INFLATION DYNAMICS AND

SHORT-TERM FINANCE IN

FRANCE, 1938-1948

A DESCRIPTIVE HISTORICAL

ACCOUNT

PATRICE BAUBEAU

WASEDA UNIVERSITY ECOHIST SEMINAR – MAY 8 2018

INFLATION DYNAMICS

1938-1948

The aims of this paper are threefold:

- Combine available data to proxy 1938-1948 [1950]

- Prices

- Money supply

- Put to the test the idea that inflation control policies worked

better during the war (dictatorship) than afterwards

(democracy)

- Challenge the assumptions on the efficiency of the “circuit

policy” (financial repression)

INFLATION DYNAMICS

1938-1948

But this comes with important caveat:

- Part of the relevant literature could not be accessed yet:

- Alfred Sauvy, La vie économique des Français de 1939 à 1945, Paris, Flammarion, 1978

- Fabrice Grenard, La France du marché noir, 1940-1949, Paris, Payot, 2012

- Eric Alary, La Ligne de démarcation, 1940-1944, Paris, Payot, 2012

- Kenneth Mouré, to be published monograph on the French black market

- Printed and Archival sources have to be explored, mostly:

- SGF and INSEE publications

- Service de contrôle des prix (Price control Office)

- DGCE and DGCEE (Economic Control Bureau)

INFLATION DYNAMICS

1938-1948

In order to proceed, we will address the different issues in the following order:

1. The historical background

2. The traditional story: price control and circuit policy

3. A general assessment of what inflation is

4. The price evidence

5. Towards an alternative price index

6. The money supply evidence

7. Conclusions

The paper being at an early stage, feel free to interrupt the presentation with questions, critiques and suggestions. Thank you!

1. THE HISTORICAL

BACKGROUND

- France started its rearmament program in 1936, and the mobilizing its economy for the war in 1938 (Munich crisis)

- The war occurred and finished in a series of short phases:

- 1938-1939: rush to the war

- 1939-1940: phony war

- 1940: war, defeat, partial occupation of territory, dictatorial government

- 1942: total occupation of territory

- 1944: Allied forces landing in France, republican government restored

- 1945: Victory in Europe, national territory freed

- 1947: major political and economic crisis, Marshall Plan

- 1949: end of rationing and black markets

1. THE HISTORICAL

BACKGROUND

Time periods Period general outline 1875-1940 THIRD REPUBLIC 1939-1945 World War 2 in Europe

Sept. 1939- May 1940 “Phony war” period 1940-1945 Battle and occupation period

May-July 1940 Battle of France 1940-1944 ETAT FRANCAIS – VICHY REGIME

July 1940-November 1944 German (and Italian) occupation (local areas remained under

German control up to May 8 1945) 1944-1947 PROVISIONAL REPUBLICAN REGIME

June 1944-May 1945 Full French participation in Allied forces war effort 1945-1948 Peace period (French colonies excluded)

May 1945 Victory in Europe (end of main armed conflicts) January 1945-August 1945 US Lend-lease provisions extended to France

August 1945-September 1947 Self-helped economic reconstruction 1947-1958 FOURTH REPUBLIC

October 1947-1951 Marshall Plan and multilateral reconstruction plans

1. THE HISTORICAL

BACKGROUND

Source: Wikipedia

1. THE HISTORICAL

BACKGROUND

Human losses

and costs - Over 480 000 war deaths (military and civilian)

- 76 000 Jews exterminated, many turned to the Nazis by French police

- Over 1 200 000 POWs during the war

- Over 700 000 workers deported to coerced labour in Germany

Occupation

costs - 400 MF/day from June 1940 to May 1941

- 300 MF/day from May 1941 to Nov. 1942

- 500 MF/day from Nov. 1942 to August 1944

- Extra payments for troops housing, Italian forces and specific areas

Material losses - Extensive communication infrastructures destructions

o No bridge over the Seine between Paris and the sea in 1944

o Almost 10 000 bridges destroyed all over the country

- 452 000 buildings destroyed, 1,5 million damaged

- Production in 1944 in % of pre-war level:

o Food: 70%

o Industry: 40%

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Weighted wholesale prices index, 135 itemsBase 100 1938

Weighted retail prices index, Paris 34 itemsBase 100 July 1914

2. THE TRADITIONAL

STORY: PRICE CONTROL

AND CIRCUIT POLICY

French monthly prices indices, 1938-1950

3. A GENERAL

ASSESSMENT OF WHAT

INFLATION IS

Five main sources could play a role in the French inflation:

- money issuance;

- flight from money;

- shortages;

- productivity decline;

- grey and black markets operations.

