisfied internal demand encourag- ed and held back exports; the rela:'civeq greater rise in French prices thaJ.l elsewhere gave imports a price advantage in FraJ.1ce and made e:-:ports less competitive in foreign I:Jarkets. The position' of France and the franc area seems to have improved until about l£arch 1951, but the balance of payments accounts for the first six months of 1951 shotyed that the i..'1',provement had been only temporary. The French deficit or. current account amounted to the equivalent of ~j240 million in contrast to a surplus of ~;)15 Ittillion in the second half of 1950. The position of the overseas territories, on other hand, still shovved a gain; the current deficit of the outer franc area fell from the equiva- lent of $85 million to ~:J15 rrd.llion!, The current dollar deficit of the frano area rose more slmvly than the overall deficit, from ~:,162 million to ~ . 182 million. A small  - 9 - reduction in the deficit of the overseas territories made up to some ex- tent for a larger increase in the deficit of France herself. But ERP aid remained substru1tial and roore than covered the frafic area dollar de- ficit. Since France was also gaining dollars from EPU, lli'1til April she was able to increase her gold and dollar reserves. After the first half of 1951, inforrJation is limi.ted to trade and to the position of France herself. It is ptobable that the deficit of the overseas territories has increased again, since its previous fall had. been largely bound up "Vdth the rise in world commodity prices. The deterioration in the foreign trade balance of France continued and the dollar position began to deteriorate rapidly. In the last quarter of the year, the volume of exports to foreign countries was 16% below the last qUal~er of 1950 and probably represented a smaller proportion of total industrial output. The continued rise in export prices no longer offset the decline in volume and. raay indeed have begun to contribute to it. The value of exports to foreifs"Il countries in the last quarter of 1951 was slightly below· the last quarter of 1950 and in the first two months of 1952 had fallen 13% below the corres?onding months in 1951. The declifie has been nost floticeable in the case 6f food and. aLrricultural products, iron and steel, textile raw L1.8.terials, yarn and cloth. Exports of machinery, however, have kept at a high level. The fall in textiles is serious, since in 1950 they had l.iade up nearly one quarter of all exports. The volume of imports, except in the Slli~er months, rose steadily throut;hout the year; in the fourth quarter of 1951 it "Vras 36% higher than in the last quarter of 1950. Such a rise was more than enough to offset the fall in import prices. The value of French imports in the first tY[Q months of 1952 Vias 527~ hi&1.er than in January and February 1951. The volm':l8 incr~ase has be~n :,10st noticeable in the case of foodstuffs, coal, pet roleur.l, chemicals, rubber and rnacflinery, reflecting primarily the heig;htened ciemand from industry. The export surplus of France at the end of 1950 had been gain- ed in spite of a deterioration in the terms of trade. The deficit in 1951 had been r.lounting in spite of an ir1provement. From devaluation in September 1949 to June 1950, the french terms of trade had deteriorated by 11%, and fro1h then to 1iay 1951, by a further 16%. But in the last quarter of 195J.; they wefe no worse than in the last quarter of 1950. The improvcr;J.ent, however, has been due far more to rising export prices than fallinG import prices. The result of the movements in prices and volumes was a rise in monthly average export receipts by ~. 2'.2 :rnillion between the last quar- ter of 1950 and the last quarter of 1951, a rise in expenditure on "ll imports by ~~123 million and a change from an average monthly surplus M nearly million to ru1 averaGe l:lonthly deficit of over $109 million, risin€:: to ~165 million in January and ~~220 million in februar-J.  -10 - Transactions 'with the EPU Area. The greater part of the ceterioration in the balance of trade is the result of adverse changes in trade with the EFU area. The DEBe Liberalization arrangements created the condition for a more rapid rise in imports from EPU countries than from any others, and overseas terri- tories, particularly sterling territories, yrere the major source of the industrial materials needed for the expansion of French output. France carries on about two-thirds of her total trace "d.th EPU countries and the expansion of imports from them in 1951 accolli.ted for as much as three quarters of the increase in the value of French imports from all foreign countries. In January 1952, the French trade deficit i'lith ::::;FU countries ivas over ~,)47 million in contrast to an average monthly'surplus of $28 million i.11. 1950. The payments deficit in January 1952, ag;;;ravated by various forms of capital fli>;;ht a.nd including invisible transactions; was !lr103 million and in FebruarY near1y ~l30 million. By Harch 1951, the franc area had built up a net cumulative credit position of ~,;271 million. An unbroken series of monthly deficits wiped it out by the middle of October, and by the end of February had led to a twnulative net deficit of ~422 million. In the space of eleven months, the posi- tion of France in had c:eteriorated by ~i;693 r!'