France’s gold reserves increased from 7 to 23 percent of total world reserves between 1927 and 1932. Some authors have argued that this increase caused the Great Depression. I don’t really buy the argument, but what made France hoard so much gold?
There’s no definitive answer but I’ll try to answer that to the best of my capabilities.
After two currency crisis in 1924 and 1926 the new French government, led by Raymond Poincaré, feared an excessive appreciation of the franc. Hence Poincaré himself mandated the Bank of France to purchase gold, silver and foreign currencies on the open market in exchange for francs. The purchases started in December 1926 and went on for one year and a half. In June 1928 The franc’s gold convertibility was reinstated at 1/5 of pre-WWI values. The same law prohibited using gold-backed foreign currency reserves to be included in the minimum legal coverage requirements, though France at the time held about half of the world’s foreign currency reserves (completely made up of British pounds and US dollars).
But why did they do this? In 1932 already Paul Einzig said French monetary politics were entirely and solely driven by politics. According to Einzig this was nothing short than full-blown financial war on the UK, which French politicians saw as a dangerous rival both in Europe and in Asia. In 1989 J. Bouvier instead suggested France wanted to rebuild large gold reserves as part of a long term strategy aimed at making Paris a leading financial hub, a “gold center”. Another theory which is becoming popular at the moment is that of risk management. The pound was by no means immune to crisis itself and a recently unearthed 1929 memorandum (quoted by Accominotti) hints at the fact both the Bank of France and the French government were seriously worried about Britain abandoning the gold exchange standard without warning and hence destroying the BoF foreign currency reserves. Hence the French choice of liquidating pound-denominated assets and buying gold and US dollars. Interestingly this memorandum follows the Labour Party victory at the general election by mere weeks and a period of low credibility for the pound, following bickering about the degree of gold purity for inter-bank exchange among the French and the British. By contrast the US dollar was immune from credibility issues even at the beginning of the Great Depression. I tend to agree with this latest vision as the BoF was a private bank at the time and had to manage its portfolio carefully to give private investors dividends.
It must be said that the history of the BoF during the Interwar period is spotty at the best despite excellent work by such researchers at Accominotti. Little or nothing is known about why the BoF stopped liquidating pound assets in late 1930 or how the £25 million loan to the Bank of England in 1931 (after Britain had effectively terminated the gold exchange standard) came into be. These decisions seem incomprehensive today and we lack contemporary sources to help us.
Wonderful. Thank you very much, Kakugo!