Lawrence Broz 211The uncertainty surrounding redemption of the currency in gold at the legal parity
made foreigners less eager to utilize franc exchange for international purposes or
to buy bills of exchange or securities issued in francs. As long as the policy was
in practice, therefore, Paris could never challenge London’s position....
The policy also affected the reserve-currency role of the franc. The Reichsbank
and the Austro-Hungarian Bank, for example, both held large portfolios of foreign
bills yet had few bills drawn on Paris because of the uncertainty of obtaining gold
there. Only Russia held substantial franc assets. These holdings, however, were
not based on the calculation that the franc was absolutely secure. Instead, they
were closely linked to Russian access to the French capital market: the Russian
State Bank, in order to insure continued access to long-term loans, kept large
sums on deposit in the French banks that distributed Russian bonds to French
investors. Without the connection between the deposits and long-term loans—and
the special economic and political relationships between France and Russia—it is
unlikely that the Russian central bank would have preferred francs as the basis of
its foreign currency reserves.
After 1900, the Bank of France began to lessen its dependence on the gold
premium policy. To do so, it began to accumulate and hold a much larger gold
reserve so that even a substantial drain could be accommodated without threatening
gold convertibility. By 1900, the bank had amassed a gold reserve of $409 million.
By 1908 the figure had increased to $593 million, well over three times the reserve
held by the Bank of England. The Bank of England could maintain convertibility
on such a “thin film of gold” by the adroit manipulation of interest rates; the
French preference was to keep interest rates low and stable by amassing a reserve
large enough to accommodate even severe foreign drains....
The result of this policy (and the occasional use of the gold premium policy)
was that the Bank of France was able to keep its discount rate extraordinarily
stable, in line with the nation’s preference for domestic monetary independence.
While the Bank of England changed its discount rate about six times per year on
average between 1880 and 1913, it was not uncommon for the Bank of France to
go for stretches of five years or more without a change from its traditional 3
percent rate....
INTERNATIONAL EFFECTS OF FRENCH MONETARY PRIORITIES
The Bank of France also had another weapon in its arsenal to defend against the
contractionary effects of gold outflows and discount-rate hikes. The policy was to
come to the aid of foreign countries—especially England—experiencing financial
distress in order to prevent the crises from reverberating back upon France. In
effect, the Bank of France used its huge gold reserves as an instrument of
international stabilization. When some major disturbance caused the Bank of
England to contemplate imposing an especially high rate of discount, the Bank of
France released gold to England, typically by discounting sterling bills. By lending
the Bank of England a portion of its gold reserves, the Bank of France helped
alleviate the pressures that threatened to force the Bank of England to raise its