.illion. Over four-i'if::'ilS or t~1e(:,otal deterioration ',hich took place in the French net position in :;PU was (ue to deficits ,d.th BelJium, Italy, Germany, the Netherlands anCl the United Kingdom, all of them countries, ';rith the exception of Italy, TIith T,~hich she had previously built up sur- pluses. Gernany is a special" case. France had had a trade surplus in the last three ~onths of 1950, but the imposition of German import res- trictions kept exports Y:ell belO'w their 1950 level while imports from Germany have more than doubled. German restrictions on trac.:e ''lith EFU countries have been lifted, but France i!> nOi'r faced with those imposed by the United Eingdom, not only on trade, but on tourist expenditure. Transactions Trith the Dollar Area. The dollar problem has energed in an even more serious form than before. The trade deficit has reverted to 19L,.9 proportions ,';hereas the rate at, ...hich dollar aid rlas so far been received has shrunk sharply" In the last quarter of 1951, the trad.e deficit was rur. ning at ~(47 nillion a month and \;,53 million in January 1952; in the first quar- ter of 1951, the average monthly deficit haJ been pulled dOlffi to ~1l5 million. But this vIas due priJnarily to the sharp increase in exports to the Unit.ed .states of products for . . Jhicn the rearmarnent program created an exceptional ll.l1satisfied demand, steel and industrial alcohol. Since June, e;cports other French products have fallen off and the total value of dollar exports in the last three mor:.ths of the year 'was ~1)9 million less than in the first three. The vol1L'1le' and value of imports, on the other hano., had been rising steadily, from ~;,44 million a :!lonth in the first quarter t.o over :i;70 million a month in January 1952. A major cause af the increase has been the resumption of coal  -11- imports, at a growing rate throughout the year. Coal, machine tools, cotton and coarse grail'ls made up nearly tYiO-thirds of total imports from the United States, 1'.::1. th petroleum products, chemcals, non- ferrous metals, oilseeds, tobacco and aircraft accounting for most of the balance. The increase in the deficit "idth the dollar area has been the more serious because part of the deficit vdth the EPU area has involved payments of gold. Since N.tarch 1951, France has had to repay to EPU $ 95.4 million in gold which she had received in part settlement of her pre- vious surpluses. By the end of the Februa.rcJ cleariilg, France had paid a further $ 64.7 million in part settlement of her net deficit 'With EPU since november. Foreign ~:change Reserves. The balance of payments data up to June 1951 show that the dominant fador in the deterioration in the current balance had been the gro'i~i.ng tra~:e dei'icit. SiEce t.his continued at an increasing scale during the rest of the year and the relief to be gained from even a . good tourist season is small in relation to deficits on debt service, freight and insuranc~, the r1ecline in :trench reserves observed since April 1951 can probably be explained 1'.'ithout assuming a capital flight of more than perhaps ~200 million. All the signals of capital flight have been flying: all that is lacking is enough information to estimate the volume. But the capital fli!;ht 'lould not have be gun unless the frarlC 'were a];ceady weak and in French conditions it must be accepted as a fact of life and. not a rare phenomenon. From the sum' of :Coreign exchange holdings and of advances to the Stabilization Fund, as given in the Bank of' Trance weekly state- ments, a rough idea can be gained of the r.lOvements in exchange reserves, if not of their absolute value. It is these movements which the general public can observe and uhich have the psychological impact on would-be speculators and illicit eapital exporters. These apparent ~xchange re- serves reached a maximum, of the equivalent of ~,950 ntl.llion, in March 1951. They fell slowly to September and drastically, by about $200 million a month, in october and Iiovember. Between kiarch and the end of December, the apparent fall amounted to about $530 million.. It is knove that about half the d.ecline was in hold.in::;s of hard currencies and that by the end of 1951 these amounted to little over C100 million; by the end of February, little I:lOre than ·.~10 million remained and only the gralilt of an exceptional three --moni:.h$lOO million credit from EPU made it possible to meet the gold payments due to EPU without dravdng on the ~·547 mllion gold stock of the Bank of France. Honey SuPPq, The d.evelopments in prices, ,rages 3.".'1(: other money incomes hate been reflected. in a rapid incf'ease in total money supply. Up to ivIarch, the expansion L~ money supply, which the increase in exchange reserves would have brought about, vras damped dorm to some extent by repayment  -12- of Treasury ind~btedness to the Bank of France. From June to the end of Januar"J 1952, total money supply rose by more than foreign assets fell. The decline~Vfhich the fall in foreign assets, actL~g alone, would. have brought about, was more than offset by