Banque de France

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Banque de France (or Bank of France) is the national bank of France. It was created in 1800 to restore confidence in the French banking system after the financial upheavals of the revolutionary period. Its headquarters are in Paris.[1]


The unfortunate first experiences of note issues in France retarded banking development in that country for many years. The monopoly given to John Law in 1716 for his Banque Générale resulted in a disastrous over-issue of paper, and the bank closed after five years. In 1790, during the French Revolution, France was flooded with assignats and the distrust of paper money was widespread and long-lived.

A decree of 1792 had forbidden the establishment of banks of issue, but the abrogation of this decree and the restoration of the ordinary currency in 1796-97 encouraged some of the Paris discount banks to undertake the issue of notes. Chief among these were the Caisse des Comptes Courants and the Caisse d’Escompte du Commerce. In 1798 when a bank of issue was set up in the provinces, namely, at Rouen. This bank took the step of issuing notes as small as 100 frs. The Paris banks had not been in the habit of issuing notes for less than 250 frs. The freedom prevailing at this time in banking in France seems to have proved very satisfactory, and no disasters occurred, but the march of political events destined this state of affairs for a short existence.

Napoleon’s mania for centralisation and his difficulty in getting Government paper discounted, chiefly owing to the lack of confidence in that Government, turned his attention to the potentialities of a bank founded under Government auspices. So in 1800 he persuaded the stockholders in the Caisse des Comptes Courants to dissolve the company and merge it into a new bank, called the Bank of France. The Bank was financed with an initial capital of 36,000,000 frs., obtained partly from the original capital of the Caisse des Comptes Courants, partly by new subscription by the public and partly from Government funds, obtained from the sinking fund of the national debt. Soon after the foundation of the Bank the Government sold out a large part of its shares, but the independence of the Bank was not thereby much increased. Further negotiations, and manipulations, largely quite unscrupulous, were undertaken in 1802, as a final result of which the Caisse d’Escompte du Commerce was unwillingly induced to fuse with the Bank of France.

The most severe blow to competition came a year later, however, when the Government, by the famous loi du 24 Germinal an XI, granted to the Bank of France the exclusive privilege of issuing notes in Paris, ordered those Paris banks already issuing notes to withdraw them by a certain date, and forbade the Organisation of any bank of issue in the provinces except by the consent of the Government, which reserved the right not only to grant all privileges of issue but also to fix the maximum of such issue. The pretext for this piece of legislation was the slight financial crisis in 1802, but, in fact, nobody had brought any accusation against the competitive banks.

From the outset the Bank of France was under continuous pressure from Napoleon. As early as 1804 a dispute arose between them because the Bank was not discounting Government paper cheaply enough. Under this pressure the Bank discounted too much and issued more notes than it had the specie to maintain. This over-issue, together with the spread of a rumour to the effect that Napoleon had sent away the metallic reserves of the Bank to Germany for military needs, saw the Bank in serious difficulties in the following year. It had partially to suspend payment and its notes depreciated 10 percent to 15 percent. For this Napoleon laid the blame on the Bank and determined to bring its constitution more under the Government. So in 1806 he gave the State a larger share in the Bank’s administration by replacing the Committee elected by the stockholders by a Governor and two deputy-Governors appointed by the head of the State.

Further heavy loans to the Treasury in 1813 caused another partial suspension of cash payments in the next year. This gave impetus to a good deal of criticism and to a movement of opinion in favour of making the Bank independent of the Government, but nothing came of this proposal.

It soon became apparent that France was extremely backward, as compared with England and America, in the development of banking facilities; particularly slow was the pace at which they grew in the provinces where, so far, and apart from small firms specialising on exchange business, they were practically non-existent. Special authority had been given to the Bank of France in 1808 to set up branches, and in those towns where it established them it was to have exclusive rights of issue. It set up its first branch offices in Lyons, Rouen and Lille, but they were all closed down after a very brief existence, because they had proved unprofitable in the difficult years in which they had begun, and it was also argued in favour of their suppression that their demands might, in periods of tight credit, encroach on the reserve of the central bank in Paris.

