Threat of a capital levy, expected devaluation and interest rates in France during the interwar period

Transcription

1 Thea of a capial levy, expeced devaluaion and inees aes in Fance duing he inewa peiod by Piee-Cyille Haucoeu * and Piee Sicsic ** I. Inoducion The inewa peiod was a ime of gea moneay unes, especially in coninenal Euope. In he case of Fance, he lenghy pocess owads he sabilizaion of he fanc, he choice of he level of sabilizaion, as well as he long elucance o abandon he gold sandad have someimes been inepeed as a succession of economic policy eos based on ideological biases o on an insufficien analysis of he siuaion (Sauvy, 984). Howeve, he lage numbe of conflicing inepeaions ha have been offeed fo he main episodes of he peiod (especially he Poincaé sabilizaion) in iself shows ha, a leas in some cases, he economic siuaion was no ha easy o analyze. Fuhemoe, poliical economiss have ecenly shown how he poliical pocess may oppose he implemenaion of a successful maco-economic policy. When sabilizaion of he budge o amoizaion of public deb is needed, he suggle beween inees goups as o who will pay he bill may lead o a subopimal decision o o no decision a all (leading someimes o inflaion as he soluion of las eso, he one which is he mos difficul o oppose because i does no esul fom a paliamenay voe). The poblem wih inoducing poliical economy ino he analysis is ha i can lead o confusion beween puely poliical gesues (which may have some edisibuive impac bu bing no duable change in he maco-economic siuaion, in paicula in budge evenues o expenses, savings o invesmen) and impoan disibuive debaes affecing all economic vaiables. In his pape, we will heefoe call poliical he puely poliical evens ha had only sho-em effecs on he pices of he enes, wih no ohe economic consequences. We popose assessing he elaive validiy of he "poliical" and "economic" inepeaions by looking a which fuue policies wee expeced by he financial makes, wih expecaions of axaion (acually of inceased axaion of financial asses) being consideed as signals of mosly poliical poblems, and expecaions of devaluaion as a sign of he need fo economic soluions o esoe he equilibium vis-à-vis he es of he wold. These quesions may be examined by looking * Univesié d Oléans, IOF and Dela (join eseach uni CNRS-EHESS-ENS); ** Banque de Fance and CEPR. Pevious dafs have been pesened a he OFCE semina "Convegences en Hisoie Economique", a seminas a Dela, Ruges Univesiy, UCLA, UC Bekeley, Univesié d Oléans, he Second Congess of he Euopean Associaion of Hisoical Economics (Venice, 996), he 997 Cliomeic Confeence, and he 997 Economic Hisoy Associaion meeing. We hank paicipans fo commens, and especially Seve Boadbey and Tim Haon. We hank Ki Baum fo poviding us wih his US daa.

2 Haucoeu and Sicsic, "Inees aes and axes" p. 2 a make inees aes, since changes in and expecaions egading axaion, inflaion and exchange aes ae efleced in make pices (a leas in efficien makes which, we ague, was he case duing he peiod unde eview). Ou main findings ae as follows. Duing he fis ciical episode fom 924 o 926, he delay in sabilizing he fanc may be aibued o a poliical suggle ove a capial levy, which explains mos of he incease in he make inees ae fom 924 (when he implied -yea make ae was 3%) o 92 (abou 6%). Neveheless, his suggle neve heaened o degeneae ino hypeinflaion, conay o wha has been fequenly agued. Fis, inees aes duing he Cael peiod wee neve as high as hey should have been had he couny been on he vege of hypeinflaion. Second, he expeced exchange ae of he Biish pound was declining and well below is cuen ae even befoe he nominaion of Poincaé as Pésiden du Conseil, so ha he apex of he exchange-ae cisis fom May o July 926 appeas o be a speculaive bubble and no he sign ha some ohe economic sabilizaion policy was needed. Concening he following peiod, we show ha he low inees aes in Fance duing he peiod efleced expecaions of an appeciaion of he fanc vis-à-vis he pound. Afe he devaluaions of boh he pound and he dolla, Fance followed a deflaionay policy in ode o mainain he gold sandad. If his policy had been expeced o succeed, inees aes would have emained low, which was no he case. We examine whehe he poliical suggle beween exeme igh and lef in he yeas can explain he ise in inees aes as i did in 92. We show ha expecaions of a fanc depeciaion fully accoun fo he ise in inees aes. This pape is oganized as follows: secion II pesens he main evens ha inees us and hei vaious inepeaions. Secion III explains he mehodology used in ode o consuc medium-em inees aes and jusifies he hypoheses used. Secion IV pesens he deived make inees aes. Secion V compaes he aes of eun on public and pivae bonds in ode o confim he validiy of using he inees aes on public bonds in he subsequen secions. Secion VI looks a he impac on inees aes of he possible inoducion of a new ax. Secion VII uses he pices of he Caillaux enes issued wih exchange-ae guaanees o assess exchange-ae expecaions. II. The Debaes Afe he Fis Wold Wa, a eun o he gold sandad was consideed in Fance (and mos counies) as he condiion fo a nomal economic siuaion. Bu high and vaying waime inflaion and he accumulaion of inenal and exenal debs by mos belligeen counies made sabilizaion difficul. As a vicoious naion, Fance consideed i nomal o eun o he nineeenh cenuy gold paiy, a goal he Unied Kingdom would each in 92. Neveheless, he cos of econsucion and compensaing fo wa losses was so high ha i equied enomous amouns of public spending,

3 Haucoeu and Sicsic, "Inees aes and axes" p. 3 which he epaaion paymens fom Gemany wee supposed o pay fo in he nea fuue, and which public boowing and pape money acually paid fo in he ineval. The exchange ae of he fanc was hen highly dependen on boh he moneay and budgeay siuaions and, heefoe, on he acual paymen of epaaions. A fis exchange-ae cisis occued in when Poincaé sen he Fench amy o he Ruh egion wihou obaining much in he way of paymens fom Gemany. A subsanial incease in axaion and an inenaional loan wee necessay o bing he fanc back fom 22 o 63 o a pound (he pewa level being 2.22). Soon afe ha cisis, he lefwing Cael des Gauches won he 924 geneal elecions, and he fanc began o slide again. Fance simulaneously expeienced capial fligh and an inflaion and poliical cisis, which all ended in he sping 926 exchange-ae cisis, when he pound exceeded 240 fancs. The nominaion of Poincaé as Pésiden du Conseil coincided wih a specacula end o he speculaion agains he fanc, followed by a coninuous appeciaion up o he end of 926, when i was sabilized de faco aound 22 fancs o he pound (a level which would be almos confimed in 928 by he law edefining he gold sandad). Many easons have been pu fowad fo he economic failue of he Cael des Gauches. Tadiional explanaions y o accoun fo he exchange-ae cisis by a maco-economic misadjusmen ha had o be se igh. Fo example, Sagen (983) consides ha he fundamenal eason fo he exchange-ae cisis was he budge defici. Moe ecen woks show ha he poblems esuled moe fom he accumulaed deb han fom he budge, since he defici deceased shaply in he las yeas and equilibium was almos eached in 92 hanks o he 20% ise in axes decided by Poincaé in Mach 924 (he so-called "double-décime"). The mos ecen daa by Villa (993, pages 70 and 90) confim ha he deb/gdp aio was sill.7 in 924 and. in 92, when he defici was only 2.9% of GDP (in fac hee was a pimay suplus of 2.%). Pai (99) consides ha people feaed a defaul on public deb, which caused a un on long-em public bonds. Ohe obseves (followed by Makinen and Woodwad, 989) conend ha he main poblem was he em sucue of he deb, since holdes of sho-em govenmen bills wee always able o pu govenmen cedi in dange by efusing o enew hei bills. Many conempoaies consideed ha he main poblem was he capial fligh ha esuled fom feas of axaion of capial o of income, a hesis which pus geae emphasis on poliical issues and which has been subsaniaed by Jeanneney (977). He shows ha by efusing o ecognize pas inflaion and o ask he Paliamen fo a ise in he Bank of Fance s plafond des avances in 924, he Cael was unable o sabilize and could only develop "des menaces inceaines", which would desoy i (Jeanneney, 977, pp. 3-40). Alesina (988) claims o boaden and synhesize peceding inepeaions in a model of he poliical economy of his peiod. He akes he poliical cisis, which was chaaceized by he succession of many govenmens wihin a sho ime, seiously and sees i as he eason fo he loss of economic confidence. He consides ha none of he hee main goups in Fench sociey (businessmen, wokes and enies) was able o impose is pefeed policy duing he Cael des Gauches peiod since his lef-wing coaliion was divided beween he Socialiss, pa of he

