Exchange Loan

No sooner had the London Financial News called attention last week to U. S. official inexperience in elaborate foreign exchange maneuvers (see p. 16) than the French Treasury proceeded to give the world a demonstration of what one of these monetary fandangoes looks like. It started with a brief semi-official announcement:

"The French Treasury is prepared to contract in London a short-term loan, thereby benefiting by the superabundance of free money in the British money market. It will be -L-25,000,000 or -L-30,000,000 in bonds for six months at 2 1/2%. By thus procuring pounds the French Treasury will transform them into francs on exchange in accordance with its needs and in accord with the Bank of England.

"The loan will be provided by British banks, not by the British Treasury or the exchange equalization funds. The latter will remain outside the operation. However, its efforts to prevent the increase in value of sterling will be temporarily eased, thanks to the buying of francs against sterling, which the French Treasury will require to be effected in order to utilize the product of the loan in France."

First reason for all this is that France needs money. Despite the vast hoards of gold in the deep cellars of the Bank of France, the French Government has a budget deficit to hold its own with any in the world, and must raise 5,000,000,000 francs by July 1. Another internal loan would be a risky business. To charm the francs from Jean Frenchman's famed sock to float the last one, the Government was forced to offer 4 1/2 bonds at 98 1/2 with the costly promise to redeem at 150. France therefore gets the money she needs from Britain, and at nearly half the interest rates she would have had to pay at home. Second reason for the loan is the belief of every Frenchman that whatever may or may not come of the Roosevelt-Herriot-MacDonald conversations in Washington, U. S. isolation as a world power is defi- nitely over. What this might mean for France they could not yet tell, but threats of further U. S. inflation had every French statesman, every businessman worried. Frenchmen, badly burned by their own inflation of 1924-25. would throw out by nightfall any government that suggested a parallel move. In effect the British loan married the paper pound to the gold franc, made them an effective team to maneuver against any sudden tricks on the part of the dollar. It brought France still another advantage, for no gold will have to cross the Channel to upset foreign exchange further. The Bank of France already holds -L-30,000,000 sterling left over from her purchases before the franc was stabilized in 1928. This she will cede to the French Treasury when the loan must be paid off. Britain, too, won a big advantage in the loan. The money is to be put up by private British banks, leaving the equalization fund untouched for further exchange maneuvers. Both French and British officials loudly insisted that the idea of using this loan in unified action against the dollar was furthest from their thoughts, but the Journal des Debats suddenly realized that if such action were taken, Britain, as the lender, might soon be cracking the whip over France.

''Is it opportune," it wrote, "to give Prime Minister MacDonald this means of pressure on France and to place in his hands several billions in [French] Treasury bonds?"

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