Almost immediately on the abandonment by the Bank of France of the attempt to establish credit facilities outside Paris, there was a short period of increasing liberalism, during which three projects were sanctioned by the Government of the Restoration for the establishment of private departmental banks of issue. These were the Banks of Rouen, Nantes and Bordeaux, formed in 1817-18. But these banks were subjected to severe restrictions. They had the right to issue notes only for their headquarters and one or two other towns mentioned in their statutes; they could only discount bills payable in their own district; and their sight liabilities might not exceed three times the amount of their metallic reserves. The restrictions of their operations to such narrow districts and their inability to set up branches or employ agents almost belied the title "Departmental," they were, in fact, merely small local banks. Nevertheless, six additional departmental banks were founded between 1835 and 1838, and the Bank of France, now taking fright at the threat of a competing banking interest, began itself to organise branch offices, fifteen of which were started between 1841 and 1848. Each branch the Bank opened was of course given a monopoly of the note issue in its own town. Moreover, Comptoirs of the Bank of France required for their authorisation only an ordonnance royale, which would be granted on the recommendation of the Conseil Générale de la Banque, whereas departmental banks after 1840 had to obtain a special Act of Parliament. Also the greater area over which the Comptoir as a member of a branch system could conduct business gave it a great advantage over the departmental bank. There never even developed among the departmental banks any system of exchange of notes: nevertheless, the success of these banks and the services they rendered to the community were far from insignificant. They met with the disapproval of the Bank of France and after 1840 the Government refused to grant any more charters for their foundation. So the movement towards greater freedom in the note-issuing business was brought to an end. The representations of the departmental banks to the Chamber of Deputies, on the occasion of the discussions of the renewal of the charter of the Bank of France, asking for modifications of their statutes in the direction of removing some of the restrictions they contained, were also unsuccessful.

The trend of policy towards complete centralisation of the note issue reached its logical conclusion as a result of the 1848 political disturbances, but the opposition voiced by the Bank of France to the renewal of the charter of the Bank of Bordeaux in that year makes it practically certain that the departmental banks would in any case not have survived after the expiration of their charter rights.

The 1848 political crisis foreshadowed in many people’s minds a repetition of the assignat regime, and their first instinct was to hoard specie, with the inevitable consequence of a run on the banks. The Government was naturally interested in preserving the capacity of the Bank of France to give it financial support in dealing with the insurgents. It therefore gave to the Bank’s notes cours forcé (legal tender status) and allowed it to issue notes for 100 frs. At the same time was imposed what was regarded as a safeguard against excessive issues by putting a maximum limit of 350,000,000 frs. on its note issue. The departmental banks were given what were nominally the same facilities, and their notes subjected to a maximum limit which amounted to 102,000,000 frs. for all nine banks together, but since their notes were made legal tender only within their own respective localities, while the notes of the Bank of France were legal tender all over France, the circulation of the Bank of France gained an overwhelming ascendancy over that of the departmental banks. The 1848 decree was consequently their ruin rather than their salvation, and in the same year they agreed to submit to a fusion with the Bank of France, practically the only course that remained open to them short of liquidation. Thus by two Government decrees they became Comptoirs of the Bank of France, which acquired their authorised note issues as an addition to its legal maximum.