ether factors, particularly the expansion of business credit. The largely unrestrained expansion of credit to private and nationalized enterprises has been of f;,Teat significa.'1ce in the develop- ment; ofche inflationary forces described above. In the course of a year, from" January 1951 to January 1952, buoiness credit expanded by nearly 40%, agai.'lst an expansion in the mon;ly supply of about 17%. The rate of expansion in the second half of the year was I3V6r twri£e as fast as in the first· half. In the last quarter al(,ne, when credit curbs were reintrod.uced, - an increase of some 18% took place. In January there ras a slight fall, but it is still ear~ to judge the effectiveness of the controls so far 1:::.. force. The various dev\';;lop:1ents, of 1'7hich the sywptoms and causes have been distuss above, tobether add up to acute econowic crisis. The budCetary, balance of payt:1ents and exchange reserve'situations 1irhich now face France al'e treated in the foll01ving Fart, together T.'ith a note of nhat steps have so far been taken. It concludes Trith some ino.ica0ions of the factors involved in the further action which is required.  - 13 ~ ~e~fate_Problems and the ReguirementQ for Future Action The Budget The Budget crisis has an importance beyond the imme~iate issues in- volved. Economic ccnsiClerations require that the solutjon of the budget deficit brjn~ a positive contribution to the solution of the eeneral economic crisis; political consi~erations anpear to make certain that it will not, But if adequate agreement cannot be reached on the main issues of the budget, it is most i~­ probable that it can be realised on the general lines of economic policy. It. is :Important to pin down the basic budgetary issue. The ordinary budget has balanced for a number of years. The capital items for t,Jar damage, re constructj on , re-equipment and defence have in the past been covered by long term loans, use of nev savings Cleposits, withdra"181s of ERP counterpart funds ano recourse to the banking system. Whether or not the use of counterpart funds and bank credit vms dangerous has depended on the level of saving and hoarding by the rest of the economy. In the present situation, it certainly is dangerous. The real budget issue now is whether investment and defense sh~uld be financed out of taxation or by long term savings. This issue, however, has not been faced squarely by the As?embly. C-lvil expenditure by and larA'e has been agreed to, with disagreements on the method of achieving economies and an estimate of what economies could be made. In total, civil expenditure will be higher in 1952 than in 1951, primarily because of higher prices and wages. The military budget has twice been raised since December. At Frs. 1270 billion, it stands Frs. 400 billion above 1951 and ma~es up about one-third of total ex- penditure. In the hone that military expenditure mi~ht not in the event be re- quired on such a scale, the Assembly voted aupropriations for only two months at a time. Given the present volume of expenditure, any Hinistry of Finance is in e dilemma. Indirect taxes already account for over two-thirds of tax revenue and their direct impact on prices forbids an increase. An inorease in direct taxation raises 8 number of issues and would not be without an effect on prices. The total weight of taxation cannot be considered lO~J, but the burden is un- evenly spread and the various estimetes given for the probable benefits from the suppression of fraud testi~T to the importance of evasion. An inorease in direct taxation without extensive tax reform runs into heaV3r opposition on the grounds both of self interest and equity. There are other cogent grounds for tax reform. An inadequate system of assessment end the low rate of progression mean that the Treasury's receipts do not benefit from higher incomes and profits on the same scale as its expenses suffer from higher prices and wages. The income tax, that is, does not act as a weapon a~ainst inflation; at a time of rising prices, the budgetary position tends to deteriorate. Tax reform is certainly essential if the budget is to have any value as an economic instrument, but there is no time for reform, as the present plight of the Treasury underlines. Committed to higher expenditure without commensu'l"ste resources, the working balance of the Treasury has fellen by about  - 14 - Frs. 1 billion a day since the beginning of the year.. No important tax. receipts fall due until the end of March. Its funds were virtually exhausted by the end of February and the Treasury had to be content with a special three-week advance from a grudging Bank of France J outspokenly critical of further operations having a direct impact on the money supply. These funds have been spent but repayment has now been deferred to the end of May. So far, proposals to meet higher expenditure have resulted only in the downfall of two cabinets. In the next few weeks, the best that can be looked for is a collection of miscellaneous measures, including some increase in tax. rates, Which vdll bring the budget nOminally into balance, but at the expense of the balance of the economy as a whole. Even on very favorable assumptions, for