Three sources of control over inflation:

- prices taxation (state-fixed prices);

- quantity regulation (supply rationing);

- monetary policy (the reduction in the so-called “inflationary gap”).

Consequently,

- State-fixed prices determine a price-level lower bound;

- black market prices set the upper-level;

- “grey” and “free” prices figure somehow between the two.

3. A GENERAL

ASSESSMENT OF WHAT

INFLATION IS

1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951

Official retail prices

Black market prices

Money supply

General sketch of the French inflation dynamics

4. THE PRICE EVIDENCE

French smoothed monthly prices indices, 1938-1950

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Weighted wholesale prices index, monthlyannualized value Base 100 1938

Weighted retail prices index, Paris 34 items,monthly annualized value Base 100 1938

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Weighted wholesale prices index, monthlyannualized value Base 100 1938

Weighted retail prices index, Paris 34 items,monthly annualized value Base 100 1938

Expon. (Weighted wholesale prices index,monthly annualized value Base 100 1938)

4. THE PRICE EVIDENCE

French smoothed monthly prices indices, 1938-1950, log scales

5. TOWARDS AN

ALTERNATIVE PRICE

INDEX

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1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949

Weighted wholesale price index(135 items)

Weighted retail price index inParis (34 items)

Unweighted index retail saleprice of 48 items in Paris(author's calculations)

Comparison of official and computed price indices

5. TOWARDS AN

ALTERNATIVE PRICE

INDEX

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Mouvement économique en France de 1938 à 1948 (mis à jour 1949), Paris, PUF, 1950Prix du pain (kg) en francs à Paris F/kg

Mouvement économique en France de 1938 à 1948 (mis à jour 1949), Paris, PUF, 1950Prix de la farine (kg) en francs à Paris F/kg

Mouvement économique en France de 1938 à 1948 (mis à jour 1949), Paris, PUF, 1950Pain de fantaisie 700 g. Prix pratiqué au marché noir à Paris F/0,7 kg

Mouvement économique en France de 1938 à 1948 (mis à jour 1949), Paris, PUF, 1950Prix de gros vers la fin du mois / Blé (indigène, à la production) F/100 kg

Wheat, wheat flour, taxed and untaxed bread prices

5. TOWARDS AN

ALTERNATIVE PRICE

INDEX

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Café en grains à Paris F/kg

Chicorée à Paris F/kg

Ratio Chicorée/Café En %

Coffee and chicory prices

5. TOWARDS AN

ALTERNATIVE PRICE

INDEX

Prices of a diversified consumption basket of goods in FF – Rivet, 1947

5. TOWARDS AN

ALTERNATIVE PRICE

INDEX

Prices of a diversified consumption basket of goods in % – Rivet, 1947

5. TOWARDS AN

ALTERNATIVE PRICE

INDEX

Official and provisional computed retail prices indices

6. THE MONEY SUPPLY

EVIDENCE

Monthly banknotes circulation and retail price index, base 100 = 1938

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BoF's banknotes circulation, base 100 = Nov. 1938

Retail Price index - Base 100 1938

6. THE MONEY SUPPLY

EVIDENCE

Prices and money supply, 1938-1949

6. THE MONEY SUPPLY

EVIDENCE

The banknotes policy, 1913-1944

6. THE MONEY SUPPLY

EVIDENCE

The banknotes policy, 1913-1944 (r2=0,82)

6. THE MONEY SUPPLY

EVIDENCE Monthly banknotes circulation and retail price index

Base 100 = 1938, 1945, 1948, adjusted for withdrawal operations (August 1945; January 1948)

7. CONCLUSIONS

Our still provisional conclusions are the following:

- The circuit policy had a much weaker impact than often stated

- and the quantity theory still holds at a sufficient long period

- The key, but often overlooked, hypothesis of the time of a difference between banknotes and current accounts is dubious

- The available statistical evidence is more robust than often stated and points towards

- Understated inflation during the war

- Overstated inflation after the war

- But there was indeed a strong shock in 1945-1947

- Which calls for a 3-period analysis (instead of 2)

- That links

- Distrust towards banknotes (rumors regarding banknotes)

- A strong discrepancy between prices, wages and productivity