4 Haucoeu and Sicsic, "Inees aes and axes" p. 4 Radicaux defending he wokes and he emaining Radicaux defending he enies. The esuling cisis is conased wih he success of Poincaé, who was called o head a Gouvenemen d'union Naionale in July 926, which acually signified ecogniion of he defea of he lef and a coaliion of enies and businessmen. Like mos ohe wies, Alesina concludes: "In he summe of 926, Fance was on he edge of a hypeinflaion. The success of Poincaé's sabilizaion is due gealy o psychological effecs" (p. 8). He neveheless does no sipulae whehe he economic effecs of he poliical suggles of he Cael peiod wee long-lasing (if hey wee he oigin of a definiive dop in he exchange ae) o mee sho-em flucuaions due o poliical concens. One of he aims of ou pape is o ejec he assimilaion of he poliical suggle fom 924 o 926 wih he bief and damaic fall in he exchange ae in he sping of 926. Anohe is o y o measue hese poliical and economic poblems moe pecisely. Two yeas afe he Poincaé sabilizaion, Fance euned o he gold sandad a a fifh of he pe-wa paiy. Massive inflows of capial, coesponding o he subsanial balance of paymens suplus ha Fance an fom 923 o 929, gave he Bank of Fance enomous gold eseves, which helped Fance and he neighboing gold block counies o be consideed as an îlo de sabilié a he beginning of he Gea Depession, bu also conibued o deflaion in he es of he wold unil he seling (93) and dolla (933) devaluaions. Mos scholas now conside ha he accumulaion of gold by Fance was he esul of an undevalued fanc (Eichengeen, 992; Sicsic, 992). Neveheless, pecise measues of ha undevaluaion will always be lacking, given he limiaions of he mos commonly used puchasing powe paiy mehod. This pape gives a fuhe indicaion of he undevaluaion of he fanc elaive o he pound, based on inees-ae paiies. The Gea Depession poduced in Fance a siuaion ha was symmeical, bu quie simila o ha of he mid-920s. A ha ime, mos counies ouside he gold block had eihe le hei cuency floa (and depeciae) o esiced capial flows. The esuling eal appeciaion of he fanc imposed a policy of deflaion as long as no one waned he gold paiy o be changed, a policy which was conduced wih special insisence by Laval, Pésiden du Conseil, in 93 and which enjoyed widespead suppo unil 936. Neveheless, no govenmen was eve able o balance he budge fom 932 onwads (because of he decline in evenue esuling fom he cisis). The budge deficis and he ising public deb made he deflaion policy less cedible; hey wee efleced in ising inees aes which, in un, pobably impeded he ecovey in invesmen ha occued duing he same peiod in Gea Biain. One may, wih Eichengeen and Sachs (98), conside ha he deflaionay policy was doomed fom he sa by he size of he pice gap wih Fance s ading panes, and heefoe ha he ovevaluaion of he fanc was he only poblem. One may also conside he inabiliy of govenmen o implemen a deflaion policy as an independen faco in he cisis, as Moué (99) suggess in he mos ecen synhesis of he issue, which explains in deail he deeioaion of confidence in public finances ha esuled fom a gowing (if hidden) eliance on money issuance o finance he budge.

5 Haucoeu and Sicsic, "Inees aes and axes" p. Bu all hese auhos conside he economic poblem o be independen of he poliical cisis ha developed duing he same peiod, even if he economic cisis was one of he easons fo he gowing doubs abou he paliamenay egime and democacy ha appeaed a ha ime. This poliical cisis was pobably moe adical han ha of he 920s. The ise of he Communis and Socialis paies wihin he lef wing did no only heaen he ich, and he agiaion in he sees by a ising anicapialis and ani-semiic exeme igh wing was gadually o become a dange fo democacy iself afe 932 (Soucy, 99, p. 36). On may wonde whehe inees aes included a poliical isk pemium, esuling fom he mee hea o poliical sabiliy, o whehe hey wee diven up only by he maco-economic siuaion: ovevaluaion of he cuency and low cedibiliy of he deflaion policy. We shall y once moe o disenangle hese wo dimensions. This pape aemps o measue he elaive impoance of puely poliical suggles and economic poblems duing he inewa peiod by looking a developmens in inees aes. Moe pecisely, i ies o evaluae he elaive impoance of he vaious policies ha wee a wok o anicipaed by compaing vaious kinds of bonds, which chaaceisics ae given in Table, ha diffe fom one ohe only in hei esponses o hese policies. Table : Chaaceisics of he main bonds used 3% ene % ene % ene Caillaux Biish Consols Pivae bonds Exchange ae guaanee no no yes yes () no Dae of opional pay-back (call) any any none Taxes: - IRVM no no no no (2) yes - IGR yes yes yes no (2) yes -ansmission ax no no no no (2) yes () Biish consols pesen an implici exchange ae guaanee fo Fench invesos. (2) Biish consols ae supposed o be held in Biain, and pay Biish bu no Fench axes. A few examples may make he mehod easie o undesand: he vaiaions in he diffeence beween he euns on Fench public and pivae bonds can povide an evaluaion of expecaions of govenmen defaul. Two impoan facos help explain he diffeence beween he goss euns on Fench and Biish govenmen bonds: axaion and devaluaion (o inflaion, which will be supposed o be he same). We esimae expecaions of axaion diecly fom he poliical debae in 92. The exisence afe 92 of Fench govenmen deb ha was quasi-denominaed in pounds allows us o measue exchange-ae expecaions diecly since he diffeence beween he usual and he exchangeae guaaneed Fench ene pices could esul only fom exchange-ae vaiaions (boh acual and expeced).