example, that prices and military costs do not rise further a.."1d that Parliament is ~ prepared to accept some of the measures it has previouiyrejected, the oeficit for 1952 is not likely to be much below Frs. 800 billion. It has been hoped to reduce the deficit by about Frs. 200 billion from the franc counterpart of U.S. aid, to leave nearly Frs. 600 billion to be met by borrowing, It is very doubtful whether a deficit of this order could be financed without substantial recourse to credit from the banking system. ;iihat is disturbing in the present situation is the eagerness to acquire M.S.A. aid in a form which provides counterpart .funds which can be used to reduce the sile ot the budget deficit to be"financed. Such funds do not correspond to any genuine French saving and to use them as if they did is J;!q inflationary in present circumstances as outright advances to the state from the Bank of France. All that can be said in their favor is that their use makes more possible a nOminal solution to the budget crisis by easing the search for other revenues or economies and a nominal solution could have considerable psychological value at the present time. A rapid settlement is urgently needed so that government can proceed and full attention be focused on the main economic issues, of which the budget is an unfortunate expression. Balance of Pa~nts and Exchange Reserves The most revealing and disturbing feature of the French balance of payments developments has been the combination of a growing deficit with foreign countries and a growing surplus with the rest of the franc area, Von" a scale greater than would be justified by investment in the colonies. The most obvious cause has been the excessive volume of imports; a oause for greater concern is the decline in the volume of exports. Both are directly related to inflation and rising costs, but the volume of imports can be physically controlled whereas the volume of overpriced exports cannot. The rapid reduction in imports, which lack of reserves now imposes, will aggravate the inflationary pressure which has been holding back exports and steering them into the softer markets of the franc area. But while present inflation reduces the availability of goods for export to foreign countries, the cumu- lative effect of inflation in the past has rendered what is available less and less competitive. France alone, it has been estimated, has lost virtually the whole of the price advantage gained from the devaluation of 1949.  - 15 - The decline in the volume of exports in the autumn of 1951 was probably only a foretaste of difficulties to come unless export prices are somehow substantially reduced. A survey of export orders in hand at the end of 1951 showed that there had been a serious drop. Orders for a wide range of mechanical and electrical engineering products, for example, were only a third to a half of their level at the end of 1950. It has to be remembered that France has also suffered from develop- ments elsewhere. The volume of total United States imports has declined sub- stantially over the last year and France can be counted fortunate in having been a marginal supplier of items specifically required for rearmament. In Europe, the Netherlands and Germany have been reducing the volume of their imports and the United Kingdom has begun to do so. A major item in the French net deficit in EPU in February is seen to have·been her deficit·· with the Un~ted Kingdom. Since her exchange reserves are now negligible, France is very poorly placed to meet adverse forces coming from abroad, quite apart from the strains set up by the situation at home. For some time, any world forces which work to her future advantage will have to be turned to account in building up reserves rather than in easing domestic pressure. The Level of United States Aid That little apparent action had been taken by the French Government about the dollar situation may, in part, have been due to confused hopes and misunderstandings about the amount of dollar aid to be received in 1951-52. The first assumption has been ~200 million, on which basis a drastic program of import cuts was prepared. This was abandoned in November when France received a commitment, subject to the performance of certain conditions by her, of a total of q,..600 million by June )0, 19521' The rate at which aid was actually forthcoming waaso slow, however, that the strain of financing the dollar import surplus was throvm on reserves. It was presumably accepted 'without too great alarm, however, on the assumption that reserves would later be replenished as aid was received. This proved a dangerous gambit, since it could not take into account the gold losses to EFU which have taken place and because in French conditions falling reserves tend to gather speed through the lack of confidence a rapid fall engenders. The aid on which France had been counting was to be in two parts, each of ~300 milliol. The first was envisaged as resulting in a net addition to the resources available to France, the second in an improvement in her budgetary and dollar exchange position, but not in additional resourc.es.. In the first ~300 million there were three items: ~170 million lIeconomicll aid, <Hl30 million for supplies to Indo-China, and ",100 million from U.. S. offshore purchases for her ovm use in surope, or for other NATO countries, including France. The way in 1I1rhich this ",100 million would be provided was left quite flexible·. The second ~,)300 million was, in princi .ple, to be in payment for French services and materials used in the provision of the United states contribution to the NATO infrastructure in France, troop pay and other supplies. By the end of 1951, France had in fact received the ~.a 70 million Ileconomic lt aid provided for in the first ~300 million tranche and only a negligible amount from the second, whereas she had probably assumed receipts on both counts' of the order of :,;»)00 million in all.  - 16 - Since the French position began to deteriorate rapidly, the aid program had been revised and is under further revision now.. The program on which action is at present being taken envisages that the first ~300 million vvill be made up of ~270 million direct economic aid and ~30 million for sup- plies to Indo-China. That is, the ,;,>100 million previously envisaged as resulting from offshore purchases has been ,converted into direct economic aid. Towards this revised program, France received a further :;p25 million economic aid on February 26, so that since June 30, 195L she has so far received #195 million direot economic aid towards a total expectation of ~~270 million.. The aid for Indo-China is in the form of shipments of materials, the authorization for which is at the moment in the hands of the Defense Department, It is learned on a CONFIDENTIAL basis that France is to be assured of receiving $600 million in one form or another by June 30, 1952, with ~400-450 million being, in effect, economic aid even if nominally resulting from transactions falling in the second ;;,)300 million category. ii'or eXaJllple, the U.S. will take over contracts already placed by the French Government or whiCh would have to be placed i f the present Frs.1400 billion defense program were to be fulfilled. ' If' such contracts have not been physically completed by June 30, arrangements will be made for advance payments to ensure that a total of ~600 million will by then actually have been received for the year 1951/52. For four months, March to June 1952, France will consequently receive aid resulting in dollar receipts of from <>,200 to :;;)250. Action Taken so Far The measures taken 50 far have been aimed at symptoms rather than at causes. This is a result, not of blindness but of political possibilities and lack of choice •. In any case, in France symptoms often become causes. In October the f,leven government had been faced with a sharp increase in illicit capital exports which an unrestrained expansion of business credit helped to sustain, since there vms no pressure on traders to repatriate balances built up abroad. Exchange controls were made more rigorous and the cost of credit and limitations on its volume were at long last tightened up. The discount rate of the Bank of France was raised from 2.5% to 3% and on November 8 to 4%. The commercial banks were instructed to fulfill the minimum requirements for holdings of government paper. The strict observance of rediscounting ceilings was reestablisher:.but the ceilings themselves were raised to allow for price increases and the oanks were allowed a margin of 10% above their ceiling at the cost of an additional ~. Among the measures taken to t.ighten exchange controls, one had an effect on the apparent EPU position of France. In November, French banks Were ordered to transfer to the Bank of France their holdings of foreign exchange, other than sterling. In February~ sterling holdings were also ordered to be transferred. The current deficit of France was approaching $1 billion at the end of 1951~ A substantial part of it was the deficit with the EPU area from which imports were generally less subject to control ~han imports from other areas. From November, France had begun to pay gold to ~PU in part settlement of her monthly deficits. The deficit in January of $103 million involved payment of some $36 million in gold at a time when reserves were  - 17 - dangerously low. At the beginning of February, a wide range of goods, from which import restrictions had been lifted as part of the OEEC Liberalization Program, were again made sub:f>ct to license, reducing the "liberalized sector" from 15% to 40%, further reduced on February 19 when it had'-become 'clear.- that the French deficit with EPU in February was likely to be more than $iOO million. On February 15, M. Faure announced that the dollar import program for the first half of 1952 had been cut from ;w500 million to ~,a30 million. This appears to be about the level which could be financed from export receipts and M.S.!. aid provided that France runs no further deficits in EPU. Special relief has been granted to exporters from various social charges and tax exemptions. Special export credit facilities have been pro- vided. These hidden subsidies to exports are estimated to make possible a reduction in export prices by about 10%. In addition, a revival of nominally barter deals with the dollar area has been authorized, which, in effect, is a reversion to multiply currency practice, such deals taking place at franc discounts of up to 20%. A further round of exchange restrictions has been announced, but as the physical effectiveness of exchange controls is increased, the incentive to evade them is increased still more and a continued flight of capital must be expected until the loss of confidence which impels it is itself removed. M. Pleven was unable to command general support for a stabilization program. 