The events of the period immediately following 1848 throw light also on the subordination of the Bank to the will of the Treasury. Up to the decree above, the Government had never imposed any limitation on the amount of the note issue. It had been content to rely, on the Bank’s obligation to pay specie on demand, and on a prohibition of small notes. Now that both these checks were gone, it did impose a limit, but this the Government showed itself ever ready to raise if it should form any obstacle to the Bank’s readiness to lend to the Treasury. The difficulties of the Bank of France in meeting its obligations in cash, which had been the avowed reason for legalising its bankruptcy, had, so far as its private commercial obligations were concerned, been of very short duration, and it showed itself ready at an early date to revert to cash payments. But the scale at which Government borrowings at the Bank continued made its position unstable. In June, 1848, and again in November, 1849, the Government had arrived at agreements with the Bank by which the latter was to make regular advances of fixed sums during the succeeding two or three years. At the end of 1849 the Bank had received permission to increase its issue to 525,000,000 frs. By this time, however, it had a very strong metal reserve (about 400,000,000 frs.), and it had already begun suppressing the restrictive measures relating to the redemption of its notes, and it would probably have decided in favour of a complete resumption of cash payments much earlier if it had not been for the Government borrowing factor. If Treasury demands were going to continue at the same rate, the Bank believed its cash reserve would be inadequate. On the other hand, its note issue very soon approached the new maximum, and the Bank was faced with the choice either of applying for a further increase of its legalised circulation or of reverting to its old statutes under which it would be obliged to redeem its notes and cours forcé (legal tender) would be abolished, but there would be no legal limitation on the total volume of notes it was allowed to issue. It was only after an agreement had been reached with the Treasury for the reduction of the Bank’s obligations to lend, that the Bank felt safe in reverting to its old statutes, and this it finally did in August, 1850.

France emerged from the 1848 political crisis with a completely centralised, single, monopoly bank of issue. The progress of the industrial revolution in France round about 1850 brought into greater prominence the extreme paucity of credit facilities, most especially in the provinces, but even in Paris itself. Where facilities for the spread of a paper circulation had been withheld there was a corresponding absence of deposit banking, and the contrast was particularly strong with England where the country bankers with local connections and knowledge, even if they had rendered no other service, had at least accustomed the provincial mind to banking habits.

Right from the beginning the Government had imposed limitations on the flexibility of discount rate. In the case of the Caisse d’Escompte it was forbidden to charge more than 4 percent. The rate of discount of the Bank of France was fixed provisionally by the Government at 6 percent, and for the first six years it was held invariable at that figure, until in 1806 it was reduced to 5 percent. Discount policy in these years was primarily conditioned by the claims of Napoleon. It was his idea that the aim of the Bank of France must be to discount for all commercial firms of reasonable standing at 4 percent, and he criticised the Bank for not being liberal enough, and it was at his instance that the rate was reduced to 4 percent in 1807. It was not changed again until 1814, when it was raised to 5 percent. It seems to have been the policy of the Bank to maintain as far as possible a stable rate, for it was sticky in both directions, and when the Bank found it necessary to extend or to contract credit, it would adopt almost any conceivable means of doing so other than that of adjusting4 the price it charged for its loans. In 1819 it adopted for some months the policy of charging a lower rate (4 percent) on bills of short date (having less than thirty days to run) before it finally decided to reduce all rates to 4 percent. In times of strain it kept the rate of interest constant and resorted to rationing, or to the purchase of specie at a premium, in order to strengthen its reserve. It was for the first time in 1847 that it discovered the effectiveness of a rise in the rate in stemming a drain of cash. It had already relowered its rate when the 1848 crisis brought another shock, and it was still too much afraid of using the weapon of discount rate to combat it. It continued throughout the year to discount at 4 percent, while the departmental banks, which were less able to bear the strain, were charging 6 percent. The reduction of the rate in 1852 to 3 percent brought to an end a period of just over thirty years, during which, with the sole exception of 1847, its rate of discount had remained unchanged at 4 percent. This is in striking contrast to the practice of the Bank of England, whose rate was changed no less than fifty times between September, 1844, and December, 1856.

From the ‘fifties onwards the French rate began, however, to fluctuate more frequently. The greater willingness to change the rate was probably strengthened by the greater need to do so, arising with the increased mobility of specie due to improved transport facilities and communications, which made arbitrage operations much easier. Also, perhaps, some allowance should be made for the beginnings of the activities of the Crédit Mobilier in the direction of capital export. Anyhow, a strong tendency to an outflow of specie set in between 1855 and 1857, culminating with the crisis of that year. The Bank was at first hesitant about raising bank rate, and in the autumn of 1856 the Governor asked the Emperor to sanction a suspension of cash payments. This the Emperor refused and the Bank next reverted to the practice of imposing a limit (two months) on the échéance of bills it was prepared to discount. Finally in 1857 it gave definite recognition to the principle of raising bank rate when there is a drain on the specie reserve, and in that year the Usury Laws prohibiting a rate above 6 percent were abrogated so far as the Bank of France was concerned. But even so, the Bank still relied partly on the method of charging higher rates on the longer-dated bills. In 1861 the rate was held for some weeks at 7 percent, and from that time onwards it fluctuated much more violently than heretofore, and began to oscillate more or less in harmony with the Bank of England rate.