6 Haucoeu and Sicsic, "Inees aes and axes" p. 6 III. Expeced Long-em Raes. Unfounaely, in Fance hee is no ecoded medium-em ae (say up o five yeas), which would be he mos useful fo examining he oubled imes ha inees us. The only obsevable inees aes ae he aes of eun calculaed on he enes (he Fench consols). Howeve, hese euns ae of limied usefulness because hey ae aveages of he aes duing hese oubled imes and of he aes ha wee expeced o pevail afewads, once sabiliy was eached again. In ode o calculae he five-yea inees aes implied by he acual pices of he enes, we have o make a hypohesis concening he long-em inees ae ha he make supposes will pevail in he long em. This expeced long-em ae is he ae expeced a a hoizon moe han 6 yeas away. The choice of his expeced long-em ae is cenal o ou deivaion of make inees aes because he eun on he enes is an aveage of he make ae we ae looking fo and he long-em ae. This secion is devoed o he choice of he long-em ae; he nex secion will use i o deive he -yea make inees aes. The fis piece of infomaion is ha he long-em inees ae in he nineeenh cenuy was beween 2.% and 3.%. No ax was hen paid on he coupon. Allowing fo an income ax ae of % (see below) gives a goss ae of beween 3% and 4%. Anohe agumen poining in he same diecion can be deived fom he appaenly bizae discepancy beween he appaen euns on Fench enes. The usual way of looking a euns on long-em unedeemable enes is o compue he aio of he nominal coupon o he pice. The pice being equal o he infinie discouned value of he coupons, wih a discoun faco by definiion equal o one plus he ae of eun, he infinie sum equals he coupon divided by his ae of eun. Such simple compuaions applied o he diffeen Fench enes give a puzzling esul as shown in Figue. In fac, he enes issued duing and jus afe he Fis Wold Wa (9 and 96 %, 97 and 98 4%, and he 920 6%) could be paid back. The % and 6% enes could be eimbused afe Januay 93, and wee evenually conveed ino a 4.% ene in Novembe 932. This is why he cuves coesponding o hese enes disappea in Figue a he end of 932, and why hei yields measued as he coupons divided by he pices convege o he coupons since hei pices moved owads pa as he edempion dae appoached (T and T6 in Figue ). The 4% enes could be eimbused in 942 and 943. We can check ha he hypohesis made egading he expeced long-em ae is consisen wih he pice of he enes ha could be edeemed. The pice of a edeemable ene is a funcion of he make inees ae, up o he convesion, he expeced long-em inees ae (which will occu afe he convesion), and he pobabiliy of his convesion (see Appendix I). The pice of he unedeemable ene is a funcion of he make inees ae and he expeced long-em inees ae. Given he expeced ae, one can compue he make ae up o he convesion wih he

7 Haucoeu and Sicsic, "Inees aes and axes" p. 7 unedeemable ene, and hen he pobabiliy of convesion. Allowing fo a pobabiliy of convesion makes i possible o explain he low pices of he 6% enes elaive o he pice of he unedeemable 3% ene. The compued pobabiliy, deived fom a goss long ae of 3.7%, is ploed in Figue 2. A highe expeced long ae would give compued pobabiliies ha ae lage han one. 2 Theefoe, we may ejec excessively high expeced long aes. The Biish wa deb made up of he wa loan sock issued in 97 wih a % coupon was conveed in Sepembe 932 ino a "3.% wa loan 92 o afe" (Capie e alii, 986). Using quoaions of he % wa loan and he 2.% consol, we have deived he pobabiliy of convesion (Figue 2). Expecaions of convesion of wa debs wee a leas a fouh in England, much smalle han in Fance. 3 These compued pobabiliies of convesion, assuming a long-em ae of 3.7%, look easonable, hus poviding an indiec check on he hypohesis made concening he expeced long ae 4. A las agumen in favo of an expeced long-em inees ae of aound 3.% afe he cuen five-yea peiod can be deived fom he siuaion in ohe counies. The US em sucues of inees aes compued by Baum and Thies and Cecchei make i possible o compue fowad inees aes ha we inepe as he expeced long-em inees aes we need. As he ae of eun on a -yea bond is equal o he eun on he opeaion consising in buying a five-yea bond now and a en-yea bond in five yeas, one can deive he ae on he 0-yea bond in five yeas (called he 0-yea fowad ae in yeas) fom he - and -yea aes of eun obseved a a given dae (see Appendix I). Assuming no em pemium afe yeas, hese fowad aes ae he long-em (0- yea) aes in yeas. They ae dawn on Figue 3, along wih he US - and -yea spo aes. The expeced long-em aes ae much moe sable han he spo aes. The diffeence in level beween he wo ses of aes comes fom he isk pemium on Raiload Aaa bonds used in he 920s. The mean of he expeced long-em aes on govenmen bonds ove he peiod is 3.38%. We did no aemp o model he opion value semming fom he choice of edempion given o he govenmen because i depends on he sochasic pocess of inees aes which, in ou case, is vey diffeen fom he usually assumed Bownian moion. As he govenmen owns he opion, he pice of he callable bonds should be lowe ha he expeced pesen value of he coupons and he conveed capial. Inceasing he quoed value of he edeemable bond, o offse his opion effec, would decease he pobabiliy of convesion. 2 The same kind of compuaion using he pice of he % edeemable ene led o implausible pobabiliies. I is visible fom Figue ha he coupon/pice aios fo he % and 6% edeemable enes wee he same unil 927, which is impossible wih any pobabiliy of convesion. 3 Capie e al. (986, p. 9, noe 9) do no see expecaions of convesion in he evoluion of he pice. They do no compae he pices of he 2.% consol and he % Wa loan a a given dae. 4 Using he same expeced long-em ae goss of axes in Fance and in Gea Biain is consisen wih a slighly lowe ae ne of axes in Gea Biain since axaion was heavie in Gea Biain: 20 o 2% compaed o abou % in Fance (see below). A he end of he XIXh cenuy, while axaion did no dive a wedge beween goss and ne aes of euns, he ae of eun on he 2.% Biish consols had been slighly lowe han he ae on he 3% Fench ene.

8 Haucoeu and Sicsic, "Inees aes and axes" p. 8 Thee had been a majo change in moneay policy egime abou one yea afe he pound lef he gold sandad (Eichengeen, 992). Wihou aking a song posiion on he influence of he wa deb convesion on long-em inees aes (Capie e alii, 986 and Sayes, 976), i is likely ha hee was a downwad shif in expeced long-em aes afe 932. Theefoe, we have compued implied Fench and Biish medium-em make aes wih goss long-em expeced aes of 3.7 and 3.2% (Figues 4 and ). An expeced goss long-em ae of 3.2% leads o a ne Biish medium-em make ae of abou 0% duing he 920s, which is no consisen wih ohe infomaion abou Biish make aes. 6 We heefoe conside ha 3.7% (which leads o a moe easonable implied Biish make ae of 7%) was he expeced wold long-em goss ae in he 920s. In he mid- 930s, an expeced ae of 3.7% leads o a negaive implied Biish make ae, so we conside 3.2% o be he expeced long-em ae fom 934 onwads. IV. Make aes Once i has been esablished ha 3.7% is a easonable expeced long-em ae fo he 920s, one can look a he implied Fench medium-em make aes (Figue 4). This ae is he discoun ae in he nex five yeas which, wih he expeced long ae used as he discoun ae fo yeas fuhe away in he fuue, equalize he obseved pice of he ene wih he pesen value of he infinie flow of coupons (Appendix III). These implied aes ae much highe han he usually epoed yields on govenmen bonds (as depiced in Figue ). Howeve, i also appeas ha Fench financies neve acually believed ha hei couny was on he bink of hypeinflaion since hey held asses wih aes of eun fo he nex five yeas ha wee always smalle han 20%. In 927, he medium-em make inees ae fo public deb was sill abou 2%. I migh seem conadicoy wih he epoed ae of eun on he 6% enes wih mauiies of 0 yeas issued in 927 (afe he de faco sabilizaion) which, accoding o Haig (929, p. 266), was 6.98%. In fac, his ae was no he expeced ae of eun on hese bonds since hey could be edeemed in 93. The ae on he 6% 927 ene as epoed by Haig was close o he coupon/pice aio fo he 6% 920 ene ploed in Figue. 7 Befoe uning o explanaions of he ends in he implied make inees ae, a emak concening he lack of alenaive mehods mus be made. One may hink ha sho-em inees Ou famewok excludes he possibiliy of a convesion having an effec on he expeced long-em ae. 6 Fo insance, he 4% Teasuy Bonds, quoed aound 93 in 92, which leads o a yield fom 92 o 93 of.% (Pembe and Boyle, 90, p. 26). 7 This is no supising since he aes epoed by Haig ae compued as if he capial will be paid back a mauiy, afe 0 yeas, and i means ha he pice of he 6% 920 and 6% 927 wee abou he same.

