Franc Talk

WELL, he did it again. Everyone, including his Finance Minister, thought Charles DeGaulle would finally be forced to devalue the franc. It was sheer economic idiocy to assume that France could possibly maintain the parity of the franc. So of course Le Grand Charles refused to devalue.

Whether he did it out of sheer peversity or out of some deeper understanding of the psychology of international economics will probably never he known. But, although it is still really too soon to tell, it seems to be working.

For the crisis of the franc, like most currency crises, was a thing of the mind. The economy of France is basically healthy: its balance of payments is sound; its unemployment rate is fairly low; productivity has been rising at a reasonable rate. The franc was in peril because enough of those holding it as currency were afraid it would be.

The mini-revolution of last May had eaten up a sizable share of France's gold reserves, as enormous amounts of consumer goods had to be imported, but it had by no means exhausted them. Relative to France's GNP or her international trade, they were still adequate in comparison with those of other nations, even the U.S. and other western European nations. True, the wage increases conceded last spring had triggered an eleven per cent increase in prices that would certainly affect France's balance of payments. But it was far from obvious that it would plunge France, consistently a surplus-runner, into a balance of payments deficit.

In fact, the franc's plight was perhaps more a result of the strength of the Deutsche Mark than any weakness of its own. West Germany has been running large balance of payments surpluses regularly and has been regularly forced to sell marks to maintain the parity of four marks to the dollar. The mark is certainly under-valued, out the Kiesinger government is understandably reluctant to revalue upwards. To do so would make German goods more expensive on the world market and undercut the prosperity West Germans have been enjoying for the past two years--and it would do so just before an election.

BUT THE pressure on the mark--and the Keisinger government--for revaluation was great, and most currency speculators became convinced that the Germans would revalue. Hence the rush to convert holdings into marks before the price of the mark went up. And, of course, French financiers and speculators, fearful of the return of the economic chaos that had characterized the Fourth Republic, were the largest buyers. Because lack of confidence in a currency, like a run on a bank or American foreign policy, moves inexorably toward confirming its premises, they seemed likely to be proven correct.

The only question appeared to be: who would give in, the Germans, DeGaulle, or both? The answer, neither, came as something of a shock.

To try to single out some nation, or group of individuals, as responsible for the situation would be absurd. It is true that the lack of confidence in the franc can be traced directly to the May upheaval. It brought about a major outflow of gold, and the large pay increases demanded--and received--were the immediate cause of a cost increase bound to weaken France's international trade position. That line of reasoning can easily conclude in an indictment of French students and workers.

But the decision to grant massive wage increases, without applying pressure on French businessmen sufficient to keep prices reasonably stable, was political cowardice. The French government should have taken the steps necessary to insure that an increase in wages would result in a roughly equal increase in real income to labor. Or conversely, it should have had the guts to deal with labor, admitting that it lacked either the power or the resolve to curb French business, and refuse to peddle an illusion. Selling the illusion of an increase in income to French labor may have bought DeGaulle political elbow room, but it did so at a ridiculously high price to the French economy, particularly to French workers.

THEN THERE are the Germans. The franc was not the only currency being attacked by speculation; the currencies of many other nations--particularly of the pound--were placed under strain by the desire to convert into marks. That pressure could have been relieved by a prompt revaluation of the mark, but the Germans played coy with the money markets, issuing occasional pronouncements to the general effect that everyone should ignore the speculation and it would finally go away. They knew it was costing the French $800 million in gold per day to maintain the parity of the franc--and they loved it.

To give them their due, though, they finally did come through with a combination of revised export and import taxes which have the same effect on the international prices of their goods as a 4 or 5 per cent upward revaluation would have had. (But adjusting export taxes does not have the same psychological impact on speculators that a revaluation has, and the Germans knew that, too.) And their position wasn't really so harsh, once it had been stripped of its vindictiveness. They were asking why they should sacrifice any of Germany's hard-earned prosperity simply because the English and French couldn't manage their economies and their currencies and keep pace. And, put that way, it doesn't seem so unreasonable a question to ask.

The search for a villain, if it fails elsewhere, can always rely on the speculators to conveniently stand as whipping boys for public indignation. The moral implication always runs, "Had it not been for their greed..." But even the speculators can be excused. Greed and avarice are fairly common human motivations, and it is a bit foolish--as well as futile--to ask financiers to exercise exemplary moral restraint.

As usual, it's not the people involved, but The System that is at fault. It may be getting a bit tire-some to hear it, but boredom doesn't change matters any. The international monetary system has weathered--just barely--three major crises in the past year, and the prospects for fundamental reform seem scarcely brighter now than they were 12 months ago.

The Special Drawing Right, which was supposed to take the place of emergency loans from other IMF nations, the sort France was forced to secure, is still waiting for ratification--as it was waiting a year ago. The argument for change then was convincing; since then it has become damning.

The SDR, however, is still only a tiny first step. It is becoming more apparent that the world needs an international analog to the Federal Reserve System--and hang the political problem of selecting the men who will adminster it. But that sort of fundamental change will come about only after a crisis comparable to the international collapse of the '30's. God only knows (and, given the habits of European bankers, He's probably left guessing, too) how many more monetary crises like this one must come and go, and which currencies will be hit, before that happens.

That isn't just poor economics--it's downright stupid.