Out of the annexation of Savoy in 1864 arose the Bank of Savoy controversy. The treaties accompanying the annexation established that individuals and institutions belonging to Savoy should be allowed to exercise the same rights in France as they had held under the law of Savoy, and the Bank of Savoy concluded from this that it had the right to establish branches over the whole of France and to issue notes payable on demand. The Bank of France was much alarmed at the prospect of having the Bank of Savoy as a competitor, especially as some features of its business were likely to make it a keen rival. The Bank of Savoy paid interest to depositors, issued notes for as low a denomination as 20 frs., and could discount two-named paper, whereas the Bank of France paid no interest on deposits and had not as yet issued notes for less than 100 frs., and could only discount three-named bills. The Bank of France made a protest on the plea of the Government’s contractual obligation to maintain its privilege, and obtained from the Minister of Finance a letter signifying the Government’s opposition to the Pereire agreement with the Bank of Savoy, and then entered itself into negotiations with that Bank, as a consequence of which the latter agreed to renounce its claims to issue notes in return for an indemnity.

This incident, together with the raising of the discount rate to 8 percent in 1864, directed the attention of many people to the hitherto rather neglected subject of the theory of the money market. Its immediate effect was to produce a demand for the appointment of a Commission to enquire into the policy of the Bank of France. The Emperor received a petition from 300 Paris merchants also demanding an investigation, on the grounds that the raising of the discount rate by the Bank of France had led to the periodic return of crises. Finally the Bank itself suggested that these demands should be satisfied, so that its position, in face of the attacks that were being made against it, might be elucidated.

The direction of the enquiry was undertaken by the Conseil Supérieur du Commerce de l’Agriculture et de l’Industrie. The discussions opened in February, 1865, and did not finish until June, 1866, by which time much of the earlier enthusiasm had died down. The problems raised for discussion were primarily two: firstly, whether the Bank’s new policy of raising its discount rate in times of strain was preferable to its old policy of maintaining its rate invariable, and, secondly, whether a single bank of issue was superior to a plural system of competing banks. Evidence was taken from practically all those having any competence to speak on the subject. The results showed a verdict of the majority on both issues in favour of the Bank of France.

Among the more academic writers the discussion continued for several years longer, until it was superseded at the beginning of the ‘seventies by the bimetallic question. It was a strange coincidence that the Crédit Mobilier, the chief engineer of the accusation against the Bank of France, should almost at the very moment of the Bank’s acquittal find itself in serious difficulties, which were to lead to its going into liquidation only a year later.

At the same time as France was consolidating her centralised system, the trend in neighbouring countries was in the same direction. In Holland the debates in 1863 on the proposal to replace the monopoly of the Netherlands Bank by free trade in the issue of notes had resulted in a decision in favour of the retention of the monopoly. In Italy increased centralisation of the note issue was proceeding pari passu with political unification.[2]

Interwar period

France, during and after World War I, suffered severe hyperinflation, fueled by massive government deficits. The deficits had run approximately 47 billion francs in 1919, 42 billion francs in 1920, 28 billion francs in 1921, 19 billion francs in 1922, 17 billion francs in 1923, and 14 billion francs in 1924. It was harder and harder to borrow money to fill in these gaps. In Germany, 1918-1923, the gap had been filled simply by government borrowing from the Reichsbank. In France the Bank of France, partially independent, held back and resisted. The government got the greater part of its funds on short term paper, the so-called "bons de la défense nationale," largely taken by the private banks or by the people. The law, moreover, put a limit on the government borrowing from the Bank of France and on the issue of notes by the Bank of France, and while this limit was from time to time raised by act of the' French Parliament, it was always a humiliating experience for the Ministry to ask for an increase, and always a source of great concern to the French people when this was done. The Bank of France fought, and held back, and protected the French franc in so doing, though the franc fell far.