9 Haucoeu and Sicsic, "Inees aes and axes" p. 9 aes could be used o analyze he peiod. Befoe he Poincaé sabilizaion, he sho-em inees ae defined as he inees paid on sho-em public deb (Bons de la Défense Naionale) was pegged. The eun on his deb was mainained a % fom 923 o 92. Makinen and Woodwad (989) ague ha when his eun was below he make ae hese bills wee no enewed, which led o moneizaion of he public deb. Acually, he subsanial ise in he medium-em ae, which occued duing 924 and 92 when i is coecly measued, should have pomped holdes o swich fom sho-em Bons o enes, unless hey vey songly favoed he liquidiy of he Bons and gealy feaed possible capial losses on enes. Eichengeen (992, p. 79) does no agee wih Makinen and Woodwad; using sho-em inees aes on "commecial pape," he agues ha make aes wee no above pegged aes on public deb. In fac, hee was no make fo sho-em pivae deb, and wha escompe hosbanque was, even anslaed as commecial pape, emains unclea o us. So we can imagine ha pivae individuals owning Bons de la Défense wee no in a posiion o swich beween hese Bons and "commecial pape." They only had a choice beween owning he Bons and money. A he end of 92, hey did no enew hei Bons o sold hem o he banks (which can be shown fom he gea upsuge in he pivae money supply: see Sicsic, 992, p. 72, Figue. ). Bu if many banks ageed o keep a lage amoun of Bons in hei pofolios, i is no only because hey had o mainain a sufficien liquidiy aio, bu also because hey could no obain highe yields by lending o pivae fims. One explanaion fo he appaen conadicion beween individuals selling hei Bons and fims efusing o ge ino deb a simila aes could be an expecaion of foced consolidaion of he Bons de la Défense. Such a soluion o he poblem of sho-em deb was conemplaed a some cucial momens duing Anohe explanaion could be he high level of bank inemediaion coss. This has some appeal since hee was no make fo escompe hos-banque. In any case, he absence of such a make as well as he difficulies in mimicking i pomped us o pefe a sudy based on medium-em aes. V. Thee was no un on public deb in 92. The fis soluion o he deb poblem faced by he govenmens in 92 and 926 is a simple defaul on public deb. Pai (99) claims ha hee was a un on he public deb moivaed by 8 The foced consolidaion was sill being examined by he govenmen a he end of June 92. Even he égens of he Bank of Fance wee almos eady o accep a moaoium a ha dae (Jeanneney, 976, p. 244). Rumos concening his soluion suvived houghou he summe, even afe he decision o issue he Caillaux convesion loan (see below). A leas, ha opinion was efleced by he bankes who wee esponsible fo he issue of he loan, as is shown by hei quesions duing hei meeings wih op officials of he Minisy of Finance (see he epo of he meeing of Augus 2, 92 n 68 signed E. Endes, file DAF374/ a he achives of he Cédi Lyonnais; see also he file "popagandes diveses cone l'empun", file B a he achives of he Minisy of Finance (quoed below as SAEF). On 22 Novembe, a bill poposing a compulsoy enewal of he Bons de la Défense was ejeced in Paliamen by only hee voes.

10 Haucoeu and Sicsic, "Inees aes and axes" p. 0 expecaions of such a defaul. As we will lae use he inenal ae of eun on he 3% enes as epesenaive of make inees aes in geneal, i is impoan o check ha he hieachy beween public and pivae bond aes did no change duing he Cael govenmens. Pai (99, pp ) quoes Le Temps fom Augus 924, whee one can ead "à l'heue acuelle, la ene se capialise en Bouse à un aux plus élevé que celui d'obligaions indusielles" (nowadays, he yield on enes is highe han ha on indusial bonds) and fom 0 Augus 92 when i saes "le aux de capialisaion des fonds fançais jouissan de la gaanie de l'ea [a] éé cependan supéieu à celui d'un ès gand nombe d'obligaions indusielles" (he yield on Fench bonds guaaneed by he govenmen has neveheless been highe han he aes on many indusial bonds). Pai, following Le Temps, inepes hese quoaions as a poof of a pemium ha had o be paid on govenmen deb because i was consideed moe isky han pivae bonds. We have compiled pices of 4 uiliy bonds, and we have compued he implied -yea aes of eun on hese pivae bonds, being vey caeful o ake ino accoun he influence of he capial eimbusemen (which was caied ou by dawing los) and coecing fo he influence of axes (see Appendix IV, and below fo he ax ules). As shown in Table 2, we find ha he euns on govenmen bonds had always been smalle han he aveage of he euns on he 4 uiliy bonds. Table 2: Implied five-yea make aes on pivae and govenmen bonds Uiliy bonds % ene Spead Noe: Implied -yea inenal aes of eun fo 4 uiliy bonds (see Appendix IV) and he -yea inenal ae of eun compued fo he 3% enes (RA3_3). Boh aes ae ne of income ax. Thee is no sign ha a pemium had o be paid on govenmen deb. We can definiely conclude ha hee was no such hing as an expecaion of govenmen defaul o a un on public deb since he aes on govenmen bonds wee lowe han hose on pivae uiliy bonds, and because he pemium paid on pivae bonds acually inceased in 92 and 926. Thee is heefoe no disadvanage in looking only a he inenal ae of eun fo he nex five yeas deived fom he 3% ene pice and inepeing i as epesenaive of make aes. These make aes ae no adjused fo he effecs of eihe an incease in expeced axaion o a fanc depeciaion, he effecs which will be deal wih in he emaining secions of his pape.