1(. Faure, on inauguration, asked for three months in which to pre- pare one~ M. nnay seems to want about the same aJ!ICiUlt of time. Meanwhile, the pressure of events is increasing, the recipes proposed are multiplying and agreement still 1n the balance. 'iJhatever the ]:I'ospects for calm and thorough action may be, some of the basic considerations which will face any government are discussed in the following paragraphs. Requirements , and Prospects for Future Action The actions taken so far do not match up at all to the scale of disorders which plague the overloaded French economy. The two basic require- ments are both simple to state, first to get rid of overloading in the future, and secondly, to get rid of the results of overloading in the past. If the diagnosis is sinple, the operation is not. On the one hand, available resources will be lower thaD: in 1951, since the present import surplus must be cut out and ideally provision should further be made for the reconstitution of gold and foreign exchange reserves. On the other hand, a numbEH' of claims are somewhat incompressible and those which are often have powerful backing. In the short run, defense expenditure is being treated as a datum. Faure had accepted a total of some Frs. 400 billion more than M. Mayer had had to budget for. A floor is being put under real wages. The farming group is particularly difficult to deal with, since it normally reacts to a relative reduction in prices by itithholding its produce and so making necessary increases in imports or a cut in exports. The least troublesome adjustment is in real incomes of those dependent on fixed money incomes. But the increase in prices by which this has so far been achieved is a mechanism vuth Which it is essential to do away.  - 18 - The kind of action possible is limited by the weapons available. The administrative machine has long been overloaded and there is neither the capacity nor the inclination to use a wide range of physical controls. The main levers have consequently to be the budget and credit control. Before the budget can be used to regulate effectively the general level and, to some extent, the direction, of spending by the rest of the economy, government reVenues and spending have first to be brought better under control and thereafter a thoroughgoing fiscal reform carried out. The failure so far of the various party groups and their sections to agree on the ways to raise additional revenue forces atteption back to cuts in expend- iture. Some savings can, in principle, be gained from the administrative reforms which have already proved the subject of sharp disagreements. But attention must chiefly be focused on reconstruction and reequipment expend- iture, at present on the same scale as the budget deficit, A reduction in total net investment is essential to correct a situation which overinvestment has done much to create. Public finance provides a large share of the total finance available for investment. To cut this item would at once ease the budgetary and the overall pressure. Since the war, France has gambled with tine, forcing along a heavy public investment program financed by means always liable to result in infla- tion. It was hoped that the gains in production and productivity could be reaped before inflation cut them away. At the moment, the gamble has not come off. A story of solid gains cm be told, but a drastic reduction in prices \vill be required before the benefits can be reaped. To press on regardless would only prevent such a price reduction from taking place. Large cuts should for the time being be made. To do SO will require a peculiar political. courage. The At10nnet Plan has had wide non-partisan sup- port. It represents a French ideal, a symbol of recovery. To cut down now looks like an admission of defeat. But if the ideal is ever to be realized, cuts now seem imperative. The same general considerations apply to private investment. In the absence of physical controls, it may require a much stiffer credit policy than has so far been practiced.. To introduce it 'will meet heavy opposition from business which has been using bank credit, in the absence of other sources of savings, to a quite abnormal extent and claims that existing restrictions have already made credit too tight. But the expansion in the volume of credit since November suggests that there is probably room both for greater selectivity and greater restraint. 