However, at the year end, 1924-1925, the Bank of France falsified its balance sheet. It had, in fact, in making year end advances to the government and others needing to meet year end commitments, exceeded its legal note issue. The year end statement showed the notes below the legal limit, but showed also an immense increase in a previously small item, Divers or miscellaneous, which did not deceive the informed reader of the balance sheet. Subsequently Baron Rothschild, a Director of the Bank of France, forced a disclosure of this deception by threatening to make the facts public himself, and the Bank of France made the humiliating confession that it had exceeded its legal limit and that it had falsified its balance sheet. Confidence in France fell low and confidence throughout the world in French finance fell low. The franc continued its downward course.[3]

As a result of the deficits and inflation, the French franc, classically set at 19.3¢ under the old gold standard, had plunged down to 5¢ in May 1925, and accelerated its decline to 1.94¢ in late July 1926. By June 1926, Parisian mobs protesting the runaway inflation and depreciation surrounded the Chamber of Deputies, threatening violence if former Premier Raymond Poincaré, known as a staunch monetary and fiscal conservative, was not returned to his post. Poincaré was returned to office July 2, pledging to cut expenses, balance the budget, and save the franc.

Armed with a popular mandate, Poincaré was prepared to drive through any necessary monetary and fiscal reforms. Poincaré’s every instinct urged him to return to gold at the prewar par, a course that would have been disastrous for France, being not only highly deflationary but also saddling French taxpayers with a massive public debt. Furthermore, returning to gold at the prewar par would have left the Bank of France with a very low (8.6-percent) gold reserve to bank notes in circulation. Poincaré was talked out of this path, however, by the knowledgeable and highly perceptive Emile Moreau, governor of the Bank of France, and by Moreau’s deputy governor, distinguished economist Charles Rist. Moreau and Rist were well aware of the chronic export depression and unemployment that the British were suffering because of their stubborn insistence on the prewar par. Finally, Poincaré reluctantly was persuaded by Moreau and Rist to go back to gold at a realistic par.

When Poincaré presented his balanced budget and his monetary and financial reform package to Parliament on August 2, 1926, and drove them through quickly, confidence in the franc dramatically rallied, pessimistic expectations in the franc were changed to optimistic ones, and French capital, which had understandably fled massively into foreign currencies, returned to France, quickly doubling its value on the foreign exchange market to almost 4¢ by December. To avoid any further rise, the French government quickly stabilized the franc de facto at 3.92¢ on December 26, and then returned de jure to gold at the same rate on June 25, 1928. At that point, foreign exchange constituted 55 percent of the total reserves of the Bank of France (with gold at 45 percent), an extraordinarily high proportion of that in sterling. Furthermore, much of the funds deposited by the Bank of France in London and New York were used for stock market loans and fueled stock speculation; worse, much of the sterling balances were recycled to repurchase French francs, which continued the accumulation of sterling balances in France.

At the end of 1926, while the franc was now pegged, France was not yet on a genuine gold standard. Officially, and de jure, the franc was still set at the prewar par, when one gold ounce had been set at approximately 100 francs. But now, at the new pegged value, the gold ounce, in foreign exchange, was worth 500 francs. Obviously, no one would now deposit gold at a French bank in return for 100 paper francs, thereby wiping out 80 percent of his assets. Also, the Bank of France (which was a privately owned firm) could not buy gold at the current expensive rate, for fear that the French government might decide, after all, to go back to gold de jure at a higher rate, thereby inflicting a severe loss on its gold holdings. The government, however, did agree to indemnify the bank for any losses it might incur in foreign exchange transactions; in that way, Bank of France stabilization operations could only take place in the foreign exchange market.