11 Haucoeu and Sicsic, "Inees aes and axes" p. VI. Taxaion VI.. Official and acual ax sysems Taxaion of income fom secuiies pesened wo main chaaceisics duing he inewa peiod: fis, i was vey complex, combining many diffeen axes, paid on diffeen secuiies, wih diffeen bases, o diffeen adminisaions; second, i inceased quickly. Two ypes of secuiies exised: beae secuiies and egiseed secuiies. Since beae secuiies was he mos widely-held ype, and since sock exchange ansacions (and he pices we will use) wee conduced wih such secuiies, we will focus hee on hei ax egime. Evey beae secuiy excep Fench enes had o pay wo axes diecly paid by he issue (pélevés à la souce): fis an income ax, called impô su le evenu des valeus mobilièes (ax on income fom secuiies, heeafe efeed o as he IRVM) 9, which is one of he impôs cédulaies composing he popoional (no-pogessive) pa of he diec axes (wih axes on wages and pofis); and second a ax called doi de ansmission, which was based on he mean value of he secuiy duing he pevious yea and was inended as a way o balance he fac ha ansacions on beae secuiies could no be egiseed and axed if hey occued ouside of he sock exchange. 0 Moeove, evey souce of pesonal income, including income fom he enes, was included in he base fo he pogessive income ax called impô généal su le evenu (IGR in he es of he pape). The aes of all hese axes wee quie low befoe he wa (fo example, i was 4% fo he popoional IRVM, and hee was no pogessive income ax). They subsequenly inceased quickly, ising iniially unil 926 and hen fom 933 unil he Second Wold Wa (Table 3). In 92, excluding he pogessive IGR, abou one fouh of he nominal coupon paid on pivae bonds was axed. If we add o his ae he maximum maginal ae of he IGR (which peaked a 60% fom 923 o 92), eally high aes ae eached. In fac, hese aes wee pobably neve paid since i was vey easy o avoid paying IGR on beae secuiies, because coupons wee paid o he beae wihou any equiemens enablilng his fuue IGR declaaion o be checked. Only wealhy people who wee known o live on income fom secuiies (enies) wee obliged o declae a leas a pa of hei income. 9 We should add ha socks wee also indiecly liable o pay ax on pofis, which was no deducible fom income ax. The level of his impô su les bénéfices indusiels e commeciaux is given in Table 3. 0 Alhough his ax was called a ansacion ax, i was in fac an income ax, and should be disinguished fom anohe ax on ansacions called impô su les opéaions de Bouse ha was always paid only in case of effecive ansacions, and ha we will ignoe hee. This siuaion was almos officially acceped, since he ae on he doi de ansmission on beae secuiies was aised elaive o ha on egiseed secuiies on he basis of his ax evasion pobabiliy.

12 Haucoeu and Sicsic, "Inees aes and axes" p. 2 Table 3: Tax aes on secuiies d IRVM IGR IGRm BIC Noe: d is he doi de ansmission on beae secuiies, as a pecenage of he mean pice of he secuiy duing he pevious yea (when he ae was changed duing a yea, we calculaed he mean ae by weighing each ae wih is duaion). IGR is he maximum maginal ae of he IGR. IGRm is he mean ae paid on he IGR by a ax-paye wih an income equal, in consan fancs, o he limi of he maximum maginal ae in 936 (.332 million fancs). BIC is he ae of he ax on pofis. Souce: Haucoeu (994, pp ). I is difficul o assess he scale of he evasion because income fom secuiies is no sepaaed in he aggegae figues fo he IGR base. Bu conempoay accouns give high evaluaions: Mouche (934, pp ), Baiglini (923, p. 0), Coudec (923, p. 29) o Coin (938, p. 6) all conside evasion vey easy (wihou being socialis). They summaize he evaluaions of IGR evasion given in Paliamen by Bokanovsky (on 2 Novembe 922), Piei (on Febuay 7, 933) and Auiol (on Decembe 3, 936), all of which esimae evasion as being equal o a leas half he income on secuiies. 2 Given he high degee of income inequaliy duing he peiod (Moisson, 99), and he likely ole of income fom secuiies in ha inequaliy, he low mean level of IGR axaion is also an agumen in favo of a high level of evasion. We may conclude ha he effecive 2 Coudec (p. 3) cies he speech of Bokanovsky a he Chambe des dépués on Novembe 2, 922, in which he evaluaes income fom secuiies a 2. billion fancs, of which a maximum of 0 billion is legally ax-fee. As only 3. billion was found by he ax adminisaion in he IGR declaaions, he evasion was a leas wo-hids of he axable amoun. Mouche epos (pp. 3) he evaluaions pesened by Piei, accoding o which income fom secuiies eached 30 billion in 930, on which billion was ax-fee and 2 billion escaped he IGR. Coin (p. 2) cies Auiol who evaluaes income fom secuiies a 26 billion fancs, of which 0 billion was ax-fee and 8 billion evaded he IGR. These wo las evaluaions coespond o a ax evasion ae of one half, excep if we suppose ha secuiy holdes had oal income below he IGR minimum heshold.

13 Haucoeu and Sicsic, "Inees aes and axes" p. 3 ax ae paid on income fom secuiies by way of IGR was a mos half he official ae. 3 In 92 he Cael was elucan o incease indiec axes, and could no aise diec axes since he ax aes had aleady been massively aised duing he pevious decade. Thee wee hen wo ways o incease govenmen eceips in ode o pay back he public deb, eihe a capial levy o an aack agains ax evasion. IGR evasion was hough of by many lef-wing depuies as he main inequaliy in he ax-sysem, and is eliminaion was hough o be he soluion o he budge poblem. The aemps made o limi his evasion did no succeed duing he inewa peiod. Fom 920 o 924, he ighis majoiy esised almos all poposals inended o limi evasion of ax on beae secuiies (acceping only a few advanages fo egiseed secuiies). The compulsoy declaaion of all coupons via he bodeeau de coupons imposed by Poincaé in 924 was (paadoxically) abandoned by Heio in 92. The simila cane de coupons voed by he Paliamen in Decembe 92 suffeed he same fae in 926 as did he cae d'idenié fiscale voed in lae 933. Many ohe poposals failed o ge he suppo of Paliamen, fom a povisional paymen by he issue (and efundable fo non-igr payes) poposed by he senao Pasque in 924, and hen by Blum in 924 and Piei in 933, o he pohibiion of beae secuiies (which was he pofound desie of he paliamenay lef in lae 92 bu which did no obain govenmen suppo). 4 VI. 2. Poliics and he capial levy Anohe soluion conemplaed in was he capial ax, which was hough of as a way o "ake he money whee i is." The mee idea of a ax based on popey and no on income was an old one, and i had been suppoed by many pogessis poposals befoe Wold Wa I (no less han 23 bills fom 882 o 94, including one by Caillaux, Finance minise in 94 6 ). A specific feaue of he peiod is ha he poposal fo a ax on capial was hen defended as a "one sho" high-level ax, wih he pupose of adically educing he level of he public deb. This easoning allowed he Socialiss, who wee he adiional suppoes of such a poposal fo disibuive puposes, o defend i as a adical and definiive soluion o he financial poblems caused by he wa. The ile of he bill pesened by 22 membes of Paliamen in July 924 is a pefec illusaion of how he "exaodinaie e unique" capial ax was fo he Socialiss he ideal soluion, allowing boh "l'amoissemen apide e oal des avances de la Banque de Fance à l'ea, des Bons e obligaions de la Défense naionale, des Bons du Téso à ois, six e dix ans" (he epaymen of sho- and medium-em public deb) and "la suppession de la axe su le chiffe d'affaie, de la axe de luxe e des impôs cédulaies su les evenus" (a decease in diec axaion, 3 In 922, when he IGR ax ae was 0%, allowing fo a 2/3 evasion ae leads o an effecive ax ae of abou %; When he IGR ax ae was 30%, he evasion ae being /2, he effecive ax ae was also %. 4 On hese poins, see Sauvy (984, vol. III, ch. ). This is a Blum's expession. 6 The lis wih some deails on many poposals can be found in he SAEF file B