17hile substantial reductions in both publicly and privately financed investment are essential, it remains import an t to minimize the long term damage which wholesale cuts might have. It still remains important to push on with the modernization and reequipment of French industry and agriculture, but at a rate which does not undermine any success achieved. Some projects cannot in any case be abandoned for engineering reasons. There remains recon- struction expenditure. To cut this could be explosive politically, but it is of the nature of the present crisis that most remedies are politically explosive,  ~ 19 - If domestic pressure were reduced by higher effective tax receipts, cuts in public and private investment and a stiffer credit policy, there could be substantial and rapid improvements in the balance of payments. There appears to be p1ently of room for cuts in total imports; the rise in the volume of imports during 1951 was far greater than was needed to feed the increase in production. What has to be avoided are panic cuts all round, affecting particular supplies on which the maintenance of production depends. Similarly, more resources would be released for exports, but it remains essential to steer them out of the franc area and for their prices to be competitive. In 1951, exports to foreign countries fell in volume by over 14%; exports to the overseas territories rose in volume by 13% as a result of the colonial investment program and the sheltered market France and the franc area provided. Amounting export surplus to the franc area has been no help in paYing for the growing deficit with the outside world. 11,thether competitive prices in foreign markets can be restored without devaluation cannot yet be said, but devaluation would make still more difficult internal stabilization and in some markets might not bring any net gain. The nature of French exports to the dollar area in particular is such that it remains doubtful wIDether a situation could be reached where net receipts from an increase in volume which might follow from devaluation would more than offset the rise which would take place in the burden of her dollar debt. There is a danger, however, that a renewed capital fli,?:ht may force devalua•. tion before it has been found whether export prices can be reduced by other means. The black market dollar has lately been averaging around Frs. 450, a 28% depreciation against par. Even i f the present overload is removed, there remain the results of overloading in the past. The French economy has adapted itself in many ways to living with inflation. A recovery of normal savings is essential to lang term stability. In its absence, forced savings are levied on all sides, by the government in taxation, by the nationalized and private enter- prises through high profit margins. There is, however, a dilemma; so long as these forced savings continue, normal savings cannot recover, but until normal savings recover, forced savings must persist.  - 20 - Part III The Creditr:ortr..iness of France The French e}.'i.ernal debt is almost entirely postwar in origin, almost zntirely government debt and aLuost entirely repayable in dollars. Excluding the 1950 U. S. private bank loan of:;;'200 million on .-:hith no .- dollar repayment proole:ra arises, out.standing debt at September 30, 1951, was equivalent to ~if2, 775 million dollars, of . . ·which ~2,469.2 million was in United States and Canadian dollars and '$2,002.7 million was o'Vred to the U. S. Government or its agencies. The three largest items were the Eximbank loans of 1945 and 1946 aM the U. S. Government Lend-Lease credit which together totalled $1,740.8 million. Total service paY1r,snts in U. S. and Canadian dollars in 1951 amounted to :tJ14l.4 million and do not decline to any significant extent before 1972. At the most favorable point'yet reached by France, in th,e first half of 1951, gross dollar receipts, net of foreign aid and ex- cluding GOld. receipts fran: Ere; were at an annual rate of ~~540 Inillion ,{fhereas her net dollar deficit, before U. S. aid, was at an annual rate of ;'360 million. 3ince then, ;ross ~iollar earninu;s have fallen and the net dollar deficit has increasec.. Sterling debt paY:":1ents on interest and priflcipal cont.inue at the eq ,-,ivalent of ;,,24.2 million until 1961. In 1950, the most favorable year in bilateral relations ,\;ith the sterling area, the net current surrlus of the franc area 'ViaS :".)5 mllion. The creditv!orthiness of France VIas last examineci a year ago. The Staff Loan Connrittee (SLC/M/219 (Rev.» endors~d the cbnclusion of the Economic Department memorandl.U:'l'submitted to it, namely, that, if any of three conditions 'were fuli111ec~, irance appeared to be creditworthy for loans in l1.'Loderate ar~ount.s for: projects in overseas territories. It was agreed that such a 10a,;.'1 should pteferably be for projects vrhich were potential earners ef har(~ currencies, Lhat :~t. ,)QuId be appropriate for the Bank to lend forei~~n excha.'1.ge for inported GOocls and services direct- ly needed for the projects and in order to nreet the increased need for foreign exchange to v;hich the projects indirectly gave rise. It was further agreed. that Bank lending for projects in French dependent terri- tories should preferably be in currencies ot,her than dollars. The conclusion of thG Economic IJepartment meiilOrandllil had been based on the assumption that at least one of the folloll:in~; conditions would be realisect.: - (i) currency convertibility and possibly an inflow of capital, (ii) " a continuatior~ of extraordinary dollar assist2,nce ,;hich would, in effect, permit the refina."1ciug of a large part of the dollar debt, or (iii) some 1Iiriting-off of existing debt. The Situation has cb.angecl for the -,:orS6 since this judgment 1';"as made whereas none of the conuitior. .s 'bas been adequately fulfilled. The improvement in the dollar balance noted at that "i:,i:ne has evaporated. The level of direct dollar earnings has been d.ependent to an alarming de~;ree on ty~O exception;::.l itelTJS, steel and. industrial alcohol, y:hereas traditional eXPJrts have tended. GO dE; cline • So far from earning c1.ollars throu::;h a surplus Y;ith EFU countries, .France is at present obliged to  - 21- pay dollars to EPU. The current account surplus l,:i.th the sterling area ynlich France had gained in 1949 and 1950 has since turned into a deficit and its future depends as much on what'happens in the sterling area'as in France. From the en0_ of Iiarch 1951, to the end of Febro.ary 1952, exchange reserves had fallen in total by over ~600 million, to a point at which on~ exceptional aid could enable France to meet her obliga- tions to EPU 'VTithout draV'iing on the e;old stock of the Bmk of France. The "iill of Irance to honor her obliga'l,ions is not in quest1on. It is unaffected by internal political indecision. Sh6rt of invasion, COi,~'1lU11ist control of the government remains iIllprobable, '.Jut COIU.'1l.Unist irritation of the governnent and stimulation of incustrial unrest are lilcel;v to increase ciuring the inevitable austerity of recbvery. 'rhe alternative is virtual abandonment of the defence program, viith impli- cations v7rdch rright be far 171Oro serious. In the existing situation and 1d.th the best vrill in the ",orld, the dollar debt burden of France is too high and no adclition should be contei"Zlplated for the time being. The present economic crisis is quite unresolved and to forecast developments in the ne.xt few months is quite impossible when so many of the steps lihich may be taken by the French Government are unl~~own, and its ability to take effective action still in question. Even it were possible to r;;ake' a loan on the creditvrorthi- ness of a colony and not of France herself, the trade pattern of the overseas territories displays the same vreakness as the trade pattern of l1etropolitan France; they run a suostarltial dollar d.eficit which vates the dollar deficit of Eetropolitan France. The dollar transactions of the colonies are financed tl:.rough France and it would not seem prudent in present circUfnstances to impose any further strain on France which might result from a colonial loan. It may be suggested that although'it Ylould be unwise to add further to the dollar obligations of France; a loan might reasonably be made in other currencies. Unfortunately, this is not so because there could be no such thing as a purely non-dollar loan to France. It is true that a non-dollar loan wOu.ld increase the difficultJ of servic- ing existing dollar debt by less, perhaps cor:.s1derab~ less, than a loan in dollars. But in present circumsta.~ces, the judgment that exist... ing dollar debt is already too high carries '(dth it the corollary that no loan be made to France for the time being which vrould at all affect adversely her ability to service dollar debt. The choice of other currencies is in effect limited to those of members of BPU. As EPU operates at pres ent, the payment by France of debt service to another T!lember vTOuld increase her net deficit or de- crease her net surplus vlith the Union. It would consequently be liable to increase her obligation to payout dollars or reduce her opportunity to earn them. EPU comes t.o an end or is to be reshaped in June 1952, but these general considerations remaL~ true so long as any system of intra-European payments provides some degree of effective convertibility.  - 22 - To recomr,lend that no loan be r!Jade for the time being is not t.o recommend that lending to France for colonial projects be ruled out for ever. It is not, however, possibl~ at present to see how the French situation ,:rill develop. At the moment, the lack of effective govern- ment puts in doubt the ability of France to' regain economic and finan- cial stability. The French people, however, combine in unique propor- tions a belief that everything arran~es itself with a flair for the un- predictable. The French econonw has great potential strength. France €;I'OYfs nearly all her 01'111. food and the years of intensive re-equipment since the war have considerably strengthened her productive ability. It conceivable that political stability rr~ght be regained in the next few months follovred by a quite unexpected change in the economic and financial situation'. There re:w.aiI1S a danger that even if stability were regaL.'1ed, the level of costs anQ prices in France would be too high to enable exporters to corapete in foreign markets; devalua- tion might then be unavoidable. Sh()uld the political and economic situation show a Ir.arked improvement, hov;ever, the advisability of lend- ing to France for colonial Projects could be reconsidered.