The franc falls dangerously low in the early '20s. France must pass an austerity package to receive a loan from Morgan Brothers of the United States. Capital problems begin to dictate policies to the government, a phenomenon the left terms "the wall of money." The government aggravates the situation in 1925 when it puts more unbacked money into circulation than is legally permitted.
Capital floods back into France when Prime Minister Poincaré comes to office and moves away from socialism. After his reelection in 1928, Poincaré returns the franc to the gold standard at one-fifth its prewar value, attracting another wave of capital which provides an initial cushion against the Depression. The reevaluation eliminates the state debt to the Bank of France.
France feels the effects of the Depression in 1931 after the U.S. raises a tariff wall against European goods and Hoover announces a yearlong moratorium on German reparations. To preserve a sense of stability, France maintains the gold standard even as others abandon it. Stubborn defense of the franc leads to controversial tax increases, cuts in civil servant wages, and fuel price raises.
A devaluation of 25 percent fails to help the economy as it comes after a wage increase and a concurrent rise in prices. By 1937, gold reserves are low, and the market loses confidence in France. During the war, the Vichy government prints money to meet German demands, thus fueling inflation to 27 percent. Much of this money goes into a growing black market.
An excess of money continues to push prices up until inflation reaches 63 percent. Prime Minister Blum's efforts to control prices put meat and many other goods onto the black market, where prices soar. The purchasing power of the average hourly wage plummets.
Devaluations and $3 billion in aid from the United States help stabilize the economy. France ends its controversial system of fluctuating exchange rates and establishes a single, uniform system of rates. The introduction of the Value-Added Tax (VAT) in 1954 increases government revenue.
A drastic reduction in social expenditure and a tax increase help balance the budget in 1958. Another devaluation and the introduction of a new franc, at a face value of 100 times the old, finally brings stability. At the end of the Algerian War, the new franc settles down to a value around five per U.S. dollar.
The rehabilitated currency and monetary stability mean relatively low inflation until the oil shock of 1973-74. The government's immediate implementation of deflationist measures puts the economy in recession. Inflation rises above 10 percent.
President Giscard d'Estaing and German Chancellor Schmidt negotiate the European Monetary System (EMS), tying several currencies to the deutsche mark and allowing them to fluctuate within agreed limits. France barely maintains the franc within the lower limits. The price of oil soars, the franc is devalued repeatedly, and prices rise by 14 percent per year. The balance of payments deficit triples.
In an economic policy U-turn, the government focuses on the issue of money. Delors orchestrates a devaluation of the franc and convinces Germany to reevaluate the mark at the same time to allow France to stay in the EMS. A combination of these measures, a hike in the petrol tax and transportation fares, budget reductions for state enterprises, and a fall in oil prices strengthens the economy.
French policy is increasingly subordinated to European Economic Community (EEC) requirements. France removes its remaining foreign exchange restrictions. The government attempts to meet reductions in corporate and personal income taxes with reductions spending. The Treaty of European Union commits France and fellow member countries to a process leading to economic and monetary union (EMU).
All efforts are focused on cutting government spending by 2 percent in 1997 in order to qualify for European Monetary Union. The government reduces its fiscal deficit and in 1999 joins 10 other EU countries in adopting the euro as its currency. Monetary policy control switches hands to the European Central Bank. January 2002 sees the euro in public circulation and the retirement of the franc.
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