14 Haucoeu and Sicsic, "Inees aes and axes" p. 4 keeping almos only he IRVM and he pogessive IGR fom he pevious diec ax sysem). The ae poposed was % fo land and 20% fo ohe asses. The capial levy was no conemplaed a ha ime eihe by he leades of he majoiy o by he govenmen. In Mach 92, he pojec eappeaed, pobably unde he influence of Blum (who on Apil 7 pesened a bill poposing a 0% ax on capial). Heio seems o have been convinced, since he asked he Finance minise Clémenel o wok on he issue. As Clémenel opposed he pojec, he esigned when Heio insised ha he capial levy be included in he budge bill fo 92 (no ye voed a ha dae). On Apil 0, his successo Monzie submied a poposal o Paliamen fo a capial ax disguised as a foced loan a a fla ae of 3% (and subjec o all axes), ha all axpayes would have o subscibe o in an amoun of up o 0% of hei wealh. Boh pojecs inceased he feas of he igh, paiculaly when a paliamenay amendmen o he Monzie bill poposed an annual ax on capial and he ceaion of an exaodinay ax on enichmen since he wa. 7 In spie of his, i seems ha he pobabiliy of a capial ax being voed was quie low a his dae, since a pa of he Radical-Socialis pay, whose suppo was necessay fo a majoiy in he Chambe des dépués, opposed i. Finally, i seems ha i ended up as a mee alibi fo Heio who waned o "fall on he lef", when he scandal of he beaching of he Bank of Fance s issuing-limi began (Jeanneney, 977; Bonnefous, 960). Afe Heio esigned, he Painlevé govenmen included Caillaux as Finance minise. Caillaux opposed he idea of a high-ae capial ax, bu was pobably favoable o a low ax on "unpoducive capial". 8 The budge bill fo 92, which was finally passed on July 2, 92, did no include he capial ax and i gained he suppo of a majoiy of he cene-lef (wihou he Socialiss and a pa of he Radical pay), which was no he Cael majoiy. Howeve, he Cael was no dead: when he Socialis Pay congess in Augus 92 decided o beak off wih he govenmen owing o is efusal o inoduce he capial ax, he issue became he cene of he discussions wih he Radical pay. The capial levy hen became he limus es fo he poliical alliance beween he Socialis and Radical paies. A he Radical Pay congess in Nice in Ocobe, Heio (who could only make a comeback wih he suppo of he lef) convinced he pay o ebuild he Cael. Caillaux was foced o esign, and he new Painlevé govenmen (wih Painlevé himself as Finance minise) was hen supposed o make he capial ax is pioiy. In fac, Painlevé poposed an exaodinay naional conibuion in Novembe, which gave holdes of secuiies a choice beween a one-ime paymen of 0% of he income and 4 annual paymens of %. Anohe 7 Noe ha an exaodinay ax on copoae wa pofis, a vey high aes, had been voed duing he wa by a lage majoiy. 8 This ax was included in he fis daf of he 926 budge pesened in Ocobe 92, bu i had no been voed when he esigned. The idea was no Caillaux s, as is shown by he exisence of simila pojecs a he Finance minisy fom 924 a leas. Noe ha he same mehod (a vey low ae) had been used by Caillaux himself in ode o obain appoval fo he income ax in 94. The apid incease in he ae of income ax in he following yeas made ha mehod much moe difficul o use in he case of he capial ax. The fac ha his ax was seen as "inquisioial" and as allowing he ceaion of wealh egisaion (cadase des founes) did no help.

15 Haucoeu and Sicsic, "Inees aes and axes" p. poposal was made by wo depuies (Bibié and Falcoz) fo a pogessive capial ax wih aes anging fom o 2% (fo founes geae han 4 million fancs), wih an advanage fo paymen in govenmen bonds. By hen, he divisions inside he Radical pay had allowed he opposiion of he igh-wing Senae o become poweful. All pojecs implying adical ax measues aimed a secuiies wee ejeced, and he esuling govenmen insabiliy blocked esoluion of he fiscal poblem unil he definiive change of majoiy and he appoinmen of Poincaé as Pésiden du Conseil. Thee conclusions emege fom his eview of he hisoy of he Cael. Duing 92, he capial levy was he mos seiously sudied of he adical soluions o he deb poblem, much moe so han he foced consolidaion of he floaing deb o he suppession of beae secuiies. 9 Secondly, he pobabiliy of a capial ax being implemened ose fom July 924 o a peak in Novembe 92. Lasly, he capial levy ha was unde discussion was a unique even, wih a high ae (somehing like 20%), bu could be paid ove seveal yeas. VI. 3. A measue of he influence of he expeced capial levy on make inees aes Expecaions of a capial levy should lead o a dop in he pices of axed capial asses. The pupose of his secion is o measue he ise in inees aes coesponding o he fall in he pices of he enes. One migh objec ha he capial levy could lead o a depeciaion of he exchange ae. This poin is examined in deail in appendix V. In he emaining pa of his secion, we will assume ha he axaion had no impac on expeced movemens in he exchange ae, and is fully efleced in he domesic cuency asse pice. Abiage wih foeign bonds (which would emain de faco fee of he capial levy) was always possible. Fuhemoe, we assume ha non-financial asses would no have been axed 20. Theefoe, we inepe he capial ax poposal as a ax o be specifically levied on Fench secuiies. To measue he influence of a possible capial levy on Fench inees aes, we have fis esimaed wha he flows of axes o be paid would be fo somebody holding a 3% ene. Assuming ha he ax base was fixed a a ene pice of 0, and ha he ae was 20% o be paid ove five yeas, he axes o be paid would be 2 fancs pe ene ove he nex five yeas. 2 We have compued, using he second equaion of Appendix III, he implied inenal ae of eun consisen wih obseved pices, assuming ha in he nex five yeas only 0. fancs would be paid, ne of axes (3 fancs of coupon minus % of income ax minus 2 fancs of capial ax). This ae of eun is he ae of eun ne of expeced axaion, ha is he ae of eun allowing fo he fac ha 9 The fac ha he capial levy was almos voed does no mean ha i would have solved he deb poblem. Fo he difficulies in implemening such a ax duing ha peiod, see Eichengeen (990). 20 We could no find pices of ohe capial asses (land, popeies) o check ha hey did no dop in The pice of he 3% ene befoe he 924 elecions was abou. I eached 0 (see Figue, coupon/pice aio is abou 6%) a he end of 924.