The French government and the Bank of France were now committed to pegging the franc at 3.92¢. At that rate, francs were purchased in a mighty torrent on the foreign exchange market, forcing the Bank of France to keep the franc at 3.92¢ by selling massive quantities of newly issued francs for foreign exchange. In that way, foreign exchange holdings of the Bank of France skyrocketed rapidly, rising from a minuscule sum in the summer of 1926 to no less than $1 billion in October of the following year. Most of these balances were in the form of sterling (in bank deposits and short-term bills), which had piled up on the continent during the massive British monetary inflation of 1926 and now moved into French hands with the advent of upward speculation in the franc, and with continued inflation of the pound. Against their will, therefore, the French found themselves in the same boat as the rest of Europe: on the gold-exchange or gold-sterling standard.

If France had gone onto a genuine gold standard at the end of 1926, gold would have flowed out of England to France, forcing contraction in England and forcing the British to raise interest rates. The inflow of gold into France and the increased issue of francs for gold by the Bank of France would also have temporarily lowered interest rates there. As it was, French interest rates were sharply lowered in response to the massive issue of francs, but no contraction or tightening was experienced in England; quite the contrary.

At the start of the Great Depression in 1931, after bank runs on Austria and Germany, it was clear that England would be the next to suffer a worldwide lack of confidence in its currency, including runs on gold. Sure enough, in mid-July, sterling redemption in gold became severe, and the Bank of England lost $125 million in gold in nine days in late July.

The remedy to such a situation under the classical gold standard was very clear: a sharp rise in bank rate to tighten English money and to attract gold and foreign capital to stay or flow back into England. In classical gold standard crises, the bank had raised its bank rate to 9 or 10 percent until the crises passed. And yet, England was so to cheap money, that it entered the crisis in mid-July at the absurdly low bank rate of 2.5 percent, and grudgingly raised the rate only to 4.5 percent by the end of July, keeping the rate at this low level until it finally threw in the towel and, on the black Sunday of September 20, went off the very gold-exchange standard that it recently had foisted upon the rest of the world. Indeed, instead of tightening money, the Bank of England made the pound shakier still by inflating credit further. Thus, in the last two weeks of July, the Bank of England purchased nearly $115 million in government securities.

England disgracefully threw in the towel even as foreign central banks tried to prop the Bank of England up and save the gold-exchange standard. Answering Montagu Norman’s pleas, the Bank of France and the New York Fed each loaned the Bank of England $125 million on August 1, and then, later in August, another $400 million provided by a consortium of French and American bankers.

England betrayed not only the countries that aided the pound, but also the countries it had cajoled into adopting the gold-exchange standard in the 1920s. It also specifically betrayed those banks it had persuaded to keep huge sterling balances in London: specifically, the Netherlands Bank and the Bank of France. Indeed, on Friday, September 18, Dr. G. Vissering, head of the Netherlands Bank, phoned Monty Norman and asked him about the crisis of sterling. Vissering, who was poised to withdraw massive sterling balances from London, was assured without qualification by his old friend Norman that, England would, at all costs, remain on the gold standard. Two days later, England betrayed its word. The Netherlands Bank suffered severe losses. The Netherlands Bank was strongly criticized by the Dutch government for keeping its balances in sterling until it was too late.

The Bank of France also suffered severely from the British betrayal, losing about $95 million. Despite its misgivings, it had loyally supported the English gold-standard system by allowing sterling balances to pile up. The Bank of France sold no sterling until after England went off gold; by September 1931, it had amassed a sterling portfolio of $300 million, one-fifth of France’s monetary reserves. In fact, during the period of 1928–31, the sterling portfolio of the Bank of France was at times equal to two-thirds of the entire gold reserve of the Bank of England.[4]


  1. "Banque de France", Encyclopædia Britannica, referenced 2014-12-31.
  2. Vera C. Smith. "Vera C. Smith, The Rationale of Central Banking and the Free Banking Alternative [1936"], Foreword by Leland Yeager (Indianapolis: Liberty Fund, 1990). , referenced 2014-12-31.
  3. Benjamin M. Anderson, "Economics and The Public welfare" (pdf), 1949, referenced 2014-12-31.
  4. Murray N. Rothbard. A History of Money and Banking in the United States: The Colonial Era to World War II (pdf), p.406-409, 428-430. Referenced 2014-12-31.