16 Haucoeu and Sicsic, "Inees aes and axes" p. 6 he quoed pices of enes (goss of axaion) had been diven down because people wee convinced ha hee would be such a capial levy of 20% o be paid ove five yeas. The esuling ae is ploed as RI_37 on Figue 6, while RA3_37 is he inenal ae compued wih he fis equaion in Appendix III, wihou any expeced capial levy (bu wih income ax of %) and wih a goss long-em ae of 3.7% (ne ae equals.8 imes 3.7). The measued influence of expeced axaion could seem o be maximized, in he sense ha applying a pobabiliy of less han one o he possibiliy of paying wo fancs pe ene in he nex five yeas would give a ae beween RI_37 and RA3_37. On he ohe hand, he hea of axaion could be lage han he 20% capial levy, if one is willing o accep ha, if applied, he bodeeau de coupons would induce an incease in he amoun of geneal income ax paid. We explain he incease in he make ae RA3_37 obseved fom mid-924 o mid-92 as being due o he hea of a capial levy. I appeas fom Figue 6 ha he diffeence in inees aes beween Fance and Gea Biain fom 923 o 927 pobably eflecs some expecaions of a depeciaion of he fanc. The diffeence beween he Fench ae of eun ne of any expeced capial levy and he Biish ae (RI_37-RCO_37) fom mid-92 o mid-926 was on aveage.% while he diffeence beween he Fench and Biish aes (RA3_37-RCO_37) was on aveage.3% in 923, and i ose o 8.6% in he yea fom July 92 o June 926. The ise in Fench make inees aes in he second half of 924 can be explained by he hea of a capial levy. I should be noiced ha he exchange ae did no move a lo duing he peiod of gowing feas of a capial levy. The fanc began o dif in he fall of 92, and he un on he fanc occued duing he fis half of 926. Fuhemoe, he exchange ae movemens ae no of an ode of magniude of 20% ha would coespond o he capial axaion. As we assumed ha he base fo he capial levy would be naow (limied o secuiies), is possible maco-economic effec on he educion of public deb would have been negligible. Theefoe, we did no invesigae he opimisic agumen wheeby a ax incease would lead o a decease in inees aes, hanks o he evenueenhancing effec fo he govenmen which would make an inflaion ax useless, and would hus have inceased he expeced value of he fanc. Anohe economic policy measue akin o a change in ene axaion had been he deflaion policy of he Laval govenmen in 93, which imposed a cu in he coupon paid on enes as pa of he compulsoy decease of 0% in all budge expendiue iems (including civil sevice pay). The influence on inees aes of he 0% cu in ene coupons is simila o a ise in he ae of ax levied on ene holdes income. I is based on he inenal ae of eun of he 3% ene assuming ha i will pay a coupon of 2.7 fancs (3 imes.9) foeve. This ae (noed RLA_32) is he soluion of he fis equaion of Appendix III (wih cp=2.7, insead of cp=3 when he soluion is RA3_32). As shown in Figue 6, he de faco convesion of he 3% ene ino a 2.7% ene implied a ise of 2.4% in he ae of eun. 22 The Fench make ae did no ise by his amoun fom The means fom July 93 o June 936 of RA3_32 and RLA_32 wee 8.8% and 6.4%.

17 Haucoeu and Sicsic, "Inees aes and axes" p. 7 o because hee wee wo offseing effecs. Fis, he Biish ae declined by.2 poins (fom 3.3 o 2.%), and second, he expeced depeciaion became smalle. 23 VII. Inees aes and expeced movemens in he exchange ae VII. The Caillaux loan wih an exchange-ae guaanee Befoe he sabilizaion of he fanc, inflaion and devaluaion wee, wih he hea of a capial levy, he second fea of bond holdes. The issue of he Caillaux loan in he summe of 92 was conceived as a esponse o his fea. Caillaux had a epuaion fo being a good financie. He ied o find a soluion o he main sho-em financial poblem faced by he govenmens of he Cael: he enewal of he Bons de la Défense Naionale. As i was said ha people sold hei Bons in ode o expo capial, he poposed a consolidaion loan (so he could no be ciicized fo inceasing he deb) offeing a low inees ae (4% nominal, acually 4.3% 24 ) in eun fo an exchange-ae guaanee (boh fo income and capial) and an exempion fom he geneal income ax IGR. 2 This was geneally consideed o be a good idea boh in Fance and aboad, whee people saw he issue as offeing good condiions o invesos and as a fis sep owads sabilizing he fanc. 26 Howeve, he issue was no successful, since only.9 billion fancs of Bons de la Défense Naionale wee consolidaed, wheeas ousanding Bons oalled 0 billion. Many explanaions fo his elaive failue have been pu fowad: he ene was issued in lae July, when many invesos wee on vacaion; a long-lasing bank sike made he issue of he loan difficul; peasans, who wee said o hoad lage amouns of money in hese oubled imes, did no subscibe because of he haves o because hey did no undesand he complex funcioning of he exchange-ae guaanee; las, many fims o banks held Bons de la Défense as liquid asses and could no ansfom hem ino long-em invesmens. These easons ae no convincing, and a close examinaion suggess ohe explanaions. 23 The 934 mean of RA3_32 was 8.4%; he aveage expeced exchange ae was fancs pe pound in 934 and 04 fancs fom mid-93 o mid-936 (see below fo deails). 24 This akes ino accoun he fac ha he fancs pe pound exchange ae on which he eun was indexed was lowe han he pevailing ae a he dae of issue (see "l'empun de libéaion naionale", SAEF file B ). 2 Jeanneney (976, p. 2) epos ha he idea was suggesed o Caillaux by a goup of influenial financies and indusialiss including de Wendel and Rohschild. 26 The Rohschild bank paised he condiions of he issue highly (much moe han fo mos govenmen issues) in he lee announcing i o is cliens on July 20, and also in diec lees o cliens (see Achives naionales 32 AQ 36, file "Empun 4% 92", and AN 32 AQ 428 he lee of July 7 o Miss Pelie). Howeve, conay o wha Jeanneney (976, p. 26) epos, he Rohschild bank only subscibed 0.64 million fancs of he new ene on hei own accoun, compaed wih a leas 7 million fo evey ene issue fom 9 o 928 (see "Tableau généal su opéaions los d'émission de enes fançaises", AN 32 AQ 36). Fo he opinion pevailing in he Unied Saes, see he epo by he Fench ambassado o he U.S. in SAEF file B

18 Haucoeu and Sicsic, "Inees aes and axes" p. 8 The ax beak given o invesos, mosly o ich ones, was appaenly impoan, alhough i could be jusified by aguing ha he ene was inended o allow consolidaion of Bons ha wee no subjec o he IGR. In fac, his advanage was no ha impoan since, as we have shown peviously, mos beae secuiies wee no liable o pay he IGR, paiculaly he foeign secuiies wih which he loan was in compeiion. 27 A close look a he issuing peiod eveals anohe eason, which is pehaps he mos impoan one: commenaies, including he mos independen ones (in he foeign pess) ae confiden of he success of he loan unil he Socialis Pay congess in Augus 92. Afe ha dae, he gowing concen suounding he possible inoducion of a capial levy coincides wih a decease in subscipions, paadoxically jus a he ime when hey should have been a hei songes. I seems logical ha he pospec of a new ax, which was he only one agains which he loan was no poeced, should be lagely esponsible fo is failue. I was seen as he aking away of an advanage ha had jus been pomised. Above all, he mos likely explanaion fo he failue of he issue is he poposed inees ae, which was vey low in compaison wih he yield on ohe enes. I had been chosen wih efeence o he foeign cuency yield of foeign secuiies quoed in Pais, he Biish consol fo insance. 28 We will ague below ha he pa on his loan was consisen wih expecaions of a lage depeciaion of he fanc, expecaions ha wee in conadicion wih he sabilizaion aim. Moe deails ae needed in ode o undesand he flucuaions in he pice of he Caillaux loan in he emaining pa of ou peiod. On July 6, 93, he fiscal saus of he Caillaux ene was changed, since i was decided ha i could only exis in egiseed fom. The pupose of his modificaion was o peven people fom peending hey owned his kind of ene when he ax adminisaion asked hem why hey did no declae any secuiy income fo IGR puposes (a eply ha could no be veified if he ene was in beae fom). The effec was o submi he ene o he inheiance ax ha i had lagely escaped befoe, like mos beae secuiies. Since he maginal ae of ha ax fo diec heis was abou 2%, i easily accouns fo he shap decease in he elaive pice of he Caillaux ene vis-à-vis ohe public bonds. While he pice of he 3% ene emained fla fom Apil o Sepembe 93, he pice of he Caillaux loan dopped fom 96 fancs on he fis of July o 84 on he 6h of Sepembe. Afe Sepembe 93, we have coeced he pice of he Caillaux ene by a faco of. in ode o accoun fo his egulaoy change. We wee unable o find quoaions of he Caillaux ene befoe Januay 926, when i was woh 90. We have fixed he pice a pa (00) in he issuance peiod (fom July o Ocobe, 92). 27 Remembe ha in he compuaions of he ne implied make aes of he 3% ene, we have used a flow of coupons of 3 imes 0.8 fancs. 28 See "Tableau indiquan le aux ne du evenu de quelques valeus mobilièes éangèes (...)" (SAEF B ): he calculaions made on he basis of quoaions on July 9, aking ino accoun a fuue ise in he income ax levied on foeign secuiies fom 8 o 2%, gave 3.2% as he ne yield on he Biish consols, 3.3% on Swiss enes, 3.% on Swedish bonds, 3.7% on Nowegian bonds and 4.3% fo Ageninean bonds. Fance could no pay moe!

19 Haucoeu and Sicsic, "Inees aes and axes" p. 9 VII.2 A measue of he influence of expeced exchange-ae movemens on make inees aes The make pice of he 4% ene wih an exchange-ae guaanee can be used o assess he impac of he expeced loss in value of he Fench fanc on inees aes in Fance. The coupons of hese enes wee indexed on he pound/fanc exchange ae, and he enes could be edeemed a a value in fancs equal o 0 imes he las half-yealy coupon. This means ha hey could be edeemed and ha he capial iself was indexed on he exchange ae. We will assume ha he enes wee expeced o be edeemed in 0 yeas, and we will compue an inenal ae of eun ove he nex five yeas, wih he pice and he coupon being expessed in pounds and expeced pounds. This ae of eun is he soluion of he equaion in Appendix VI, and is ploed as RERA_37 and RERA_32 in Figues 4 and. The expeced exchange ae (ERA), ploed in Figue 7 along wih he acual exchange ae, is compued accoding o he uncoveed inees ae paiy fomula ove he nex five yeas since he inees aes ae five-yea inees aes: RA3_ 37 / 00 ERA = ER fo he yeas befoe 933 and RERA_ 37 / 00 RA3_ 32 / 00 ERA = ER fo he yeas 934 o 937 (fo he change in he expeced longem inees ae fom 3.7 o 3.2% afe 933, see secion III RERA_ 32 / 00 above) Using he issue pice of he Caillaux loan o compue fis he ae of eun in consan fancs, and secondly he expeced exchange ae, leads o a vey low expeced exchange ae (60 fancs pe pound, see Figue 7). This signals ha people wee willing o subscibe o he Caillaux loan only when hey expeced a lage depeciaion of he fanc. The fis quoed pice we found, fo Januay 926, did lead o a much highe expeced exchange ae of abou 30, close o he spo ae a he same ime. We may conclude ha he failue of he Caillaux loan esuled fom he fac ha he implied exchange ae was below ha expeced by mos make paicipans: he expeced gain hough he exchange-ae guaanee was no enough o compensae fo he low nominal eun. The ae of eun in consan fancs (RERA_37) is vey high in ealy 926, which means ha hee wee expecaions of an appeciaion while he cuen value of he fanc was exemely low. The expeced exchange ae deived fom he pice of he Caillaux ene neve eached 0 fancs pe pound (Figue 7), so we can conside ha he shap depeciaion of he fanc (flucuaing beween 0 and 200 fancs pe pound) in he fis half of 926 did no eflec he medium-em expecaions of he make and can be consideed a speculaive bubble. Fom 928 o 93, he ae of eun in consan fancs was beween he ae of eun in fancs and he ae of eun in pounds of he Biish consol. The vey low level of he ae of eun in fancs elaive o he inenal ae of eun in pounds can be lagely explained by expecaions of an appeciaion of he fanc. In he wo yeas following Sepembe 929, he diffeence beween Biish and Fench aes was.3 poins on aveage, while he diffeence beween he consan fanc ae and

20 Haucoeu and Sicsic, "Inees aes and axes" p. 20 he Fench ae (RERA_37 - RA3_37) was 3.%. Expecaions of an appeciaion of he fanc explain abou 3/h of he gap beween Fench and Biish aes. Symmeically, afe 93, expecaions of a depeciaion accoun fo he ise in Fench inees aes, while consan fanc and Biish aes wee falling. In 934 and 93, he gap beween he Fench ae and he consan fanc ae was lage han he gap beween Fench and Biish aes (Fig. ). The expeced depeciaion heefoe explained moe han he obseved gap beween Fench and Biish aes. The ise in he budge defici afe 932 did no have any impac, independenly of depeciaion expecaions, unil 936, since he consan fanc ae declined unil mid-93, and he subsequen ise could iniially be explained by he 0% Laval coupon cu, which also applied o he Caillaux loan. Afe he Sepembe 936 devaluaion (which had been coecly expeced fo a while 29 ), expecaions of fuhe depeciaion appeaed almos immediaely in lae 936. Thee was sill a diffeence beween he ae of eun in consan fancs in Pais and he ae of eun in pounds in London. This diffeence canno be explained simply by he exisence of capial conols, since he pices of Biish consols in London and in Pais, whee hey wee also quoed on he sock exchange, wee vey close when conveed wih he pound/fanc exchange ae. Anohe explanaion has o be found. Taxaion canno povide his explanaion since ou implied make inees aes have been compued ne of axes. VIII. Conclusion This pape ies o impove undesanding of he inewa Fench moneay siuaion by using one indicao houghou: long-em inees aes. As such, i could be ciicized fom a mehodological poin of view as elying oo heavily on ha one indicao and on a small numbe of hypoheses (alhough we have empiical agumens fo each of hese). We do conside ha while each of ou hypoheses (and hen ou measues) may be debaed, he oveall picue we daw is he only one which pus all he available daa ino a consisen ode. This picue is diffeen fom he pevailing one as egads some aspecs of he Poincaé sabilizaion, and i einfoces one of he inepeaions of he 930s. Fis, inees aes duing he Cael peiod wee quie high (abou 6%), bu vey fa fom wha one would expec if he couny wee on he bink of hypeinflaion. Moeove, he incease in he ae afe 924 (when he implied make ae was 3%) could be explained by he hea of a capial levy. The apex of he exchange ae cisis fom May o July 926 (when ae wen fom 40 o 200 fancs pe pound) appeas o be a speculaive bubble, since exchange-ae expecaions (as deduced 29 One should have aken ino accoun he Laval 0% cu, esimaed above a 2%, in he compuaion of ne of ax Fench inees aes RA3_32 and RERA_32; bu his omission on boh aes cancels ou in he compuaion of he expeced exchange ae.